41 THE NAFCU JOURNAL MAY–JUNE 2022 Capital Adequacy and Risk Based Capital Rule Implementation The NCUA issued a final risk-based capital rule, which took effect on January 1, 2022. The rule outlines the risk-based capital requirements that complex credit unions are now subject to. As a result, changes were made to the quarterly Call Report, which complex credit unions will start utilizing for the March 31, 2022, reporting period. The NCUA notes that “examiners will review the accuracy of complex credit unions’ reporting for the new data elements required in the risk-based capital scheduled of the Call Report.” Credit unions may find it helpful to review NCUA’s FAQs on the rule. Loan Loss Reserving Credit unions with $10 million or more in assets are required to implement the Financial Accounting Standards Board’s (FASB) Accounting Standards Update No. 2016-13, Topic 326 by January 1, 2023, for loan loss reserving, otherwise known as the current expected credit losses methodology (CECL). Consumer Financial Protection For 2022, in addition to general risk- focused consumer compliance reviews that are completed, the NCUA has identified various consumer financial protection areas for examiners to focus on, including protections implemented during the COVID-19 pandemic, fair lending, the Servicemembers Civil Relief Act, the Fair Credit Reporting Act, and overdraft programs. Loan Participations This year, the NCUA will continue to review safe-and-sound practices for managing loan participation portfolios. The NCUA recognizes that these portfolios may be serviced by outside entities, and will evaluate accordingly to verify that “credit unions have evaluated the risk in the loan participation transactions and how that risk fits within the tolerance levels established by the credit union’s board.” The NCUA will also look at transactional-level details, and credit unions’ reconcilement procedures. Fraud Based on the “offsite posture” due to the COVID-19 pandemic over the last two years, the risk for fraud has significantly increased. The NCUA plans to review the efforts of credit unions to prevent and detect fraud, which includes establishing and implementing strong internal controls and keeping certain duties clearly separated. The NCUA’s Fraud Prevention Resources webpage provides a great deal of information on deterring, detecting, responding to, and reporting fraud. London Inter-Bank Offered Rate (LIBOR) Transition Pursuant to the winding down of the LIBOR, the NCUA will ensure that credit unions limit their LIBOR exposure and have established adequate fallback language in their contracts. The NCUA’s Letter to Credit Unions 21-CU-03 encouraged the transition away from the LIBOR no later than December 31, 2021 and included a Supervisory Letter on evaluating LIBOR transition plans. Interest Rate Risk Lastly, the NCUA will review credit unions’ interest rate risk during this year’s examinations. The NCUA noted that “if credit unions invested surplus funds in long duration assets, this could result in greater sensitivity to market risk, and therefore increased interest rate risk.” The agency recommends that credit unions continue to model and manage interest rate risk carefully and use wide-ranging scenarios and assumptions. Examinations can be an arduous process, and to the extent possible, NAFCU is here to help with questions, tips, and resources. One such resource is the NAFCU Exam Fairness Guide, which may be useful to credit unions amid an especially tricky examination. Rebecca Tetreau is regulatory compliance counsel for NAFCU. “Examinations can be an arduous process, and to the extent possible, NAFCU is here to help with questions, tips, and resources. One such resource is the NAFCU Exam Fairness Guide, which may be useful to credit unions amid an especially tricky examination.”
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