NCUA Releases 2020 Supervisory Priorities

By January 9, 2020 No Comments

The NCUA has just released their supervisory priorities for 2020. Let’s look at the focus areas and what it means for your credit union.

Credit Risk including Concentration Risk

For 2020, examiners will be looking at credit risk management, specifically at underwriting procedures and standards and if the credit union has analyzed a borrower’s ability to meet debt service requirements without undue reliance on the value of any collateral. Like in 2019, examiners will again review concentration risk exposure by implementing enhanced procedures for credit unions that have high concentrations of a specific loan type.

What it means for you…

What strikes me as interesting is the NCUA’s deliberate addition of the phrase without undue reliance on the value of any collateral. The NCUA is making it a priority to not only review safety and soundness, but to confirm that you’re making loans in the best interest of your membership and not spreading them too thin financially.

“If I were an examiner focusing on this topic, I’d be looking for loans where DTIs are above normal thresholds (exceptions) and CLTVs are low,” advised Dan Price, CPA, CFA. “Loans where the approver effectively said, ‘Approve it. Who cares if they pay? We’ll just take the house.’”

Credit risk management is of vital importance to the health of your credit union. Being able to successfully analyze and manage risk will lead to increased profitability and financial health. Setting concentration limits, analyzing borrowers credit risk and stress testing for changes in the economy are all important aspects of managing credit risk.

Current Expected Credit Losses (CECL)

Credit unions took a sigh of relief when the Financial Accounting Standards Board (FASB) gave an extension for CECL compliance until January 2023 but CECL is not going away. The NCUA examiners will want to discuss your credit unions plan for CECL implementation.

What it means for you…

CECL implementation is a multi-phase process consisting of identifying and understanding your data, determining the best CECL methodology and implementing processes and controls. CECL presents unique challenges. Seeing the delay as a reason to put compliance planning away would be a mistake. The time is now to prepare.

Liquidity Risk

The NCUA will be looking at liquidity management and planning, specifically evaluating the following;

  • Effects of changing interest rates on market value of assets and capacity to borrow.
  • Analysis for liquidity risk modeling, including member share migration (moving from deposits to rate sensitive accounts).
  • Contingency plans for funding liquidity shortfalls.

What it means for you…

Loan to share growth has increased over the past years as the economy has strengthened and consumers access to credit has widened. Loan to share ratio for Q3 2019 was 84.1%, down from 84.9% in Q3 2018, but close to 40 year highs. While this is indicative of stronger loan growth it also puts a crunch on liquidity levels. Liquidity management is important in any economic time. Having a healthy balance of competitive loan rates and steps to stimulate deposit growth is key.

Not surprisingly, the following areas remain a focus for examiners in 2020;

  • Bank Secrecy Act Compliance/Anti-Money Laundering
  • Cybersecurity
  • Consumer Compliance including;
    • Electronic Fund Transfer Act (Regulation E)
    • Fair Credit Reporting Act (FCRA)
    • Gramm-Leach-Bliley (Privacy Act)
    • Small dollar lending (including Payday Alternative Lending)
    • Truth in Lending Act (Regulation Z)
    • Military Lending Act (MLA) and Servicemembers Civil Relief Act (SCRA)

New Areas of Focus

LIBOR Cessation Planning

The London Interbank Offered Rate (LIBOR) is going away after 2021. Credit unions that have exposure to LIBOR may have increased legal, financial and operational risks. Examiners will review a credit unions transition away from instruments that use LIBOR as a reference rate and cessation plan related to LIBOR.

For more information on the NCUA priorities for 2020 including modernization initiatives and statutory and regulatory updates read the full letter from the NCUA here.


Dinny Lechman

2020 Analytics

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