As anticipated, the NCUA has released Letters to Credit Unions 22-CU-02, outlining the NCUA’s 2022 Supervisory Priorities. The NCUA reiterated its commitment to a risk-based approach to examinations, focusing on areas that present the highest risk to credit unions, members and the Insurance Fund.
Following is a list of those priorities the NCUA will be focusing on in its upcoming exams. To prepare, your credit union should be thinking about the impact and risk in each area as well as whether the credit union has the appropriate coverage and oversight to handle such risks.
Credit risk management
NCUA examiners will continue to review credit risk management and mitigation efforts, with the expectation that programs and practices are appropriate for the credit union’s complexity and nature of the lending activities. Credit unions must maintain safe and sound lending practices, including compliance with consumer financial protection laws. This includes compliance with disclosures and regulatory reporting requirements.
The NCUA will focus on adjustments made to lending programs to address borrowers facing financial distress by reviewing loan workout strategies, risk management practices and new strategies put in place to help borrowers. They will evaluate credit union controls, reporting and tracking of these programs, including any programs allowed under the CARES Act and extended in the Consolidated Appropriations Act, 2021.
The NCUA also encourages credit unions to continue working with their members impacted by the pandemic, noting examiners will not criticize a credit union’s efforts to provide prudent relief for borrowers when these efforts are reasonably conducted with proper controls and management oversight.
Information security and cybersecurity
The likelihood of cybersecurity threats such as ransomware, third-party risks and business email compromises are significant threats to credit unions and their members. It’s no surprise that a continued review by examiners of information security practices at credit unions is expected. This coming year, the NCUA will continue to pilot its exam procedures based on size and complexity of the credit union.
The Automated Cybersecurity Evaluation Toolbox (ACET) application continues to be voluntary for credit unions. The ACET allows credit unions of any size to determine and measure cybersecurity preparedness.
Consumers demand easier and faster electronic access to and settlement of funds. This increases risks to credit unions — fraud, breaches and illicit use of payments and technology. The NCUA will focus on the technology used in electronic payment processing and applications used and the corresponding controls, as well as the security of the platforms used.
Bank Secrecy Act compliance and Anti-Money Laundering (AML)/Countering the Financing of Terrorism (CFT)
As expected, BSA remains a priority. Examiners conduct BSA compliance and AML/CFT reviews during every examination. The AML Act of 2020 and the Corporate Transparency Act amended the BSA, resulting in incremental requirement changes throughout 2022. The NCUA will communicate any changes in requirements, as well as impacts on examinations to credit unions, as they arise.
The NCUA meets with interagency partners, and as part of this process, the Federal Financial Institutions Examination Council (FFIEC) will continue to publish updates to the BSA/AML Examination Manual as needed.
Capital adequacy and risk-based capital rule implementation
NCUA examiners are aware of the impacts of recent excess share growth on net worth and risk-based capital ratios and will ensure credit unions are evaluating the impact of COVID-19 response efforts and the effect on their capital positions and financial stability.
Complex credit unions (assets exceeding $500 million, as reflected in the most recent Call Report) are subject to new risk-based capital requirements included in the final risk-based capital rule, effective January 1, 2022. These requirements will cause changes to the Call Reports, starting with the reporting period of March 31, 2022. NCUA examiners will review the accuracy of complex credit unions’ reporting for the new data elements.
Loan loss reserving
The Current Expected Credit Losses (CECL) methodology must be implemented for fiscal years beginning after December 31, 2022, so for credit unions on a calendar year-end, the effective date is January 1, 2023. Expect examiners to be discussing the credit union’s preparedness to implement CECL.
NCUA examiners will also be evaluating the adequacy of credit unions’ current allowance for loan and lease losses (ALLL) accounts by reviewing the following:
- ALLL policies and procedures
- Documentation of the ALLL reserving methodology, including modeling assumptions and qualitative factor adjustments
- Adherence to generally accepted accounting principles
- Independent reviews of credit union reserving methodology and documentation practices by the supervisory committee or by an internal or external auditor
Note that federal credit unions with less than $10 million in assets are not required to implement CECL but will still need to follow a reasonable reserve methodology that adequately covers known and probable loan losses. Federally insured, state-chartered credit unions should check with state law for GAAP-related requirements.
Consumer financial protection
The NCUA will continue to examine compliance with applicable consumer financial protection laws and regulations during every federal credit union exam. The scope will be risk-focused and based on the credit union’s compliance record, products and services provided and new or emerging concerns. Examiners will focus on areas related to the following:
- COVID-19 pandemic
- Fair lending
- Servicemembers Civil Relief Act
- Fair Credit Reporting Act
- Overdraft programs
Mortgage forbearances and other loan accommodation policies and procedures, including reporting, will be evaluated for compliance with the CARES Act amendments to the Fair Credit Reporting Act, as well as for the temporary COVID-19 Mortgage Servicing Rules.
The exam will also identify fair lending policies and practices that indicate discrimination risk or loan portfolio/underwriting discrimination risk, as well as perform an assessment of policies and procedures to evaluate the consistency, fairness and accuracy of appraisals a credit union obtains.
Overdraft programs will be a focus, including the credit union’s monitoring tools and audit of the overdraft programs, along with the communications provided to consumers about such programs. Examiners anticipate using this information to perform a fuller review of overdraft programs in 2023.
NCUA examiners will verify credit unions’ evaluation of the risk in loan participation transactions and how that risk fits within the tolerance levels established by the credit union’s board. The examiners will also be looking at the transactional-level information to ensure the loan participation records are maintained at loan level.
The NCUA will review credit union efforts to detect and deter fraud, including internal controls and segregation of duties, including transactional testing.
London Inter-Bank Offered Rate (LIBOR) transition
Examiners will focus on credit unions with significant LIBOR exposure or inadequate fallback language. Supervisory Letter 21-01, Evaluating LIBOR Transition Plans, provides the framework examiners will continue to use to evaluate credit unions actions regarding the transition from LIBOR.
Interest rate risk
Credit unions should continue to model and manage interest rate risk. Due to the high share growth over the past two years, credit unions that invested in long-term assets may be at greater interest rate risk. Credit unions should be using their models to run various scenarios and testing assumptions for potential risks.
The CAMEL rating system has been updated to the CAMELS rating system and will be effective for examinations starting on or after April 1, 2022. The evaluation of the “S” component reflects the exposure to changes in earnings and capital position from changes in market prices and interest rates. Risk management should include policies, appropriate and identifiable risk limits, risk mitigation strategies and a suitable governance framework. In evaluating the “L” component, examiners will consider current and prospective sources of liquidity compared with funding needs. Also, the examination will include the adequacy of liquidity risk management, relative to the credit union’s size, complexity and risk profile.
How Wipfli can help
Our teams can help guide your credit union through these issues, whether through internal audit, regulatory compliance, risk assessments, or validations of data. Please contact us if you have any questions.
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