BSA/AML, CECL, credit risk top NCUA’s 2020 supervisory priorities

January 9, 2020

NCUA sent a letter to credit unions (20-CU-01) this week describing the agency’s supervisory priorities for 2020.

The letter also contains information on NCUA’s modernization efforts, as well as important statutory and regulatory updates due to recent changes in laws and regulations.

Bank Secrecy Act Compliance/Anti-Money Laundering (BSA/AML)

NCUA examiners conduct a BSA/AML review during every examination. An ongoing area of emphasis for examinations will be the customer due diligence and beneficial ownership requirements that became effective May 11, 2018.

The NCUA will continue to communicate with credit unions, engage with law enforcement, and collaborate with the other banking regulators on several initiatives, including:

In addition, NCUA will continue to focus on proper filing of SARs and CTRs.

Consumer Financial Protection

NCUA examines for compliance with applicable consumer financial protection regulations during every examination, with a scope largely based on each credit union’s compliance record, products and services provided, and any new or emerging concerns.

In addition, each year the NCUA identifies several specific consumer financial protection regulations that are required to be reviewed at all examinations when applicable to the credit union.

In 2020, NCUA examiners are required, at a minimum, to review compliance with the following consumer protection requirements:

  • Electronic Fund Transfer Act (Regulation E). Examiners will evaluate Electronic Fund Transfer (EFT) policies and procedures and review initial account disclosures. Examiners will also review compliance with Regulation E’s error resolution procedures for when consumers assert an error.
  • Fair Credit Reporting Act (FCRA). Examiners will review credit reporting policies and procedures. If applicable, examiners will also review the accuracy of reporting to credit bureaus, particularly the date of first delinquency.
  • Gramm-Leach-Bliley (Privacy Act). Examiners will continue to assess compliance with Gramm-Leach-Bliley to evaluate credit union protection of non-public personal information about consumers.
  • Small dollar lending (including Payday Alternative Lending). Examiners will test for compliance with NCUA Payday Alternative Lending (PALs) rules and interest rate cap. In addition, examiners will determine whether a credit union’s short-term, small-dollar loan programs that are not PALs comply with regulatory requirements.
  • Truth in Lending Act (Regulation Z). Examiners will evaluate credit union practices concerning annual percentage rates and late charges. Examiners will also review whether credit unions appropriately levy late fees.
  • Military Lending Act (MLA) and Servicemembers Civil Relief Act (SCRA). MLA and SCRA have been a supervisory priority since 2017 and will remain so for 2020. For credit unions that have not received a recent review, examiners will review credit union compliance with the MLA and SCRA.

Credit Risk

In 2020, NCUA examiners will place emphasis on the review of the credit union’s loan underwriting standards and procedures. In particular, if credit unions properly analyzed the ability of borrowers to meet debt service requirements without undue reliance on the value of any collateral.

In addition, examiners will continue to review concentration risk exposure during each examination. In 2020, the NCUA is implementing enhanced examination procedures, including supervisor concurrence and additional quality controls, for credit unions with very high concentrations in specific loan types.

Current Expected Credit Losses

Although the Financial Accounting Standards Board granted a one-year delay (to January 2023) for credit unions to comply with its new current expected credit losses (CECL) standard, examiners will continue to discuss with credit union management their plans to implement CECL.

Information Systems and Assurance (Cybersecurity)

In 2018, the NCUA began using the Automated Cybersecurity Examination Tool (ACET) to assess credit unions’ cybersecurity maturity. The NCUA collaborated with the Department of Homeland Security and the Idaho National Laboratory to create an updated client/server version of the ACET that is being fully deployed in 2020. Credit unions will be able to complete self- assessments through access to the new ACET on NCUA’s website in early 2020.

The NCUA began the cybersecurity maturity assessments for credit unions with assets of $1 billion or greater in 2018, followed by institutions with assets between $1 billion and $250 million in 2019. In 2020, the NCUA will continue completing these assessments for credit unions with assets over $250 million, and begin completing assessments for credit unions with assets over $100 million.

The initial maturity assessment cycle will be completed in 2021. Starting in 2022, the agency will refresh the maturity assessments following the same asset size schedule discussed above, resulting in a refresh cycle of once every four years.

In addition to the ACET, the NCUA will be piloting new procedures in 2020 to evaluate critical security controls during examinations between maturity assessments. The critical security controls reviews will be scaled to the size and risk profile of the institution.

LIBOR Cessation Planning

The United Kingdom’s Financial Conduct Authority has announced that it cannot guarantee LIBOR’s availability beyond the end of 2021. LIBOR is a reference rate commonly used in setting the interest rate for many adjustable- or variable-rate financial products.

Examiners will assess credit unions’ exposure and planning related to the discontinuance of LIBOR. The scope of the review will cover:

  • Identification of all LIBOR-related transactions including both on- and off-balance sheet exposures (number of transactions and balance amounts); and
  • Planning, governance, senior executive engagement, budgeting, accounting, and addressment of other impacts related to the transition and discontinuance of LIBOR.

Liquidity Risk

For 2020 examinations, examiners will review credit union liquidity management and planning. In particular, for credit unions with low levels of on-balance sheet liquidity, examiners will assess liquidity management by evaluating:

  • The potential effects of changing interest rates on the market value of assets and borrowing capacity;
  • Scenario analysis for liquidity risk modeling and scenario analysis for changes in cash flow projections for an appropriate range of relevant factors; and
  • The appropriateness of contingency funding plans to address any potential liquidity shortfalls.