2020’s worldwide pandemic had a profound effect on the lending landscape. While consumer and auto loan demand dropped sharply during the early months of the crisis, a rise in mortgage refinancing spurred by historically low interest rates more than compensated.
Meanwhile, the federal government moved quickly to restore confidence in the economy by enacting several rounds of legislation highlighted by the $2.2 trillion CARES Act. The Act offered consumers and businesses a wide array of relief measures in the form of forbearance, loan modifications and funding via the Payroll Protection Program, among other actions.
Now that the pandemic crisis is receding, credit unions are facing new risks as an uncertain economic recovery takes hold. The NCUA is aware of these risks to the Share Insurance Fund and is prioritizing its examination strategy on the most vulnerable sections of credit unions’ balance sheets, particularly the loan portfolio.
The NCUA released its annual Letter to Credit Unions in January 2021 that outlined the regulator’s supervisory priorities for this year. To help credit unions focus their efforts, here are some of the most recent topics examiners are zeroing in on this year. Use this as a guide for setting up your institution for exam success this year and beyond.
- ALLL/CECL: As is common knowledge, the NCUA Board delayed the requirement for credit unions to comply with the current expected credit losses (CECL) standard until January 2023. However, the NCUA is encouraging cooperatives to continue to assess their allowance needs and evaluate methodologies for the eventual implementation of the CECL standard.
The NCUA remains focused on credit unions’ allowance for loan and lease losses (ALLL) processes during this exam cycle. This includes reviews of all ALLL policies and procedures, documentation pertaining to reserves methodology and modeling, assumptions and qualitative factor adjustments and adherence to generally accepted accounting principles (GAAP). In addition, credit unions must obtain independent reviews of their reserves methodology by their Supervisory Committee.
What CUs should do: Keep working toward implementing your CECL methodology, tracking and reporting systems – CECL IS coming! Begin now by establishing a system to gather and report on all required data that considers multiple historical loss analysis methods, easily incorporates qualitative and forecast factors, and has the ability to generate comprehensive disclosures and key reports at the push of a button.
- Fair Lending Compliance: Examiners are laser-focused on consumer financial protection. In 2021, this includes special attention placed on Fair Lending and areas related to the COVID-19 pandemic.
Fair Lending laws are designed to ensure the fair and unbiased treatment of all consumers in credit-related decisions. Key regulations include the Fair Housing Act (FHAct) and the Equal Credit Opportunity Act (ECOA). These laws prohibit financial institutions from discriminating against borrowers or applicants on the basis of race, color, national origin, religion, sex and other factors.
According to the NCUA’s Letter to Credit Unions, examiners are assessing credit unions’ Fair Lending Compliance Management Systems by delving into areas like board and management oversight, policies and procedures, training, monitoring, and corrective action, along with how credit unions respond to member complaints.
What CUs should do: Lenders should ensure they have a system in place that is able to gather demographic data, analyze loans and new applications for pricing discrimination and steering, and provide estimates of factors like race and ethnicity.
- Credit Risk Management: In response to the crisis, the NCUA has confirmed it will not criticize the efforts of credit unions that offer their members prudent relief, as long as it is provided “in a reasonable manner with proper controls and management oversight.”
However, NCUA examiners are reviewing credit unions’ underwriting standards and credit risk management procedures, including those addressing loan workouts and new pandemic-related borrower relief programs authorized in the CARES Act and subsequent legislation.
Additionally, examiners are paying close attention to real estate portfolios, especially first mortgages, which need to be regularly analyzed multi-dimensionally to ensure guidelines and regulations are followed. Such analysis will also provide insight on pockets of risks that may not be seen at a high level, including loss given default, probability of default, pre-delinquency movement and overall loss trends. Credit unions should note that examiners have also expressed concerns with misrepresentation of mortgage credit terms, APRs, and fees, and are eyeing mortgage servicing actions and disclosure requirements, including those pertaining to escrow accounts.
What CUs should do: Credit unions should closely monitor potential credit losses, delinquency trends, concentration risk and credit migration trends using an end-to-end solution featuring enhanced reporting efficiency, predictive insights and stronger portfolio visibility. This gives lenders a clearer understanding of different segments within their portfolio and how they are changing so they can proactively address risk and make informed, forward-looking decisions.
- Liquidity Risk Management: The ongoing economic impacts of COVID-19 are likely to result in increased volatility of share and loan balances, along with a rise in loan losses. NCUA examiners are focusing on this area of risk with an emphasis on the frequency and scope of credit unions’ scenario analysis and stress testing for liquidity risk.
What CUs should do: Employ a robust system and process for evaluating liquidity risk within your loan and deposit portfolios, including interest rate scenarios, cash flow projections, effects of loan payment forbearance and modifications, declining credit quality, and reduction in available credit lines.
Leveraging Data-Driven Analytics is Key to Exam Success
Data and analytics are the means to managing risk and navigating your next safety and soundness exam. To ensure success, make sure you have a holistic, comprehensive data management and analysis system in place that allows you to properly and efficiently aggregate and analyze your institution’s data from a variety of disparate sources. Use this information to begin implementing CECL processes, manage credit and liquidity risks, and ensure you are applying and acting on credit requests fairly and accurately.
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