The National Credit Union Administration (NCUA) has already issued a significant amount of 2021 guidance for credit unions. The Board held its first open meeting for 2021, and the agency has released its annual letter to credit unions outlining supervisory priorities for examinations in 2021. The NCUA and the Office of the Comptroller of the Currency (OCC) have also issued proposed rules pertaining to Suspicious Activity Reporting (SAR) requirement exemptions. There’s a lot to digest early on this year, so I want to look at key takeaways from each release to help credit unions prepare for new and evolving regulations.
NCUA’s First Open Meeting of 2021
On January 14, 2021, the NCUA Board held its first open meeting for the year. During the meeting, the Board approved one advanced notice of proposed rulemaking, three proposed rules, and one final rule.
Risk-Based Capital – In 2015, the NCUA set the risk-based capital requirements that would become effective on January 1, 2022. The effective date was later delayed to reevaluate the capital standards for federally insured credit unions that are classified as “complex” or those with total assets exceeding $500 million. In their 2021 meeting, the Board approved an advance notice of proposed rulemaking, which establishes two approaches to simplify risk-based capital requirements. Once the advanced notice of proposed rulemaking enters the Federal Register, it will remain open for comments for 60 days.
The Board approved a proposed rule pertaining to risk-based capital in the interim that would raise the asset threshold for defining a credit union as “complex.” According to the NCUA, the rule “would amend the NCUA’s regulations to provide that any risk-based net worth requirement will be applicable to only a federally insured, natural-person credit union with quarter-end assets that exceed $500 million and a risk-based net worth requirement that exceeds six percent.” Once the proposed rule enters the Federal Register, it will remain open for comments for 30 days.
CAMEL Rating System – The Board approved a proposed rule pertaining to the CAMEL rating system to increase transparency and align the regulation of credit unions with other financial institutions. Currently, CAMEL is an acronym for Capital Adequacy; Asset Quality; Management; Earnings; and Liquidity and Asset Liability Management. The rule, which could take effect as early as the first quarter of 2022, would add an “S” to represent “Sensitivity to Market Risk” and would redefine the “L” as Liquidity Risk. Once the proposed rule enters the Federal Register, it will remain open for comments for 60 days.
CUSO Lending – The Board approved a proposed rule to amend current credit union service organization (CUSO) regulations by adding “originating any type of loan that a federal credit union (FCU) may originate” to the list of permissible activities and services for CUSOs and by granting the Board authority to approve permissible activities. Once the proposed rule enters the Federal Register, it will remain open for comments for 30 days.
Corporate Credit Union Regulations – The Board approved a final rule, effective January 1, 2022, pertaining to corporate credit union regulation. According to the NCUA, the final rule “updates the definitions in this regulation and makes clear that corporate credit unions may purchase subordinated debt instruments issued by natural-person credit unions; and specifies the capital treatment of these instruments for corporate credit unions that purchase them.”
NCUA’s 2021 Supervisory Priorities
The NCUA also released their annual letter to credit unions containing supervisory priorities for 2021. As credit unions prepare for upcoming NCUA examinations, they should focus on the priorities outlined below.
Allowance for Loan and Lease Losses (ALLL) – With the transition to CECL delayed until January 2023, the examination focus moves back to evaluating the ALLL under current generally accepted accounting principles (GAAP). Examiners will review credit union’s related policies, procedures, and documentation, as well as their adherence to GAAP.
Bank Secrecy Act (BSA) and Anti-Money-Laundering (AML) Compliance – There are numerous improvement efforts in the works for regulation and supervision of BSA and AML through the collaboration of the NCUA, FinCEN, and federal banking agencies. Examiners will focus on customer due diligence, beneficial ownership requirements, proper filing of SARs and CTRs, and reviews of bi-weekly 314(a) information requests from FinCEN.
Coronavirus Aid, Relief and Economic Security Act – Examiners will review credit union compliance under the Consolidated Appropriations Act, 2021 and continue to review compliance with CARES Act provisions, including the suspended requirement (through January 1, 2022) to categorize certain loan modifications as troubled debt restructurings (TDRs); administrative provisions for the additional 2020 recovery rebates; and modifications, credit reporting, forbearances, and foreclosures that were conducted in 2020.
Consumer Financial Protection – Examiners will perform a risk-focused assessment of your consumer financial protection regulations. For 2021, there are emerging concerns related to the COVID-19 pandemic. The NCUA will focus on your Fair Lending Compliance Management System, including management oversight, procedures, monitoring, corrective action, and other areas.
Credit Risk Management – Examiners will focus on loan underwriting standards and credit risk-management procedures, as well as on controls, reporting, and tracking of programs to provide funds to borrowers affected by COVID-19. To prepare, credit unions should ensure appropriate written policies and internal controls are in place to determine how accommodations are offered and how they are reported to credit bureaus. According to the letter, “Credit unions must demonstrate they understand and are continually evaluating credit risks specific to this crisis.”
Information Systems and Assurance (Cybersecurity) – The NCUA will focus on reviewing information systems and assurance programs. The agency continues to roll out its Information Technology Risk Examination for Credit Unions (InTREx-CU) platform in 2021. The platform will allow “examiners and credit unions to identify and remediate potential high-risk areas by identifying critical information security program deficiencies.”
LIBOR Transition – LIBOR has commonly been used in setting the interest rate for adjustable-rate or variable-rate financial products. Beginning in 2022, this reference rate will no longer be available. Expect a review of your exposure and plans for the transition as part of your NCUA examination.
Liquidity Risk – Managing financial risk is an integral part of supervisory responsibility. According to the NCUA’s letter, credit unions can expect examinations to include a review of:
- Sudden and significant share outflows;
- A broad range of possible interest rate paths to identify the potential variability in loan and securities cash flows;
- Changes in cash flow projections for relevant factors, such as a change in prepayment speeds, decay rates, share compositions and volumes;
- The effects of loan payment forbearance, loan delinquencies, projected credit losses and loan modifications on liquidity and cash flow forecasting;
- The decline in credit quality and resulting market value of assets as it relates to external borrowing capacity, and;
- Stress scenarios that include the reduction of available credit lines to ensure an adequate mix of diversified funding sources.
Serving Hemp-Related Businesses – The NCUA encourages credit unions that serve hemp-related businesses to proceed with caution and to “understand the complexities and risks involved, and secure the necessary expertise and resources to conduct this activity safely and soundly and in compliance with all applicable laws and regulations.”
NCUA Proposed Rule
The NCUA Board approved a proposed rule to allow the NCUA in conjunction with FinCEN to grant exemptions from SAR requirements. Based on factors deemed appropriate by the NCUA, and if the exemption “is consistent with the purposes of the BSA, if applicable, and with safe and sound practices,” the NCUA will consider exemptions for federally insured credit unions on a case-by-case basis. Exemptions may also be granted to federally insured credit unions that meet BSA requirements through their own innovative means. After the proposed rule is published in the Federal Register, it will remain open for comments for 30 days.
We’re Here to Help
ARB’s Credit Union Advisory Services Team is available to assist with understanding new standards, staying alert to accounting updates, and creating a plan for implementation and compliance.
by Samantha Pedersen, CPA
Samantha Pedersen joined ARB in 2004 and currently serves as a director. She provides business advisory and attest services primarily to credit unions, commercial businesses, manufacturers, and nonprofit organizations. Sam is responsible for coordinating the training and implementation of Financial Accounting Standards Board (FASB) updates at ARB.