Washington State DCU Issues Initiatives and Exam Focus for 2022

The Washington State Department of Financial Institutions Division of Credit Unions (DCU) issued DCU Bulletin B-22-02 to provide Washington State-chartered credit unions with insight into the DCU’s initiatives and exam focuses for 2022.

Initiatives

  • Returning to On-Site Exam Work – The DCU currently plans to return to onsite exam work in April, with the plan to use a hybrid approach. Under the hybrid approach, some examiners will work fully remote while some will work onsite at the credit unions.
  • Using the new NCUA MERIT Exam Software Program for All Exams – The NCUA replaced the AIRES (Automated Integrated Regulatory Exam System) with the MERIT (Modern Examination and Risk Identification Tool) in September 2021. The DCU is now conducting all exams in MERIT. With MERIT, the credit union uploads the loans/shares to the NCUA’s Data Exchange Application (DEXA), in addition to uploading them to DFI. This will be a bigger change for some credit unions, than others.
  • Reconfiguring How IT Security Exams are Performed – In 2020 the DCU restructured the division and created four teams. Three teams are devoted to performing safety and soundness exams and one is devoted to specialty exams. One of the goals of the restructure was to add a second IT examiner. In March 2022, the DCU will have at least two examiners dedicated to IT security exams.

2022 Exam Focus

  • Net Worth Ratio Pressure – Examiners will have a continued focus on the declining net worth ratios. Decreased consumer spending coupled with the low interest rate environment, and low loan demand environment, has caused continued asset growth to outpace net worth growth, putting pressure on the net worth ratio. The examiners’ focus will be tailored to reviewing the credit union’s planned response to the pandemic-related influx of deposits. Examiners will consider the following areas:
    • Strategic Planning: During safety and soundness examinations, examiners will review the strategic plan, business plan, and budget to evaluate the adequacy of a credit union’s objectives and goals in relation to the credit union’s financial performance. Examiners will look for a well-structured process that is appropriate for the size, complexity, and financial and operational needs of the credit union. Strategic planning, business planning, and budgeting are important factors in the “Management” CAMELS component rating.
    • Business Planning: Business planning should focus on shorter-term actions designed to implement the strategic plan. A sound business plan flows logically from and should be consistent with the strategic plan.
    • Budget: The budget should be based on the financial and operational goals established in the business plan. The budget should be realistic, and project cash flows occur during the year. In addition, the budget should be supported by documented assumptions that correlate with the business plan. The management and board of directors should review and discuss a monthly or quarterly budget variance analysis and if necessary, determine actions to bring material variances back into alignment with the budget projections.
  • Credit Risk – Examiners will consider trends in credit unions’ loan portfolios. Credit unions have begun to offer new loan products and services in recent years. While these areas can offer opportunities to serve members, expand loan portfolios, and increase earnings, credit unions should be sure to perform adequate due diligence and properly manage risk.
  • Consumer Compliance – The DCU conducts compliance reviews in two different ways: either as part of the safety and soundness exam or as a stand-alone compliance exam. Stand-alone consumer compliance exams for credit unions with $500 million or over in assets are scheduled on a periodic basis. These exams may be concurrent with the safety and soundness exams.
  • Information Security and Technology – Information Security risks and increased cybersecurity threats continue to be a concern for all financial institutions. During 2022, IS&T examiners will:
    • Continue to encourage credit unions to complete the FFIEC Cybersecurity self-assessment tool, the NCUA Automated Cybersecurity Assessment Tool (ACET), or use a similar type of tool to help the credit union assess its cybersecurity preparedness.
    • Review third-party risk management, especially for third parties with access to non-public member information. NCUA issued a Letter to Credit Unions 21-CU-16 that offers guidance to credit unions on how to establish a strong due diligence process, policies and procedures, and supervisory considerations of these relationships

 Question of the Week

Q. If a credit union gives a prize to a member, what are the tax implications?

A. When a credit union gives a prize to a member, the credit union may have to file one of three possible tax forms. Before deciding which form to use it must be determined why the prize was given and the value of the prize. First, a prize may be given to an employee as part of the employer-employee relationship. If this is the case, the prize is considered taxable wages and must be reported on the employee’s form W-2.

Second, if the prize was awarded in connection with the member opening a deposit account or maintaining an account relationship and is valued at $10 or more, the credit union must file a Form 1099-INT. The value of the item is determined by using the “fair market value” standard and is generally equal to what the credit union paid to purchase the item.

Third, a 1099-MISC must be filed when neither of the above two options applies personally to the member, and the value given to the member throughout the year is at least $600. Here, the prize is considered miscellaneous income and not interest income because it is not associated with the opening or maintaining of an account.

When determining whether to file a 1099-MISC or a 1099-INT for a prize, consider whether the prize was given in connection with the member opening a deposit account or maintaining an account relationship. If the prize was given based on one of those reasons, it is considered interest and a 1099-INT must be filed if the prize is valued at $10 or more. If the item was given as a prize or award and the winning person did not agree to participate based on the opening or maintaining of an account, a 1099-MISC is required. The $600 requirement for the 1099-MISC includes the combined value of all miscellaneous income the member received throughout the calendar year.

Resources

26 CFR 1.6041-1
26 CFR 1.6041-2
26 CFR 1.6049-4

Compliance Alerts

National Credit Union Administration

Submission for 2021 Voluntary Credit Union Diversity Self-Assessment Extended to Jan. 31, 2022: The NCUA extended the deadline for credit unions to submit the 2021 voluntary Credit Union Diversity Self-Assessment. Submissions for 2021 will now be accepted until Jan. 31.

Financial Crimes Enforcement Network

FDIC and FinCEN Launch Digital Identity Tech Sprint: FinCEN and the FDIC announced a Tech Sprint to develop solutions for financial institutions and regulators to help measure the effectiveness of digital identity proofing—the process used to collect, validate, and verify information about a person. Through the Tech Sprint, FDIC’s tech lab (FDITECH) and FinCEN seek to increase efficiency and account security; reduce fraud and other forms of identity-related crime, money laundering, and terrorist financing; and foster customer confidence in the digital banking environment.

Washington State Department of Financial Institutions

Guidance to Help Financial Institutions and Facilitate Recovery in Areas of Washington Affected by Flooding and Mudslides: The DFI reminded Washington state financial institutions that the FDIC announced a series of steps intended to provide regulatory relief to financial institutions and facilitate recovery in areas of Washington affected by flooding and mudslides.

Office of Foreign Assets Control

OFAC has updated the SDN list as of Jan. 12. The last update prior to this was Jan. 5.

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

Posted in Compliance News, Compliance News, Compliance Question.