Anti-money laundering efforts, use of aid to deal with the coronavirus crisis, credit risk management and LIBOR transition are all among the updated items in the list of regulatory priorities released by the federal credit union regulator Wednesday
In a letter to credit unions, the National Credit Union Administration (NCUA) said that the additional items to its regulatory priority list are those that “pose elevated risk to the credit union industry and the National Credit Union Share Insurance Fund given the current environment.”
The agency outlined its approach to exams in three areas: smaller credit unions, those considered larger and those feeling the stress of the economic downturn.
“The NCUA’s targeted Small Credit Union Exam Program (SCUEP) procedures will be used to examine most federal credit unions with assets under $50 million,” the agency stated. “For all other credit unions, examiners will conduct risk-focused examinations, concentrating on areas of highest risk, new products and services, and compliance with applicable laws and regulations.”
Those credit unions experiencing “elevated sensitivity and exposure to economic stressors” will receive “a commensurate increase in the NCUA’s supervisory activity,” the agency said.
The key areas the agency outlined in its updated priority list included:
Bank Secrecy Act Compliance/Anti-Money Laundering (BSA/AML): “During every examination, the NCUA will continue to conduct BSA/AML reviews and will take appropriate action when necessary to ensure credit unions meet their regulatory obligations. Customer due diligence and beneficial ownership requirements that became effective May 11, 2018, will continue to be ongoing areas of emphasis.”
Coronavirus Aid, Relief and Economic Security Act: “NCUA has added the Coronavirus Aid, Relief and Economic Security Act (CARES Act) as a supervisory priority to reflect the importance of the provisions outlined in the Act. NCUA examiners will review credit unions’ good faith efforts to comply with the CARES Act and will take appropriate action, when necessary, to ensure credit unions meet their obligations under the new law.”
Consumer Financial Protection: “The COVID-19 pandemic continues to effect consumers and could result in increased consumer compliance risk in certain areas; consumer financial protection, therefore, remains an NCUA supervisory priority. The NCUA will continue to examine for compliance with applicable consumer financial protection regulations during every examination as established in the January 2020 Letter to Credit Unions, 20-CU-01, 2020 Supervisory Priorities, which included Electronic Fund Transfer Act (Regulation E), Fair Credit Reporting Act (FCRA), Gramm-Leach-Bliley (Privacy Act), Small dollar lending (including payday alternative loans), Truth in Lending Act (Regulation Z) and the Military Lending Act (MLA) and Servicemembers Civil Relief Act (SCRA).
Credit Risk Management and Allowance for Loan and Lease Losses: “In response to the economic impact of the COVID-19 pandemic and subsequent regulatory and statutory changes, the NCUA is shifting its emphasis to reviewing actions taken by credit unions to assist borrowers facing financial hardship. The NCUA will also review the adequacy of loan and lease losses (ALLL) accounts to address the pro-cyclical effects of economic downturns.”
Information Systems and Assurance (Cybersecurity): “Emerging cyber-attacks have become a persistent threat to the financial sector, and the likelihood of these threats adversely affecting credit unions and consumers has increased as a result of advances in financial technology; an increase in a remote workforce; and increased use of mobile technology for financial transactions.”
LIBOR Transition Planning: “Credit unions offer, own, and are counterparties to London Interbank Offered Rate (LIBOR)-based products and contracts, including loans, investments, derivatives, deposits, and borrowings. These may be subject to increased legal, financial, and operational risks once the reference rate is no longer available (after the end of 2021). On July 1, 2020, the FFIEC issued a Joint Statement on Managing the LIBOR Transition that highlights the risks that will result from the transition away from LIBOR and encourages supervised institutions to continue their efforts to transition to alternative reference rates.”
Liquidity Risk: “The economic impact of the COVID-19 pandemic may result in additional stress on credit union balance sheets, potentially requiring robust liquidity management over the course of 2020 and into 2021. As a result, examiners will continue to review liquidity risk management and planning in all credit unions, and will place emphasis on: The effects of loan payment forbearance, loan delinquencies, projected credit losses and loan modifications on liquidity and cash flow forecasting; Scenario analysis for changes in cash flow projections for an appropriate range of relevant factors (for example, changing prepayment speeds); Scenario analysis for liquidity risk modeling, including changes in share compositions and volumes; Potential effects of low interest rates and the decline of credit quality on the market value of assets, funding costs and borrowing capacity; and adequacy of contingency funding plans to address any potential liquidity shortfalls.
Serving Hemp-Related Businesses: “NCUA examiners will continue to collect data through the examination process concerning the types of services credit unions provide to hemp-related businesses.”
Modernization efforts through NCUA Connect and MERIT: “Following challenges related to the COVID-19 pandemic, the NCUA has delayed the rollout, training and launch of these applications to all examination staff until the second half of 2021. (NCUA Connect is a secure, common entry point for authorized users to access NCUA applications; MERIT – the Modern Examination and Risk Identification Tool – is a new examination tool.) However, However, the agency will continue to use MERIT in 2020 and 2021 in both a pilot and limited-release capacity.”