Dear Boards of Directors and Chief Executive Officers:
This letter outlines the National Credit Union Administration’s supervisory priorities and other aspects of the agency’s examination program for 2022. The NCUA remains committed to focusing its examination activities on the areas that pose the highest risk to credit unions, credit union members, and the National Credit Union Share Insurance Fund.
The NCUA recognizes the ongoing challenges faced by credit unions and their efforts to assist members affected by the ongoing COVID-19 pandemic. The NCUA encourages credit unions to continue working with their members who may be experiencing financial difficulty.
Given the ongoing uncertainty associated with the COVID-19 pandemic, the NCUA will continue to conduct examination and supervision activities primarily offsite. Working with our public health consultant, the agency continues to closely monitor the COVID-19 pandemic trends and will resume onsite examination and supervision work when safe to do so. For additional information on the NCUA’s COVID-19 response efforts, visit the NCUA’s Coronavirus (COVID-19): Information for Federally Insured Credit Unions and Members webpage.
The agency’s flexible examination scheduling policy will continue in 2022. Examinations of credit unions that qualify for the extended examination cycle will be scheduled accordingly.1 Most federal credit unions with assets under $50 million will continue to receive examinations conducted based on the Small Credit Union Exam Program. For all other credit unions, NCUA examiners will use the agency’s risk-focused examination procedures to conduct the examination.
Supervisory Priorities for 2022
Credit Risk Management
NCUA examiners will continue to review credit unions’ credit risk-management and mitigation efforts. For all lending programs, credit unions’ risk management practices should be commensurate with the level of complexity and nature of their lending activities. Credit unions must maintain safe-and-sound lending practices and comply with consumer financial protection laws, including disclosures and regulatory reporting requirements.
NCUA examiners will focus on adjustments credit unions made to lending programs to address borrowers facing financial hardship. NCUA examiners will also focus on reviewing policies that address the use of loan workout strategies, risk-management practices, and new strategies implemented to provide funds to borrowers under distress, including programs authorized under the CARES Act and extended in the Consolidated Appropriations Act, 2021. In particular, NCUA examiners will evaluate credit unions’ controls, reporting, and tracking of these programs.
Credit unions are encouraged to continue working with their members who were and continue to be affected by the COVID-19 pandemic. NCUA examiners will not criticize a credit union’s efforts to provide prudent relief for borrowers when such efforts are conducted in a reasonable manner with proper controls and management oversight.
For more information, see:
- Joint Statement on Additional Loan Accommodations Related to COVID-19 (opens new window);
- NCUA Letter to Credit Unions, 20-CU-13, Working with Borrowers Affected by the COVID- 19 Pandemic; and
- The Lending Programs section on the NCUA’s Frequently Asked Questions for Federally Insured Credit Unions.
Information Security (Cybersecurity)
Cybersecurity risks remain a significant threat to the financial system. The likelihood of these threats adversely affecting credit unions and their members continues to rise. Ransomware, third-party/supply chain risks, and business email compromises, in particular, continue to be of concern. The review of credit union information security practices continues to be a priority for the agency.
The NCUA continues to develop updated information security examination procedures that are tailored to institutions of varying size and complexity. These procedures will continue to be piloted in 2022, with the goal of having them finalized in 2022.
In October 2021, the NCUA released the Automated Cybersecurity Evaluation Toolbox (ACET) application, which provides credit unions the capability to conduct a maturity assessment aligned with the Federal Financial Institutions Examination Council (FFIEC) Cybersecurity Assessment Tool. Using the assessment within the ACET allows institutions of all sizes to determine and measure their cybersecurity preparedness. The ACET is entirely voluntary and does not introduce any new requirements or expectations on credit unions.
For more cybersecurity information, visit the NCUA’s Cybersecurity Resources webpage.
Payment products, services, and operations is a growing area of complexity and risk for credit unions and consumers. As the retail payments landscape increasingly shifts and grows to meet consumer demand for easier and faster electronic access to and settlement of funds, the corresponding risk to credit unions and their members also increases. Today’s environment of easy and fast electronic processing of transactions relies on technology, the applications and their controls, and the underlying security of the platforms facilitating the transactions. The changes in payment systems increase the risk of fraud, illicit use, and breaches of data security. The NCUA will include increased focus in this area.
