Compliance Blog

Written by Brandy Bruyere, Director of Regulatory Compliance

Happy Wednesday! Many of you probably noticed that NCUA issued its annual Supervisory Priorities last week in Letter to Credit Unions 17-CU-01. Meanwhile, credit unions have had questions about the Letter to Credit Unions on NCUA's Risk-Based Examination Scheduling Policy (16-CU-12). Today's blog will provide a high level overview of these two pieces.

Supervisory Priorities. The 2017 Supervisory Priorities are not surprising, our old friends cybersecurity and Bank Secrecy Act compliance remain high on the list. For cybersecurity, NCUA is encourage[ing] credit unions to use the Cybersecurity Assessment Tool, (CAT) and will be enhancing the examination focus with a structured assessment process. In other words, making use of the CAT. NAFCU members can find our user-friendly workbook version of CAT here.

NCUA will also focus on the following:

• internal controls and fraud prevention, including controls for insider fraud
• interest rate and liquidity risk
• commercial lending, including evaluating a credit union's commercial loan policies and procedures and assess the risk management processes used to manage portfolios
• Military Lending Act compliance

NCUA includes various resources in the letter, but some of these topics like commercial lending/member business lending and interest rate risk are addressed in the updated version of the Examiner's Guide.

Risk-Based Examination Scheduling Policy. Last month, NCUA issued another Letter to Credit Unions providing some information about its examination flexibility initiative and its efforts to move to an extended examination cycle for some credit unions.

Federally chartered credit unions. Federal credit unions meeting certain eligibility requirements will qualify for an extended exam cycle of 14 to 20 months from the prior examination completion date:

• Assets less than $1 billion;
• CAMEL code 1 or 2, in both the composite rating andthe management component rating;
• Well capitalized under prompt corrective action (PCA) regulations;
• No outstanding documents of resolution (DOR) items related to significant recordkeeping deficiencies; and
• Not operating under a formal or informal enforcement or administrative order, such as a cease and desist order (C&D), letter of understanding and agreement (LUA), preliminary warning letter (PWL), or a PCA directive.

However, small credit unions with limited segregation of duties that are otherwise eligible for an extended exam cycle may receive more frequent examinations on a random sample basis. Also, while NCUA anticipates a full transition to this exam cycle for eligible FCUs within two years, some credit unions may receive examinations earlier than the 14 to 20 month timeframe. This means some credit unions will still have their next exam in the current shorter timeframes. Here is one of the FAQs NCUA issued on the exam flexibility initiative:

When will eligible credit unions begin the longer, extended cycle?

While some credit unions will begin the new cycle on January 1, it could take up two years to be fully phased-in. NCUA's regional management team is working on a plan to ensure consistent application across the country. While some exams may need to be performed on an annual basis, others will start to move to a longer cycle in line with the lower range for eligible credit unions. This is similar to what we planned for and experienced when the agency adopted risk-based scheduling in 2001, and an annual examination in 2009.

What about federally-insured state chartered credit unions? Federally-insured state charters that meet any one of the following three criteria will receive NCUA exams between 8 to 12 months from the prior examination completion date:

• Assets greater than $1 billion;
• NCUA CAMEL code 4 or 5, with assets greater than $50 million; or
• NCUA CAMEL code 3 with assets greater than $250 million.

All other federally-insured state chartered credit unions will be examined by NCUA based on risk, but no less frequently than once every five years.

NCUA also states the agency will make every effort to conduct its examination jointly with the credit union's state supervisory authority. To facilitate this, a joint NCUA-state supervisory working group is being formed to consider issues like improved coordination of joint exams, reducing redundancy with exam and supervisory approaches, and evaluate the appropriateness and feasibility of alternative examination approaches.

Other Changes. NCUA will also implement the following changes in 2017:

• Providing at least four weeks advanced notice when scheduling an exam, unless concerns at the credit union warrant shorter or no notice;
• Improving coordination of document requests tailored to the credit union's risk profile and products; and
• Separating and emphasizing pre-exam planning & scoping from the beginning of onsite exam work.

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Programming Note: Inauguration Day. Did you know that Inauguration Day is a federal holiday in the DC metro area? As a result, NAFCU will be closed this Friday and back to blogging on Monday. And shake your head at us if you want, but if you've seen our traffic on a regular day, it can be almost impossible to get around town when swearing in a new president.