By:  Jennifer Winston

jwinston@cusolaw.com

 

In Letter to Credit Unions 23-CU-01, the NCUA has outlined its supervisory priorities for 2023. The NCUA’s primary areas of supervisory focus this year will be:

Interest Rate Risk: The NCUA sees the sharp rise in rates as amplifying “market risk because a credit union’s assets and liabilities do not reprice equally”, which has the potential to impact net economic values and projected earnings of the credit union. Last year the NCUA issued Letter to Credit Unions 22-CU-09  and Supervisory Letter 22-01, updating the NCUA supervisory framework for Interest Rate Risk (“IRR”).  In addition, Sensitivity to Market Risk has also been added to the CAMELS rating system.

Liquidity Risk: The NCUA notes that higher interest rates have caused a slowdown in prepayments for some loans and investments, which has resulted in reduced cashflows and large increases in share balances risk an increased level of share sensitivity. Examiners will be evaluating the “L” in CAMELS by considering current/prospective liquidity vs funding needs, a credit union’s liquidity policies and procedures, and the adequacy of the risk management framework.

Credit Risk: High inflation and rising interest rates are adding to members’ financial pressure, making credit risk a priority for the NCUA. Borrowers’ ability to repay outstanding debt is at risk due to both high inflation and an expected increase in unemployment rates. Examiners will be reviewing the soundness of existing lending programs, adjustments made to loan underwriting standards and portfolio monitoring practices. Examiners will be evaluating all factors in a credit union’s efforts to provide relief to borrowers, including whether they are reasonable and done with proper management oversight.

Fraud Prevention and Detection: As fraud risks remain elevated, the NCUA will continue to review internal controls and separation of duties. New this year is a management questionnaire designed to enhance the identification of fraud red flags, supervisory concerns and other potential new risks.

Information Security (Cybersecurity): This has been a continued priority for the NCUA. Examiners will be looking at whether a credit union has established adequate information security programs.  Credit unions are encouraged to remain vigilant and protect themselves with a cybersecurity program that evolves and adapts to evolving cybersecurity threats.

Consumer Financial Protection: Always a priority for Examiners, the NCUA will continue to review for compliance with consumer financial protection laws and regulations. Specifically, this year examiners will be focusing on (1) Overdraft programs, (2) Fair lending, (3) the Truth in Lending Act, and (4) the Fair Credit Reporting Act.

Other updates included in this letter include a reminder that Current Expected Credit Loss (CECL) must be implemented this year. In addition, the NCUA has determined that inadequate succession planning can be a significant reason for credit union consolidations and will begin requesting information on a credit union’s succession plans.  Finally, the NCUA will be continuing its Small Credit Union and Minority Depository Institutions support program.

As a reminder, the NCUA will be updating their post-examination survey this year to continue obtaining feedback.  The NCUA has also made clear this year that federal credit unions may record their exam exit meetings provided they comply with applicable laws and regulations and provide a copy to the NCUA.

Read the full Letter 23-CU-01 to see additional details on what examiners will be evaluating when making their assessments in 2023.