A lot has changed since last year, including NCUA’s exam focus.
In mid-2020, NCUA issued updated 2020 supervisory priorities, which continue to be a focus for 2021. With the signing of the Consolidated Appropriations Act, 2021, in December 2020, many of the Coronavirus Aid, Relief and Economic Security (CARES) Act provisions have been extended, resulting in continued focus from examiners on credit unions’ response.
There is also a continued focus on cybersecurity, BSA and consumer protection. Below is a summary of the areas of focus. The CARES Act, signed into law on March 27, 2020, will continue to be of focus, along with the Consolidated Appropriations Act, 2021.
Allowance for loan and lease losses (ALLL)
Though NCUA examiners will not be assessing credit unions’ efforts to transition to the CECL standard, they do encourage credit unions to continue to assess their needs and evaluate methodologies for the eventual implementation of the CECL standard, which is currently set at fiscal years starting after December 15, 2022.
Examiners will, however, be evaluating current ALLL methodologies for adherence to current standards (FASB Accounting Standards Codification [ASC] Subtopic 450-20 [loss contingencies] and/or ASC 310-10 [loan impairment]). Credit unions should expect examiners to evaluate the credit union’s response to the borrower’s financial condition and collateral values as they pertain to the current economic environment. Examiners will be reviewing the following:
- ALLL policies and procedures
- Documentation of an ALLL reserving methodology, including modeling assumptions and qualitative factor adjustments
- Adherence to generally accepted accounting principles
- Independent reviews of credit unions’ reserving methodology and documentation practices by the supervisory committee or an internal or external auditor
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 biweekly 314(a) information requests from FinCEN. As a result of COVID-19, many processes have probably changed, and it is important that the credit union maintain strong controls and procedures to stay compliant with BSA/AML.
NCUA continues to communicate with credit union and other banking regulators on various initiatives related to BSA/AML, such as updates to the FFIEC BSA/AML Examination manual, development of suggestions and clarifications to improve SAR and CTR filing, and an increase in human trafficking awareness.
The Consolidated Appropriations Act, 2021 extended several CARES Act provisions. The provision of the CARES Act that suspended the requirement to categorize certain loan modifications as troubled debt restructurings (TDR) was extended through January 1, 2022, and examiners will continue to review compliance with this provision.
Examiners will continue to review the credit union’s compliance with the CARES Act and Consolidated Appropriations Act, 2021, including requirements for financial institutions related to the administrative provisions for the additional 2020 recovery rebates for individuals, as well as modifications, credit reporting, forbearances and foreclosures.
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
The COVID-19 pandemic continues to affect consumers, which increases consumer compliance risk in certain areas. The scope of the exam will be risk focused and based on the credit union’s compliance record, products and services and new and emerging concerns.
Examiners will also assess a credit union’s fair lending compliance management system. Fair Lending reviews will include areas such as board and management oversight, policies and procedures, training, monitoring and corrective action and member compliance response.
Credit risk management
Though NCUA reaffirms that examiners will not criticize the credit union’s efforts to provide prudent relief to borrowers; they will continue to focus on the loan underwriting standards and credit risk management procedures. Processes and policies put in place to respond to borrowers’ needs and as authorized under the CARES Act and extended in the Consolidated Appropriations Act, 2021 will be evaluated.
Credit unions should also expect examiners to evaluate their management of credit risks and the impact on capital position and financial stability of the credit union.
Information systems and assurance (cybersecurity)
Emerging cyberattacks are a persistent threat that has increased due to advances in technology, an increase in the remote workforce and increased use of mobile technology. NCUA will continue to evaluate the information systems using the ACET and newly launched InTREx-CU, which are exam procedures shared by the FDIC and Federal Reserve System. These systems will help examiners and credit unions identify gaps in security safeguards as well as identify critical program deficiencies in controls and practices. Since InTREx-CU is expected to be deployed in 2021, the ACET will become a self-assessment resource for credit unions.
LIBOR transition planning
As confirmed by the United Kingdom’s Financial Conduct Authority, LIBOR will no longer be available after the end of 2021. Credit unions that have contracts and/or products that are based on LIBOR should continue to reference the LIBOR Assessment Workbook for assistance in planning for the transition. The joint statement issued by the FFIEC should continue to be referenced for additional guidance.
Since the COVID-19 pandemic, there has been additional stress on balance sheets, which could require an increased level of liquidity management throughout 2021. Examiners will continue to review liquidity risk management and how credit unions are planning. They will be looking for credit unions to be evaluating liquidity risks using a broad range of scenarios. 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.
Credit unions should continue to consider whether they are able to provide financial services to lawfully operating hemp-related businesses safely and properly. NCUA issued a letter to credit unions, 20-CU-19, to provide guidance on servicing or considering servicing these types of businesses. 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.
Credit unions must continue to serve their members in prudent ways in our current pandemic environment. Regulators will assess and consider the credit union’s response, but this will not give free reign with impunity. Be sure to act within the guidance offered and document actions taken. Regulators will be working with you to ensure the safe servicing of member needs.
How Wipfli can help
Check out our COVID-19 resource center and articles on stimulus legislation for more information. Our teams can help you with solutions ranging from strategy and operations to digital transformation and compliance regulations.