NCUA's COVID-19 Examination Guidance
On June 23, 2020, the FFIEC released an Interagency Examiner Guidance for Assessing Safety and Soundness Considering the Effect of the COVID-19 Pandemic on Institutions. The guidance provides that examiners will exercise appropriate flexibility and will consider if credit unions have taken appropriate actions in response to COVID-19 impacts. Examiners will review management’s response to the pandemic and determine the reasonableness of those actions given the credit union’s economic environment.
The NCUA, in alignment with this guidance, published a COVID-19 chapter in its Examiner’s Guide on June 30, 2020. The NCUA mirrors the language from the FFIEC guidance, urging examiners to 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.” Throughout the guide, the NCUA states that credit unions will not be criticized or penalized for their efforts to provide prudent relief to their members, “when such efforts are conducted in a reasonable manner with proper controls and management oversight.”
If you are a credit union, this should give you some relief (Yay! No penalties!), but it should also give you pause (what does ”proper controls and management oversight” during a pandemic even mean?).
The exam guide provides credit unions with some specifics on what the NCUA examiners will be looking for. The COVID-19 chapter specifically addresses operations, risk management, PPP, small-dollar loans, payday alternative loans, loan workouts, ALLL, liquidity, consumer financial protection, and COVID-19 related relief. Summaries of a few of these topics are below, but more information can be found in the Examiner’s Guide.
In this section the NCUA provided a fair amount of emphasis on strategic risk and cybersecurity. When it comes to strategic risk, examiners will review the effectiveness of a credit union’s disaster recovery and business continuity plans, stating at a minimum the plan should address how the credit union operates with limited essential staff and informing members of the credit union’s reduced operations. Examiners will evaluate management’s initial and ongoing risk assessment in relation to the information available and stage of local economic recovery.
If your credit union has developed a prudent strategy for providing sustainable financial relief to your members impacted by COVID-19, examiners generally will not penalize your credit union even if the strategy results in a negative impact on earnings.
In terms of cybersecurity, the NCUA states that COVID-19 has elevated two cybersecurity concerns: mobile banking and employees working remotely. NCUA expects credit unions to have policies and procedures in place that minimize the risk of a cyberattack and state how the credit union will respond should an attack occur. A few examples provided in the Examiner’s Guide of what a credit union should include in their policies and procedures are how a credit union is collecting and maintaining system and account logs; how an employee can report a suspected incident of cyberattack to the credit union; and what appropriate corrective action would be taken, should a security breach occur.
Credit unions were urged by the NCUA in Letter to Credit Unions 20-CU-04 to offer small-dollar loans to those facing hardship due to COVID-19. However, the NCUA expects credit unions to have done so in a responsible manner and should follow the risk management practices issued by the FFIEC’s Interagency Lending Principles for Offering Responsible Small-Dollar Loans.
The FFIEC and NCUA has encouraged credit unions to work with borrowers who may be unable to meet their payment obligations due to the pandemic. The CARES Act provided three types of loan relief for members affected by COVID-19: relief from TDR, foreclosure moratorium, and mortgage forbearance. Examiners will not criticize credit unions for loan workouts structured as part of a risk mitigation strategy intended to improve collectability of existing loans. Examiners instead will assess the appropriateness of a credit union’s policies and procedures for credit renewals, extensions, or modifications.
The Examiner’s Guide states that credit unions were provided temporary relief from the accounting and reporting requirements for certain TDRs, however the credit union should maintain records of the volume of loans involved and maintain an appropriate ALLL for allowance for credit losses.
Relief Related to COVID-19
This section of the Examiner’s Guide touches on a variety of miscellaneous relief efforts that were granted to credit unions and members due to COVID-19, and examiners will not criticize credit unions for taking advantage of these relief efforts. These include deferral of appraisals, mortgage foreclosure moratorium, acquired premises waivers, eligible obligations and loan participation temporary amendments, capital adequacy temporary amendments, and board meeting flexibility.
The NCUA exam guide also has a workpapers and resources chapter, where the NCUA has complied COVID-19 laws, regulations, guidance, and letters.
The FFIEC guidance and the updated NCUA Examiner’s Guide stress that any COVID-19 related changes that the credit union implemented will be examined based on if the changes were done in a reasonable manner. The examiners will look at a credit union’s management oversight and reasonableness of its policies and procedures based on the credit union’s size, complexity, and risk profile. The NCUA and other regulatory agencies maintain the ability to downgrade component or composite ratings and take formal or informal enforcement action for poor management response to the issues caused by COVID-19. However, these examination outcomes can be mitigated if the credit union has appropriately planned for financial resiliency and continuity of operations; implemented prudent policies; and is pursuing realistic resolution of the issues confronting the credit union.