Bank Secrecy Act Compliance and Anti-Money Laundering/Countering the Financing of Terrorism
Bank Secrecy Act (BSA) compliance and Anti-Money Laundering (AML)/Countering the Financing of Terrorism (CFT) continue to be national priorities. NCUA examiners conduct BSA compliance and AML/CFT reviews during every examination and take appropriate action, when necessary, to ensure credit unions meet their obligations.
The Anti-Money Laundering Act of 2020 (opens new window) (AML Act) and the Corporate Transparency Act (opens new window) amended the BSA for the first time since 2001.2 There will be several new requirements for credit unions to update their risk-based BSA and AML/CFT policies, procedures, and processes. These requirements will be implemented incrementally throughout 2022. The NCUA will communicate changes in BSA and AML/CFT requirements, and any impacts on examinations to credit unions.
The NCUA meets regularly with interagency partners to address the AML Act requirements and to improve the transparency, efficiency, and effectiveness of BSA and AML/CFT regulation and supervision. As part of this interagency process, the FFIEC will continue to publish updates to the BSA/AML Examination Manual.3
Credit union efforts to comply with these requirements help to fight crime and to keep America safe. Law enforcement also uses the information provided to identify and thwart illicit financial and terrorist activities.
For additional BSA/AML resources, visit the NCUA’s Bank Secrecy Act Resources webpage.
Capital Adequacy and Risk Based Capital Rule Implementation
Capital adequacy standards are important to ensure the safety and soundness of credit unions. Capital serves as a buffer to prevent institutional failure and dramatic deleveraging during times of stress.
NCUA examiners will be mindful of the effects of recent excess share growth on net worth and risk-based capital (RBC) ratios. NCUA examiners will ensure that credit unions are evaluating the impact of their COVID-19 response and relief efforts on their capital position and financial stability.
Effective January 1, 2022, complex credit unions are subject to the risk-based capital requirements in the final risk-based capital rule (opens new window). A complex credit union has total assets that exceed $500 million, as reflected in the most recent Call Report. In support of this new capital adequacy framework, there will be changes to the quarterly Call Report starting with the reporting period of March 31, 2022. Complex credit unions’ prompt corrective action net worth categories will incorporate the results of their risk-based capital ratios beginning with the March 31, 2022, Call Report cycle.4
NCUA examiners will review the accuracy of complex credit unions’ reporting for the new data elements required in the risk-based capital schedule of the Call Report.
Loan Loss Reserving
For loan loss reserving, credit unions are required to implement the Financial Accounting Standards Board’s Accounting Standards Update No. 2016-13, Topic 326 by January 1, 2023. This is commonly referenced as the current expected credit losses methodology, or CECL. For credit unions not yet adopting CECL, they will follow FASB Accounting Standards Codification (ASC) Subtopic 450-20 (loss contingencies) and/or ASC 310-10 (loan impairment). Federal credit unions with less than $10 million in assets are not required to follow generally accepted accounting principles (GAAP), and therefore do not have to implement CECL. However, all federal credit unions will be required to have a reasonable reserve methodology, provided that it adequately covers known and probable loan losses. Federally insured, state-chartered credit unions should refer to state law on GAAP accounting requirements and CECL standard applicability.
NCUA examiners will be evaluating the adequacy of credit unions’ Allowance for Loan and Lease Losses (ALLL) accounts by reviewing:
- ALLL policies and procedures;
- Documentation of an ALLL reserving methodology, including modeling assumptions and qualitative factor adjustments;
- Adherence to generally accepted accounting principles; and
- Independent reviews of credit union reserving methodology and documentation practices by the Supervisory Committee or by an internal or external auditor.
