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NCUA's Webinar On Supervisory Priorities:A Transcript




 

The following is a transcript of NCUA's Industry Webinar from February 9, 2024. All speakers are identified by number, other than Chairman Todd Harper who does a short intro.


The transcript is not perfect as it is achieved by using AI. At the end we provide a link to the YouTube video of this event.


2024 Supervisory Priorities

 

 

Speaker 1

Hello and welcome to the two thousand twenty four supervisory priorities webinar. I'm Christelle or you study a policy officer in the office of examination and insurance and I'll be your moderator today before we begin.

 

Speaker 1

I will cover some technical tips to make sure that you can see the webinar console and hear the presenters. First, all attendees will be in listen only mode. Second, if you have questions, you can submit them anytime using the Q and a feature at the bottom right corner of your Webex console to submit a question.

 

Speaker 1

Simply click the Q and a button type your question in the box provided and then click send. Third, if your volume sounds too low, check to make sure your volume is turned all the way up on your computer.

 

Speaker 1

You may have to plug in external speakers. If that doesn't work. Fourth, closed captioning will be available within the Webex console to enable captions. Click the CC icon in the bottom left of the console.

 

Speaker 1

Again, I want to welcome you to our webinar as we delve into N. C. way letter to credit union twenty four. C. U. O. one supervisory priorities for this year in the next hour we'll discuss each priority explain its significance and shed light on what examiners may focus on in your forthcoming examination.

 

Speaker 1

Accompanying us today are esteemed members from various N. C. way program offices comprising an all star lineup ready to tackle your questions. Stay tuned as we explore the evolving landscape of the exam program, encompassing crucial changes and updates.

 

Speaker 1

The office of examination and insurance, or sometimes we refer to as capital markets division will cover interest rate risk and liquidity risk in ice credit division. We'll discuss credit risk updates in ice critical infrastructure division will present on information security and the office of consumer financial protection will discuss updates to the two thousand twenty four consumer compliance review.

 

Speaker 1

Up for examination updates, including the bank secrecy act will be brought to you by and ice fraud and anti money laundering division and support for small credit unions and minority minority depository institutions will be discussed by N.

 

Speaker 1

C. way's office of financial technology and access. We will leave time at the end of the presentation to answer questions from you, the audience. Please add your questions to the Q and a as you think of them.

 

Speaker 1

I want to now welcome into ways for chairman Todd Harper, who will start us off with some opE&Ing remarks chairman Harper. Thank you so much for joining us.

 

Chairman Todd Harper

And thank you, Christelle, and thanks to everyone joining today's webinar on the Ncua's Supervisory Priorities for 2024. We appreciate you taking time to learn about the areas of focus for the Ncua's examinations during the year ahead.

 

Chairman Todd Harper

Today, you'll explore the Ncua's Supervisory Priorities and the rationale behind their selections. These priorities represent the Ncua's roadmap, and with their publication, we are underscoring the agency's commitment to transparency, accountability, and prudent risk management.

 

Chairman Todd Harper

These priorities also align with the agency's mission to ensure the system of cooperative credit remains both safe and sound, and that it protects consumers' interests and their hard -earned savings.

 

Chairman Todd Harper

Today, you'll delve deeper into liquidity risk, interest rate risk, consumer financial protection, information security, and credit risk, and we'll discuss their potential implications for credit union's operations during the year and beyond.

 

Chairman Todd Harper

Earlier, I mentioned transparency across the credit union system as one of the Ncua's commitments. Only with a full and current picture of credit union operations can the Ncua be effective, efficient, and most importantly, responsive in executing its supervisory priorities.

 

Chairman Todd Harper

In that same spirit, the agency values sharing the rationale behind its decisions as it fosters trust and understanding with stakeholders. The selection of these supervisory priorities reflects the current landscape of opportunities, threats, risks, and challenges the credit union system faces.

 

Chairman Todd Harper

The Ncua has considered emerging trends, evolving risks, and stakeholder expectations to determine the areas where focused attention is most needed. That said, these supervisory priorities are not static with an evolving and unusual economic environment, ongoing interest rate uncertainty, and elevated liquidity, cybersecurity, and consumer financial protection risks for credit unions and the financial services sector, we must all remain flexible and agile in our efforts.

 

Chairman Todd Harper

That's why the supervisory priorities will continue to evolve alongside credit unions, their members' expectations, and the broader economic environment. The Ncua routinely reviews and adopts its priorities to ensure they remain relevant and effective.

 

Chairman Todd Harper

Take, for example, the growing number and sophistication of cybersecurity attacks on the credit union system. Just last November, the Ncua received cyber incident reports from multiple credit unions, stating their core service provider had been experiencing intermittent system outages.

 

Chairman Todd Harper

As a result, dozens of credit unions across 40 states with total assets of nearly 1Billion dollars and almost 100 ,000 members experienced outages or disruptions of services in some form. We should expect similar and possibly larger events like this in the future.

 

Chairman Todd Harper

Thus, the Ncua is focusing on information security and the valuable tools to augment it, such as the cyber incident notification rule, the automated cybersecurity evaluation toolbox, and the information security examination procedures.

 

Chairman Todd Harper

Let me close by thanking the offices of examination and insurance and consumer financial protection for their extensive work and collaboration on the Ncua's 2024 supervisory priorities. And thank you to our examiners for their hard work throughout the year in assessing your credit unions performance.

