January 23, 2023

NCUA recently issued Letter No. 23-CU-01 outlining its supervisory priorities for 2023, to better assist credit unions in preparing for their next NCUA examination. Several of the areas are carried over from prior years and continue to be high on NCUA’s risk areas for 2023, according to the letter. We encourage you to review and share this information with your supervisory/audit committee and/or board of directors.

The complete list of items listed in the letter as the top areas of focus for 2023 are as follows:

  • Interest Rate Risk – This is certainly not anything new, but due to the significant rise in interest rates during 2022, the IRR risk is elevated and presents a greater risk to earnings and capital. This sharp rise in rates has amplified market risk because credit unions’ assets and liabilities do not reprice equally, potentially impacting net economic values and credit unions’ projected earnings. In September 2022, the NCUA issued Letter to Credit Unions 22-CU-09 which updated the NCUA supervisory framework for IRR. In April 2022, the Sensitivity to Market Risk (“S”) was added to the CAMELS rating system, and therefore the agency formalized the focus on IRR as a specific rating category. High levels of IRR can increase your credit union’s liquidity risks, contribute to asset quality deterioration and capital erosion, and put pressure on earnings. Well-managed credit unions are prudent and proactive in managing IRR and risks. Examiners will be reviewing your credit union’s IRR program for the following key risk management and control activities:
    • Key assumptions and related data sets are reasonable and well-documented.
    • The credit union’s overall level of IRR exposure is properly measured and controlled.
    • Results are communicated to the decision-makers and the board of directors.
    • Proactive action is taken to remain within safe and sound policy limits.
  • Liquidity Risk – The increase in interest rates has caused a slowdown in prepayments for some loans and investments while increasing levels of share sensitivity and share roll-off as market rates continue to rise. Examiners will consider the current and prospective sources of liquidity compared to funding needs for credit unions. Examiners will be looking at a credit union’s liquidity policies, procedures, and risk limits. They will also be evaluating the adequacy of each credit union’s liquidity risk management framework relative to the size, complexity, and risk of the credit union. Credit management should be evaluating the potential effects of changing interest rates on the market value of assets and borrowing capacity, liquidity risk modeling including possible share runoff, changes in cash flow projections, and the appropriateness of contingency funding plans (including the testing of those contingent plans).
  • Credit Risk Management – Examiners will continue to review 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. High inflation and higher interest rates will increase financial pressure on the credit unions’ members. This could result in higher loan payments for certain members. Credit unions must maintain safe-and-sound lending practices and comply with consumer financial protection laws. Examiners will focus on lending program adjustments made to address borrowers facing financial hardship, policies that address the use of loan workout strategies, and risk-management practices.
  • Fraud Prevention and Detection – Fraud risk remains elevated so the NCUA will continue its efforts to review internal controls and segregation of duties at each credit union. In 2023, the NCUA will introduce a questionnaire designed to enhance the identification of fraud red flags, material supervisory concerns, and other new risks identified. Credit unions will complete one questionnaire per examination, and the CEO will complete and sign it. The questionnaire was designed to help protect the credit union and reduce potential losses to the Share Insurance Fund.
  • 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 compromise continue to be of concern. Credit unions are encouraged to conduct voluntary self-assessments using the Automated Cybersecurity Evaluation Toolbox (ACET).
  • Consumer Financial Protection – The NCUA will continue to examine compliance with the applicable consumer financial protection laws and regulations. In 2022, examinations were risk-focused and based on the credit union’s policies regarding compliance, products and services provided, and any new or emerging concerns. In 2023, examiners will expand the review of credit unions’ programs including website advertising, balance calculation methods, and settlement processes. The NCUA will also evaluate any adjustments credit unions have made to their overdraft programs to address consumer compliance risk and potential consumer harm from unanticipated overdraft fees. Continued review of Fair Lending, Truth in Lending Act, and the Fair Credit Reporting Act compliance will occur due to trends in higher violations. Reviewing policies related to residential real estate appraisals and evaluating the consistency, fairness, and accuracy of appraisals will be a part of the 2023 examinations. Fair Credit reporting testing will include examining the furnishing of, adverse action notices, risk-based pricing, and consumer rights disclosures.
  • Current Expected Credit Loss Implementation – Credit unions are required to adopt this new financial reporting standard for years beginning after December 15, 2022. For many, this means it should have been adopted as of January 1, 2023. Examiners will evaluate each credit union’s policies and procedures, documentation on the reserving methodology, validation of the data inputs and assumptions, and overall adherence to Generally Accepted Accounting Principles (GAAP). Independent evaluations performed by auditors, like GBQ, will be evaluated as well.
  • Succession Planning – The NCUA has found that inadequate succession planning is one of many reasons for credit union consolidations. Succession planning and business continuation plans should be evaluated annually. Throughout 2023, examiners will request information about a credit union’s approach to succession planning which will help the NCUA further understand succession planning activities and needs in the credit union industry. Examiners will not be looking for any information not already considered in evaluating the management component of the CAMELS rating. Examiners will not be issuing findings or documents of resolution if the credit union has not conducted succession planning, or if the planning is not adequate unless the credit union is in violation of its own policies.

GBQ’s team of professionals, from directors and seniors to IT professionals and accredited compliance experts, exclusively serve credit unions, offering diverse expertise, background, and education, and providing resources to our clients far beyond the basic audit and tax services. In fact, our IT professionals have been using the FFIEC Cybersecurity Assessment Tool to assist our clients in evaluating and implementing risk monitoring tools. Who is empowering your growth? Contact our team of Credit Union Services specialists today.

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