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NCUA 2023 supervisory priorities: What you should know

Feb 20, 2023

The National Credit Union Administration (NCUA) announced their upcoming supervisory priorities and other updates to the agency’s examination program on January 18, 2023. These priorities are released on an annual basis to provide federally insured credit unions with guidance on specific NCUA policies and procedures, compliance, governance and other timely issues.  

Here is a summary of the newly updated NCUA supervisory priorities.

What you should know

As interest rates and inflation continue to rise, it should come as no surprise that there will be a continued focus on liquidity risk, credit risk and interest rate risk when evaluating your CAMELS rating.

The rise in interest rates has increased market risk, potentially impacting net economic values and projected earnings. The NCUA hasn’t announced any significant changes to the examination procedures related to these risks but encourages continued scrutiny. 

A few things that were stressed in the NCUA supervisory letter regarding these risks include:

  • Interest rate risk (IRR): Examiners will focus on key interest rate risk management and control activities, including reasonable and well-documented assumptions and data sets. It’s also important that the overall IRR exposure is measured and controlled and that proactive action is taken to stay within safe and sound policy limits. Results should be appropriately communicated to decision makers and the board of directors.
  • Liquidity risk: Examiners will be focused on the credit union’s liquidity risk management framework, relative to the credit union’s risk profile. The assessment will be focused on sources of liquidity compared to funding needs, and how changing rate and market values impact assets used for collateral. Scenario analysis will also be a focus, including member share migration, cash-flow projections and appropriateness of any contingency funding.
  • Credit risk: High inflation and rising rates continue to put pressure on credit union members, increasing the risk of borrower’s ability to repay outstanding debt. The NCUA will review the soundness of lending programs, including underwriting, monitoring practices and loan workout strategies.

Other areas you can expect continued focus during the examination:

  • Fraud prevention and detection: Examiners to continue focus on internal controls and segregation of duties.
  • Information security (cybersecurity): Examiners will evaluate the adequacy of security programs to protect members and the credit union, as well as the credit union’s ability to adapt to the evolving cybersecurity threats.
  • Consumer financial protection programs: Exams will include a review of compliance with applicable consumer financial protection laws and regulations for federal credit unions.
  • Allowance for credit losses (ACL): Examiners will review policies and procedures, documentation of methodology, adherence with GAAP as well as results of any independent review of the ACL. If your credit union has adopted current excepted credit losses (CECL), expect a review of the initial adjustment to undivided earnings.
  • Succession planning: To help with the NCUA’s understanding of needs in the credit union system, examiners will request information about the credit union’s approach to succession planning for senior leaders.

The NCUA has published updated resources on their website to assist you in strengthening your programs and understanding their enhanced examination procedures. Refer to the NCUA website for additional resources and any future updates.  

Upcoming enhancements

Though the NCUA’s supervisory priorities have not changed significantly from the past few years, there have been some enhancements made to their approach in the coming exams.

The third quarter report of the Share Insurance Fund indicated there were approximately $7 million in losses in 2022 due to four credit union failures, in which fraud was a contributing factor. In an effort to protect credit unions and reduce potential losses to the Share Insurance Fund, a new questionnaire will be issued through the modern examination and risk identification tool (MERIT) during the pre-examination phase. The questionnaire will be used to refine the scope of the exam by identifying fraud red flags, material supervisory concerns and other areas of potential increased risk.

The NCUA has also published new cybersecurity examination procedures to be used in 2023. The updated procedures will be tailored to institutions of varying size and complexity to strengthen the examination process for cybersecurity. Additionally, the NCUA has an automated cybersecurity evaluation toolbox (ACET) available on their website to be used for voluntary self-assessments of cybersecurity preparedness.

In 2022, there was an increased focus on consumer financial protection laws and regulations across the financial services industry. The NCUA will continue to focus on the following areas, increasing their review as noted:

  • Overdraft programs, including website advertising, balance calculation methods and settlement processes, as well as any adjustments made to address consumer compliance risk and potential consumer harm from unanticipated overdraft fees
  • Fair lending, including review of residential real estate appraisals for bias, and policies and practices for steering or loan pricing discrimination factors
  • The Truth in Lending Act, including disclosures related to auto lending for credit unions that experienced high auto loan growth over the past year
  • The Fair Credit Reporting Act, including adverse action notices, risk-based pricing and consumer rights disclosures
  • Flood Disaster Protection Act, including disclosure requirements and the impact of climate-related financial risk on credit unions

In case you missed it

The NCUA also published updates to other programs, including the Current Excepted Credit Loss (CECL) implementation, succession planning, support for small credit unions and minority depository institutions and post-examination survey.

If you haven’t started preparing for CECL, you should prioritize implementation since all federal and federally insured, state-chartered credit unions are required to implement a CECL analysis for financial reporting years beginning after December 15, 2022.

You can find additional updates and resources in the published supervisory priorities located on the NCUA’s website.

How Wipfli can help

Wipfli can help support your federally insured credit union as you navigate NCUA compliance. Our team understands the guidelines, helping you identify and focus in on higher risk areas. Contact us today for more on how we can help you be prepared for your next NCUA supervisory test.

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Author(s)

Alison J. Herrick, CPA
Partner
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