 

Chairman Todd Harper

I encourage you to learn, engage, and ask many questions today. In doing so, you can help your credit unions to better serve your members, no matter how challenging the economic or financial services marketplace becomes.

 

Chairman Todd Harper

Thank you so much. Please enjoy.

 

Speaker 1

Thank you for that welcome and overview, Chairman Harper. Now we'll cover the supervisory priorities. SE&Ior Capital Market Specialist Jonathan Farrell from the Capital Markets Division of E&I will start us off discussing interest rate risk.

 

Speaker 3

Hello, I'm Jonathan Farrell, sE&Ior capital market specialist from the division of capital markets in the office of examination and insurance. Interest rate risk remains an NC way supervisory priority for 2024.

 

Speaker 3

Given higher interest rates, examiners will focus on elevated interest rate risks for IRR and the related exposure to earnings liquidity and capital. Well managed credit unions are prudent and proactive in managing IRR and the related risks to capital, asset quality, earnings and liquidity.

 

Speaker 3

As such, in evaluating the S component, examiners will review your credit unions IRR program for the following key risks, key risk management and control activities. The assumptions and related data sets are reasonable and well documented.

 

Speaker 3

Back testing and sensitivity testing of the assumption set are completed. The credit unions overall level of interest rate risk exposure is properly measured and controlled. Results are promptly communicated to the decision makers and the board of directors.

 

Speaker 3

And that institutions are proactive, take proactive action to remain safe and sound and within policy limits. Additional references for interest rate risk are in the examiner's guide under work papers and resources.

 

Speaker 3

Next slide please. I will now turn over the presentation to my colleague, Dale Klein.

 

Speaker 4

Good afternoon. I'm Dale Klein, a senior capital markets specialist from the division of capital markets in the office of examination and insurance. Credit unions will need to maintain strong liquidity risk management in 2024 due to increased uncertainty in interest rates and economic conditions.

 

Speaker 4

Factors contributing to uncertainty include deposit pricing pressure, increased wholesale funding, shifting credit conditions, changing member behaviors and changing risk relationships. This environment requires greater focus on assumptions and techniques used for forward looking cash flow analysis and risk projections.

 

Speaker 4

It is also important to note when borrowings need to be refunded and plan accordingly. For example, maturing bank term funding program or BTFP borrowings from the Federal Reserve. Increased liquidity risk and uncertainty heightened the need for credit unions to prepare for contingency funding needs.

 

Speaker 4

Section 741 .12 of NCUA's rules contains scaled credit union contingency funding plan expectations. In evaluating the L camels component, examiners continue to assess liquidity management by evaluating the effects of changing interest rates on the market value of assets and borrowing capacity.

 

Speaker 4

Scenario analysis for liquidity risk modeling, including possible member share migrations, for example, shifts from core deposits to more rate sensitive accounts. Scenario analysis for changes in cash flow projections or an appropriate range of relevant factors, for example, changing prepayment speeds.

 

Speaker 4

The cost of various funding alternatives and their impact on earnings and capital. The diversity of funding sources under normal and stressed conditions. And the appropriateness of contingency funding plans to address any plausible unexpected liquidity shortfalls.

 

Speaker 4

Resources and guidance on liquidity risk can be found in the NCUA's examiners guide and the liquidity risk resources page. Thank you, and I will now hand it back over to Christelle.

 

Speaker 1

Thank you, Jonathan and Dale. Next, I will turn it over to senior credit specialist, Walanda Hollins, who will present for the credit division from the Office of Examination and Insurance to discuss credit risk updates.

 

Speaker 5

Good afternoon credit risk remains a supervisory priority high interest rates and borrowing costs declining savings levels and the end of pandemic error stimulus and relief programs have negatively impacted some members ability to repay their debts.

 

Speaker 5

Credit unions loan portfolios expanded faster during 2022 than any year within the last 30 years while aggregate loan performance began showing signs of deterioration in 2023. Credit unions will need to maintain strong credit risk management practices specifically examiners will review the following lending policies to evaluate whether they include adequate underwriting standards.

 

Speaker 5

And proper controls for each loan type offered documentation supporting any adjustments in loan underwriting standards to assess compliance with established policies and procedures. Contractual arrangements for loan programs involving 3rd parties, such as credit union service organizations, auto dealerships and to determine whether the credit union established loan quality control and reporting requirements.

 

Speaker 5

Strategic plans and budgets to determine if necessary staffing and technology and liquidity sources are adequate to support lending programs. Loan management reports and related discussions with board minutes to determine if the credit union has sufficient portfolio monitoring practices.

 

Speaker 5

For example, does documentation indicate ongoing assessment review discussion and explanation of negative performance trends, such as excessive loan growth or higher than expected delicacies and charge offs.

 

Speaker 5

Next slide as previously noted aggregate loan performance began showing signs of deterioration in 2023. NCUA recognizes that credit unions strive to work prudently with bars who experience financial difficulties and cannot meet their contractual payment obligations.

 

Speaker 5

Examiners review modification and workout strategies for bars facing financial hardships and collection programs. This may include sampling modified loans for compliance and reviewing management reports.

 

Speaker 5

Examiners will carefully consider all factors in evaluating a credit union's efforts to provide relief and including whether the efforts were reasonable and conducted with proper controls and management oversight.

 

Speaker 5

For credit unions engaging in commercial lending, the inter agency policy statement on prudent commercial rule of state loan accommodations and workouts became effective in June 2023. This guidance builds on existing supervisor and guidance in working prudently and constructively with credit worthy bars during times of financial stress and it provides updated examples of classifying and accounting for loans modified or affected by loan accommodations or loan workout activity.

