DCU Issues Bulletin Regarding Focus on Liquidity and Interpretive Letter on Verification of Members’ Accounts


The Washington State Department of Financial Institutions Division of Credit Unions (DCU) recently issued DCU Bulletin B-18-13, which explains the DCU’s increased focus on credit union liquidity. Due to a downward trend in cash and short-term investments, examiners will expand their liquidity analysis for credit unions with low liquidity levels to ensure credit unions have other resources of contingency liquidity to safely manage liquidity pressure.

The examiners’ liquidity review will include, but is not limited to, the following:

  • Liquidity policy and contingency funding plan;
  • Cash flow forecast; and
  • Liquidity testing and monitoring.

Liquidity Policy and Contingency Funding Plan

The board of directors must determine the appropriate tolerance for liquidity risk by establishing the purpose, objective, and goals of liquidity management. The liquidity policy and contingency funding plan should be tailored to the size and complexity of the credit union and should address both low and excessive cash flows.

Examiners will focus on the following items:

  • The primary and secondary sources of liquidity
  • Balance sheet composition
  • Uses of borrowed funds
  • Maximum/minimum liquidity ratio limits
  • Appropriate limits such as total loans to shares thresholds and the cash plus short-term investments to assets ratios
  • Contingency funding sources and triggers
  • The Asset Liability Management Committee and the Board reporting requirements

As outlined in 741.12(d), a credit union over $50 million in assets must have a written contingency funding plan based on its complexity, risk profile, and scope of operations that sets out the strategies for addressing liquidity shortfalls in emergency situations. Examiners will review the funding plans to ensure credit unions have appropriately identified and have access to multiple sources of funding. These funding sources should include both funds from the credit union’s own balance sheet and through market funding sources. Credit unions with more than $250 million in total assets must establish at least one federal source of contingent liquidity.

Cash Flow Forecast

Forecasts must be based on anticipated changes in cash flow and should include, but not limited to, the following:

  • Estimated loan demand and expected loan repayment amounts
  • Share and deposit inflows and outflows
  • Investment maturities, purchases and anticipated payments received
  • Contingent liabilities
  • Operating expenses
  • Earnings

Effective forecasting and planning will help anticipate liquidity needs before they arise and will provide for timely consideration of potential solutions.

Testing and Monitoring

Credit union management should monitor current liquidity levels to ensure they are within the established limits and proactively take action when necessary to restore liquidity to appropriate levels. Also, management should periodically review cash flow projections and periodically test using its contingency funding sources.

The Division understands that liquidity management does not have a one-size-fits-all approach and that the success of an effective liquidity management program is dependent upon a credit union’s business model, size, and complexity.

In addition, the DCU issued Division of Credit Unions Interpretive Letter I-18-02 which clarifies that Washington state chartered credit unions must only perform a verification of members’ accounts at least once every two years. The wording in the 2017 amendment to RCW 31.12.335(1)(b) is confusing and was not intended to require an annual verification of members’ accounts. The supervisory committee of the credit union still needs to perform or arrange for a complete annual audit of the credit union.

Question of the Week

If our member writes their PIN on their debit card and thieves use the PIN to make money out of the account, is the credit union still obligated to pay the claim even though the member’s own negligence caused the loss?

Yes. As unfair as this may be, the commentary to the Electronic Fund Transfers Act says that “negligence by the consumer cannot be used as a basis for imposing greater liability than is permissible under Regulation E.” The commentary goes on give “writing the PIN on a debit card” as an example of negligence.

Related Links:

12 CFR 1005.6(b)
Commentary to 12 CFR 1005.6(b)

Legal Briefs

National Credit Union Administration (NCUA)

The NCUA released Q2 2018 credit union system performance data.

Bureau of Consumer Financial Protection (BCFP)

The BCFP released its latest supervisory highlights, which shares observations in the areas of auto loan servicing, credit card account management, debt collection, mortgage servicing, payday lending, and small business lending.

Washington State DFI Division of Credit Unions (DCU)

The DCU issued DCU Bulletin B-18-13 which provides insight in to expanded examiner focus on liquidity.

The DCU issued Division of Credit Unions Interpretive Letter I-18-02, which clarifies that the supervisory committee only needs to conduct verification of member accounts at least every two years.

The DCU issued Division of Credit Unions Interpretive Letter I-18-03, which reviews the expedited approval process for credit unions to invest in investments that are not listed in RCW 31.12.436, but are eligible to pledge as collateral for holding public deposits.

Office of Foreign Assets Control (OFAC)

OFAC has updated the SDN list as of Sept. 7, 2018. The last update prior to this was Aug. 24, 2018.

Questions? Contact the Compliance Hotline: 1.800.546.4465; compliance@nwcua.org.


Posted in Compliance News.