Compliance: NCUA outlines supervisory priorities for 2019

January 14, 2019

NCUA outlined its primary areas of supervisory focus in its first Letter to Credit Unions (19-CU-01) of 2019. The letter also contains information on full implementation of an extended exam cycle in 2019.

Agency examiners will continue using the streamlined small credit union exam program procedures for most credit unions that have assets under $50 million.

For all other credit unions, examiners will conduct risk-focused examinations, concentrating on the areas of highest risk, new products and services, and compliance with federal regulations.

In 2019, NCUA examiners will have increased flexibility to conduct suitable examination work offsite. In the agency’s Flexible Examination Program (FLEX) pilot, examiners were able to conduct as much as 35% of examination time offsite, according to NCUA.

NCUA expects this increased flexibility will reduce the time impact on credit unions, save on travel costs and increase staff productivity.

NCUA’s primary areas of supervisory focus for 2019 are:

Bank Secrecy Act Compliance

Examiners will perform more in-depth reviews of credit unions’ Bank Secrecy Act and anti-money laundering policies, procedures, and processes to assess compliance with regulatory requirements for customer due diligence and for identifying and verifying beneficial owner(s) of legal entity members.

Concentrations of Credit

Examiners will have a continued focus on large concentrations of loan products and concentrations of specific risk characteristics, defined as any single exposure or group of highly correlated exposures that have the potential to produce losses large enough to threaten a credit union’s health or ability to maintain its core operations.

Consumer Compliance

As in 2018, examiners will continue to perform limited reviews of Home Mortgage Disclosure Act (HMDA) quarterly Loan/Application Registers, or full-year Loan/Application Registers when applicable, to evaluate federal credit unions’ good faith efforts to comply with 2018 HMDA data collection and reporting requirements.

These reviews will account for the statutory partial exemptions that took effect on May 24, 2018.

NCUA will also continue to focus on Military Lending Act (MLA) compliance, and examiners will evaluate credit unions’ efforts to comply with the MLA.

Examiners will review credit unions’ compliance with Regulation B’s notification requirements following adverse action taken on consumer credit application. They will also review overdraft policies and procedures for compliance with Regulation E.

Current Expected Credit Losses (CECL)

While the CECL requirements may continue to evolve in 2019, examiners will inquire about efforts a credit union has taken to prepare for the new accounting standard, and whether a credit union has performed analysis for how CECL would alter the Allowance for Loan and Lease Losses funding needs.

The standard has an effective date of January 1, 2022 for most credit unions.

Information Systems and Assurance

Examiners will continue conducting information security maturity assessments with the Automated Cybersecurity Examination Toolbox (ACET). Examiners will use the ACET to assess credit unions with over $250 million in assets that have not previously received an assessment.

Two additional areas of supervisory focus for 2019 are the assessment of credit union IT risk management to ensure it effectively identifies, remediates, and controls inherent risks to appropriate residual risk levels, and oversight of service provider arrangements to ensure credit unions implement effective risk-based supply chain management.

Liquidity and Interest Rate Risks

Examiners will assess liquidity and interest rate risk management, including the following:

  • The potential effects of rising interest rates on the market value of assets that affect changes to net worth and borrowing capacity;
  • Member preference shifts to shares with more market sensitivity; and
  • Credit union management’s ability to meet liquidity needs given the increased competitive pressures that affect share balances.

An effective liquidity and interest rate risk management program is a key component of a credit union’s safety and soundness. The projected economic fluctuations in 2019 make this an increased area of emphasis.

When rates rise, it puts pressure on credit unions to raise deposit rates in order to maintain deposit account volume. Also, enhanced mobile and internet banking applications and non-bank financial technology may result in greater challenges to retain low cost core deposits compared to prior interest rate cycles.

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