Change in the Focus of NCUA ExaminersJuly 14, 2014

Have you noticed a change in the focus of the National Credit Union Administration (NCUA) examiners? If you haven’t yet, you soon will. Our Credit Union team attended a recent conference where the NCUA discussed the areas they will be focusing on during the upcoming months. Those areas include:

• Interest Rate Risk – Examiners are looking to verify that Credit Unions have a comprehensive interest rate risk process/policy and thorough shock testing of the balance sheet. Policies should include a well-controlled and documented decision-making process. Polices should also require a documented action plan to respond to instances of non-compliance with the policy.
• Operational Risk – Examiners will be focused on BSA/AML compliance, cyber security, fraud indicators, and benefit plans. With respect to fraud indicators, the NCUA is going to focus on the Credit Union’s internal audit functions. The internal audit function should be independent from management, provide for appropriate testing, and provide adequate oversight of the Credit Union. The NCUA will be including fraud detection procedures as part of the annual exam program through the use of specialists. The focus on benefit plans will be geared towards determining whether investments to fund the benefit conform to the NCUA rules and regulations.
• Concentration Risk – The NCUA will be looking to see if the Credit Union relies on one particular product or service for income, loan types (including participations and individual borrowers), deposit types, third party service providers, and/or services to other parties.
• New Fast Growing Programs – The examiners will be looking to see if the Credit Union has appropriate policies/procedures in place to manage the risk of new programs. They will be primarily focused on private student lending, taxi medallion lending, investments in Credit Union Owned Life Insurance (CUOL), and long-term investments.
• Compliance – The examiners will be focusing on the following:
  • Remittance Transfer Rule (Regulation E)
  • Truth in Lending (Regulation Z); specifically the ability to repay and qualified mortgages, loan originator compensation, and escrow requirement standards
  • Home Ownership and Equity Protection Act (HOEPA)
  • Equal Credit Opportunity Act (ECOA) with respect to valuation rules
  • Real Estate Settlement Procedures Act (Regulation X) and Truth in Lending (Regulation Z) with respect to mortgage servicing rules

We interviewed three New Jersey Credit Union CEOs with respect to their most recent NCUA exam.

The first Credit Union interviewed had total assets in excess of $200,000,000. The examination lasted approximately four days and the team was comprised of four individuals [lead examiner, BSA specialist, lending specialist, and asset liability management (ALM) specialist]. The examiners focused on interest rate risk, student lending, taxi medallion lending, and SAFE ACT compliance. The CEO shared that the prior year’s examination included an IT specialist which focused on data security.

The second Credit Union interviewed had total assets between $100,000,000 and $200,000,000. The examination team was comprised of six individuals including IT and capital market specialists. The examination focused on IT policies and procedures specific to data security and disaster recovery. With respect to ALM, the examiners verified the model was independently validated. They also focused on whether the ALM policies addressed how to remedy matters that are outside of policy. With respect to concentration risk, the examiners requested documentation to support the methodology behind limits established in the Credit Union’s concentration policy. With respect to operational risk, the examiners requested a copy of the Credit Union’s most recent BSA examination and reviewed selected currency transaction reports (CTRs), suspicious activity reports (SARs), and aggregated transaction reports. The examiners inquired about the Credit Union’s internal audit process. The examiners also reviewed the Credit Union’s vendor management process, specifically the evaluation of new vendors and monitoring of existing vendors.

The third Credit Union interviewed had total assets of less than $100,000,000. The examination team was comprised of six examiners including BSA, lending, and internal control specialists. Also included in the examination team were two specialists-in-training. The examiners interviewed the supervisory committee with respect to the procedures they perform and corresponding results. The examiners focused on the Credit Union’s operating results, overdraft protection program, negative shares, and rapid growth of a new loan product and corresponding concentration risk policy.

As you can see, regardless of size there are similarities as well as variations with respect to the areas of focus among the three Credit Unions interviewed. In addition, there appears to be an increased number of specialists participating in the examination process. In closing, our interviews indicate examiners have already begun addressing the areas of focus mentioned at the start of this post, and you can rest assured the areas not yet addressed will be in the near future.