 

Speaker 5

In general, collection programs should remain effective in response to emerging market conditions and recognize loan losses promptly. In see ways review of a credit unions collection program will evaluate.

 

Speaker 5

Policies and procedures, collection efforts and whether credit unions are reasonably recognizing loan losses. Examiners will also review policies related to the allowance for credit losses also referenced as the documentation of the reserve methodology, the adequacy of reserves and adherence to generally accepted accounting principles.

 

Speaker 5

Thank you and I will now hand it back over to Cristelle.

 

Speaker 1

Thank you, Alonda. I'll now ask Ernie Chambers to address information security risk. Ernie is the Director of the Critical Infrastructure Division in E&I. Ernie, the floor is yours.

 

Speaker 6

Thanks, Crystal. It's my pleasure to outline the 2024 supervisory priorities, particularly emphasizing the dynamic and crucial areas of cybersecurity and information security. Next slide, please. As we step into 2024, it's imperative to recognize the rapidly evolving landscape of cyber threats.

 

Speaker 6

These threats continue to pose significant risk to credit unions. In response, the NCUA remains steadfast in its commitment to prioritize cybersecurity as a key examination focus. Our examiners are geared up to rigorously assess the robustness of information security programs within credit unions, ensuring that they are effectively equipped to counter these evolving threats.

 

Speaker 6

Next slide, please. A significant development for this year is the introduction of the Cyber Incident Notification Reporting Rule. As of September 1st of 2023, this rule mandates that each federally insured credit union must notify the NCUA as soon as possible, and no later than 72 hours after the credit union reasonably believes it has experienced a reportable cyber incident or received a notification from a third party regarding a reportable cyber incident.

 

Speaker 6

The Cyber Incident Notification Requirements Rule includes criteria for a reportable incident and the process for reporting such incidents. It's vital that the initial reports focus on the basic details of the incident, avoiding the inclusion of sensitive, personally identifiable information.

 

Speaker 6

Next slide. That said, it's also crucial to understand and differentiate the Cyber Incident Notification Requirements Rule of Part 748 from Appendix B to Part 748, Guidance on Response Programs for Unauthorized Access to Member Information and Member Notice.

 

Speaker 6

The Cyber Incident Rule lays out the requirements for reporting a cyber incident to the NCUA, whereas the guidance in Appendix B to 748 reflects the NCUA's interpretation of the Gramm -Leach -Bliley Act's Information Security Program response requirement.

 

Speaker 6

Next slide, please. NCUA also continues to emphasize the importance of using tools and resources for enhancing cybersecurity preparedness. The Automated Cybersecurity Evaluation Toolbox, or ASET, remains a totally voluntary but valuable tool, allowing credit unions to conduct self -assessments of their cybersecurity maturity.

 

Speaker 6

Moreover, tools like the FFIEC Cybersecurity Assessment Tool, known as the CAT, and the Cybersecurity and Infrastructure Security Agency's Ransomware Readiness Assessment are also useful in conducting reviews of one's cybersecurity readiness.

 

Speaker 6

In conclusion, the NCUA is committed to the safety and soundness of the credit union system through these supervisory priorities. We emphasize the need for continuous vigilance and adaptation to the ever -changing cybersecurity risk.

 

Speaker 6

NCUA urges all credit unions to actively engage with the resources and tools provided by the agency, while NCUA will continue to provide guidance and clarification regarding cybersecurity practices and regulations as needed.

 

Speaker 6

Thank you for your attention. Let's collaborate to fortify our defenses against cyber threats. Back to you, Christelle.

 

Speaker 1

Thank you Ernie. I will now turn it over to the Office of Consumer Financial Protection to discuss consumer financial protection priorities.

 

Speaker 7

Thank you, Cristal. Good afternoon, everyone. My name is Ernestine Ward, and I'm the director of the Division of Consumer Compliance Policy and Outreach in NCUA's Office of Consumer Financial Protection.

 

Speaker 7

I'm going to speak with you today about the 2024 Consumer Financial Protection Supervisory Priority. Next slide, please. The NCUA examines for compliance with consumer financial protection regulations during every federal credit union examination.

 

Speaker 7

To determine areas of supervisory focus, the NCUA considers trends and violations identified through examinations and member complaints, emerging issues, and any recent changes to regulatory requirements.

 

Speaker 7

Under the 2024 Consumer Financial Protection Supervisory Priority, in federal credit unions, examiners will focus on the following, overdraft programs, fair lending, and auto lending, including indirect loans.

 

Speaker 7

While in all federally insured credit unions, examiners will continue to review the Flood Disaster Protection Act requirements. I will now give a brief overview of each review area. First up, overdrafts.

 

Speaker 7

Overdraft protection programs are important to credit unions and their members, and the market and regulatory landscape around overdraft fees is always evolving. In 2023, examiners conducted overdraft reviews for federal credit unions with assets totaling 500 million or more.

 

Speaker 7

This year, examiners will review federal credit unions with total assets between 100 and 500 million and federal credit unions with assets totaling 500 million or more that did not receive an overdraft review in 2023.

 

Speaker 7

Examiners will review credit unions overdraft programs, including their website advertising, balance calculation methods, and settlement processes. Examiners are also going to review disclosures and member statements, including statements related to payday alternative type 2 loans, otherwise known as PALS 2 loans.

