Credit unions have always been in the business of serving members and helping the underserved, so it is only natural that they embrace these unprecedented times and do whatever they can to help their members and community.
Many of these efforts came in the form of loan payment deferrals, loan modifications and fee waivers as well as participating in the SBA Paycheck Protection Plan. With the amount of volume and activity credit unions experienced in these areas, as well as the procedural changes needed to keep employees and members safe, it is to be expected that examiners will be focusing on COVID-19 related efforts.
The NCUA released a letter to credit unions on July 15 containing updates NCUA’s 2020 supervisory priorities, reflecting a shift in focus by examiners due to COVID-19.
Examiners focused on the same areas — such as Bank Secrecy Act Compliance/Anti-Money Laundering and LIBOR transition — as they did in their January update.
But as we all adjust to the havoc from COVID-19, examiners also focused on issues such as the Coronavirus Aid, Relief and Economic Security Act (CARES Act), consumer financial protection (Regulation E, FCRA, GLBA, small dollar lending, Regulation Z, Military Lending Act and Servicemembers Civil Relive Act), credit risk, information systems and assurance (cybersecurity), and liquidity risk.
Here is a summary of changes:
Bank Secrecy Act Compliance and Anti-Money Laundering
Bank Secrecy Act Compliance and Anti-Money Laundering remain a priority. NCUA will continue to review BSA/AML programs, with specific focus on customer due diligence and beneficial ownership requirements, proper filing of SARS and CTRS and bi-weekly 314(a) information requests from FinCEN. As a result of COVID-19, many processes have probably changed, it is important that the credit union maintained strong controls and procedures to stay compliant with BSA/AML.
Coronavirus Aid, Relief and Economic Security Act (CARES Act)
The CARES Act included many provisions applicable to credit unions, such as:
- Additional liquidity to help meet the needs of the members
- Suspended the requirement to categorize troubled debt restructurings that are related to COVID-19
- Introduced the Paycheck Protection Program
- Changed requirements for reporting loan modifications related to COVID-19 to credit reporting agencies
- Prohibited foreclosures on all single family, federally backed mortgage loans between March 18, 2020 through May 17, 2020, later extended to June 30, 2020 by FHLMC, FNMA, FHA, VA and USDA, and further extended by FNMA and FHLMC to August 31, 2020, provided up to a 360-day forbearance for borrowers with a single family, federally backed mortgage due to hardship related to COVID-19
- Allowed for a 90-day forbearance for multifamily, federally backed mortgage loans.
Credit unions should be prepared to show how they responded to these provisions through appropriate reporting and documentation. Any types of modifications/forbearances related to COVID-19 should be appropriately documented with reasonable support that the hardship was strictly COVID-19 related.
Consumer financial protection
- Regulation E: Examiners will be evaluating compliance with Electronic Fund Transfer Act, specifically initial account disclosures and error resolution procedures. Examiners will also evaluate the credit union’s practices concerning the Remittance Transfer Rule changes to the safe harbor threshold and disclosures of rates and costs associated with the remittance transfers.
- Fair Credit Reporting Act: Examiners will review credit reporting policies and procedures and the accuracy of reporting to credit bureaus. As noted by the CARES Act, procedures should have changed to reflect the reporting requirement for COVID-19 related modifications.
- Gramm-Leach Bliley: Continued evaluation of protection of NPPI. With the changes in branches and more staff working from home, GLBA compliance should be addressed in the risk assessment and procedures.
- Small dollar lending (including payday alternative loans): Examiners will test for compliance with the NCUA payday alternative lending rules with interest rate cap and other payday loans, not considered PALs comply with CFPB regulatory requirements.
- Truth in Lending Act: Evaluation of credit union practices concerning annual percentage rates and late charges will be conducted. Examiners will also evaluate credit union practices concerning changes made in response to COVID-19, specifically for TRID and Regulation Z Rescission rules that permit members to waive the waiting periods under both rules.
- Military Lending Act and Servicemembers Civil Relief Act: This area has been a focus for the past couple years, for credit unions that have not been examined by NCUA for MLA and SCRA, expect to have a review.
Credit risk management and allowance for loan and lease losses
CREDIT risk management and allowance for loan and lease losses will be a focus during the upcoming exams, shifting emphasis to the credit unions response to assisting borrowers facing financial hardship. Examiners will look at workout strategies, risk management practices and new strategies used to help borrowers.
Additional loan workouts/modifications/payment deferrals were also used by credit unions to help members. Though the expectation is that these changes are related to a temporary setback and that the loans are not impaired, the reality is they may not all be collectible. It is important for credit unions to document the reason for the modifications/deferrals as well as track these loans for allowance for loan loss reserves. Though the NCUA did mention they will put CECL readiness on hold until further notice, they are going to be analyzing the credit unions process for reporting, tracking and internal controls over these programs in relation to the current allowance for loan loss method.
Information systems and assurance (cybersecurity)
Emerging cyber attacks are a persistent threat that has increased due to advances in technology, increase in remote workforce and increased use in mobile technology. The NCUA will evaluate the information systems using the ACET and piloting a new tool called InTREx-CU, which are exam procedures shared by the FDIC and Federal Reserve System. This system will help examiners and credit unions identify gaps in security safeguards as well as identify critical program deficiencies in controls and practices.
LIBOR transition planning
As confirmed by the United Kingdom’s Financial Conduct Authority, LIBOR will no longer be available after the end of 2021. If the credit union has contracts and/or products that are based on LIBOR, the NCUA will be looking for a transition plan to handle this change. The NCUA has a LIBOR Assessment Workbook that they will be using to conduct such reviews. Since the earlier priorities were published, the FFIEC has issued a joint statement on the LIBOR transition highlighting the risks with the transition.
Liquidity risk was noted earlier in the year as a result of strong loan growth. Since COVID-19 pandemic, there has been additional stress on balance sheets. Examiners will continue to review liquidity risk management and how credit unions are planning. The effects of payment forbearance, loan delinquencies, projected losses and loan modifications on liquidity and cash flow forecasting will be considered. Examiners will be evaluating the credit union’s efforts for analyzing various cash flow projection scenarios, as well as the adequacy of the contingency funding plans to address any potential shortfalls. Potential effects of low interest rates and decline on credit quality on the market values of assets, funding costs and borrowing capacity will also be a consideration.
A new focus added to the July supervisory priorities is on serving hemp-related businesses. The NCUA issued a letter to credit unions, 20-CU-19 to provide guidance on serving or considering serving these types of businesses. The NCUA examiners will continue to collect data through their upcoming exams to help the agency better understand how to assist credit unions serving hemp-related businesses.
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