The National Credit Union Administration (NCUA) has released its annual letter to credit unions containing supervisory priorities for 2022. While many of the NCUA’s 2022 supervisory priorities build on their priorities and guidance issued in 2021, there are some new areas of focus. Credit unions should pay close attention to compliance in 2022 and focus on the supervisory priorities outlined below as they prepare for their upcoming NCUA examinations.
Credit Risk Management
NCUA examiners will focus on the adjustments your credit union has made to its lending programs, specifically to address the controls, reporting, and tracking of borrowers facing financial hardship, “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 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. The letter states, “NCUA examiners will not criticize a credit union’s efforts to provide prudent relief for borrowers when such efforts are conducted in a reasonable manner with proper controls and management oversight.”
Cybersecurity & Fraud
The NCUA will focus on reviewing information systems and assurance programs due to the continued increase in cybersecurity risks. The Agency will also perform transaction testing and focus on separation of duties and internal controls to deter and detect fraud risks associated with the increasing “offsite posture of many credit unions over the last two years.”
To prepare, credit unions can utilize the NCUA’s Automated Cybersecurity Evaluation Toolbox (ACET) application, a voluntary program that aims to help credit unions “determine and measure their cybersecurity preparedness.” The NCUA’s letter also announces additional cybersecurity procedures to come later in 2022.
NCUA examiners will focus on your technology, applications and related controls, and “the underlying security of the platforms facilitating the transactions” to stave off the increased risk of “fraud, illicit use, and breaches of data security.”
Because new payment products, services, and operations are being introduced and existing systems continue to evolve, credit unions will need to monitor related complexities and risks for themselves and their members.
NCUA examiners will focus on Bank Secrecy Act (BSA), Anti-Money Laundering (AML), and Countering the Financing of Terrorism (CFT) compliance.
Recent legislation has amended the BSA. Several new requirements will be coming down the pipeline for credit unions in 2022, including updates to risk-based BSA and AML/CFT policies, procedures, and processes. Credit unions need to remain up-to-date on the NCUA’s guidance on BSA and AML/CFT requirements and updates to the Examination Manual.
Capital Adequacy and Risk-Based Capital Rule Implementation
According to the letter, “NCUA examiners will be mindful of the effects of recent excess share growth on net worth and risk-based capital (RBC) ratios.” The Agency’s goal is to ensure that credit unions evaluate how their COVID-19 response and relief efforts impact their financial stability and capital position.
In their examinations of complex credit unions, NCUA examiners will review the accuracy of the “credit unions’ reporting for the new data elements required” (effective January 1, 2022) in the risk-based capital schedule of the Call Report. A “complex credit union” is a credit union with “total assets that exceed $500 million, as reflected in the most recent Call Report.” These credit unions should prepare for their prompt corrective action net worth categories to incorporate the results of their risk-based capital ratios in their quarterly Call Reporting, starting with the reporting period of March 31, 2022.
Loan Loss Reserving
Federal credit unions with $10 million or more in assets must adopt the current expected credit losses (CECL) methodology of accounting for loan losses by January 2023. For those credit unions that have not yet adopted CECL, examinations will focus on adherence to the Allowance for Loan and Lease Losses (ALLL) methodology.
Examiners will review credit union’s ALLL policies, procedures, documentation (of methodology, modeling assumptions, and qualitative factor adjustments), and their adherence to GAAP. Credit unions should also prepare to have independent reviews of their reserving methodology and documentation practices conducted by the Supervisory Committee, an internal auditor, or an external auditor.
All federal credit unions, regardless of size, “will be required to have a reasonable reserve methodology, provided that it adequately covers known and probable loan losses.” The letter also advises federally insured, state-chartered credit unions to “refer to state law on GAAP accounting requirements and CECL standard applicability.”