 

Speaker 7

Next up, we have fair lending. As we all know, federal fair lending laws make it unlawful for a creditor to discriminate against an applicant in any aspect of a credit transaction based on certain protected characteristics.

 

Speaker 7

For the 2024 fair lending review, examiners will assess credit unions policies and practices for redlining, marketing, and pricing discrimination risk factors. All of which are areas of review in the interagency fair lending examination procedures.

 

Speaker 7

The redlining discrimination risk factor review is only required if the credit union has a community charter or if the credit union has a multiple common bond charter and serves at least one underserved area in their field of membership.

 

Speaker 7

As in previous years, their lending reviews will be conducted in both risk focused and small federal credit union exams. All right, now we're going to get to auto lending. The Truth in Lending Act, otherwise known as TILA, and it's implementing regulation, Regulation Z, requires that borrowers receive written disclosures about important terms of credit.

 

Speaker 7

Examiners are going to review compliance with Reg Z disclosures regarding late fee practices on indirect auto loans. Next slide, please. Thanks. Examiners will also review credit unions policies and procedures on guaranteed asset protection insurance, otherwise known as GAAP insurance.

 

Speaker 7

GAAP insurance covers the difference or GAAP between the amount a borrower owes on their auto loan and what their insurance pays if their vehicle is stolen, damaged, or totaled. Last but not least, examiners will continue to review for compliance with the Flood Disaster Protection Act rules in all federally insured credit unions, as is done every year.

 

Speaker 7

Thank you so much for your time. And now back to Christelle.

 

Speaker 1

you, Ernestine. We will now shift gears to discuss other updates. We've included additional program updates for credit unions in the letter. We will now cover the Bank Secrecy Act and the Small Credit Union and Minority Depository Institution Support Program.

 

Speaker 1

I'll now turn it over to our E&I's Fraud and Anti -Money Laundering Division Janelle Portere to discuss the Bank Secrecy Act.

 

Speaker 8

Thank you, Christelle. The NCUA continues to focus on the Bank Secrecy Act, or BSA, and ensuring credit unions have effective and reasonably designed anti -money laundering, encountering the financing of terrorism programs.

 

Speaker 8

Credit unions are required to establish and maintain procedures that are reasonably designed to assure and monitor compliance with the BSA. And we will continue to take a risk focused approach to evaluating credit unions' programs during all safety and soundness exams.

 

Speaker 8

In 2024, we expect the Financial Crimes Enforcement Network, or FINCIN, the Administrator of the BSA, to continue its implementation of the Anti -Money Laundering Act of 2020. This significant legislation will require FINCIN to undertake a number of rulemakings and other activities that are likely to impact regulations, supervisory expectations, and examination procedures in the future.

 

Speaker 8

While the details are still forthcoming, we will continue to coordinate with FINCIN and ensure credit unions are informed of changes that will affect anti -money laundering and countering the financing of terrorism programs.

 

Speaker 8

As part of the Corporate Transparency Act, FINCIN recently issued its final Beneficial Ownership Access Rule. This rule prescribes access requirements to the Beneficial Ownership Information Technology System, which will eventually include optional access for credit unions.

 

Speaker 8

This new rule does not create new regulatory requirements or supervisory expectations for credit unions as long as they do not access the database. This view was recently reaffirmed in a joint statement that we released along with FINCIN and the other agencies in December.

 

Speaker 8

A copy of this statement can also be found on our website. When credit unions are eventually able to request database access, likely later this year, we will provide additional guidance as appropriate.

 

Speaker 8

We look forward to the evolving changes of the BSA and its role in deterring and detecting money laundering, terrorist financing, and other illicit financing through the United States financial institutions.

 

Speaker 8

With that, I'll turn it back over to Krista.

 

Speaker 1

Thank you, Janelle. Natasha McAdoo and Heather Phelps are both in the Office of Financial Technology and Access. Both support the NCWAs initiative to foster financial inclusion and address the financial disparities experienced by minority, underserved and unbanked population.

 

Speaker 1

Heather will now discuss support for small and minority depository credit unions.

 

Speaker 9

The NCUAA recognizes the important role that small and minority depository institutions, also known as MDIs, play in the credit union system and in the day -to -day lives of the communities they serve across the country.

 

Speaker 9

The NCUAA is committed to supporting the ongoing successes of these credit unions, including acknowledging the fact that at times, some of these institutions may need more or different support from the NCUAA than other credit unions.

 

Speaker 9

In 2024, the NCUAA will continue the important program to support small credit unions and minority depository institutions. The agency offers enhanced support by continuing to allocate staff hours and resources to selected MDI credit unions and credit unions under 100 million assets.

 

Speaker 9

Through this program, examiners can offer assistance that's not part of the typical exam process, such as resources and guidance on creating succession plans and strategic plans and help with examination and compliance issues.

 

Speaker 9

Examiners are also able to utilize MDI -specific tools. These tools aid examiners when analyzing MDI credit unions by offering guidance and insight into the unique strategies and member needs of MDI credit unions.

 

Speaker 9

In addition, since many MDI credit unions have unique business models, examiners can utilize MDI peer matrix as opposed to the traditional peer matrix to measure MDI's financial performance. If your credit union is interested in assistance through the support program, please contact your examiner or your regional office.

 

Speaker 9

And next, Natasha McAdoo, Access Program Coordinator, will share other ways the NCUAA is actively working to support these credit unions in the communities they serve. Next slide, please.

