Hello, this is Samantha Shares.
This episode covers N C U A's 2025 Supervisory Priorities.
The following is an audio version of Letter to Credit Unions 25-CU-01.
This podcast is educational and is not legal advice.
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And now the Supervisory Priority Letter.
Dear Boards of Directors and Chief Executive Officers:
This letter outlines the N C U A's supervisory priorities and other updates
to the agency's 2025 examination program.
Our priorities focus on the areas posing the highest risk to credit union
members, the credit union industry, and the National Credit Union Share
Insurance Fund (Share Insurance Fund).
There continued to be signs of financial stress on credit union
balance sheets during 2024.
Aggregate loan performance began to deteriorate in 2022, and the
trend has continued through 2024.
The overall loan delinquency rate is currently at its highest point since
year-end 2013, while the rolling 12-month net charge-off rate is at its highest
point since the second quarter of 2012.
Additionally, the return on average assets continues to experience pressure
from the interest rate environment and provision for loan and lease loss expense.
Even considering these trends, the credit union system remains stable and relatively
resilient against economic disruptions.
With that economic landscape in mind, below are the N C U A's primary
areas of supervisory focus for 2025.
Supervisory Priorities for 2025
Credit Risk
Credit risk will remain a supervisory priority for 2025.
Loan growth moderated during 2024 while overall delinquencies
and charge-offs increased.
Most notably, the performance within credit card portfolios has
deteriorated much more rapidly than other aspects of federally insured
credit union loan portfolios.
The current delinquency rate and rolling 12-month net charge-off rate
for credit card loans both exceed the peak that was reached during the global
financial crisis fifteen years ago.
Used vehicle loan performance has also materially deteriorated.
The delinquency rate and rolling 12-month net charge-off rates for
used vehicle loans are currently at the highest levels on record.
To address these matters, N C U A examiners will continue to review
your credit union's lending and related risk-management practices.
This priority will include reviewing the sufficiency of your loan underwriting
standards, collection programs, Allowance for Credit Losses reserves,
charge-off practices, management and board reporting, and management of
any concentrations of credit risk.
To the extent possible, examiners will also review your credit
union's third-party risk-management practices when lending, servicing, or
collection functions are outsourced.
Moreover, it is important for your credit union to work with borrowers
encountering financial difficulties.
These efforts are consistent with the credit union system's statutory mission
of meeting the credit and savings needs of members, especially those of modest means.
Accordingly, examiners will assess your credit union's modification and workout
strategies for borrowers experiencing financial difficulty, including assessing
whether your credit union's efforts were reasonable and conducted with proper
controls and management oversight.
For more resources, refer to the Examiner's Guide and the
following Letters to Credit Unions:
23-CU-05, Commercial Real Estate Loan Accommodations and Workouts
23-CU-04, Update to Interagency Policy Statement on Allowances for Credit Losses
14-CU-08, Home Equity Lines of Credit Nearing Their End-of-Draw Period
10-CU-03, Concentration Risk
09-CU-19, Evaluating Residential Real Estate Loan Modification Programs
07-CU-13, Evaluating Third Party Relationships
03-CU-01, Loan Charge-off Guidance
91-CU-120, Interest Rate Adjustment Errors for A R M Loans
Balance Sheet Management and Risk to Earnings and Net Worth
Credit unions are exposed to various risks affecting their earnings and net worth.
Among the most significant are credit, liquidity, and market risk.
These risks are tied to the institution's ability to manage its financial assets
and liabilities and have a direct effect on earnings and net worth.
For credit unions, the primary market risk element is interest rate risk.
Interest rate changes can affect the income credit unions generate
from their lending and funding activities, which can affect the credit
union's ability to build net worth.
Loan losses can also diminish a credit union's earnings and net worth.
Over the last few years, the rising interest rate environment increased
some credit unions' cost of funds faster than the returns on loans and
investments, squeezing the net interest marginâa key driver of earnings.
In 2023 and 2024, this increase in funding costs put pressure on earnings until loan
and investment returns could catch up.
If interest rates continue to decline, higher yielding loans
and investments are prone to prepayment, which could accelerate
as rates drop, reducing interest income from longer-duration assets.
For the last several quarters, net interest margins have only slightly
exceeded operating expenses.
Any increase in operating expenses or further decline in loan performance
could put earnings and net worth at risk.
In evaluating your credit union's earnings and net worth risk-management
frameworks, examiners will weigh the current and prospective sources
of earnings and the composition of net worth relative to your credit
union's approved plans and thresholds.
This approach will help examiners focus on trends in earnings and develop a
better understanding of concentration risks for both earnings and net worth.
Also, examiners will continue to consider the current and prospective
sources of liquidity compared to funding needs to determine the
adequacy of your credit union's liquidity risk-management framework.
Examiners will review your credit union's policies, procedures, risk limits, and
evaluate the adequacy of your credit union's risk-management framework relative
to its size, complexity, and risk profile.
Liquidity resources and guidance can be found in the N C U A's Examiner's Guide
and the Liquidity Risk Resources webpage.
For interest rate risk-related resources, refer to the Examiner's Guide and
the following regulatory guidance:
Letter to Credit Unions 22-CU-09, Updates to Interest
Rate Risk Supervisory Framework
Supervisory Letter 22-01, Updates to Interest Rate Risk Supervisory Framework
Earnings resources and guidance can be found in the N C U A's
Examiner's Guide and the following Letters to Credit Unions:
09-CU-23, Reviewing Adequacy of Earnings
06-FCU-04, Evaluation of Earnings
For resources on net worth and capital adequacy, refer to the following N C U A
Regulatory and Compliance Resources pages:
Risk-Based Capital
Capital Planning & Stress Testing
Net Worth Ratio & Prompt Corrective Action
Cybersecurity
Cybersecurity remains a top supervisory priority as cyberattacks against all
industries, including credit unions and the vendors they use, become
more frequent and sophisticated.