Consumer Financial Protection
Examiners will perform a risk-focused assessment of your compliance with consumer financial protection laws and regulations. Your examination will be based on your products and services, and NCUA examiners will consider your compliance record and take new or emerging member complaints, and recent changes to regulatory requirements concerns into account as they review your consumer financial protection measures related to:
- The COVID-19 pandemic, including
- related mortgage forbearances and other loan accommodations;
- reporting of these accommodations under the amendments the CARES Act made to the Fair Credit Reporting Act;
- applicable policies and procedures regarding the temporary COVID-19; and Mortgage Servicing Rule (Regulation X).
- Fair lending, including
- policies and practices “that indicate discrimination risk or loan portfolio and underwriting discrimination risk”; and
- whether policies and procedures exist to evaluate the consistency, fairness, and accuracy of the appraisals it obtains.
- Servicemembers Civil Relief Act
- Fair Credit Reporting Act
- Overdraft programs, including
- governing policies and procedures;
- monitoring tools and the audit process for the programs; and
- the communications it provides to consumers about such programs.
NCUA examiners will assess whether your credit union utilizes safe-and-sound practices to manage your loan participation portfolios. The Agency will verify that your credit union has “evaluated the risk in the loan participation transactions and how that risk fits within the tolerance levels” established by your board.
To prepare, your credit union should ensure that, at a transactional level, each loan participation has “separate and distinct records for individual payments, including principal, interest, fees, escrows, and other information relating to individual loans.” Your credit union must properly reconcile this information to the servicer’s records and follow applicable third-party due diligence practices when purchasing loan participations.
The London Inter-Bank Offered Rate (LIBOR) rate has commonly been used in setting the interest rate for adjustable-rate or variable-rate financial products, but, as of January 1st, the 1-week and 2-month LIBOR reference rates are no longer available. While they will eventually become unavailable as well, the overnight, 1-month, 3-month, 6-month, and 12-month reference rates have been extended to June 2023.
The NCUA has previously advised credit unions to be prepared for the transition with “fallback language and a replacement rate(s) for all legacy LIBOR-based contracts” by the end of 2021. Credit unions may continue using NCUA’s LIBOR Assessment Workbook for assistance and should expect a review of their transition as part of their upcoming NCUA examinations.
Interest Rate Risk
If your credit union invested surplus funds in longer-duration assets, your organization may have greater sensitivity to market risk and, in turn, increased interest rate risk. On the other hand, your current period earnings could be impacted if your credit union keeps all assets short-term.
According to the letter, “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.”
Additional Updates and Resources
The MERIT Platform – The NCUA announced that credit unions will need to use their new Modern Examination and Risk Identification Tool (MERIT) platform and its related systems during their examinations this year. The Agency has allocated time in 2022 for credit unions to train on these new tools. Credit unions may find more information on MERIT and other Examination Modernization Initiatives (EMIs) on the NCUA’s dedicated webpage.
CAMEL Rating System – Currently, CAMEL is an acronym for Capital Adequacy; Asset Quality; Management; Earnings; and Liquidity and Asset Liability Management. The rule, which is effective for examinations starting on or after April 1, 2022, adds an “S” to represent “Sensitivity to Market Risk” and redefines the “L” as Liquidity Risk.
In examining the “S” component, the NCUA will focus on your credit union’s “exposure to changes in its earnings and capital position arising from changes in market prices and interest rates.” They also advise credit unions that their risk management programs should include “comprehensive interest rate risk policies, appropriate and identifiable risk limits, clearly defined risk mitigation strategies, and a suitable governance framework.”
In examining the “L” component, the NCUA will focus on your credit union’s liquidity risk management by examining the current and prospective sources of liquidity compared to funding needs to determine the adequacy of a credit union’s liquidity profile.
For full details on the matters included among the NCUA’s 2022 supervisory priorities, credit unions should consult the Examiner’s Guide.
We’re Here To Help
ARB’s Credit Union Advisory Services Team is available to assist with understanding the NCUA’s 2022 supervisory priorities, staying alert to other accounting and regulatory updates, and creating a plan for implementation and compliance. Contact me today for more information on this information or other credit union regulations and guidelines.
by Sam 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.