 

Speaker 10

Thank you, Heather. In 2024, the agency will actively champion the growth and sustainability of these credit unions through several strategies and initiatives. These efforts include initiatives to increase access to safe, fair, and affordable financial services.

 

Speaker 10

To do this, the agency will analyze trends and utilize data to monitor the unique needs of these credit unions and the communities they serve. To promote access to safe, fair, and affordable financial services.

 

Speaker 10

Complementary training for credit union staff and credit union volunteers through platforms such as webinars, roundtables, and the learning management system, a free resource on our website, offering a variety of educational materials and courses.

 

Speaker 10

The Community Development Revolving Loan Fund. This fund provides loans and grants to MDI and low income designated credit unions so that they may, in turn, extend services to their members and improve credit union operations.

 

Speaker 10

And guidance, such as guidance to credit unions when applying for field and membership expansions to allow additional growth and outreach opportunities. For more information on these resources, visit our website at ncua .gov or contact CURE via email at curemail at ncua .gov.

 

Speaker 1

Thank you, Natasha, and now policy officer Elliott Weiss will guide us through the Q and a session and it looks like we have a few coming in already Elliott. I'll turn it over to you.

 

Speaker 11

Thank you, Kristal. I'll go right back to you. The first question is, will the slides be made available for this webinar?

 

Speaker 1

This is me, Christelle, again, policy officer. Yes, Elliot, the slides are available in WebEx. To access the slides, you can go to the registration link for the webinar. Click the register button to re -register for the webinar.

 

Speaker 1

After you re -enter your information, a pop -up box may appear saying you've already registered for the webinar. Click OK, and then click the download button next to the PDF file on your screen. That concludes my response.

 

Speaker 11

Thank you, Kristal. The next question I believe will be for Ernie. Ernie, are the ASIT, FFIEC, and a ransomware tool considered risk assessments?

 

Speaker 6

That's a great question, Elliot. I like to think about it in two buckets. We've got the exams, and then we've got assessments like the cybersecurity or those things for cybersecurity preparedness under which, yes, those cited ransomware assessment, the CAT and the ASET would all fall.

 

Speaker 11

Thank you Ernie. The next question is for Janelle. Janelle, what areas do you believe credit unions should focus on in the prevention of money laundering and where can credit unions look for resources to prevent money laundering and fraud?

 

Speaker 8

you for the question. When it comes to money laundering and fraud, there really is not a one size fits all type of program. Each credit union really needs to identify its specific risks and then put into place appropriate controls to address those risks.

 

Speaker 8

It's always good for credit unions to communicate with local law enforcement to find out what kind of financial crimes they're seeing as well as emerging trends. And there's also a number of public resources that are available that frequently refer or provide updates to ongoing trends or emerging risks, things like Vincent's alerts and advisories or other reports.

 

Speaker 8

The FBI's internet crimes complaint center provides a number of alerts and reports on an ongoing basis. And trade associations may also have specifics to share that are more local or specific to your institution.

 

Speaker 8

Thank you for the question and back to you, Elliot.

 

Speaker 11

Thank you, Janelle. The next question, will there be any focus on a credit union's use of AI? This might be for Nagi and potentially Ernie.

 

Speaker 12

So I would begin by saying that the NCUA is currently in its early stage of being engaged in research in this area within its Office of Examination and Insurance. It's a FinTech and Access Office and in the Office of Consumer Financial Protection and we're reviewing developments related to AI lending within the credit union industry to determine how to most effectively address it in our examination program.

 

Speaker 12

And we're also in the early stages of researching the pros and cons of implementing AI tools in various aspects of our examination program as well. And I think you might have something else to add from a critical infrastructure perspective.

 

Speaker 6

Thanks, Nagi. Yes, from a threat perspective, the NCUA is actively engaged in understanding and mitigating the threats posed by artificial intelligence to the financial sector, inclusive of credit unions.

 

Speaker 6

This effort is part of the broader initiative amongst federal financial regulatory agencies that are looking to gather insights on the use of AI to understand it further as well as its impacts as it evolves in the sector.

 

Speaker 6

Back to you, sir.

 

Speaker 11

Thank you, Nagi and Ernie. The next question is for Matt Dolores. Matt, for indirect auto exams and GAAP, are examiners going to be reviewing how accrediting is refunding unearned premiums on early terminated loans?

 

Speaker 11

Matt can answer some, maybe Nagi might jump in if needed. Matt?

 

Speaker 13

Yeah, thank you, Elliot. This is Matt Velouris in the Office of Consumer Financial Protection. The answer to that question is yes. We're going to be asking examiners this year to look at how the gap insurance refunds are provided when loans are paid off early.

 

Speaker 13

We'll focus on areas such as how the refunds are calculated, which party is particularly responsible for making sure the consumer is paid the money, the refund, the timing, the refunds, evidence that is needed to demonstrate that the refund was paid.

 

Speaker 13

And for those states that for those credits that operate in multiple states, we're going to be wanting to look at policies relating, understanding the various implications of the different state laws and how these particular gap insurance refunds may be applied or may be required.

 

Speaker 13

Back to you, Elliot.

 

Speaker 11

Okay, Maggie, did you have anything she wanted to add?

 

Speaker 12

Yeah, so, so from the credit risk side of things, as it is with any program, really, if, if examiners did notice there's emerging concerns with a particular area, there definitely would be an enhanced focus on it during the examination.

 

Speaker 12

That's not unique to this condition. That's really to any condition related to lending that might arise. So I would echo a mass response from a credit risk perspective. It would really be contingent on the certain conditions within the exam.

