On Compliance: Will a COVID-19 recession lead to supervisory enforcement actions?
Despite short-term regulatory relief, credit unions should prepare to respond to likely DORs and LUAs if the current economic slide worsens.
The National Credit Union Administration and state regulators have taken a variety of actions to grant credit unions regulatory relief during the COVID-19 pandemic. Most of those regulatory relief actions, however, are short-term measures will not significantly help credit unions that incur significant credit losses during a COVID-19 recession. While it is too early to comprehend fully COVID-19’s economic impact on credit unions, if a recession does materialize, credit unions should prepare for a wave of enforcement actions brought by NCUA and state credit union regulators.
NCUA has taken several broadly applicable supervisory actions to address the short-term impacts of COVID-19, including guidance allowing federally insured credit unions to treat loans as current if the credit union grants the borrower a COVID-19-related loan forbearance or modification that suspends loan payments for a few months. On May 21, the NCUA Board also issued an interim final rule on COVID-19-related prompt corrective action changes that, until the end of 2020, allows federally insured credit unions that are “adequately capitalized” to stop making normally required transfers to their retained earnings and allows streamlined net worth restoration plans for federally insured credit unions that become “undercapitalized” primarily because of increases in members’ share balances related to COVID-19. NCUA’s COVID-19 loan loss guidance and interim final rule on COVID-19 prompt corrective action should somewhat insulate credit unions from COVID-19-related loans losses and prompt corrective action restrictions in the short term.
The NCUA guidance and interim final rule do not truly mitigate, however, the impact of net worth ratio reductions from losses incurred when borrowers are unable to repay their loans over the long term. A significant proportion of COVID-19-related job losses are likely to be permanent and many small businesses will have trouble surviving the coming months. Virtually all credit unions are likely to be exposed to loan losses stemming from their members’ job losses. Credit unions that make member business loans are also likely to be exposed to losses resulting from small business failures.
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