Examiners will also discuss the credit union’s preparations to implement CECL. A variety of resources about CECL are available for credit unions, including:
- FASB’s Accounting Standards Update 2016-13, Topic 326, Financial Instruments—Credit Losses
- FASB Staff Q&A, Topic 326, No. 1: Whether the Weighted-Average Remaining Maturity Method Is an Acceptable Method to Estimate Expected Credit Losses
- FASB Staff Q&A, Topic 326, No. 2: Developing an Estimate of Expected Credit Losses on Financial Assets
- FASB’s Frequently Asked Questions on the New Accounting Standard on Financial Instruments – Credit Losses (opens new window)
- NCUA Letter to Credit Unions 16-CU-13 – Frequently Asked Questions on the New Accounting Standard on Financial Instruments Credit Losses
- NCUA Letter to Credit Unions 17-CU-05 – Frequently Asked Questions on the New Accounting Standard on Financial Instruments Credit Losses
Consumer Financial Protection
The NCUA will continue to examine for compliance with applicable consumer financial protection laws and regulations during every federal credit union examination. The scope of each examination’s consumer compliance review is risk-focused and is based on the credit union’s compliance record, products and services provided, and any new or emerging concerns. The NCUA selects the specific priorities to reflect trends in violations identified through examinations and member complaints, any recent changes to regulatory requirements, and how much time has passed since the regulation was last required to be reviewed by examiners.
In 2022, examiners will focus on areas related to:
- the COVID-19 pandemic,
- fair lending,
- Servicemembers Civil Relief Act,
- Fair Credit Reporting Act, and
- overdraft programs.
NCUA examiners will review mortgage forbearances and other loan accommodations credit unions have provided to their members during the COVID-19 pandemic, as well as the credit union’s reporting of these accommodations under the CARES Act amendments to the Fair Credit Reporting Act. Examiners will evaluate a credit union’s policies and procedures, as applicable, regarding the temporary COVID-19 Mortgage Servicing Rule (Regulation X (opens new window)).
Examiners will identify fair lending policies and practices that indicate discrimination risk or loan portfolio and underwriting discrimination risk. In addition, examiners will assess whether a credit union has policies and procedures to evaluate the consistency, fairness, and accuracy of the appraisals it obtains.
Examiners will request information about a credit union’s policies and procedures governing its overdraft programs and the monitoring tools and audit of its overdraft programs, as well as the communications it provides to consumers about such programs. We anticipate using this documentation for a fuller review of credit unions’ overdraft programs in 2023.
The NCUA continues to encourage credit unions to utilize safe-and-sound practices as they manage their loan participation portfolios, which are often serviced by an outside entity. NCUA examiners will verify that credit unions have evaluated the risk in the loan participation transactions and how that risk fits within the tolerance levels established by the credit union’s board. At a transactional level, each loan participation must have separate and distinct records for individual payments, including principal, interest, fees, escrows, and other information relating to individual loans. While remittances to the credit union may come in a single payment, credit unions must reconcile this information to the servicer’s records and follow prudent third-party due diligence practices when purchasing loan participations.
The offsite posture of many credit unions over the last two years has increased the potential fraud risks. The NCUA will review credit union efforts to deter and detect fraud, including internal controls and separation of duties. Transaction testing will be part of the examination procedures.
London Inter-Bank Offered Rate (LIBOR) Transition
On March 5, 2021, the United Kingdom Financial Conduct Authority and ICE Benchmark Administration announced that the one-week and two-month U.S. dollar LIBOR settings will cease to be published immediately after December 31, 2021. The overnight and one-, three-, six-, and 12-month USD LIBOR settings will be extended through June 2023, which will provide additional time to wind down or renegotiate existing contracts that reference these LIBOR settings.
During 2022, NCUA examiners will focus on credit unions with significant LIBOR exposure or inadequate fallback language. In May 2021, the NCUA issued Letter to Credit Unions, 21-CU-03, LIBOR Transition that also included Supervisory Letter, 21-01, Evaluating LIBOR Transition Plans. The Supervisory Letter provides the supervision framework examiners will continue to use to evaluate a credit union’s risk management processes and planning regarding the transition from LIBOR. The Letter to Credit Unions encouraged credit unions to prepare for the expected discontinuation of LIBOR and to transition away from using the U.S. dollar LIBOR settings by no later than December 31, 2021, and to provide fallback language and a replacement rate(s) for all legacy LIBOR-based contracts.
