NCUA Provides Insight into Supervisory Focus for 2012

In both the National Credit Union Administration (NCUA) letter to credit unions (12-CU-01) and the “Chairman’s Corner” of the January 2012 edition of “The NCUA Report,” the NCUA provides insight into the risk issues that examiners will be focusing on this year.

The main focus areas will be credit risks, interest rate and liquidity risks, and concentration risks. The NCUA established these areas of exam focus by performing post-mortems on failed credit unions to see what could have been done differently to have prevented those institutions from failing.

Credit risks will include (1) each credit union’s regular evaluation of the adequacy of its allowance for loan and lease loss (ALLL) account and the full funding of ALLL account. (2) The NCUA will also expect credit unions to have appropriate policies and controls in place and monitor the performance of modified loans on an ongoing basis to properly mitigate credit risks. (3) Third-party loans and loan participations will also have a greater focus. These types of loan programs will call for an added level of monitoring over vendors, sound underwriting standards, and the implementation of proper controls to monitor these activities. (4) In addition, examiners will continue to look at credit portfolio risk and expect credit unions to have appropriate credit risk policies. These policies will cover an annual review of credit portfolio and members’ credit worthiness to ensure the members still qualify for the credit that is extended. Policies and procedures should include what to do if the member has open-end credit for which they no longer meet the underwriting requirements.

Interest rate and liquidity risks will play an ever-expanding role in examinations over the coming years. The growth in low-rate first mortgages is of particular concern for the NCUA, and credit unions with elevated levels of long-term, fixed-rate real estate loans made at these historically low interest rates can be exposed to significant interest rate risk in the event of a rising-rate environment. Examiners will focus on credit unions’ ability to develop models and manage interest-rate risk, which means examiners will be asking questions about each credit union’s interest-rate risk policy and procedures. The examiners will also be looking to see if credit unions have sufficient access to federal liquidity sources and have backup emergency liquidity plans.

Concentration risks are compounded when a credit union holds high levels of a particular type of loan—especially real estate loans or mortgage-backed securities. Examiners will be looking for the credit union to have sound portfolio limits in place to address concentration risks and to manage within those limits.

While ensuring that credit unions mitigate all these risks, the NCUA will continue to encourage responsible lending as one of the best services that credit unions can offer to members during these uncertain economic times. As credit unions overcome the effects of the economic downturn, the NCUA examiners will continue to work with credit union directors and management to maintain stable balance sheets.


Questions? Contact the Compliance Hotline: 1.800.546.4465,

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