NCUA’s 2022 Supervisory Priorities and Exam Program Updates

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In a recent letter to credit unions, the National Credit Union Administration (NCUA) details its supervisory priorities for 2022. The NCUA remains committed to focusing its examination activities on the areas that pose the highest risk to credit unions, credit union members, and the National Credit Union Share Insurance Fund.

The primary areas of its 2022 supervisory focus include: 

Credit Risk Management
NCUA examiners will continue to review credit unions’ credit risk-management and mitigation efforts, and will focus on adjustments credit unions made to lending programs to address borrowers facing financial hardship. NCUA examiners will also focus on reviewing policies that address the use of loan workout strategies, risk-management practices, and new strategies implemented to provide funds to borrowers under distress, including programs authorized under the CARES Act and extended in the Consolidated Appropriations Act, 2021. In particular, NCUA examiners will evaluate credit unions’ controls, reporting, and tracking of these programs.

Information Security (Cybersecurity)
Cybersecurity risks remain a significant threat to the financial system and the review of credit union information security practices continues to be a priority for the agency. The NCUA continues to develop updated information security examination procedures that are tailored to institutions of varying size and complexity. These procedures will continue to be piloted in 2022, with the goal of having them finalized in 2022.

Payment Systems
Payment products, services, and operations is a growing area of complexity with increased fraud, breach, and data security risks for credit unions and consumers. The NCUA will include increased focus in this area.

Bank Secrecy Act Compliance and Anti-Money Laundering/Countering the Financing of Terrorism
Bank Secrecy Act (BSA) compliance and Anti-Money Laundering (AML)/Countering the Financing of Terrorism (CFT) continue to be national priorities. The Anti-Money Laundering Act of 2020 (AML Act) and the Corporate Transparency Act amended the BSA for the first time since 2001. There will be several new requirements for credit unions to update their risk-based BSA and AML/CFT policies, procedures, and processes. These requirements will be implemented incrementally throughout 2022. The NCUA will communicate changes in BSA and AML/CFT requirements, and any impacts on examinations to credit unions.

Capital Adequacy and Risk Based Capital Rule Implementation
Effective Jan. 1, 2022, complex credit unions are subject to the risk-based capital requirements in the final risk-based capital rule. A complex credit union has total assets that exceed $500 million, as reflected in the most recent Call Report. In support of this new capital adequacy framework, there will be changes to the quarterly Call Report starting with the reporting period of March 31, 2022. Complex credit unions’ prompt corrective action net worth categories will incorporate the results of their risk-based capital ratios beginning with the March 31, 2022, Call Report cycle. NCUA examiners will review the accuracy of complex credit unions’ reporting for the new data elements required in the risk-based capital schedule of the Call Report.

Loan Loss Reserving
For loan loss reserving, credit unions are required to implement the Financial Accounting Standards Board’s Accounting Standards Update No. 2016-13, Topic 326 by Jan. 1, 2023 (commonly referenced as the current expected credit losses methodology, or CECL). For credit unions not yet adopting CECL, they will follow FASB Accounting Standards Codification (ASC) Subtopic 450-20 (loss contingencies) and/or ASC 310-10 (loan impairment). Federal credit unions with less than $10 million in assets are not required to follow generally accepted accounting principles (GAAP), and therefore do not have to implement CECL. However, all federal credit unions will be required to have a reasonable reserve methodology, provided that it adequately covers known and probable loan losses. Federally insured, state-chartered credit unions should refer to state law on GAAP accounting requirements and CECL standard applicability. NCUA examiners will be evaluating the adequacy of credit unions’ Allowance for Loan and Lease Losses (ALLL) accounts. Examiners will also discuss the credit union’s preparations to implement CECL.

Consumer Financial Protection
The NCUA will continue to examine for compliance with applicable consumer financial protection laws and regulations during every federal credit union examination. In 2022, examiners will focus on areas related to the COVID-19 pandemic; fair lending; Servicemembers Civil Relief Act; Fair Credit Reporting Act; and overdraft programs.

Loan Participations
NCUA examiners will verify that credit unions have evaluated the risk in the loan participation transactions and how that risk fits within the tolerance levels established by the credit union’s board. At a transactional level, each loan participation must have separate and distinct records for individual payments, including principal, interest, fees, escrows, and other information relating to individual loans. While remittances to the credit union may come in a single payment, credit unions must reconcile this information to the servicer’s records and follow prudent third-party due diligence practices when purchasing loan participations.

The offsite posture of many credit unions over the last two years has increased the potential fraud risks. The NCUA will review credit union efforts to deter and detect fraud, including internal controls and separation of duties. Transaction testing will be part of the examination procedures.

London Inter-Bank Offered Rate (LIBOR) Transition
On March 5, 2021, the United Kingdom Financial Conduct Authority and ICE Benchmark Administration announced that the one-week and two-month U.S. dollar LIBOR settings will cease to be published immediately after Dec. 31, 2021. The overnight and one-, three-, six-, and 12-month USD LIBOR settings will be extended through June 2023, which will provide additional time to wind down or renegotiate existing contracts that reference these LIBOR settings. During 2022, NCUA examiners will focus on credit unions with significant LIBOR exposure or inadequate fallback language.

Interest Rate Risk
Credit unions have experienced high share growth over the last two years. If credit unions invested surplus funds in longer duration assets, this could result in greater sensitivity to market risk, and therefore increased interest rate risk. Conversely, keeping all assets short-term can impact current period earnings. Credit unions should continue to carefully model and manage interest rate risk using a broad range of scenarios that include various prepayment speed and yield curve assumptions.

Exam Program Updates

NCUA Connect & MERIT
In 2021, the NCUA trained all NCUA and state regulator users on its new examination platform, the Modern Examination and Risk Identification Tool (MERIT) and associated systems. This new examination platform will provide important benefits to the NCUA and credit unions.

Recording of Official Meetings
As noted in the NCUA’s Examiner’s Guide, “credit unions may record their meetings” (exit conferences and joint conferences). The officials should ask for the examiner’s concurrence before recording the meeting, a request to which the examiner should normally agree. Credit unions should refer to local, state, and federal laws, and consult with legal counsel prior to recording conversations, especially as it relates to any requirements to obtain consent from the parties involved. Also consistent with the Examiner’s Guide, “the examiner has the discretion to request that a copy of the recording or a transcript be sent to the examiner.”

In October 2021, the NCUA Board finalized a rule that added the “S” component (for Market Sensitivity) to the existing CAMEL rating system and redefined the “L” component, thus updating the CAMEL rating system to CAMELS. Adoption of CAMELS allows the NCUA, state supervisory authorities, and federally insured credit unions to achieve greater transparency in the ratings and clearly distinguish between liquidity risk in the “L” component and sensitivity to market risk captured in the “S” component. The final rule is effective for examinations starting on or after April 1, 2022.

The evaluation of the “S” component reflects the credit union’s exposure to changes in its earnings and capital position arising from changes in market prices and interest rates. Effective risk management programs include comprehensive interest rate risk policies, appropriate and identifiable risk limits, clearly defined risk mitigation strategies, and a suitable governance framework.

In evaluating the “L” component to determine the adequacy of a credit union’s liquidity profile, examiners will consider the current and prospective sources of liquidity compared to funding needs. The adequacy of liquidity risk management is also evaluated relative to a credit union’s size, complexity, and risk profile.

Additional details and resources can be found here: LCU #22-CU-02

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