Each year, the NCUA sends out their list of supervisory priorities for the year. Credit unions preparing for their exams can reference the letter to focus on specific areas.

As you can imagine, the NCUA’s supervisory priorities for 2021 reflect the chaos of 2020. Note increased scrutiny on digital banking and security, liquidity, and a new look at cannabusiness exposure.

Also note: The NCUA is still using an extended examination schedule for qualifying credit unions. The Small Credit Union Exam Program will affect credit unions with less than $50m in assets.

Highlights from the NCUA Letter to Credit Unions

The biggest thing to note from this year’s letter is that the NCUA has maintained its commitment to work with smaller credit unions regarding COVID-19 delays.

However, most credit unions will get the usual treatment. The NCUA will concentrate on high-risk areas, new products and services, and compliance. Many of their concerns are the same as they were in 2020 (and even 2019). Here’s what to expect:

1.    Allowance for Loan and Lease Losses (ALLL)

As many expected, CECL is delayed until 2023. This means that the NCUA will evaluate credit union ALLL accounts, including:

• ALLL policies and procedures;
• Documentation of an ALLL reserving methodology (including modeling assumptions and qualitative factor adjustments);
• Adherence to generally accepted accounting principles; and
• Independent reviews of credit union reserving methodology and documentation practices by the Supervisory Committee or by an internal or external auditor.

Learn more about Allowance for Loan and Lease Losses in the pandemic age here.

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

The NCUA likes to play its greatest hits. After many updates throughout 2020 (and several planned updates in 2021), they’ll check closely to make sure that your credit union stays up to date.

The NCUA will focus on customer due diligence and ownership procedures, proper filing of SARs and CTRs, and reviews of bi-weekly 314(a) information requests from FinCEN. You can learn more here.

3.    Coronavirus Aid, Relief and Economic Security (CARES) Act

The CARES Act was signed into law on March 27, 2020 and provides support for credit unions and members alike. Some aspects of the CARES Act (i.e. the suspended requirement to categorize certain loan modifications as TDRs) will extend through January 1, 2022.

The NCUA will review CARES Act and Consolidated Appropriates Act compliance. They’ll also review modifications, credit reporting, forbearances, and foreclosures conducted under CARES Act provisions. Learn more here and here.

4.    Consumer Financial Protection

Another repeat from 2020 here. The NCUA wants to pay extra attention to consumer protection after a year that saw record unemployment and disruptions to the status quo.

Particularly, the NCUA will look at Fair Lending and anything related to COVID-19.

5.    Credit Risk Management

This, too, featured on the 2020 list. Per the NCUA:

“The NCUA continues to encourage credit unions to work with their members who were affected by the COVID-19 pandemic. The NCUA reaffirms that examiners will not criticize credit unions’ efforts to provide prudent relief for borrowers, when such efforts are conducted in a reasonable manner with proper controls and management oversight.”

Like last year, the NCUA intends to look closely at underwriting standards and credit risk-management procedures. This year, they will also review coronavirus-related lending adjustments.

6.    Information Systems and Assurance (Cybersecurity)

The NCUA cites three major reasons why this priority is coming back:

• Advances in financial technology;
• An increase in a remote workforce; and
• Growing adaptation of mobile technology for financial transactions

The NCUA has now moved away from the ACET assessment. Instead, they are following the Information Technology Risk Examination for Credit Unions (InTREx-CU). The ACET will still be a valuable self-assessment resource.

Cybersecurity will be an ongoing focus of the NCUA for the foreseeable future. You can stay up to date here.

7.    LIBOR Transition

The London Inter-bank Offered Rate (LIBOR) is expected to end. The NCUA wants to ensure that credit unions are moving away from LIBOR exposure.

You can access their LIBOR Assessment Workbook to assist your transition here, or see additional guidance here.

8.    Liquidity Risk

The NCUA expects the economic impact of COVID-19 to increase risk and volatility. Consequently, they plan to examine various scenarios, including:

• Sudden and significant share outflows;
• A broad range of possible interest rate paths to identify the potential variability in loan and securities cash flows;
• Changes in cash flow projections for relevant factors, such as a change in prepayment speeds, decay rates, share compositions and volumes;
• The effects of loan payment forbearance, loan delinquencies, projected credit losses and loan modifications on liquidity and cash flow forecasting;
• The decline in credit quality and resulting market value of assets as it relates to external borrowing capacity, and;
• Stress scenarios that include the reduction of available credit lines to ensure an adequate mix of diversified funding sources.

They provide further guidance in the NCUA Examiner’s Guide.

9.    Serving Hemp-Related Businesses

The NCUA sounds rather skeptical of serving cannabusiness. However, with the recent spate of legalizations—and the general trend toward legalization and decriminalization across the country—they recognize that it’s fair to proceed with caution.

They’ll check to see that credit unions can safely and properly serve hemp-related businesses within their fields of membership. They provide additional guidance here and FinCEN guidance about BSA/AML here.

Next Steps for Credit Unions

Preparing for examinations is no small feat. However, proper planning and framework can make even the largest job feel manageable.

Join Redboard for our webinar:

The Findings Accountability Framework: 3 Proven Strategies to Resolve Findings Quickly. In the webinar, you will learn how to:

• Create a structured process to manage findings;
• Resolve audit findings on time and as expected;
• Escape the pain of managing via spreadsheet; and
• Cut your administrative time in half.

And don’t forget to download your Credit Union Audit Checklist, which was initially created to help with NCUA examinations!