NCUA’s 2023 Supervisory Priorities for Credit Unions

NCUA’s 2023 Supervisory Priorities for Credit Unions

The National Credit Union Administration (NCUA) has released its annual letter to credit unions containing supervisory priorities for 2023. While many of the NCUA’s 2023 supervisory priorities build on their priorities and guidance issued in 2022, there are some new areas of focus. Credit unions should focus on the supervisory priorities outlined below as they prepare for their upcoming NCUA examinations.

Interest Rate Risk Management

Interest rate risk (IRR) involves risks related to capital, asset quality, earnings, and liquidity. But in 2022, because the “S” component (Sensitivity to Market Risk) was added to the CAMELS rating system, the NCUA designated IRR as a specific rating category, separate from liquidity risk. In 2023, examiners will review your credit union’s IRR program to determine whether:

  • key assumptions and related data sets are reasonable and well documented;
  • your credit union’s overall level of IRR exposure is properly measured and controlled;
  • results are communicated to decision-makers and the board; and
  • your credit union is taking proactive action to remain within safe and sound policy limits.

Liquidity Risk Management

To determine the adequacy of your credit union’s liquidity risk management framework, the NCUA will examine the “L” component of the CAMELS rating. Examiners will focus on your credit union’s current and prospective sources of liquidity compared to funding needs to determine the adequacy of your liquidity profile. Full resources and guidance on liquidity risk can be found in the NCUA’s Examiner’s Guide, but examiners will:

  • evaluate the
    • potential effects of changing interest rates on the market value of assets and borrowing capacity; and
    • appropriateness of contingency funding plans to address plausible unexpected liquidity shortfalls.
  • perform a scenario analysis for
    • liquidity risk modeling, including possible member share migrations; and
    • changes in cash flow projections for an appropriate range of relevant factors.

Credit Risk Management

Due to rising interest rates, high inflation, and the likelihood of increased unemployment rates, NCUA examiners will focus on the soundness of your existing lending programs. In addition, the NCUA will review adjustments made to loan underwriting standards and portfolio monitoring practices, and your credit union’s loan workout strategies for its borrowers facing financial hardships.

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 carefully consider all factors in evaluating your credit union’s efforts to provide relief for borrowers, including whether the efforts were reasonable and conducted with proper controls and management oversight.”

Cybersecurity & Fraud

NCUA examiners will evaluate whether your credit union has established an adequate information security program to protect your credit union and your members. In 2023, the NCUA will use updated Information Security Examination procedures, which are tailored to institutions of varying size and complexity, during its examinations.

Your credit union may use the NCUA’s Automated Cybersecurity Evaluation Toolbox to assist with voluntary, cybersecurity self-assessments. The toolbox will prepare you for an Information Security Examination.

Examiners will also continue to review internal controls and separation of duties to identify and prevent fraud. In 2023, the NCUA will implement a management questionnaire “designed to enhance the identification of fraud red flags, material supervisory concerns, or other potential new risks to which your credit union may be exposed.”

For more cybersecurity and fraud information and resources, visit the NCUA’s Cybersecurity Resources & Fraud Prevention Resources webpages.

Consumer Financial Protection

Examiners will perform a risk-focused assessment of your compliance with consumer financial protection laws and regulations. In addition, examiners will continue to review compliance with Flood Disaster Protection Act requirements, including disclosures.

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:

  • Overdraft programs
    • As in 2022, this includes:
      • monitoring tools and the audit process for the programs;
      • communications provided to consumers about such programs.
    • For 2023, examinations will also include:
      • website advertising;
      • balance calculation methods;
      • settlement processes; and
      • adjustments made to your overdraft programs to address:
        • consumer compliance risk; and
        • potential consumer harm from unanticipated overdraft fees.
  • Fair lending, including
    • policies and practices “for steering or loan pricing discrimination risk factors”;
    • whether policies and procedures exist to evaluate the consistency, fairness, and accuracy of the appraisals it obtains; and
    • a review of residential real estate appraisals for any bias.
  • The Truth in Lending Act, including
    • auto lending requirements and disclosures for credit unions with high auto loan growth over the past year.
  • The Fair Credit Reporting Act, including
    • credit reporting protections related to “furnishing, adverse action notices, risk-based pricing, and consumer rights disclosures.”

Additional Updates

Allowance for Credit Loss (ACL) – Federal credit unions with $10 million or more in assets were required to adopt the current expected credit losses (CECL) methodology of accounting for loan losses on or before January 2023. All federal credit unions under that threshold are required to have “any reasonable reserve methodology (incurred loss), provided it adequately covers known and probable loan losses.”

Examiners will review ACL policies, procedures, documentation, and adherence to generally accepted accounting principles (GAAP), if applicable, as well as independent reviews of their reserving methodology and documentation practices conducted by the Supervisory Committee, an internal auditor, or an external auditor.

Succession Planning – In 2023, examiners will request information about your credit union’s approach to succession planning to assess the needs of the industry as a whole. Examiners will not evaluate this information beyond what would normally be considered in the “M” component of the CAMELS rating. However, in some cases, they will issue an Examiner’s Finding or Document of Resolution if the credit union has not conducted any or adequate succession planning.

For full details on the matters included among the NCUA’s 2023 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 2023 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

sam pedersen thumbnailSamantha 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.

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