 

Speaker 11

All right, thank you, Nagi. The next question is for Dale Klein. Dale, could you better define what is expected with liquidity stress tests?

 

Speaker 4

Thank you, Elliot. Liquidity stress testing involves the assessment of projected sources and uses of funds to evaluate solvency and compliance with credit union policies. This forward looking view is based on historical behaviors, anticipated conditions and risk relationships.

 

Speaker 4

So, given today's heightened uncertainty, it's prudent to challenge those historical behaviors and then an assumptions and be transparent about the potential impact of these changing behaviors and relationships.

 

Speaker 4

All right, back to you.

 

Speaker 11

Thank you, Dale. Another question. This goes to John Farrell. John, are there updates expected to the sub test?

 

Speaker 3

Thank you. We are not planning any changes at this time to the supervisory test, and it will continue to be used in 2024 to assist in determining the examination scope and procedures used during interest rate risk and as component examinations.

 

Speaker 3

Thank you.

 

Speaker 11

Thank you, John. Right now, I'm not seeing any other questions. I know we've got about 19 minutes left. Um, Crystal, do you want to. Close things up. Are you seeing any other questions we can answer?

 

Speaker 6

This is Ernie. If I could just go back, because I think I answered the question regarding, I only heard assessments versus risk assessments. No, is the answer to that question those particular set the cat, the ransomware, those are cybersecurity, maturity, preparedness assessments.

 

Speaker 6

They are not risk assessments. So, just wanted to point that out for clarification and thanks to my team.

 

Speaker 11

All right, thank you, Ernie. So was there anything else, any other questions that you can see that we can answer here today?

 

Speaker 1

give it just another beat, Elliot. Thank you. Just to see if there's anything else. Looks like we might have one that if you guys can go ahead, sorry team from NCUA, if you have any more, go ahead and throw them in the questions queue for Elliot so he can grab those.

 

Speaker 1

We'd be more than happy to grab that. I'll give you guys a moment to throw that in there so we can be clear. Did you see any added, Elliot?

 

Speaker 11

I haven't, I haven't seen any added right now. No, of course not.

 

Speaker 1

All right, I'll look for a little thumbs up from my boss in the chat and he'll let me know.

 

Speaker 11

Oh, I correct correct. I correct you. Okay. We do have 1 more is for Nagi. What can be identified as a red flag. In a real estate loan where money laundering may be occurring.

 

Speaker 12

Thanks. So, yeah, so, so typically speaking, unusually large cash transactions and consistent property valuations, complex ownership structures and any like a genuine business rationale full alone. Not necessarily just for real estate, but any loan type for that matter could be identified as as red flags.

 

Speaker 12

But, um, Janelle, I don't know if you have anything additional to add from the side, but I do believe. So, this would be applicable really for any long time, not necessarily just real estate, but focus on large cash transactions, complex ownership structures, any consistency and valuation that might lack a true purpose or genuine business rationale behind a loan.

 

Speaker 8

Nagi, I think you pretty much covered it, thanks.

 

Speaker 11

Okay, we do have a few more questions here. This one goes back to you, Nagi. When it comes to credit risk, are there specific loan categories that the NCUA will be prioritizing?

 

Speaker 12

Credit risk in general is a high priority for the agency. We don't specify any specific loan type as credit unions from different size and complexities have portfolios from that are concentrated in different loan types.

 

Speaker 12

So, it really is credit union dependent. There are headwinds that we're seeing within the call reports and that we're keeping a close eye on, but there aren't any specific loan types that I would point out.

 

Speaker 12

It really is credit union dependent.

 

Speaker 11

Okay. All right. Thank you, Nagi. The next one is for Matt Belloris. Matt, is the NCUA including fair lending exams as a normal part of their risk exams going forward?

 

Speaker 13

All right. Thank you, Elliot. This is Matt Velouris again from the Office of Consumer Financial Protection. I guess the short answer to that is yes. Every year is part – for the last several years, we've been incorporating some of the FFIC interagency fair lending exam procedures, some of the areas of risk or focus into the risk -focused examinations our examiner is conducting.

 

Speaker 13

So, for example, this year they're looking at redlining discrimination risk, marketing discrimination risk and pricing discrimination risk. Also, in addition to that, under the risk -focused examination, an examiner could scope into, based on the profile of the credit union, and look at things that may impact fair lending laws like ECOA or the Fair Housing Act.

 

Speaker 13

So there are times when examiners will find issues, violations, seek corrective action through their risk -focused exams that aren't necessarily one of the priorities that we have identified for them as far as that.

 

Speaker 13

And then, of course, every year our office conducts 50 to 60 or so fair lending exams that are strictly focused on compliance with the fair lending laws that we have out there. Back to you, Elliot. All right.

 

Speaker 11

Thank you, Matt. Next one is for Dale Klein. Dale, can you provide information on the acceptable and or unacceptable use of secondary sources of liquidity?

 

Speaker 4

Thank you, Elliot. And so secondary sources of liquidity, such as borrowings and broker deposits should be used in ways that are consistent with credit unions policies and procedures, and in a safe sound way.

 

Speaker 4

Borrowings in particular can be part of regular operational liquidity and also borrowings may also be triggered as part of contingency fund agents. Thank you, Elliot.

 

Speaker 11

You're welcome. Thank you, Dale. The next question is for Trey Dameron. Trey, what are examiner's expectations around CSEL, current expected credit loss model evaluations?

