While we are all getting tired of hearing “COVID-19” multiple times a day, this time it may help you when examiners come to visit. On June 30, the NCUA updated its Examiner’s Guide to include a section on COVID-19.
The section begins with “The COVID-19 pandemic may have a lasting impact on credit unions’ financial and operational conditions. Examiners should consider the extraordinary and potential long-term nature of the COVID-19 economic issues confronting credit unions, understand it is a unique circumstance, and be flexible in their supervisory approach. Credit unions and examiners should also reference the NCUA’s Coronavirus (COVID-19): Information for Federally Insured Credit Unions and Members webpage for frequently asked questions that are updated periodically.
Included in the new COVID19 section of the Examiner’s Guide (with selected highlights) are:
Credit Union Operations – Examiners should evaluate a credit union’s risk management practices based on the scope and thoroughness of the credit union’s internal risk assessment and business continuity plan. In assessing management’s effectiveness, examiners should consider the credit union’s size, complexity, and risk profile. Additionally, examiners should be mindful that in times of crisis, risk management changes are likely to occur on a lagged basis, once resources and operations have stabilized and lessons learned can be thoughtfully incorporated.
The credit union’s decision-making process should start with an initial risk assessment and include a process for refining the risk assessment over time as more information becomes available.
Examiners should determine whether the risk assessments are sufficient in scope and content. In reviewing the assessments, examiners should recognize that the issues confronting affected credit unions are complex and the resolution may be multifaceted and require time. The examination scope may need to be adjusted depending on the quality and thoroughness of the risk assessment. Additionally, the scope and content of a risk assessment will vary based on the credit union’s size, complexity, and risk exposure.
The risk assessment should reflect management’s best estimate of the credit union’s asset quality, given the prevailing economic conditions. In addition to determining the effect on asset quality, management should be able to explain the implications for the credit union’s earnings and capital, as well as the effect on funding, liquidity, operations, and asset/liability management.
The examiner’s assessment of operational risk should address the effectiveness of the credit union’s operational capability and its business continuity plan. Management should be able to explain its review and assessment methodology and demonstrate reasonable progress, given the circumstances.
Credit Risk Management – Credit unions should continue to implement sound loan underwriting standards and credit risk management procedures. NCUA examiners will focus on any adjustments credit unions made to these programs to address borrowers facing financial hardship as a result of the COVID-19 pandemic.
Credit union policies should address the use of loan workout strategies, risk management practices, and new strategies implemented to provide funds to borrowers impacted by the COVID-19 pandemic, including new programs authorized through CARES Act. NCUA examiners will evaluate credit unions’ controls, reporting, and tracking of these programs. Credit unions must demonstrate they understand and are continually evaluating the credit risks that exists during a crisis.
Additionally, credit unions’ risk-monitoring practices should be commensurate with the level of complexity and nature of their lending activities, maintain safe and sound lending practices, and comply with consumer disclosure and regulatory reporting requirements.
Paycheck Protection Program – Covers criteria, terms, obligations, underwriting, documentation, forgiveness, participates and sales, exclusions, and many other functions of the Paycheck Protection Program.
Small-Dollar Loans – As with all loan products, there are risks to consider and mitigate. The NCUA, in collaboration with other federal financial institution regulators, issued a joint press release, Interagency Lending Principles for Offering Responsible Small-Dollar Loans, to address prudent risk management practices for responsible small-dollar lending. Credit union policies, risk management practices, and controls should generally address the following for small-dollar loans.
Loan Workouts – A credit union should assist financially distressed members to the extent it is able. NCUA examiners will not criticize a credit union’s efforts to provide prudent relief for borrowers when such efforts are conducted in a reasonable manner with proper controls and management oversight. This approach agrees with the NCUA’s longstanding practice of encouraging credit unions to assist borrowers in times of natural disaster, severe financial disruption, and other extreme events. The NCUA considers such proactive measures to be in the best interest of credit unions, their members, and the economy. Examiners will assess whether various loan workout programs (modifications, refinances, adjusting due dates, etc.) ultimately improve collectability.
Allowance for Loan and Lease Losses – The COVID-19 pandemic has the potential to impose significant financial hardship on many credit union members. This economic uncertainty creates the need for credit unions to evaluate the negative impact of the COVID-19 pandemic on the estimate of probable loan losses and, if needed, include additional reserves in the ALLL account.
Due to the recent economic developments resulting from the COVID-19 pandemic, it is pertinent to ensure credit unions maintain an adequate ALLL account in accordance with ASC Subtopic 450-20 (loss contingencies) and/or ASC 310-10 (loan impairment).
Liquidity – Maintaining an adequate level of liquidity depends on a credit union’s ability to efficiently meet both expected and unexpected cash flows and collateral needs without adversely affecting the credit union’s daily operations or financial condition. The 2020 CARES Act contains several provisions that could materially influence a credit union’s liquidity position. Credit unions should consider the following when conducting liquidity risk management and planning activities:
- The effects of loan payment forbearance, loan delinquencies, projected credit losses and loan modifications on liquidity and cash flow forecasting
- Scenario analysis for changes in cash flow projections for an appropriate range of relevant factors (for example, changing prepayment speeds)
- Scenario analysis for liquidity risk modeling, including changes in share compositions and volumes
- The potential effects of low interest rates and the decline of credit quality on the market value of assets, funding costs and borrowing capacity
- The adequacy of contingency funding plans to address any potential liquidity shortfalls
Consumer Financial Protection – Addresses the interpretive rule clarifying when consumer can elect to modify or waive waiting periods for some mortgage loans, and Regulation E’s Remittance Transfer Rule change.
Relief related to COVID-19 – Covers a gamut of topics, including appraisals, foreclosures, eligible obligations, participations, restoration plans, board meetings, and audit reports.
The Workpapers and Resources section includes a good list of resources related to COVID-19 including the CARES Act, Interpretive Rulings, Supervisory Letters, and Interagency Guidance.
Let us know if we can help you prepare in any way.
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