Compliance Blog

I hope everyone’s new year is still going well, and I hope you are all on track to meet your new year’s resolutions. For their upcoming resolutions, on January 18^, 2022, NCUA issued Letter to Credit Unions 22-CU-02 outlining NCUA’s supervisory and examination priorities for 2022. These priorities are discussed below.

Credit Risk Management

A repeat priority for NCUA. NCUA plans “to review credit unions’ credit risk-management and mitigation efforts.” NCUA will continue to focus on “reviewing policies on loan workout strategies, risk-management practices, and strategies to provide funds to distressed borrowers, including programs authorized under the CARES Act and Consolidated Appropriations Act, 2021.” NCUA notes that its “examiners will evaluate controls, reporting, and tracking of those programs.”

Cybersecurity

NCUA reminds credit unions that cybersecurity “remain[s] a significant threat to the financial system.” NCUA is in the process of developing updated information security examination procedures tailored to an institution’s size and complexity. NCUA hopes to have the procedures finalized in 2022. NCUA also notes that in October 2021, it released the Automated Cybersecurity Evaluation Toolbox (ACET) application. This tool allows institutions to assess their cybersecurity preparedness, and its use is voluntary.

Payment Systems

This is a new priority for this year. NCUA notes that payments is a “growing area of complexity and risk . . . .” Because of increased reliance on technology and new technology, changes in payments systems increase risk of fraud, use for illegal purposes, and data security breaches. NCUA did not indicate exactly what it would focus on here—just that it “will include increased focus in this area.”

Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) Compliance

BSA and AML continue to be a priority for NCUA. NCUA notes that there will be new requirements for credit union’s to update their BSA/AML policies, procedures, and processes. However, “these requirements will be imposed incrementally throughout 2022[,]” and NCUA will communicate any required change and its effect on credit union examinations.

Capital Adequacy and Risk Based Capital Rule Requirements

New to 2022 is the risk-based capital rule and NCUA’s focus on capital adequacy and credit unions’ implementation of the rules related to risk-based capital requirements. Effective January 1, 2022, credit unions with total assets that exceed $500 million are subject to the risk-based capital rule. Starting with the reporting period of March 31, 2022 NCUA will make changes to the quarterly Call Report. The letter explains that examiners will concentrate on assessing a credit union’s efforts to assist its members through some of the economic challenges related to the COVID-19 pandemic and how those efforts affect the credit union’s “capital position and financial stability.” Examiners will also focus on whether complex credit unions are accurately reporting risk-based capital information in the Call Report, as required by the changes.

CECL

NCUA notes that “credit unions are required to implement the Financial Accounting Standards Board’s Accounting Standards Update No. 2016-13, Topic 326 by January 1, 2023.” Credit unions may know this as the current expected credit losses methodology or CECL. Examiners will review a credit union’s CECL readiness and discuss that with a credit union. Fortunately, in the letter, NCUA provides a list of resources to help credit unions implement CECL.

Consumer Compliance

NCUA has returned to naming specific focus areas for examination related to consumer financial protection in 2022. These focus areas are: (1) a credit union’s efforts to assist its members during the pandemic; (2) fair lending, including issues related to appraisals and racial equity; (3) the Servicemembers Civil Relief Act (4) the Fair Credit Reporting Act (FCRA) and issues related to the CARES Act FCRA amendments; and (5) overdraft programs, which appear to be in the crosshairs of several federal regulators.

Loan Participations

NCUA encourages credit unions “to utilize safe-and-sound practices as they manage their loan participation portfolios.” NCUA notes that credit unions must keep separate and distinct records for each loan participation and practice “prudent third-party due diligence when purchasing loan participations.”

Fraud

NCUA notes that potential fraud risks have increased as a result of credit unions’ use of remote or offsite work over the last two years. NCUA will examine a credit union’s “efforts to deter and detect fraud,” and this will include transaction testing.

London Inter-Bank Offered Rate (LIBOR) Transition

Due to the end of LIBOR, NCUA will focus on credit unions with LIBOR exposure and those credit unions that have contracts that fail to include robust fallback clauses—language that helps parties understand how an alternative reference rate will be selected. For more information on LIBOR transitioning, NCUA provides the following resources:

·       21-CU-03, LIBOR Transition

·       Supervisory Letter, 21-01

·       LIBOR Assessment Workbook 

·       LIBOR Joint Statement

These resources can help credit unions identify their LIBOR exposure and assess whether the risk management plans they have in place to deal with LIBOR effectively manage any existing LIBOR risk.

Interest Rate Risk

The letter suggests that a credit union’s interest rate risk could be affected by the growth in shares during the pandemic and investment in longer-term assets. NCUA advises credit unions to model and manage interest rate risk “using a broad range of scenarios that include various prepayment speed and yield curve assumptions.” More information on interest rate risk can be found in the NCUA’s Examiner’s Guide.

Exam Program Updates

Beyond its priorities, NCUA announced the following changes to its exam program.

NCUA Connect & MERIT

NCUA has transitioned to the Modern Examination and Risk Identification Tool (MERIT) that it has been piloting since 2019. Additional information on MERIT can be found here.

Recording of Official Meetings

NCUA notes that credit unions may record their meetings with examiners, after asking for permission. However, NCUA cautions that credit unions should refer to all relevant law before recording any conversation, especially those laws that relate to consent.

CAMELS Update

In October 2021, NCUA finalized a rule that updates the CAMEL rating system to the CAMELS rating system. This rule split the L component into liquidity risk, “L”, and sensitivity to market risk, “S.” This rule and change “is effective for examinations starting on or after April 1, 2022.”