A compliance professional’s guide to 2020 examination priorities

NCUA has released its supervisory priorities for the year, so you might want to grab a drink (non- alcoholic!) before reading it because the letter is lengthy (at least compared to what’s been released in recent years). This article summarizes what is covered in the letter, but like the good compliance professionals that you are, please go read NCUA’s letter and take advantage of the resource links provided in the letter.

Ok, so here is the run-down of NCUA’s 2020 exam priorities:

BSA Compliance/AML
As with every examination, NCUA conducts a BSA/AML review to ensure credit unions are meeting those obligations. CDD (and the beneficial ownership requirements that became effective in 2018) is still an area of focus for 2020.  In addition, NCUA will continue to focus on the proper filing of SARs and CTRs, with “proper” meaning informative and timely. As you know, SARS and CTRs are useful in providing law enforcement, intelligence, and counter-terrorism officials with helpful information to identify and thwart criminal and terrorist activities.

Electronic Fund Transfer Act (Regulation E)
Review your EFT policies and procedures, as well as initial account disclosures, to ensure that they cover the requirements under the regulation. Examiners will also be interested in the error resolution procedures your credit union has in place for when a consumer asserts an error.

Fair Credit Reporting Act (FCRA)
Examiners will be interested in reviewing credit reporting policies and procedures used by the credit union and will also be interested in the accuracy of any reports made to credit bureaus including the date used as the first delinquency.

Privacy (Gramm-Leach-Bliley)
How does your credit union protect consumers’/members’ non-public personal information? Are the efforts meeting the requirements under the rule?

Small dollar lending and payday alternative loans
Does your credit union offer a short-term small dollar loan product (outside of PALS 1 or 2)? Examiners will be interested in confirming that the product is meeting the requirements under the regulation. If your credit union offers PAL 1 or PAL 2 loans, examiners will check to ensure that the loans meet the requirements under the rule and the interest rate caps set forth under the rule.

Truth in Lending (Regulation Z)
What are your credit union’s practices related to annual percentage rates and late charges? Examiners will be interested in how your credit union applies loan payments to principal, interest, fees, and other charges. Is the process used consistent with the written disclosures and agreement? How is your credit union assessing late fees? Does it meet the requirements under the rule? Other areas of focus will be the accurate disclosure of finance charges and annual percentage rates.

MLA and SCRA
These have been a priority since 2017, so if your credit union has not had a recent MLA or SCRA review this will be an area of focus.

Credit Risk
This year there will be increased focus on credit unions’ loan underwriting standards and procedures.  Has your credit union properly analyzed the ability of borrowers to meet debt service requirements without excessive reliance on the value of the collateral?

Concentration Risk
New this year are enhanced examination procedures and additional quality controls requirements for credit unions with high concentrations of loans in the following areas: participations; commercial lending; indirect lending; and residential real estate lending.

CECL
Yes, CECL was delayed until 2023, but examiners will still want to review your credit union’s plans for the implementation of the new accounting standard. If you haven’t developed a plan yet, now is the time to start!

Cybersecurity
NCUA started using ACET in 2018 to assess credit unions’ cybersecurity maturity. Beginning in early 2020, credit unions will able to complete self-assessments using the ACET tool. Also new in 2020, NCUA will begin piloting new procedures to evaluate critical security controls during examinations between maturity assessments. The review of critical security controls that a credit union has in place will be scaled to the size and risk profile of the institution.

LIBOR Cessation Planning
LIBOR (London Interbank Offer Rate) is a reference rate commonly used in setting the interest rate for many adjustable or variable rate financial products. Did you know that its availability is not guaranteed beyond the end of 2021? Once it is no longer offered, the lack of guarantee could subject credit unions to increased material exposure and risks (legal, financial, operational). Credit unions offer, own and are counterparties to, LIBOR based products and contracts such as loans, investments, derivatives, deposits and borrowings. Therefore, credit unions will need to proactively begin to transition away from instruments using LIBOR as a reference rate. As such, examiners will be interested in a credit union’s exposure to LIBOR and the planning related to the discontinuance of it. There is a LIBOR Assessment Workbook in AIRES that examiners will be using. The LIBOR Assessment Workbook will be used to:

• Identify all LIBOR-related transactions including both on- and off-balance sheet exposures (number of transactions and balance amounts); and
• Identify impacts to planning, governance, senior executive engagement, budgeting, and accounting.
• Address other impacts related to the transition and discontinuance of LIBOR.

So that covers it for what NCUA examiners will be assessing in 2020.  The link to NCUA’s letter detailing the supervisory priorities for 2020 is here.

But wait, I’m not through yet – also as part of the letter were updates on areas where NCUA’s examination program has been updated to reflect changes as a result of recent statutory and regulatory changes.  These areas include:

• Commercial real estate appraisals. The commercial real estate appraisal rule was effective October 22, 2019 and increases the standards for the qualifications and independence of individuals conduct written estimates of market value.
• Acceptance of private flood insurance policies. You’ll want to review NCUA’s regulatory alert on flood insurance alternatives pertaining to flood insurance policies that are not issued by the National Flood Insurance Program.
• Public unit and non-member shares. NCUA’s rule was effective January 29, 2020. Under 701.32, a credit union must develop, and make available for examination, a plan for the use of funds if its public unit and nonmember shares, combined with borrowing, exceeds 70 percent of paid-in and unimpaired capital and surplus.
• Serving Hemp businesses. Hemp is no longer a controlled substance at the federal level.  Credit unions may provide business accounts — including loans to lawfully operating hemp related businesses within the credit union’s field of membership. NCUA examiners will be collecting data through the examination process, concerning the types of services credit unions may be providing to hemp-related business. Additional guidance on serving hemp-related business is forth coming from NCUA.
• Supervisory Committee Audits. If the supervisory committee chooses to use the other supervisory committee audit option for completing its annual audit requirements under §715.7, they will need to consult Appendix A, under Part 715 for meeting the required minimum procedures. In addition to the requirements outlined in Appendix A of the rule, NCUA has released a guide to assist those supervisory committees choosing this option.  See Letter to Credit Unions 20-RA-01.

Lastly, the letter also gave insight into to the types of technology applications that NCUA is implementing in 2020 as part of its exam modernization efforts:

• NCUA Connect is a common entry platform where one can access all NCUA examination-type applications. It will be made available to all credit unions and state regulators.
• NCUA’s new examination platform, the Modern Examination and Risk Identification Tool (MERIT) will be released to all examination staff in the second half of 2020.

To stay up-to-date on the latest regulatory developments and get compliance training essential to your role, here are CUNA’s industry-specific events.

CUNA members can find more posts like this and get answers to the most complex compliance issues in the CUNA Compliance Community.