Predicting the NCUA’s 2022 supervisory priorities

The NCUA will soon be releasing their Supervisory Priorities for 2022. Based on past priorities, evolving NCUA guidance, and the current economic environment here is what we think will be most important to examiners in 2022.

Allowance for Loan and Lease Losses AND Current Expected Credit Losses (CECL)

Moving into 2021, the NCUA instructed examiners to delay assessing credit unions’ efforts to transition to the CECL standard until further notice. With implementation scheduled to occur in January 2023, we expect that the 2022 Supervisory Priorities will officially put examiners on notice to begin evaluating your transition efforts.

The 2021 Supervisory Priorities placed a priority on the evaluation of your Allowance for Loan Loss Adequacy, particularly as it related to additional economic impacts from the COVID-19 pandemic.

We expect this to continue into 2022, with examiners placing priority on (a) are you complying with the current guidance appropriately and (b) are you prepared, or preparing, to comply with the CECL standards beginning in Q1 2023.

If you haven’t begun preparing for your CECL transition, the CECL Resource Center is a great place to start.

Credit Risk and Concentration of Risk

In 2021 examiners focused on evaluating credit risk as concerns of pandemic-related defaults continued. With delinquency numbers staying low as we move further and further into our new normal, examiner concerns may shift from focusing on how your credit union is evaluating borrower level credit risk to how you’re managing concentration risk and preparing for potential macro-economic impacts.

Could large shifts in our economic conditions impact your concentration of risk? For example, an increase in interest rates may reduce the Net Economic Value (NEV) of your balance sheet.

In addition to interest rate risk, additional payment pressure will fall on members with variable rate loans, which may cause defaults.

Foreclosures increasing as a result, purchasers of these homes will ultimately have reduced purchasing power due to the increased interest rates, putting downward pressure on home values.

It’s important to understand how these factors could potentially impact your capital position and ultimately your safety and soundness.

Information Systems and Assurance (Cybersecurity)

There may be no larger threat to your credit union than cyber security. The Apache Log4j Vulnerability identified in December 2021 is one of the most widespread security vulnerabilities ever encountered, impacting virtually all organizations.

As security systems become more sophisticated, so do bad actors. Expect the NCUA to continue to prioritize their reviews of how you’ve assessed previous risks and the procedures you’ve put in place to assess ongoing potential risks as part of their 2022 examinations.

Consumer Financial Protection

In 2022, we expect the NCUA will continue to focus on Fair Lending and Consumer Financial Protection related to the COVID-19 pandemic.

In addition to what we believe will be widespread NCUA priorities, there are some additional priorities we expect to impact credit unions where applicable, including:

Relationships with Third Parties that Provide Services Related to Digital Assets

In December 2021, the NCUA issued Letter to Credit Unions 21-CU-16.  We expect the NCUA to place scrutiny on these programs where they exist, particularly regarding the diligence in selecting a third-party partner, the protections in place for the credit union, and the credit unions’ disclaimers and advertising of the services provided.

Serving Hemp-Related Businesses

Consistent with 2021, we expect the NCUA to continue to encourage credit unions to consider whether they are able to provide financial services to lawfully operating hemp-related businesses within their fields of membership safely and properly.

What does this mean for you?

Supervisory priorities from the NCUA are often what auditors will call “SALY”; Same As Last Year.

However, while the priorities may not be new, you should be constantly re-evaluating the specific threats surrounding those priorities and updating policies and procedures to best protect your credit union’s safety and soundness, but also your reputation, your customer satisfaction, and your ability to bring value to your membership.