Compliance Blog

Author’s Note: Hi All—I want to take the time to introduce myself to the credit union community. My name is Justin White and I started at NAFCU in August 2021 as a Regulatory Compliance Counsel. I graduated from Suffolk University Law School in May 2020 with an interest in financial services and government regulatory law. I am excited to continue pursuing these interests as a Regulatory Compliance Counsel and I look forward to serving NAFCU members.

The Government Accountability Office (GAO) recently published a report discussing its recommendations to strengthen NCUA oversight over troubled credit unions . The report focuses on NCUA’s activities from 2010-2020, with a specific focus on credit union failures during this time frame. While economy of scales and competition from non-depository financial services companies led to an increase in credit union consolidation and asset concentration, losses to the National Credit Union Share Insurance Fund (NCUSIF) also dwindled. During the same period, the GAO report assesses NCUA did not fully implement NCUA’s own Office of Inspector General (OIG) recommendations to strengthen oversight over the credit union industry. Here are some of the report’s main findings:

Credit Union Failures Declined Last Decade, With Losses to NCUSIF Increasing Only in Two Years of the Decade

Over the last decade, credit union assets grew while failures and losses to the NCUSIF declined—with only measured increases in 2012 and 2018. The report finds credit unions that did fail were typically smaller than the industry median and had higher loan portfolio concentrations, such as having a high concentration of taxi medallion loans. The reasons for these failures varied depending on the size of the credit union. The NCUA OIG linked credit union failures to insufficient board or committee oversight, passive and untimely NCUA action, the credit union’s own lending practices, the credit union’s risk-management practices, the credit union’s loan portfolio concentration, weak or non-existent NCUA guidance, and a lack of NCUA resources. The report frequently cites committee or board oversight and NCUA examination supervision and oversight as reasons a credit union failed.

GAO Recommends NCUA Increases Reliance on CAMEL Ratings

The GAO report explores the relationship between the use of CAMEL components and composite ratings and how, when used together, these mechanisms may serve as a predictive tool to forecast future credit union deterioration and failures. In its report, the GAO found when a CAMEL composite rating is accompanied with a worse component rating of the same institution both scores are “additionally predictive of both deteriorating conditions and failures.” Despite the predictive nature of the CAMEL components, the report also finds NCUA has not fully implemented this tool into its decision making. For example, while NCUA uses CAMEL composite ratings to determine the formality of the enforcement action, NCUA does not weigh individual CAMEL components in the same conversation. The GAO believes uses of both score mechanisms would allow NCUA supervision to become more targeted. 

Report Suggests New Ways to Collect and Report Aggregated Data

The GAO Report also details NCUA stores collected supervisory data regarding credit unions and their interactions with examiners over multiple systems across multiple offices. In its own collection and review of the data, the GAO found the data was sometimes “incomplete and inaccurate.” Officials attributed these shortcomings to the manual operation and the lack of a documented or automated process for aggregating data across multiple systems and offices. This shortcoming may be short-lived as NCUA plans to complete implementation of its Modern Examination and Risk Identification Tool (MERIT) by November 2021. The implementation was delayed because of COVID-19.

The GAO also notes that NCUA could improve in conducting and reporting all its post-mortem analysis over the review’s span. In the last decade, NCUA did not meet 33 out of 44 postmortem filing deadlines. This results in NCUA analyzing fewer failures. The GAO goes on to maintain NCUA will miss opportunities to improve its role as the supervisory authority of credit unions unless a centralized office and processes is established to conduct these postmortems.

NCUA Identified and Moved to Address Those Risks to the Credit Union Industry Exacerbated by the Covid-19 Pandemic

COVID-19 worsened, as identified by NCUA, the following four risk areas: (1) credit risk; (2) concentration risk; (3) operational risk; and (4) liquidity risk. Since identifying these areas, NCUA has conducted industry outreach, developed risk-monitoring applications, adjusted scope of examinations.  increased focus on cybersecurity and fraud, and created a committee to monitor the pandemic's effects. The committee continues to monitor the pandemic, finding there has been no increased risk across the areas previously identified.

Conclusions

The GAO recommends: (1) a more effective use of CAMEL Ratings to help determine earlier supervisory action; (2) an integration of existing data into NCUA’s Modern Examination and Risk Identification Tool (MERIT); and (3) a more centralized response to post-mortem reports.

To read the GAO’s full analysis and description of recommendations, find the report here.