NCUA Identifies Supervisory Priorities for 2024

ALEXANDRIA, Va.–In a new Letter to Credit Unions, NCUA has outlined its supervisory priorities and other updates for its 2024 examination program.

The agency said the areas identified are those with the highest risk to credit union members and the insurance fund.

As CUToday.info has previously reported, growing financial strains and liquidity risks are cited by the agency, as well as the growth in the number of composite CAMELS code 3, 4, and 5 credit unions. 

The agency further noted:

• Its exam flexibility initiative will continue in 2024, extending the exam cycle for certain credit unions.
• It will continue its Small Credit Union Exam Program in most federal credit unions with assets of $50 million or less.

Supervisory Priorities for 2024

Below is an overview of the areas where NCUA said it will focus its examinations this year:

Credit Risk

“Economic conditions continue to change the credit risk environment in the credit union industry, as inflation, high interest rates and borrowing costs, declining savings levels, and the end of pandemic-era stimulus and relief programs have negatively impacted some members’ ability to repay their debts. Credit unions’ loan portfolios expanded faster during 2022 than any year within the last 30 years, while aggregate loan performance began showing signs of deterioration in 2023,” NCUA said. 

Examiners will review:

• Existing lending programs’ soundness
• Credit union risk management practices, including any adjustments a credit union made to loan underwriting standards, portfolio monitoring practices, modification and workout strategies for borrowers facing financial hardships, and collection programs. 
• Policies and procedures related to the Allowance for Credit Losses (ACL), documentation of the ACL reserve methodology, the adequacy of ACL reserves, and adherence to generally accepted accounting principles.

Liquidity Risk

The agency said pressure in deposit pricing and the use of wholesale funding is accelerating as alternative funding options, while new lending, participations, and loan sale markets may slow. In addition, member behaviors and risk relationships are also changing,  combining to create liquidity challenges and increased risk to earnings and capital.

“Increased liquidity risk and uncertainty heighten the need for credit unions to prepare for contingency funding needs. Section 741.12 of the NCUA’s regulations contains scaled credit union contingency funding plan expectations,” NCUA said. 

It noted that in previously released Letter to Credit Unions 23-CU-06, Importance of Contingency Funding Plans, adding an addendum to the 2010 Interagency Policy Statement on Funding and Liquidity Risk Management, reinforcing the need to adjust to changing market conditions. 

“In evaluating the “L” component of CAMELS to determine the adequacy of a credit union’s liquidity risk management framework, examiners will continue to consider the current and prospective sources of liquidity compared to funding needs,” NCUA said.

The agency said examiners will:

• Review the credit union’s policies, procedures, and risk limits
• Evaluate the adequacy of the credit union’s liquidity risk management framework relative to its size, complexity, and risk profile.

It will also continue to assess liquidity management by evaluating:

• The 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 cost of various funding alternatives and their impact on earnings and capital.
• The diversity of funding sources under normal and stressed conditions.
• The appropriateness of contingency funding plans to address any plausible unexpected liquidity shortfalls.

Consumer Financial Protection

The NCUA said it will continue assessing federal credit unions’ compliance with applicable consumer financial protection laws and regulations, including:

• Overdraft Programs. In 2024, examiners will continue an expanded review of credit unions’ overdraft programs, including website advertising, balance calculation methods, and settlement processes. NCUA said it will also continue to evaluate adjustments credit unions made to their overdraft programs to address consumer compliance risk and potential consumer harm from unexpected overdraft fees.
• Fair Lending. Examiners will review policies and practices for redlining, marketing, and pricing discrimination risk factors.
• Auto lending. Examiners will review credit unions’ disclosures, policies, and practices to assess compliance with the Truth in Lending Act as implemented by Regulation Z. Examiners will also review credit unions’ policies regarding Guaranteed Asset Protection insurance.
• Policies and procedures governing compliance with flood insurance rules.

Information Security/Cybersecurity

With cybersecurity, the agency said examiners will continue to assess whether credit unions have implemented robust information security programs to safeguard both members and the credit unions themselves. 

“Examiners will continue to utilize the information security examination procedures in 2024, ensuring a thorough evaluation of cybersecurity measures,” NCUA said. 

NCUA further noted it implemented a new Cyber Incident Notification Reporting Rule, effective Sept. 1, 2023, mandating federally insured credit unions swiftly — within 72 hours — notify the NCUA after the credit union reasonably believes that a reportable cyber incident has occurred. 

Credit unions should also notify the NCUA if a third-party provider experiences a cyber incident affecting the credit union.

NCUA said key steps to consider when implementing the reporting rule are found in the NCUA Letter to Credit Unions 23-CU-07, Cyber Incident Notification Requirements, and include:

• Updating response plans
• Reviewing third-party contracts
• Training employees
• Monitoring and documenting incidents.

Interest Rate Risk (IRR)

In evaluating the “S” CAMELS component, the agency said its examiners will continue to evaluate whether a credit union proactively manages its IRR and the related risks to capital, asset quality, earnings, and liquidity. In particular, NCUA said its examiners will review a 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
• Back testing and sensitivity testing of the assumption set
• 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.

Other Updates

In the Letter to Credit Unions, NCUA said additional updates include:

Bank Secrecy Act (BSA) Compliance

“A credit union’s deficiency in or failure to comply with the BSA’s programmatic, recordkeeping, and reporting requirements can pose a significant risk to the institution, its members, and the Share Insurance Fund,” NCUA said, adding it will provide updates to credit unions regarding any regulatory changes to the BSA throughout 2024, as well as updates to supervisory expectations and examination procedures. 

Support for Small Credit Unions and Minority Depository Institutions

In 2024, NCUA said it will remain committed to supporting and preserving small credit unions and minority depository institutions (MDIs) through its Small Credit Union and MDI Support Program (Support Program). Small credit unions and MDIs face unique risks and hurdles, and the NCUA will continue to offer custom support to eligible credit unions. 

“Credit unions with less than $100 million in assets and MDIs of all asset sizes are eligible and can request assistance through their examiner or regional office,” the agency said. “The NCUA recognizes the value small and MDI credit unions bring to members in underserved communities by offering access to safe, fair, and affordable loans and other financial products and services.”

According to NCUA, the benefits of this program are expected to include:

• Expanded opportunities for qualifying credit unions to receive support through NCUA grants, training, and other initiatives
• Furthered partnerships with organizations and industry mentors that can support small credit unions and MDIs
• Added support to credit union management in addressing operational challenges.

The full letter, including links to additional resources, can be found here.