NEWS: The NCUA outlined its 2023 supervisory priorities and examination focus areas in its Letter to Credit Unions 23-CU-01. The NCUA will conduct exam and supervision activities both onsite and offsite. Examiners will continue to conduct some exam activity offsite when the activity can be completed efficiently and effectively at credit unions that can accommodate offsite work.
The NCUA’s primary areas of supervisory focus in 2023 are:
- Interest Rate Risk – Well-managed credit unions are prudent and proactive in managing IRR and the related risks to capital, asset quality, earnings, and liquidity. As such, examiners will review your credit union’s IRR program for the following key risk management and control activities:
- Key assumptions and related data sets are reasonable and well documented.
- The credit union’s overall level of IRR exposure is properly measured and controlled.
- Results are communicated to decision-makers and the board of directors.
- Proactive action is taken to remain within safe and sound policy limits.
- Liquidity Risk – 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, including possible member share migrations (for example, shifts from core deposits into more rate-sensitive accounts).
- Scenario analysis for changes in cash flow projections for an appropriate range of relevant factors (for example, changing prepayment speeds).
- The appropriateness of contingency funding plans to address any plausible unexpected liquidity shortfalls.
- Credit Risk – NCUA examiners will review the soundness of existing lending programs, any adjustments your credit union made to loan underwriting standards and portfolio monitoring practices, and loan workout strategies for borrowers facing financial hardships. NCUA examiners will carefully consider all factors in evaluating your credit union’s efforts to provide relief for borrowers, including whether the efforts were reasonable and conducted with proper controls and management oversight.
- Fraud Prevention and Detection – Fraud risks remain elevated. As such, the NCUA will continue their efforts to review internal controls and separation of duties. In 2023, the agency will also implement a management questionnaire designed to enhance the identification of fraud red flags, material supervisory concerns, or other potential new risks to which your credit union may be exposed.
- Information Security (Cybersecurity) – The NCUA will continue to have cybersecurity as an examination priority. Examiners will evaluate whether credit unions have established adequate information security programs to protect members and the credit union. To strengthen the examination process for cybersecurity, the NCUA developed and tested updated Information Security Examination procedures tailored to institutions of varying size and complexity. Examiners will use these new procedures in 2023.
- Consumer Financial Protection – The NCUA will continue to review compliance with applicable consumer financial protection laws and regulations for federal credit unions that the NCUA has under its consumer financial protection supervision authority. Examiners will continue to review your credit union’s compliance with Flood Disaster Protection Act requirements, including disclosure requirements, as we continue to evolve our understanding of the impact of climate-related financial risk on credit unions, credit union members, and the Share Insurance Fund.
Examiners will also consider trends in violations identified through examinations and member complaints, emerging issues, and any recent changes to regulatory requirements to establish priorities. Accordingly, in 2023 examiners will focus on areas related to:
- Overdraft programs.
- Fair lending, including review of residential real estate appraisals for any bias.
- The Truth in Lending Act.
- The Fair Credit Reporting Act.
- Current Expected Credit Loss Implementation (CECL) – Credit unions are required to implement the Financial Accounting Standards Board’s Accounting Standards Update No. 2016-13, Topic 326, Financial Instruments – Credit Losses, commonly referred to as Current Expected Credit Loss (CECL) for financial reporting years starting after December 15, 2022. Most credit unions adopted CECL on January 1, 2023.
Under the NCUA’s CECL Transition Rule, federally insured credit unions with assets of less than $10 million are generally not required to implement CECL. For credit unions below this threshold, the rule requires “any reasonable reserve methodology (incurred loss), provided it adequately covers known and probable loan losses.”3 Federally insured, state-chartered credit unions should refer to state law on Generally Accepted Accounting Principles (GAAP) requirements and CECL standard applicability, as those requirements may be more restrictive.
Examiners will evaluate the adequacy of your credit union’s Allowance for Credit Losses (ACL) on loans and leases by reviewing:
- ACL policies and procedures.
- Documentation of an ACL reserving methodology, including logic for model selection and related input data, modeling assumptions, and qualitative adjustments.
- Adherence to GAAP (if applicable).
- Succession Planning – During 2023, examiners will request information about a credit union’s approach to succession planning for senior leaders, including any written succession plan the credit union has established.
- Support for Small Credit Unions and Minority Depository Institutions – In 2023, the NCUA will continue its Small Credit Union and Minority Depository Institutions (MDIs) support program, which the agency implemented in 2022 to support and preserve these credit unions.
NCUA’s exam flexibility initiative will continue in 2023, which establishes an extended exam cycle for certain credit unions. They will also continue their Small Credit Union Exam Program in most federal credit unions with assets under $50 million. For all other credit unions, NCUA examiners will use the agency’s risk-focused examination procedures.