Supervisor Priorities for 2022 Released by the NCUA
ARTICLE | MAY 10, 2022
Written by Walker Coburn, CPA, CGMA, Partner
The National Credit Union Administration (NCUA), in a letter to credit unions, announced its supervisory priorities for 2022.
In the letter, the NCUA stated that it will continue to conduct examinations offsite and will resume onsite examinations when it is safe to do so. For credit unions over $50 million in assets, the Agency will perform a risk-focused examination. The primary areas of supervisory focus during the upcoming year are: Credit Risk Management, Cybersecurity, Payment Systems, Bank Secrecy Act Compliance, Capital Adequacy and Risk Based Capital Rule Implementation, Loan Loss Reserve, Consumer Financial Protection, Loan Participations, Fraud, LIBOR Transition, and Interest Rate Risk.
Credit Risk Managment
Examiners will focus on adjustments credit unions made to lending programs to address borrowers facing financial hardship. This includes reviewing policies that address 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 and extended in the Consolidated Appropriations Act. In particular, examiners will evaluate the controls, reporting, and tracking of these programs. It is important that you make sure your policies and internal controls are up-to-date to address these accommodations.
The NCUA will continue to make information security a priority during its examinations and plans to develop updated information security examination procedures that are tailored to institutions of varying size and complexity. These procedures will continue to be piloted in 2022, with the goal of having them finalized by the end of the year.
In October 2021, the NCUA released the Automated Cybersecurity Examination Tool (ACET) application, which provides credit unions the ability to conduct a self-assessment. The ACET is supposed to align with the Cybersecurity Assessment Tool that was developed by the Federal Financial Institutions Examination Council (“FFIEC”). This tool will allow credit unions of all sizes to determine and measure their cybersecurity preparedness.
Payment products, services, and operations continue to evolve as credit unions strive to meet consumer demand for easier and faster access to and settlement of funds. With this reliance on new and ever-changing and-sound practices of your loan participation portfolios. Examiners will evaluate the risk in the loan participation transactions and how that risk fits within the tolerance levels established by the credit union’s board. Your credit union needs to ensure that each loan participation has separate and distinct records for individual payments, including principal, interest, fees, escrows, and other information relating to the individual loans. Credit unions must reconcile payments to the servicer’s record and follow prudent third-party due diligence when purchasing loan participations.
Examiners will continue to evaluate the adequacy of the internal controls, including separation of duties, and approach to managing and detecting fraud risk.
London Inter-Bank Offered Rate (LIBOR) Transition
In May 2021, the NCUA issued Letter to Credit Unions, 21-CU-03, LIBOR Transition that also included Supervisory Letter, 21-01, Evaluating LIBOR Transition Plans. The Supervisory Letter provides the supervision framework examiners will continue to use to evaluate a credit union’s risk management processes and planning regarding the transition from LIBOR. The Letter to Credit Unions encourage credit unions to prepare for the expected discontinuation of LIBOR and to transition away from using U.S. dollar LIBOR settings by no later than December 31, 2021, and to provide fallback language and a replacement rate for all legacy LIBOR-based contracts.
Interest Rate and Liquidity Risk
If your credit union invested the high share growth experienced over the last two years in longer duration assets, this could result in greater sensitivity to market risk, and therefore increased interest rate risk. Conversely, keeping all assets short-term can impact current period earnings. The letter states that credit unions should continue to carefully model and manage interest rate risk using a broad range of scenarios that include various prepayment speeds and yield curve assumptions.
While these priorities will not seem new to most credit unions, now is the time to start evaluating the specific threats that are applicable to you and ensuring that your credit union has updated policies and procedures to protect its safety and soundness.
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