 

Speaker 14

Thank you, Elliot. This is Trey Dammer and I'm the senior policy accountant for the division of chief accountant with examiners are looking at the validations. They're looking for to ensure that the model validations.

 

Speaker 14

1st of all, if they're done, they're done independently to make sure that there's some testing that's going on to ensure that the assumptions are looked at. I want to make sure that the policies and procedures are in line and the model documentation is updated from time to time since the models do tend to be reviewed at least on an annual basis to be looked at.

 

Speaker 14

So, they're just going to be looking at process procedure, making sure it's updated and making sure that there's an independent validation that may not be specifically done as a part of the procedures of the audit.

 

Speaker 14

If someone is coming in and doing their annual audit, they're going to be more concerned with evaluation and compliance that on the financial statements, but not necessarily with if the model is optimal or working properly.

 

Speaker 4

Okay.

 

Speaker 11

Thank you, Trey. The next question is for Natasha McAdoo. Natasha, where can we find the Minority Depository Institution or MDI -specific exam tools for smaller MDIs?

 

Speaker 10

Thank you. And to be clear, those are MDI specific examiner tools. So those are tools that help and aid examiners when they're analyzing MDI credit unions to help offer guidance and insight into the unique strategies and member needs of these MDI credit unions.

 

Speaker 10

So, those are for examiner use. However, there is a tool that is available for examiners and also available to anyone through the financial performance ratios. So, now, examiners can compare MDIs to their peer group, including specific MDI peer groups, and anyone can use these peer groups as well.

 

Speaker 10

So, when going to the NCUA site and looking at financial performance ratios, there is now a filter that you can include minority depository designation as one of the filters for a peer group. Thank you.

 

Speaker 11

You're welcome. Thank you, Natasha. The next question is for Janelle. Janelle, for suspicious acts reporting, is there a volume expectation based on your size and product offerings?

 

Speaker 8

you, Elliot. There really isn't a specific volume expectation. Credit unions should really be focused on items like their product and services offerings, types of members, and their geographic location.

 

Speaker 8

Back to you, Elliot.

 

Speaker 11

Thank you Janelle. Next question is for Matthew Blores. Matt, can you elaborate on what specifics will be reviewed on overdraft programs?

 

Speaker 13

Sure. Thank you, Elliot. This is Matt Velouris again from the Office of Consumer Financial Protection. As we did last year, this year, with a different asset threshold in mind for credit unions with assets between 100 million and less than 500 million.

 

Speaker 13

We're asking examiners to look at aspects of overdrafts regarding website advertising, balance calculation methods, settlement processes, and any actions taken or understanding of potential exposure for unanticipated overdraft fees.

 

Speaker 13

And when we talk about that, we're talking about matters like transactions that clear where there's a positive balance when the transaction is done, there's a positive balance in the account, but by the time it clears, it's negative.

 

Speaker 13

We're also talking about multiple re -presentment of fees charged for that. When a credit union charges an additional NSF each time a merchant attempts to process the same transaction after the transaction was declined.

 

Speaker 13

And as we did last year, also looking at fees related to return deposit items, an example, when a 3rd party check that a consumer deposits in their checking account is returned to the consumer because the check could not be processed against the balance.

 

Speaker 13

So, a lot of what we looked at last year, we're looking at again this year, we just changed the asset threshold that applies to that. Back to you, Elliot.

 

Speaker 11

All right, thank you, Matt. The next question is for Christelle. Christelle, will there be a recording available of this webinar?

 

Speaker 1

Hi, Elliot. Yes, this is Christelle. And yes, the archive version of the webinar will be posted on NCUAway's YouTube channel. They can reach, obtain it there. Thanks, Elliot.

 

Speaker 11

You're welcome. Thank you, Christelle. Next question is for Nagi. Nagi, for the credit risk area of examinations, what are the areas in a commercial lending program that the examiners will prioritize?

 

Speaker 11

And what areas are concerns for commercial loan workout?

 

Speaker 12

Thanks. So, I'll answer this question a little bit more broadly. So, at the NC, where we've been monitoring growth and commercial loans as credit unions have been getting more engaged in it over the past few years, especially throughout the pandemic years to where we're seeing a gradual increase in the concentration of commercial loans to the total assets.

 

Speaker 12

It's still fairly low, but it is gradually increasing. So, it's an area that we continue to to just keep keeping in the back of our minds, not from a high risk perspective, but just to keep an eye on as the concentration continues growing and credit unions continue diversifying into more and more products related to commercial loans.

 

Speaker 12

From a workout perspective, to answer the 2nd, part of the question, I'd guide the question or to the recent effort that the had joined on the interagency policy statement on putting commercial real estate loan accommodations on workout, where essentially we updated existing joint guidance on commercial real estate loan workouts and introduce new sections on short term loan accommodations and relevant accounting standard changes on estimated loan losses.

 

Speaker 12

And within that statement, we really addressed our viewpoints on sound principles and supervise your expectations of commercial real estate loan program workouts, including risk management and applicable loan classifications.

 

Speaker 12

Thanks, Ali.

 

Speaker 11

You're welcome. Thank you, Nagi. And the next question is for Tom Fay. Tom, related to interest rate risk, are you considering that interest rates are expected to remain stable or decline? In other words, a 300 basis point shock is not probable.

 

Speaker 15

Thanks, Elliot, and hi, everyone. Tom Fay here from the Capital Markets Division Office of Examination and Insurance. It's important to understand that the NCUA supervisory task is not a projection of what we think interest rates will do, but essentially built around to understand the credit union sensitivity to a change in interest rates.