The risk of a cybersecurity incident rises as dependence on
networks and technology increases.
A loss or compromise in confidentiality, integrity, or availability of systems
or information may lead to fraud, as well as financial and reputational loss.
It is thus crucial for your credit union to manage its information
security programs and continuity of operations plans proactively, and
to conduct ongoing due diligence of your critical service providers.
In 2025, examiners will continue to use the information security examination
procedures to assess whether your credit union has implemented robust information
security programs to safeguard both members and the credit union itself.
The N C U A will continue to support credit unions' voluntary use of the
Automated Cybersecurity Evaluation Toolbox to assess their cybersecurity maturity.
For access to more cybersecurity information and resources, including
detailed information on examination procedures, credit unions are
encouraged to visit the N C U A's Cybersecurity Resources webpage.
These resources provide valuable insights and guidance to help your credit union
strengthen its cybersecurity stance and stay abreast of the latest developments.
As a reminder, your federally insured credit union is required to report
cyber incidents to the N C U A within 72 hours after you reasonably believe a
reportable cyber incident has occurred.
This reporting includes notifying the N C U A if a third-party
provider experiences a cyber incident affecting your credit union.
More information can be found in N C U A Letter to Credit Unions 23-CU-07,
Cyber Incident Notification Requirements.
Your credit union is also encouraged to reference Appendix B to Part
748 â Guidance on Response Programs for Unauthorized Access to Member
Information and Member Notice for guidance on cyber incident response.
The N C U A urges your credit union's board of directors to prioritize
cybersecurity as a top oversight and governance responsibility, as
outlined in N C U A Letter to Credit Unions 24-CU-02, Board of Director
Engagement in Cybersecurity Oversight.
Consumer Financial Protection
The N C U A will continue to prioritize reviewing compliance
with consumer financial protection laws and regulations during every
federal credit union examination.
In addition to reviewing any areas specific to your credit union identified
during the risk-focused examination scoping process, in 2025 examiners
will, in particular, assess your credit union's compliance with the following
consumer financial protection areas:
Overdraft programs.
Examiners will continue a review of credit union overdraft programs, including
policies, procedures, disclosures, fees, account statements, member complaints,
internal reviews, and websites.
Fair lending.
Examiners will assess policies and practices for identifying and mitigating
potential discrimination in residential real estate valuation practices.
Home Mortgage Disclosure Act and Regulation C.
Examiners will evaluate compliance with Home Mortgage Disclosure
Act data collection and reporting policies and practices, including
transaction testing, for credit unions above the reporting threshold.
Military Lending Act.
Examiners will review compliance with the Military Lending Act
requirements, including policies and procedures, compliance
management systems, and checking and monitoring for military status.
Electronic Fund Transfer Act and Regulation E.
Examiners will assess policies and procedures related to
payments and error resolution.
Other Updates
Exam Updates
In 2025, the N C U A will update its exam flexibility initiative to provide
an extended exam cycle for credit unions over $1 billion in assets where
the N C U A rated the credit union a CAMELS composite 1 or 2 with no change
in C E O since the last examination.
These institutions will now be eligible for a 12- to 16-month exam cycle.
Additionally, the extended exam cycle for eligible federal credit
unions will be shortened from 14 to 20 months to 14 to 18 months.
The agency will continue conducting the defined scope Small Credit Union
Exam Program in most federal credit unions with assets of $50 million or
less, and risk-focused examination procedures for all other credit unions.
Examiners will continue to perform examination and supervision activities
onsite and offsite, as appropriate.
While new programs and evolving risks related to third parties, technology,
and cybersecurity may receive additional attention, your credit unions is
encouraged to review and maintain fundamental controls over lending,
recordkeeping, and internal controls.
The N C U A also encourages your credit union to remain aware of changing Bank
Secrecy Act, anti-money laundering, and countering the financing of terrorism
regulatory requirements, as the federal financial institution regulators
and the Financial Crimes Enforcement Network continue to implement the
Anti-Money Laundering Act of 2020.
Minority Depository Institution (M D I) Preservation Program
The N C U A recognizes the important role that M D Is play in the credit union
system and in the daily lives of the members they serve across the country.
The N C U A is committed to supporting the ongoing success of M D Is, including
the need to support some M D Is more or differently than other credit unions.
Examinations will consider the unique strategies and member
needs of M D I credit unions.
Additionally, the N C U A will continue to offer customized support
to credit unions with less than $100 million in assets and M D Is of all
asset sizes through its Small Credit Union and M D I Support Program.
The N C U A recognizes the value these institutions bring to members
in underserved communities by offering access to safe, fair, and affordable
financial products and services.
If eligible, your credit union can request assistance through your examiner,
regional office, or the Office of Credit Union Resources and Expansion.
This assistance may be used to support the board, supervisory committee, or managers
with a variety of credit union needs.
Conclusion
The N C U A will continue to evolve and improve its methods to
supervise and support credit unions.
We are committed to productive communication, adopting innovations,
such as recording official meetings (exit conferences and joint
conferences), and implementing efficient practices in our exam program.
Our primary objectivesâensuring a safe and sound credit union system and protecting
credit union membersâcan only be fulfilled when we adapt to the ever-changing
economic and technological landscape.
Please contact your N C U A examiner or regional office if you have
any questions about the N C U A's supervisory priorities for 2025.
This concludes the letter.
If your Credit union could use assistance with your exam, reach out to Mark Treichel
on LinkedIn, or at mark Treichel dot com.
This is Samantha Shares and we Thank you for listening.