Interest Rate Risk
Credit unions have experienced high share growth over the last two years. If credit unions invested surplus funds in longer duration assets, this could result in greater sensitivity to market risk, and therefore increased interest rate risk. Conversely, keeping all assets short-term can impact current period earnings. Credit unions should continue to carefully model and manage interest rate risk using a broad range of scenarios that include various prepayment speed and yield curve assumptions.
For more information on interest rate risk, see the NCUA’s Interest Rate Risk chapter of the Examiner's Guide (opens new window).
Exam Program Updates
NCUA Connect & MERIT
In 2021, the NCUA trained all NCUA and state regulator users on its new examination platform, the Modern Examination and Risk Identification Tool (MERIT) and associated systems.5 This new examination platform will provide important benefits to the NCUA and credit unions.
Credit unions will use the new MERIT platform and its related systems during their examinations. Additional information about these modernized tools can be found on the NCUA’s website. The NCUA allocated time for examiners to work with credit unions on how to use these new tools during 2022.
Recording of Official Meetings
As noted in the NCUA’s Examiner’s Guide, “credit unions may record their meetings” (exit conferences and joint conferences). The officials should ask for the examiner’s concurrence before recording the meeting, a request to which the examiner should normally agree.6 Any rare cases of disagreement will be addressed at the regional management level. Credit unions should refer to local, state, and federal laws, and consult with legal counsel prior to recording conversations, especially as it relates to any requirements to obtain consent from the parties involved. Also consistent with the Examiner’s Guide, “the examiner has the discretion to request that a copy of the recording or a transcript be sent to the examiner.”
In October 2021, the NCUA Board finalized a rule that added the “S” component (for Market Sensitivity) to the existing CAMEL rating system and redefined the “L” component, thus updating the CAMEL rating system to CAMELS. Adoption of CAMELS allows the NCUA, state supervisory authorities, and federally insured credit unions to achieve greater transparency in the ratings and clearly distinguish between liquidity risk in the “L” component and sensitivity to market risk captured in the “S” component. The final rule is effective for examinations starting on or after April 1, 2022.
The evaluation of the “S” component reflects the credit union’s exposure to changes in its earnings and capital position arising from changes in market prices and interest rates. Effective risk management programs include comprehensive interest rate risk policies, appropriate and identifiable risk limits, clearly defined risk mitigation strategies, and a suitable governance framework.
In evaluating the “L” component to determine the adequacy of a credit union’s liquidity profile, examiners will consider the current and prospective sources of liquidity compared to funding needs. The adequacy of liquidity risk management is also evaluated relative to a credit union’s size, complexity, and risk profile.
The NCUA remains committed to continuing to improve the examination and supervision program and welcomes any suggestions credit unions, their members, and other stakeholders have.
If you have any questions about the NCUA’s supervisory priorities for 2022, please contact your NCUA regional office.
Todd M. Harper
2 See Text – Public Law 116-283 January 1, 2021: William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 (opens new window) | Congress.gov | Library of Congress.
3 The FFIEC includes the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the NCUA, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau, and the State Liaison Committee. Updates to the FFIEC BSA/AML Examination Manual sections were most recently published in 2020 and 2021.
4 Complex credit unions that qualify may alternatively opt into the Complex Credit Union Leverage Ratio (CCULR) framework and not be required to report on RBC to satisfy their regulatory capital requirements. The CCULR provides a simplified measure of capital adequacy for federally insured, natural-person credit unions classified as complex. A qualifying complex credit union that opts into the CCULR framework and maintains the minimum net worth ratio would be considered well capitalized.
5 Associated systems include NCUA Connect, the Data Exchange Application, and the Admin Portal.
6 This guidance only applies to NCUA examiners. State examiners will follow guidance provided by the state supervisory authority. Generally, the NCUA will defer to the state supervisory authority for state-chartered credit union meetings.