As this year winds down and we consider all the regulatory changes that have occurred, it’s important to reflect on one issue that might not always have been front and center: your credit union’s policies and procedures.

Granted, most credit unions make policies and procedures a priority just before or following an examination. But if you aren’t regularly reviewing and updating policies and procedures as regulatory changes are made, you’ll have a daunting task ahead of you—especially after this year when there were so many new rules and rule changes. So, where should your focus start?

Start with a review of the policies that regulations specifically require boards to review annually. Those
policies and the NCUA Rules and Regulations citation are:

• Incentive bonus policies (Part 701.21);
• Investment policies (Part 703.3);
• Member business loan policies (Part 723.5); and
• Security program (Part 748).

Be mindful that NCUA also has issued a proposed rule amending NCUA Rules and Regulations Part 741 to require an interest-rate risk policy for certain credit unions that includes an annual review provision.

As a best practice, create a schedule for your board so it reviews all policies on an annual basis, not just the ones required by regulation. (The NCUA Examiner’s Guide provides that “the board must approve all major policies. Further, it should review and, if necessary, update those policies at least annually.”)

Once you’ve made sure you’re on track with an annual review process, direct your attention to those policies where examiners show interest: appraisals, indirect lending, foreclosures, and the Bank Secrecy Act (BSA).

Examiners want to see whether or not you have a separate appraisal and property valuation policy addressing the necessary changes brought about by the new Regulation Z rule and Interagency Guidelines related to appraisals and valuations.

Some items to address in your property valuation and appraisal policy (along with NCUA’s Part 722 requirements):

• Not coercing persons that prepare valuations or perform valuation management functions;
• Ensuring that persons who prepare a valuation or perform valuation management functions do not have a conflict of interest;
• Monitoring the performance of appraisers and people performing valuations;
• Reviewing appraisals to determine whether or not they comply with appropriate regulations and contain sufficient information to support the credit decision; and
• Refusing to extend credit if there is a known violation of the valuation rules.

In addition, examiners may ask to review your policies on indirect lending and foreclosures. NCUA has issued letters to credit unions on both issues, specifically indicating that the credit union should have policies in those areas. (See NCUA Letters to Credit Unions Nos. 10-CU-15 for indirect lending and 11-CU-01 for foreclosures.)

Finally, BSA continues to remain on examiners’ radar. They’ll be looking to see if your BSA policy clearly addresses the Suspicious Activity Report escalation process.

Keep in mind, however, that your process doesn’t end with policies. You should have procedures that correspond with and support your policies. Policies should be the “what” of your compliance program, and procedures should be the “how.”

In other words, policies are the formal requirements while procedures are the operational steps. There’s no bright line as to what must be in a policy versus a procedure unless specifically spelled out in the regulation. The structure is at your discretion.

Most important, the key to policies is to follow them. Make sure your credit union’s internal practices reflect your written policies to avoid potential examiner findings. So, wrap up 2011 by completing your policy updates and prepar¬ing for the changes coming in 2012. 

ANDREA STRITZKE is vice president, regulatory compliance, for PolicyWorks. Contact her at policyworksllc.com.