The 2023 NCUA Supervisory Priorities

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

In 2023, the focus is shifting away from assisting members through the COVID-19 pandemic. Instead, attention will be put on areas affected by the current high-interest rate environment.

Read on for our full recap of the NCUA’s supervisory priorities letter.

Download our revised Credit Union Audit Checklist here.

NCUA Supervisory Priorities for 2023

The following are the NCUA’s main areas of interest in 2023.

1.  Interest Rate Risk

Major increases to interest rates over the last year have increase credit unions’ interest rate risk (IRR). Because assets and liabilities are affected differently, net values and projected earnings may have changed.

To ensure a well-managed IRR, the NCUA will look at:

• Well-documented key assumptions and data sets;
• Properly measured and controlled IRR exposure;
• Communication with leaders and boards about results; and
• Action is taken to remain within policy limits.

Key links include:

• Updates to IRR frameworks in a recent Letter to Credit Unions and Supervisory Letter
• References for IRR in the Examiner’s Guide under Workpapers and Resources

2.  Liquidity Risk

High-interest rates have reduced cash flow, thereby increasing liquidity risk. The NCUA will review liquidity policies, procedures, and risk limits to ensure your credit union’s sources of liquidity meet its funding needs.

Examiners will look at:

• Interest rates vs. assets vs. borrowing capacity;
• Liquidity modeling;
• Cash flow projections; and
• Contingency funding plans.

3.  Credit Risk

High inflation, high interest rates, and increased unemployment may affect borrowers’ ability to repay debt. Examiners will look for adjustments to loan underwriting standards, portfolio monitoring practices, and loan workout strategies for borrowers who may be unable to pay.

Key links include:

• Interagency policy statement on allowances for credit losses and guidance on credit risk review systems
• Letter to credit unions on working with borrowers affected by COVID-19
• Letter to credit unions on HELOCs nearing their end-of-draw period
• Letter to credit unions on commercial real estate loan workouts
• Letter to credit unions on concentration risk
• Letter to credit unions on working with residential mortgage borrowers
• Letter to credit unions on loan charge-off guidance

4.  Fraud Prevention and Detection

Fraud risk is still high, and the NCUA will deliver a questionnaire prior to examinations to identify any issues. The questionnaire will arrive with the Items Needed List through a MERIT survey, and the credit union CEO or other executive will need to complete it.

Key resource: the NCUA Fraud Prevention Resources page

5.  Information Security (Cybersecurity)

Cybersecurity risks continue to grow and evolve, posing a constant risk to increasingly complex credit union operating environments. The NCUA created new examination procedures for 2023 (link below). Credit unions are also encouraged to conduct cybersecurity self-assessments with the Automated Cybersecurity Evaluation Toolbox (ACET).

Key resources include:

• New procedures for the Information Security Examination
• The Automated Cybersecurity Evaluation Toolbox
• The NCUA Cybersecurity Resources page

6.  Consumer Financial Protection

First, the NCUA will review compliance with climate-related financial risk, such as Flood Disaster Protection Act requirements.

Examiners will also look for trends in areas of high consumer complaint. Consequently, they will deepen their review of overdraft programs (and any changes thereto), including advertising, balance calculation measures, and settlement processes.

Other areas of interest for consumer protection include:

• Fair lending (including residential real estate appraisals for bias)
• The Truth in Lending Act (especially with regards to auto lending)
• The Fair Credit Reporting Act

Other Exam Program Updates

The following are a few additional updates to the NCUA’s 2023 examinations:

1.  Current Expected Credit Loss (CECL) Implementation

The dreaded CECL conversion is finally here. All credit unions with at least $10m in assets are required to have adopted CECL as of Jan 1, 2023.

Examiners will review all policies, methodology documentation, assumptions, and adjustments for credit unions’ Allowance for Credit Losses (ACL). However, credit union whose ACL is already reviewed (by a supervisory committee, internal/external auditor, e.g.), that counts for the evaluation.

Key resources include:

• The CECL Transition Rule (for adjustments to undivided earnings)
• FASB’s Accounting Standards Update for financial instruments – credit losses
• FASB staff Q&A on “whether the weighted-average remaining maturity method is an acceptable method to estimate expected credit losses”
• FASB staff Q&A on “developing an estimate of expected credit losses on financial assets”
• NCUA letter to credit unions on FAQs on the New Accounting Standard on Financial Instruments Credit Losses
• NCUA letter to credit unions on the simplified CECL tool
  
  

2.  Succession Planning

Credit unions—particularly smaller ones—continue to consolidate. The NCUA has found that often, this is the result of inadequate succession planning.

In 2023, the NCUA will request and review credit unions’ succession plans. The purpose of this review is to gather more information and better understand the industry’s needs. As an editorial aside, what they learn may be used to inform policy around succession planning.

The NCUA doesn’t plan to evaluate succession plans past the “Management” component of their CAMELS rating. Furthermore, they don’t intend to issue any findings or DORs regarding succession planning unless the credit union is violating one of its own policies on succession planning.

3.  Support for Small Credit Unions and Minority Depository Institutions

The NCUA is continuing its Small Credit Union and Minority Depository Institutions (MDIs) support program in 2023. The goal of the program is to assist and preserve these credit unions so that they can continue serving underserved communities. The NCUA has developed MDI-specific exam procedures and improved its program benefits.

New program benefits will include:

• Greater awareness of the needs of these credit unions and their role;
• Expanded opportunities for NCUA support (i.e. grants, training, etc.); and
• Furthering partnerships with organizations that can support these credit unions.
  
  

4.  Post-Examination Survey

The NCUA is building on its post-examination survey pilot and focus group research. The post-examination survey is updated for 2023.

Additional Reading

The full text of the NCUA’s 2023 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. It will help you prevent overdue and unresolved findings at your credit union!