NCUA Approves Proposed Rule Amending the Supervisory Committee Audit Regulation

The proposal outlines minimum procedures that reflect common industry practices for testing accounts and controls over financial institution financial statements.

2/19/2019

Hand holding the word "compliance."

The National Credit Union Administration’s (NCUA) Board approved a proposed rule to amend the regulations governing the responsibilities of a federally insured credit union (FICU) to obtain an annual supervisory committee audit of the credit union.

The proposal includes Appendix A, which outlines minimum procedures that reflect common industry practices for testing accounts and controls over financial institution financial statements. The Board believes that providing a targeted list of minimum procedures to be included in an audit would clarify and simplify the audit process. Under this framework, credit unions and outside parties hired to conduct audits for credit unions would only need to refer to the streamlined Appendix A to determine the minimum audit requirements.

APPENDIX A – SUPERVISORY COMMITTEE AUDIT – MINIMUM PROCEDURES

This Appendix presents minimum procedures, which a supervisory committee, its internal auditor, or other qualified person must complete when a credit union chooses the Other Supervisory Committee Audit option for completing its annual audit requirements under §715.7(c) of this part.

This option may not be adequate for all credit unions as it is designed for smaller, less complex credit unions. The supervisory committee, internal auditor, or other qualified person may also need to perform additional procedures to supplement these minimum procedures if the specific circumstances of a particular credit union so dictate. The supervisory committee must apply its judgment in determining the procedures necessary to meet audit requirements. The supervisory committee remains responsible to ensure that a complete set of test procedures is performed. All test procedures will be done using balances and samples for the applicable review period.

Any time the test or confirmation procedures include making a sample or selection, the supervisory committee’s report, its internal auditor’s report, or other qualified person’s report on minimum procedures should delineate the method of selection and the number of selected items.

For purposes of this Appendix, the following definitions will apply:

  • Confirm or confirmation refers to a written verification with a third-party (person or organization) pertaining to an account balance or condition. Examples of confirmation letters are bank/corporate credit union account confirmation, investment account confirmation, borrowing or line of credit confirmation, attorney letter confirmation, and member share/loan account confirmation.
  • Materiality refers to a statement, fact, or item, which, giving full consideration to the surrounding circumstances as they exist at the time, it is of such a nature that its disclosure, or the method of treating it, would be likely to influence or to make a difference in the judgment and conduct of a reasonable person. Materiality should take into account ending balances as well as the volume of transactions in an account. Typically, balances or transaction volume greater than 5 percent of the credit union’s net worth should be considered material for purposes of this Appendix.
  • Review refers to the examination of policies and procedures, and a review of a sample portion of activities, rather than all of the activities.
  • Test refers to procedures applied to the individual items that compose an account balance or class of transactions. The tests involve confirmation, inspection, or observation procedures to provide evidence about the recorded amount.

The supervisory committee, internal auditor, or other qualified person must perform and document the following minimum procedures:

Test and confirm material asset and liability accounts including, at a minimum:

  • Loans
  • Cash on deposit
  • Investments
  • Shares
  • Borrowings

Test material equity, income, and expense accounts.

Review key internal controls including, at a minimum:

  • Bank reconciliation procedures
  • Cash controls
  • Dormant account controls
  • Wire and ACH transfer controls
  • Loan approval and disbursement procedures
  • Inside account controls
  • Other real estate owned
  • Foreclosed and repossessed assets

Test the mathematical accuracy of the allowance for loan and lease loss account and ensure the methodology is properly applied.

Test loan delinquency and charge-offs.

Question of the Week

Are we required to provide the member with an IRS Form 1098 for interest paid on an RV loan?

No. The IRS instructions for the 1098 define a mortgage as any obligation secured by real property. Real property is land and generally anything built on it, growing on it, or attached to the land. Among other things, real property includes a manufactured home with a minimum living space of 400 square feet and a minimum width of more than 102 inches and which is of a king customarily used at a fixed location.

If the property that secures the loan is not real property you are not required to file Form 1098. However, the borrower may be entitled to a deduction for qualified residence interest, such as may be the case for a boat, which has sleeping space and cooking and toilet facilities, that the borrower uses as a home.

Legal Briefs

National Credit Union Administration (NCUA)

The NCUA issued a proposed rule amending the supervisory committee audit regulations for federally insured credit unions.

Consumer Financial Protection Bureau (CFPB)

The CFPB has published the 2019 list of rural and underserved counties.  The 2019 lists can be found here. The rural and underserved areas tool can be found here.

The CFPB released their Semi-Annual Report to Congress for the period of April 1, 2018 through Sept. 30, 2018. The report covers topics such as significant problems facing consumers, list of rules adopted, complaints, and supervisory actions.

Federal Emergency Management Administration (FEMA)

FEMA released a Fact Sheet providing information on the NFIP’s Increased Cost of Compliance program that can help with rebuilding and bringing the building into compliance with the community’s floodplain management requirements.

Office of Foreign Assets Control (OFAC)

OFAC has updated the SDN list as of Feb. 15, 2019. The last update prior to this was Jan. 28, 2019.

Questions? Contact the Compliance Hotline: 1.800.546.4465, [email protected].