The NAFCU Journal: NCUA Modernizing Exams in 2020

By Brandy Bruyere

The NAFCU Journal, March-April Edition, NCUA Exams, Brandy Bruyere, NAFCU VP of Regulatory Compliance

For the past few years, NCUA has worked on various exam modernization initiatives. This includes modernizing the Call Report, improving the coordination of shared NCUA/state regulator exams and enterprise solution modernization.

As part of its enterprise solution modernization, NCUA has created the Modern Examination and Risk Identification Tool (MERIT), which will replace the current AIRES software and questionnaires. MERIT will have a central user interface with a secure connection where credit unions can provide status updates and have secure online access to complete exam reports. Credit unions will be able to designate who on staff can access particular areas of the tool. MERIT will incorporate information from the current questionnaires, although the agency has indicated that it expects MERIT to be more streamlined.

When can credit unions expect to see MERIT in action? In the fall of 2019, the agency began using MERIT with some of the over $10 billion asset level credit unions examined by the Office of National Examinations and Supervision (ONES). Sometime this year, it is anticipated that the broader exam staff will be trained on using MERIT so that by late 2020, the tool will begin being used for examining credit unions with assets under $10 billion as well. However, given that some credit unions are on an extended exam cycle, it will be 2021 before AIRES is fully retired. While NCUA has a set of FAQs on MERIT, NAFCU has indicated to the agency a NCUA Modernizing Exams in 2020 By Brandy Bruyere THE NAFCU JOURNAL MARCH–APRIL 2020 37 need for information and resources on these changes, and we will keep members updated on these developments.

NCUA has also been testing a virtual examination program since 2018. As part of this initiative, the agency is researching methods to conduct many exam and supervision aspects off-site. This can reduce travel time for examiners while also improving experiences for credit unions. The program also aims to reduce coordination challenges and improve effectiveness and standardization of exams. The virtual exam program is still in the research and discovery stage, and a status report is expected to be provided to the NCUA Board sometime in 2020. However, this is a long-term project, with a goal to “transform within the next five to 10 years the examination and supervision program into a predominately virtual one for credit unions that are compatible with this approach.”

NCUA also continues a comprehensive review of the Call Report, in an effort it describes as a “complement” to the enterprise solution modernization program. The agency has conducted industry outreach over the past few years and has developed a prototype of a modernized Call Report including changes that would accommodate the transition to CECL. While some new account codes would be added, the agency’s proposal indicated there would be “a net reduction of approximately 40 percent” in the total number of account codes. It is not entirely clear yet when these changes may be finalized, but the completed forms will be released for public comment at some point.

NCUA Chairman Rodney Hood has also made cybersecurity one of his many priorities, including appointing a special adviser on this key issue. The agency continues to work on using the Automated Cybersecurity Examination Tool (ACET) and is reviewing what other resources the agency could make available on its Cybersecurity landing page. This issue is likely to remain an agency supervisory priority and continues to be a focus of examinations. Credit unions can find NAFCU resources on this issue on our Cybersecurity Compliance page.

What else may be coming this year? Last year was the first year that credit unions subject to the Home Mortgage Disclosure Act (HMDA) were required to file the additional data points added to that rule in 2015. NCUA utilizes HMDA data for possible outliers, and if the data falls outside normal ranges, the agency may conduct a separate fair lending exam. This is only one of a few criteria that can lead to a fair lending exam, with others including consumer complaints or higher baseline risk for violations. But with more data points available, that could mean more room for outliers whose data leads to additional scrutiny by examiners. Overall, it is possible that the industry will see an increase in separate fair lending examinations, although this is not official. NCUA usually publishes supervisory priorities early in the year, which generally give more information on the focus for exams in the coming year and were not yet published at the time this article was written. However, fair lending issues have been among NCUA’s supervisory priorities in the past few years.

NAFCU’s regulatory compliance team will continue to keep members updated on a host of issues, including exam-related topics and developments, throughout the year through our publications, including our Compliance Blog and our Compliance Monitor.

Brandy Bruyere is vice president of regulatory compliance for NAFCU.

This article was published in the March-April 2020 edition of The NAFCU Journal magazine. 
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