NCUA Releases 2015 Exam Priorities

You can read the full NCUA letter online.

The National Credit Union Administration sent a letter Tuesday to Federally Insured Credit Unions outlining their 2015 exam priorities, which had subtle differences from their 2014 priorities. 

Similar to last year, cyber-security, interest rate risk (IRR), money servicing businesses (MSB), and liquidity management are all high on the list of exam priorities, but this year the NCUA provided additional details on what specifically is expected. 

Cyber-Security

NCUA examiners will focus on proactive measures credit unions can take to protect their data and their members, including:

  • Encrypting sensitive data;
  • Developing a comprehensive information security policy;
  • Performing due diligence over third parties that handle credit union data;
  • Monitoring cyber-security risk exposure;
  • Monitoring transactions; and
  • Testing security measures.

The National Institute of Standards and Technology’s (NIST) Framework for Improving Critical Infrastructure Cybersecurity provides an excellent overview of steps credit unions can take to ensure they are meeting industry standards.  Many of the recommendations are fairly easy to implement and do not require large capital expenditures.

Interest Rate Risk

The NCUA is concerned that a rising interest rate environment could create a liquidity event, with long-term net assets creating unrealized losses. NCUA examiners have been directed to use existing guidance to assess credit unions’ IRR exposure, but indicated that they are in the process of updating this guidance to ensure that IRR is assessed accurately and that the appropriate supervisory steps are taken in response to excessive IRR exposure.

“Changes to the interest rate risk guidance will be tracked closely by regulatory advocates concerned that NCUA policies might harm their bottom line,” said John Trull, director of regulatory advocacy for the NWCUA. “Would we prefer guidance which can be invoked without a public comment period or would we prefer a rule that advocates can weigh in on? Either way, the NCUA should expect a strong response.”

Money Servicing Businesses

The NCUA recently issued guidance to examiners to educate them about MSBs and steps credit unions can take to mitigate the money-laundering risks posed by MSBs. They include:

  • Identifying customers;
  • Ensuring that each MSB is registered with the Financial Crimes Enforcement Network (FinCEN) and is in compliance with state and local licensing requirements; and
  • Conducting a Bank Security Act/Anti-Money Laundering risk assessment to document the level of risk associated with each MSB account and determine whether greater due diligence is necessary.

Private student lending was not on this year’s list of priorities and the myriad of new regulatory requirements was whittled down as the agency’s pace of rulemaking slowed, due in part to a contentious fight over the risk-based capital proposal.

The NCUA Indicated That They Will Be Looking for Compliance With the Following New Rules:

Liquidity and Contingency Funding Plans Rule, TILA-RESPA, and Ability to Repay

TheNCUA’s liquidity rule became effective March 31, 2014, and is intended to ensure that all credit unions conduct sound liquidity planning. Most credit unions in the Northwest have taken the appropriate steps to comply. Credit unions under $50 million are expected to have a basic written liquidity policy that has been approved by the board. Credit unions between $50 million and $250 million are expected to have a contingency funding plan that demonstrates how they would access liquidity should an adverse situation arise. And credit unions over $250 million need to have access to the NCUA’s Contingency Liquidity Facility or The Fed Discount Window.

Examiners will make sure that credit unions are using a combined TILARESPA disclosure as of August 1, and are in compliance with the ability-to-repay rule that took effect early last year.

Small Credit Union Exam Program

According to Trull, smaller credit unions continue to feel that examiners have unrealistic expectations, often times expecting them to be as sophisticated as the larger shops.

In 2015, NCUA’s Small Credit Union Examination Program (SCUEP) will employ a defined-scope exam approach that focuses staff attention on the primary areas of risk for small credit unions: internal controls, recordkeeping and lending. This narrower scope requires field staff to focus on risk exposures in the areas that, historically, have led to small credit union failures and losses to the National Credit Union Share Insurance Fund. 

When fully implemented by the second quarter of 2015, the new SCUEP examination will involve more transactions testing and a three-tiered review. The first tier includes standard, required procedures; subsequent tiers require more in-depth analysis and testing triggered by red flags or concerns.

The table below summarizes the type of examination each federal credit union (FCU) will receive, depending on its overall CAMEL rating, size, and complexity. 

Type of FCU Exam by CAMEL Rating and Asset Size

The Association has been advocating for improvements to small credit union examinations and, if implemented properly, this new program has the potential to provide significant regulatory relief for smaller credit unions.

While the letter outlines broad agency priorities, other issues may arise. For example, the Northwest has seen a significant regulatory focus on bank-owned life insurance (BOLI) products and split-dollar life programs, with both NCUA and state examiners taking significant interest in how employee benefits are structured.

The Association is able to identify regional trends thanks to a new exam reporting tool, which allows credit unions to share exam issues in as much or as little detail as they like. The reported data is used by advocates as they work with regulatory agencies to improve exams. 

“The past five years were reactive, as new regulations that threatened credit unions were coming from every direction,” said Trull. “In 2015 we will take a proactive approach to improve the regulatory and exam environment for the long-term benefit of the credit union movement.”

“The facts are,” Trull concluded, “we have a Congress that is controlled by a majority of individuals skeptical of regulation, many of the most onerous statutory regulations have been finalized, and we anticipate a stabilizing economy will necessitate greater access to capital, allowing us to change the conversation.” 

Questions about this story? Contact James Pearson: 206.340.4790, jpearson@nwcua.org.

Posted in Advocacy News, NCUA.