2022 ncua credit union supervisory priorities with redboard audit and examination software

Each year, the NCUA sends out their list of supervisory priorities for the year. Credit unions preparing for their exams can reference the letter to focus on specific areas.

As in recent years, the NCUA is again encouraging credit unions to assist members through the COVID-19 pandemic.

Given ongoing health concerns and uncertainty, the NCUA will continue conducting examinations and supervision activities primarily offsite. They will also continue their flexible examination scheduling policy through 2022. Credit unions under $50 million will receive examinations conducted based on the Small Credit Union Exam Program. For all other credit unions, NCUA examiners will use the agency’s risk-focused examination procedures.

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NCUA Supervisory Priorities for 2022

The following are the NCUA’s main areas of interest in 2022.

1.    Credit Risk Management

The NCUA expects all credit union rick management practices to be commensurate with the level of complexity and nature of their lending activities. They’ll focus on adjustments credit unions made to lending programs to address borrowers facing hardship.

The NCUA will also focus on reviewing policies around loan workout strategies, risk-management practices, and efforts to borrowers under distress (including the CARES Act). In particular, the NCUA will evaluate controls, reporting, and tracking of these programs.

Key links include:

2.    Information Security (Cybersecurity)

The NCUA expects negative effects from cybersecurity threats to increase. They will focus on ransomware, third-party/supply chain risks, and business email compromises in particular.

The NCUA will continue to develop updated information security examination procedures tailored to institutions of varying size and complexity through 2022 (with a goal of completing updates in 2022).

The NCUA recommends using their Automated Cybersecurity Evaluation Toolbox (ACET) application, which enables credit unions to conduct an FFIEC Cybersecurity Assessment Tool maturity assessment.

Key link: The NCUA’s Cybersecurity Resources webpage

3.    Payment Systems

As consumer expectations for speed and new technologies continue to shape the direction of payments trends, the NCUA will pay close attention to the underlying security of payment platforms. They’ll look for risk of fraud, illicit use, and breaches in data security.

4.    Bank Secrecy Act (BSA) Compliance and Anti-Money Laundering (AML) / Countering the Financing of Terrorism (CFT)

NCUA examiners conduct BSA compliance and AML/CFT reviews during every examination and take appropriate action, when necessary, to ensure credit unions meet their obligations.

There are several new requirements for credit unions to update their risk-based BSA and AML/CFT policies, procedures, and processes (after amendments to the AML Act and Corporate Transparency Act).

The NCUA will continue to focus on compliance for these national priorities.

Key link: The NCUA’s Bank Secrecy Act Resources webpage

5.    Capital Adequacy and Risk Based Capital Rule Implementation

NCUA examiners will be mindful of the effects of recent excess share growth on net worth and risk-based capital (RBC) ratios. NCUA examiners will ensure that credit unions are evaluating the impact of their COVID-19 response and relief efforts on their capital position and financial stability.

Effective January 1, 2022, complex credit unions (total assets >$500m) are subject to the risk-based capital requirements in the final risk-based capital rule.

Accordingly, the NCUA will change 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, during which the NCUA will review the accuracy of complex credit unions’ reporting for those new data elements.

6.    Loan Loss Reserving

Credit unions are required to switch to Current Expected Credit Loss (CECL) methodology by January 1, 2023.

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 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 generally accepted accounting principles (GAAP) accounting requirements and CECL standard applicability.

NCUA examiners will evaluate credit unions Allowance for Loan and Lease Losses (ALLL) accounts by reviewing:

  • ALLL policies and procedures;
  • Documentation of an ALLL reserving methodology, including modeling assumptions and qualitative factor adjustments;
  • Adherence to GAAP; and
  • Independent reviews of credit union reserving methodology and documentation practices by the Supervisory Committee or by an internal or external auditor.

Examiners will also discuss preparations to implement CECL. Key links include:

7.    Consumer Financial Protection

The NCUA will examine for compliance with consumer financial protection laws and regulations. The scope of review is risk-focused, based on each credit union’s compliance record, product and service suite, and any new or emerging concerns.

In particular, examiners will focus on:

  • The COVID-19 pandemic
  • Fair lending
  • Servicemembers Civil Relief Act
  • Fair Credit Reporting Act
  • Overdraft programs

NCUA examiners will also review policies, procedures, and reporting around mortgage forbearances and loan accommodations. They will look for signs of discrimination risk in lending and for policies and procedures to evaluate consistency, fairness, and accuracy of credit union appraisals.

Finally, the NCUA will ask for more information about credit union policies and procedures around overdraft programs—this will inform a fuller review of overdraft programs in 2023.

8.    Loan Participations

The NCUA encourages credit unions to use safe-and-sound practices in managing loan participation portfolios. Examiners will verify that credit unions have evaluated the risk in the loan participation transactions established by the credit union’s board. Also, 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.

9.    Fraud

Increasingly offsite operations increase potential fraud risks. The NCUA will review credit union efforts to deter and detect fraud, including internal controls and separation of duties—this will include transaction testing.

10.    London Inter-Bank Offered Rate (LIBOR) Transition

NCUA examiners will focus on credit unions with significant LIBOR exposure or inadequate fallback language. Supervision framework for evaluating LIBOR transition plans can be found here and here.

Examiners will look for plans to transition away from using USD LIBOR settings by no later than December 31, 2021, and to provide fallback language and a replacement rate for all legacy LIBOR-based contracts.

Key links:

11.    Interest Rate Risk

The NCUA will look for carefully modeled and managed interest rate risk across a broad range of scenarios that include various repayment speed and yield curve assumptions.

Key link: The Interest Rate Risk chapter of the NCUA Examiner’s Guide

Exam Program Updates

There are three program updates for NCUA examinations.

1.    NCUA Connect and MERIT

The NCUA and state regulator users will use its new examination platform, the Modern Examination and Risk Identification Tool (MERIT) and associated systems.

Credit unions will use the new MERIT platform and its related systems during their examinations. Additional information about these modernized tools can be found on the NCUA’s website. The NCUA allocated time for examiners to work with credit unions on how to use these new tools during 2022.

2.    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 permission to record first, and the examiner should normally agree. (The examiner may request a copy or transcript of the recording.)

Rare cases of disagreement will be addressed at the regional management level. 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.

3.    CAMELS Update

The final rule for the change from CAMEL to CAMELS is effective for examinations starting on or after April 1, 2022.

The change allows the NCUA, state supervisory authorities, and federally insured credit unions to achieve greater transparency in ratings and better distinguish between liquidity risk and sensitivity to market risk.

In more detail, the NCUA added the “S” component (for Market Sensitivity) to reflect credit union exposure to changes in earnings and capital position arising form changes in market prices and interest rates. The NCUA redefined the “L” component to evaluate the adequacy of credit union liquidity profiles, especially as they relate to funding needs. Liquidity risk management is also evaluated relative to credit union size, complexity, and risk profile.

Additional Reading

The full text of the NCUA’s 2022 Supervisory Priorities can be found here on their website. We encourage you to give them a full review.

Also, download our Unresolved Findings Eliminator if you have unresolved issues from previous exams or audits. It will help you prevent overdue and unresolved findings at your credit union!

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