 

Speaker 15

And so while we only use an up scenario, we encourage credit unions to do both, to have down and up scenarios so you understand the full breath of the sensitivity to change in rates in all of your assets and liabilities.

 

Speaker 15

Thank you, back to you, Elliot.

 

Speaker 11

Thank you, Tom. There have been a couple of questions for Janelle Patera. Janelle, there have been a couple of questions pertaining to check fraud. Is there anything that you would like to address on that topic?

 

Speaker 8

Thank you, Elliot. You know, fraud is one of those things that's constantly changing. And sometimes what is old can be new again, like, check fraud. We really encourage credit unions to continue working with partner institutions on on this issue and the refunds and transactions, but there's also a number of trade groups that are extremely engaged on this matter.

 

Speaker 8

And I believe have instituted some ways to try to expedite the communications between financial institutions. A lot of issues related to checks have also developed from a lot of mail theft and the postal inspection service is extremely aware of this and is working to implement a number of initiatives and increase their outreach efforts to help address these problems.

 

Speaker 8

And Vincent also released a check fraud alert last year that might be helpful and also credit unions can look at their internal controls around checks and limitations and things like that. That may also be beneficial.

 

Speaker 8

Thank you, Elliot.

 

Speaker 11

You're welcome. Thank you, Janelle. Back to you, Trey Dameron. Trey, regarding CSOL, how in -depth are examiners digging into the underlying calculations, specifically when a credit union uses numerous methods throughout their calculations?

 

Speaker 11

Are you looking at all inputs? Are you just looking into like a quote unquote warm and fuzzy number from an overall funding perspective?

 

Speaker 14

That's a good question. I guess the way that I perceive this question is first is I don't think that the examiner is coming in, doing their own calculation and having you defend the difference between those between the calculation.

 

Speaker 14

The examiner comes up with and that, so I want to lay that concern. We do believe that examiners will come in and evaluate the adequacy of the by looking at policies and procedures and making sure that everything is working the way that's intended.

 

Speaker 14

That is documented properly looking at the documentation for the reserving methodology and looking at, you know, whether you made good choices for model selection and input data related to that modeling assumptions and making sure you're using other qualitative adjustments that not only look at historical, but also focus on future oriented data for reasonable and supportable forecasts and then generally making sure that you're adhering to gap and the intent of a C3 26.

 

Speaker 14

Thank you.

 

Speaker 11

You're welcome. Thank you, Trey. We've got a couple more questions. We've got three more minutes left to see if we can get to both of those. The next one's for Matt Belloris. Again, Matt, what's your close review of the overdraft program as opposed to previous years?

 

Speaker 13

All right, thanks, Elliot. This is Matt Velouris again from the Office of Consumer Financial Protection. I think the best way to look at this question is to kind of provide some background. We were looking at overdrafts prior to COVID 2018 -2019.

 

Speaker 13

We were looking at opt -in consents, affirmative opt -in for some of those programs. We were looking at overdraft services in 2019. As COVID hit, we were still looking at things like potential pyramiding of fees, but we focused some of our compliance resources to look at aspects of compliance with the CARES Act, the Fair Care Reporting Act changes, loan forbearance programs and so forth.

 

Speaker 13

As COVID laying down, we started to pick up back again in 2022. We asked examiners to collect documentation regarding overdraft programs from credit unions, their policies and procedures, disclosures and so forth.

 

Speaker 13

Last year, we spent time digging into some of that to scope into what we asked examiners to do to look at and it really was recognizing, as Ernestine mentioned, the evolving nature of overdraft programs.

 

Speaker 13

What we're seeing in terms of potential lawsuits was to make credit unions aware of the heightened risk of some of these overdraft related fee practices. The ones I mentioned, the authorized positive, settle negative, multiple re -presentment and return deposit items and then now this year, we're doing the same procedures again with those credit unions between 100 million and 500 million in assets.

 

Speaker 13

So, the goal of this is to kind of get an understanding of the landscape. It's likely we'll be putting some guidance out to talk about what we're seeing in these and where some of the exposure lies, what credit unions may be able to do to help mitigate that risk.

 

Speaker 13

And also remind them of the private rights of actions that consumers have that even if a credit unions program looks sound to them, there are private rights of actions that consumers have when it comes to potentially unfair practices.

 

Speaker 13

So, that's where we're going from that. That's how it kind of came about in terms of us stepping up the focus on this. Back to you, Elliot.

 

Speaker 11

Thank you, Matt. Well, with 1 minute left, we do have 1 quick question, and then I'll turn the floor back over to Christelle to wrap things up. This 1's for for Nagi. Where can we find updated guidance on loan workouts?

 

Speaker 12

Thanks, Elliot. So it's on NCUA's web page under letter to credit unions and other guidance. Specifically, that one is title 23 -cu -05 and it was issued back in June of 23. Thank you. You're welcome.

 

Speaker 11

All right, well that wraps up the Q &A. We're at the 3 o 'clock hour. And I will turn the floor back over to Christelle to wrap things up. Christelle?

 

Speaker 1

Thank you. With those questions, we've come to the end of our webcast. Thanks again for joining us today. We hope that you found the information helpful. And last, I want to join my co presenters and everyone who assisted in responding to your questions and thanking you all for attending today's presentation.

 

Speaker 1

We would like to wish you a safe and healthy 2024.



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