By Steven Houle, CFA, FRM, Catalyst Strategic Solutions, Vice President of Advisory Services
In January, the National Credit Union Administration (NCUA) outlined their 2022 supervisory priorities, which focus on “areas that pose the highest risk to credit unions, credit union members and the National Credit Union Share Insurance Fund.”
Specifically, the letter outlined the following priorities:
- Credit Risk Management – The NCUA encourages credit unions to continue working with their members who were, and continue to be, affected by the COVID-19 pandemic. The NCUA will focus their review on adjustments credit unions made to their lending programs to address borrowers facing financial hardship. This includes controls, reporting and tracking of these programs.
- Information Security (Cybersecurity) – This remains a significant risk with ransomware, third-party/supply chain risks and business email compromise of particular concern. The NCUA continues to develop updated information security examination procedures that are tailored to institutions of varying size and complexity. Furthermore, in October 2021, they released the Automated Cybersecurity Evaluation Toolbox (ACET) application, which allows credit unions of all sizes to determine and measure their cybersecurity preparedness.
- Payment Systems – The NCUA will increase their focus in this area due to the growing complexity risk payment products, services and operations have for credit unions and consumers.
- Bank Secrecy Act Compliance and Anti-Money Laundering/Countering the Financing of Terrorism – With amendments to the BSA for the first time since 2001, credit unions will be required to update their risk-based BSA and AML/CFT policies, procedures and processes throughout 2022. The NCUA will communicate changes in BSA and AML/CFT requirements, and any impacts on examination to credit unions.
- Capital Adequacy and Risk-Based Capital Rule Implementation – NCUA examiners will ensure that credit unions are evaluating the impact of their COVID-19 response and relief efforts on their capital position and financial stability. Additionally, examiners will review the accuracy of complex credit unions’ reporting for the new data elements required in the risk-based schedule of the Call Report.
- Loan Loss Reserving – Examiners will focus on the adequacy of credit unions’ Allowance for Loan and Lease Losses (ALLL) accounts, specifically policies and procedures, documentation of reserving methodology, adherence to generally accepted accounting principles and independent reviews of reserving methodology and documentation practices by the Supervisory Committee or by an internal or external auditor.
- Consumer Financial Protection – Examiners will confirm credit unions are compliant with applicable consumer financial protection laws and regulations, which in 2022 will include the COVID-19 pandemic, fair lending, Servicemembers Civil Relief Act, Fair Credit Reporting Act and overdraft programs.
- Loan Participations – Examiners will verify that credit unions have evaluated the risk in loan participation transactions and how that risk fits within the tolerance level established by the credit union’s board. Examiners will also look at transaction level compliance.
- Fraud – The NCUA will review credit union efforts to deter and detect fraud, including internal controls and separation of duties. Examination procedures will include transaction testing.
- London Inter-Bank Offered Rate (LIBOR) Transition – Examiners will focus on how credit unions with significant LIBOR exposure or inadequate fallback language are managing the transition. Credit unions can continue using NCUA’s LIBOR Assessment Workbook for assistance and refer to the July 2020 and October 2021 releases for additional guidance.
- Interest Rate Risk – The NCUA will evaluate how credit unions have modeled and managed interest rate risk, given the high share growth the last two years and the invested surplus funds in longer duration assets.
If any of these areas pose a potential issue for your credit union, Catalyst Strategic Solutions is here to assist you. Our experienced team of Advisory and ALM experts have the industry knowledge to help you prepare for this year’s NCUA supervisory priorities. For more information, contact us today.