The NCUA has released its examiner guide on January 8, 2020 which shows the priorities its examiners will focus on in 2020 for Supervisory Committee Audits and Minimum Procedures. The entire guide can be found here: https://www.ncua.gov/files/publications/guides-manuals/2020-supervisory-committee-audit-guide.pdf Some of the details of the various hot topics for Supervisory Committee Audits and also for areas where CU examiners will focus on are as follows. Note I will spend more time on the lending side.
Bank Secrecy Act and anti-money-laundering compliance: Examiners will conduct a BSA/AML review during the exams. There will be a focus on customer due diligence and beneficial ownership requirements that started May 11, 2018. They will also look at the appropriate filing of SARs and CTRs.
Consumer Financial Protection: Examiners will review compliance with the Electronic Funds Transfer Act (Regulation E), error resolution procedures; Fair Credit Reporting Act (FCRA), reviewing credit reporting procedures; Small dollar and payday alternative lending, including compliance with NCUA Payday Alternative Lending (PALs) rules; Truth in Lending Act (Regulation Z); Military Lending Act (MLA) and Serviceman Civil Relief Act (SCRA).
Cybersecurity: The agency’s new security review program called the “Automated Cybersecurity Examination Tool (ACET)” will be in force this year. This allows CUs to do a self-assessment through access to the program on the agency’s website early in the year.
Loan Reconciliations: As common with most exams, there will be a focus on the loan trail balance and subsidiary ledgers to insure their accuracy and that they are reconciled correctly to the general ledger. Accrued interest receivable will also be reviewed.
Loan Approvals and Processing: Review a sample of at least 25 approved loans in the testing period. This should be selected in proportion to the types of loans granted during the period. A review should be done on the underwriting, supporting documents, and list any exceptions. Loan functions of approval, disbursement, and processing should have a separation of duties among different workers. All loan terms should on the closing documents should be compared with what was approved. Approvals should be documented according to loan policy and exceptions mentioned where applicable. Collateral perfection will be inspected. The fair market value of the collateral will be reviewed to make sure it falls within CU guidelines.
Loan File Maintenance: Obtain the list of individuals who have authority to approve loans, process loans, and complete file maintenance. Are file maintenance items being reviewed by a different individual than those initiating the transaction? Review at least 15 days of file maintenance change reports to verify the modification, extension, proper review, and accurate input on the system.
Loan Delinquencies: Look at two months of delinquency reports to identify a selected number of loans that appear on the delinquency reports. Inspect charge offs, refinanced delinquent loans, and those which have had payments made on the loans.
Charge Off Loans: A review of the Board approved written charge off policy will be inspected and this will be reviewed compared to the actual practices of charge off and recovery of loans.
Allowance for Loan and Lease Losses (ALLL): The examiners will review ALLL policy and the actual practices of the reserve calculation considering all loan charge-offs and recoveries, management support of the ALLL calculation, testing of all schedules to insure mathematical accuracy and logical support of the ALLL methodology. There will also be discussions on the upcoming Current Expected Credit Losses (CECL) in 2023 to see what work CUs are doing now to prepare to implement the new Financial Accounting Standards Board (FASB) standards. Each institution should be making some steps now in preparation of these future changes.
Control over Employee and Official (related party) Accounts: Any special interest rates for employees, delinquent employee loans, reversed fees on employee loans, loans approved with terms not in line with board policy, and loans to officials in excess of $20,000 in aggregate will be subject to be reviewed.
London Interbank Offered Rate (LIBOR) interest rate benchmark transition: Examiners will look at a CU’s exposure and planning with the future discontinuance of LIBOR in 2021. This will include loans, LIBOR related transactions on and off-balance sheet exposures, planning, governance, budgeting, and any other impact to the institution with the discontinuance of this index.
Investments: A review of Held to Maturity (HTM), Available for Sale (AFS), or Trading Investments will be reviewed for all mathematical accuracy, policy compliance, accurate book keeping of accrued interest, discounts, gains, etc.
Share Accounts: Examiners will look at the reconciliation, overdrafts, accrued interest payable, closed, dormant accounts, and share file maintenance.
Other Balance Sheet and Income Statement Items: Examiners will look for the reconciliation and accurate reporting of all other items on the balance sheet and income statements.
Board Minutes: Review all Board of Directors board minutes for the testing period and make sure all items have been approved or reviewed by the board, as applicable for these items, unless delegated to management: interest rate changes, dividends on share accounts, investment, A/L management, BSA, Loan policies, ALLL policy, delinquent loan reports, and charge offs.
Liquidity Risk: Credit unions with low levels of balance sheet liquidity will have their liquidity management reviewed by looking at the potential effects of changing interest rates on the market value of assets and borrowing capacity, risk modeling, changes in cash flow projections based on an appropriate range of relevant factors, and a review of contingency funding plans in the event of a liquidity shortfall.
The NCUA will also open up the Modern Examination and Risk Identification Tool (MERIT) in the second half of 2020. Credit unions and examiner staff will be able to transfer documents and files needed for the examination securely, receive updates on changes for corrective actions and access completed examination reports securely.
These are a few things to look forward to as audits for supervisory committees and examinations are gearing up for the current year. As you make plans for 2020 for a third-party loan review, remember Pactola provides these credit risk advisory services. We would love to discuss the range of services you need and provide a detailed scope of services we can perform.