NCUA Chairman Todd M. Harper
As Prepared for Delivery on January 27, 2022
Thank you, Kelly and Naghi, for that informative briefing on the priorities for the NCUA’s examination program in 2022. As you noted, these priorities were issued to credit unions and examiners earlier this month in a Letter to Credit Unions.
During the last year, I have frequently noted the agency’s top priority is to ensure the credit union system and the National Credit Union Share Insurance Fund can adapt to the evolving nature of the COVID-19 pandemic and its financial and economic disruptions. The NCUA’s supervisory priorities in 2022 reflect that need by focusing on the areas of the greatest risk to credit unions, members, and the broader system.
With supply chain disruptions, labor shortages, inflation, the Omicron variant, and stresses on household finances, our examiners will focus on critical areas like capital, liquidity, and a credit union’s ability to manage credit and interest rate risk. Our examiners will also look at credit unions’ loan loss reserving practices to ensure they are correctly accounting for potential losses commensurate with their risk and internal policies.
Additionally, the 2015 risk-based capital rule and the recently approved Complex Credit Union Leverage Ratio became effective at the start of this year. These rules will help ensure the continued stability of the credit union system as it navigates the next phase of the pandemic and in the years ahead. As these rules are implemented, NCUA examiners will be mindful of the effects of recent share growth on credit unions’ net worth and risk-based capital ratios. They will also ensure that a credit union evaluates the impact of their COVID response and relief efforts on its capital position and financial stability.
Our supervisory priorities also include areas like fraud, payments systems, and cybersecurity. Additionally, ensuring continued compliance with the Bank Secrecy Act and anti-money laundering laws and regulations remains priority, so as to prevent our financial system from being used by criminals and terrorists. Moreover, the emergence of new technologies and changes to how financial institutions operate and offer services because of the pandemic have only increased the potential for risk in these areas.
This is especially true in the area of cybersecurity. The pandemic has increased cybersecurity exposures for all parts of the financial services sector, including federally insured credit unions. I cannot stress this point enough: All credit unions, regardless of size, are vulnerable to potential cyberattacks. As a result, we must remain laser focused on these issues.
The NCUA is committed to strengthening the readiness of the credit union system to respond to these risks through our supervisory program and with tools like the ACET Toolbox, training, and the Community Development Revolving Loan Fund’s grant and loan programs. However, all of us — the NCUA, state supervisory authorities, vendors, and credit unions — are responsible for protecting our systems, improving our ability to recover from incidents, educating our staff, sharing information, and reporting and addressing potential vulnerabilities.
Several critical consumer financial protection matters are also included in this year’s priorities. In 2022, examiners will focus on areas related to the pandemic, fair lending, the Servicemembers Civil Relief Act, the Fair Credit Reporting Act, and credit union overdraft programs. These supervisory efforts will ensure that all members have access to safe, fair, and affordable financial services and products.
In 2020, NCUA examiners found weaknesses in credit unions’ compliance management systems. Our examiners also observed notable shortfalls in complying with the Fair Credit Reporting Act, the Electronic Fund Transfer Act, and the Truth in Lending Act. If left unchecked, these problems could lower consumer credit scores, lead to expensive fees, and increase the cost of credit.
Notably, in 2022, examiners will identify fair lending policies and practices that indicate discrimination risk or loan portfolio and underwriting discrimination risk. NCUA examiners will also assess whether a credit union has the proper policies and procedures to evaluate the consistency, fairness, and accuracy of the appraisals it obtains.
In supervising overdraft programs, examiners will request information about credit union overdraft policies and procedures, as well as the monitoring tools and audit of credit union overdraft programs. Credit union communications with members about these overdraft programs will also be reviewed. In my view, the overdraft practices of some federal credit unions are fundamentally detrimental to members and inconsistent with the definition of federal credit union in the Federal Credit Union Act. We anticipate using the documentation gathered this year for a more thorough review of credit unions’ overdraft programs in 2023.
Finally, given the ongoing uncertainty associated with the pandemic, the NCUA will continue to conduct much of its examination and supervision activities remotely, at least until it is safe to return onsite. This offsite posture will help protect the health and safety of our employees and contractors, as well as those who work at credit unions. The NCUA continues to closely monitor the pandemic’s trends and will resume onsite examination and supervision work when safe to do so. However, the NCUA is still prepared and able to step in onsite when necessary, such as in instances of fraud.
Before I recognize my fellow Board members, I have several questions for the panel. First, it has been two years or longer since most credit unions have had an NCUA examiner onsite. How important is it to review a credit union’s internal controls more closely when we are able to return to onsite work?
Thank you, Kelly. Another concern that I frequently hear from credit unions is about the implementation of the FASB’s Current Expected Credit Losses rule, commonly known as CECL, which is scheduled to begin for fiscal years on or after December 15, 2022. What educational materials are planned to help credit unions with CECL’s implementation?
And, what about a simplified CECL spreadsheet?
Thank you. These next two questions are for you, Matt. In recent years, the NCUA has annually conducted between 25 and 30 fair lending examinations. And, we have budgeted resources to increase the number of fair lending exams this year. What issues did OCFP identify in those exams last year?
Thank you, Matt. How is OCFP evolving its fair lending program to include more than just HMDA data when assessing where to perform fair lending exams?
Thank you, Matt for that response.
Before closing, I urge all credit unions to continue working with their members experiencing financial difficulties. To support your efforts, the NCUA has instructed its examiners to refrain from criticizing a credit union’s efforts to provide prudent relief for members when conducted in a reasonable manner with proper controls and management oversight. As credit unions navigate the next phase of the pandemic, such efforts will help ensure that credit union members, local businesses, and communities are able to recover and prosper.
That concludes my remarks. I now recognize Vice Chairman Hauptman.