NCUA exam priorities: What to expect in 2020
Top issues include BSA/AML compliance, CECL, and credit and concentration risk.
NCUA has released its supervisory priorities for the year, so you might want to grab some coffee before reading it because the letter is lengthy.
This article summarizes what the letter covers. Like all good compliance professionals, please read NCUA’s letter and take advantage of the resource links it provides.
Here are NCUA’s supervisory concerns and areas of focus for 2020.
As with every examination, NCUA conducts a Bank Secrecy Act/Anti-money laundering (BSA/AML) review to ensure credit unions meet those obligations.
Customer due diligence (and the beneficial ownership requirements that became effective in 2018) is still an area of focus for 2020. Plus, NCUA will continue to focus on the proper filing of suspicious activity reports (SARs) and currency transaction reports (CTRs) with “proper” (informative and timely) filing.
As you know, SARS and CTRs provide law enforcement, intelligence, and counter-terrorism officials with helpful information to identify and thwart criminal and terrorist activities.
Electronic Fund Transfer Act (Regulation E)
Examiners will want to review your EFT policies and procedures, as well as initial account disclosures, to ensure they cover the requirements under the regulation.
Examiners also will analyze your member error-resolution procedures for when a consumer asserts an error.
Fair Credit Reporting Act
Examiners will review your credit reporting policies and procedures, and will check the accuracy of any reports made to credit bureaus, including the date used as the first delinquency.
Gramm-Leach-Bliley Act (privacy)
How does your credit union protect members’ nonpublic personal information? Do your efforts meet the requirements under the rule?
Small-dollar lending/payday alternative loans
Does your credit union offer a short-term, small-dollar loan outside of NCUA Payday Alternative Loans (PALs)?
If so, examiners will confirm the product meets the requirements under the regulation. If your credit union offers PAL 1 or PAL 2 loans, examiners will determine whether the loans meet the requirements, including interest-rate caps, set forth under the rule.
Truth in Lending (Regulation Z)
What are your credit union’s practices related to annual percentage rates (APR) and late charges?
Examiners will review how your credit union applies loan payments to principal, interest, fees, and other charges.
Is your process consistent with the written disclosures and agreement? How does your credit union assess late fees? Does it meet the rule’s requirements?
Other areas of focus will be the disclosure of finance charges and APR.
MLA and SCRA
These have been a priority since 2017, so if your credit union has not had a recent Military Lending Act or Servicemembers Civil Relief Act review, this will be an area of focus.
Credit and concentration risk
There will be increased focus on credit unions’ loan underwriting standards and procedures. Has your credit union properly analyzed borrowers’ ability to meet debt service requirements without excessive reliance on the value of the collateral?
New this year are enhanced examination procedures and additional quality control requirements for credit unions with high concentrations of loans in participations, commercial lending, indirect lending, and residential real-estate lending.
Yes, the Financial Accounting Standards Board (FASB) delayed implementation of the Current Expected Credit Losses standard until 2023, but examiners will still review your credit union’s plans for its implementation.
If you haven’t developed a plan yet, start now.
NCUA started using the Automated Cybersecurity Examination Tool (ACET) in 2018 to assess credit unions’ cybersecurity maturity.
Beginning in early 2020, credit unions will able to complete self-assessments using ACET.
Also new in 2020, NCUA will pilot new procedures to evaluate critical security controls during examinations between maturity assessments. These reviews will be scaled to the credit union’s size and risk profile.
LIBOR cessation planning
LIBOR (London Interbank Offer Rate) is a reference rate commonly used in setting interest rates for adjustable or variable-rate financial products. Did you know its availability is not guaranteed beyond 2021?
Once it is no longer offered, the lack of guarantee could subject credit unions to increased material exposure and legal, financial, and operational risks.
Credit unions offer, own, and are counterparties to LIBOR-based products and contracts such as loans, investments, derivatives, deposits, and borrowings. Therefore, they’ll need to transition away from instruments using LIBOR as a reference rate.
As such, examiners will review credit unions’ exposure to LIBOR and planning related to its discontinuance. Examiners will use a LIBOR assessment workbook to:
- Identify all LIBOR-related transactions, including both on- and off-balance-sheet exposures (number of transactions and balance amounts).
- Identify impacts to planning, governance, senior executive engagement, budgeting, and accounting.
- Address other impacts related to LIBOR’s transition and discontinuance.
NCUA’s letter also outlines how the agency has updated its examination program to reflect changes in:
• Commercial real estate appraisals. Effective Oct. 22, 2019, commercial real estate transactions below $1 million do not require appraisals by certified appraisers. Instead, credit unions may conduct a written estimate of market value or obtain an appraisal from a state-licensed appraiser.
The rule also increases standards for the qualifications and independence of individuals conduct written estimates of market value.
• Acceptance of private flood insurance policies. You’ll want to review NCUA’s regulatory alert on flood insurance alternatives pertaining to flood insurance policies that are not issued by the National Flood Insurance Program.
• Public unit and nonmember shares. NCUA’s rule was effective Jan. 29, 2020. Under 701.32, a credit union must develop and make available for examination a plan for the use of funds if its public unit and nonmember shares, combined with borrowing, exceed 70% of paid-in and unimpaired capital and surplus.
• Serving hemp businesses. Hemp is no longer a controlled substance at the federal level. Credit unions may provide business accounts and loans to lawfully operated hemp-related businesses within their fields of membership.
NCUA examiners will collect data through the examination process about the types of services credit unions may be providing to hemp-related businesses. Additional guidance for serving hemp businesses is forthcoming from NCUA.
• Supervisory committee audits. In September 2019, the NCUA Board approved a final rule amending part 715 to provide additional flexibility for financial statement audits. These amendments went into effect Jan. 6, 2020.
The agency issued a new guide to assist supervisory committees in conducting “other” supervisory committee audits. The new guide can be found here [PDF].
If the supervisory committee uses this option to complete its annual audit requirements under §715.7, it should consult Appendix A under Part 715 to meet the required minimum procedures.
The supervisory priority letter provides insight into the types of technology applications the agency is implementing in 2020 as part of its exam modernization efforts:
- NCUA Connect is a common entry platform where one can access all NCUA examination-type applications. It will be made available to all credit unions and state regulators.
- MERIT (Modern Examination and Risk Identification Tool), NCUA’s new examination platform, will be released to all examination staff in the second half of 2020.
Questions? Don’t hesitate to contact us.
NANCY DeGRANDI is CUNA’s manager, federal compliance information and research.