NCUA’s Examination Modernization Initiatives Will Produce Benefits for Credit Unions and the Agency

The financial services sector is evolving in ways that many could not imagine a generation ago. Not only must the NCUA’s regulatory structure change to meet these new challenges, but also the agency’s examination program.

The NCUA is participating in an examination modernization project with the other agencies on the Federal Financial Institutions Examination Council. The objective of the project is to identify and assess ways to improve the effectiveness, efficiency, and quality of safety and soundness examination procedures for financial institutions, particularly through increased leveraging of technology.

Additionally, the NCUA Board approved five initiatives to modernize the agency’s exam processes. These include the Flexible Examination Pilot Program, the Office of National Examinations and Supervision’s Data-driven Supervision Program, the Shared NCUA-State Regulator Federally Insured, State-Chartered Credit Union Program, the Enterprise Solution Modernization Program, and the Virtual Examination Program. Some of the intended benefits of these initiatives include:

  • More efficient examination and supervision contacts;
  • Reduced burden on credit unions;
  • Replacement of outdated examination systems;
  • More consistent and accurate supervisory determinations;
  • Greater ability to adapt to changes in the marketplace and credit union business models;
  • Enhanced coordination with state supervisory authorities;
  • Lower travel costs;
  • Improved quality of life for examiners; and
  • Development of a secure, reliable, and flexible infrastructure capable of supporting new systems and technology in the future.

As these initiatives support and build upon each other, they will ultimately result in a fully modernized examination and supervision program, with various incremental improvements occurring along the way. What follows in this article is a more in-depth discussion of each of the initiatives, their goals and benefits.

 

Flexible Examination Pilot Program

The Flexible Examination Pilot Program or FLEX is a program managed in Region IV in Austin, Texas. FLEX evaluated how to conduct certain existing exam procedures offsite. This program reflects the NCUA’s most immediate solution to the agency’s efforts to reduce, but not eliminate, its onsite presence during exams.

In 2017, the NCUA tested the pilot with five examiner groups in 28 credit unions located in a variety of geographical locations in Region IV. The pilot assessed examiners working remotely on portions of examinations of well-run credit unions that had the technology and platforms to provide NCUA with electronic data securely. During these reviews, over 35 percent of the total exam hours were performed offsite. The credit unions that participated in the program were as small as $4 million in assets and as large as $9.4 billion in assets.

Preliminary results from the pilot showed a cost savings to the NCUA, realized in part by reduced travel time and costs for examiners. Credit union feedback on the program has also been positive, with the majority of credit unions reporting positive experiences with the modified exam approach.

However, the pilot reinforced the need for the NCUA to have a secure file transfer portal to support much of the work being done offsite efficiently. The new, secure file transfer portal was deployed in July 2018. The agency will continue to refine the portal as it develops plans to increase the use of offsite procedures in the future.

 

Data-Driven Supervision Program

This initiative began in 2018 as an effort to move to a continuous supervision model for the large natural-person credit unions supervised by the Office of National Examinations and Supervision. The continuous supervision model uses data-driven analytics to monitor and identify risk in these institutions, and the program will support the transition to credit union-driven stress testing. This program may also lead to additional improvements that can be adapted for use in the supervision of other federally insured credit unions.

 

Shared NCUA-State Regulator Federally Insured, State-Chartered Credit Union Program

In 2017, the NCUA created the Joint NCUA-State Supervisor Working Group. This working group is tasked with improving coordination and scheduling of joint exams, providing greater flexibility when scheduling examinations, and reducing redundancy where possible. The group’s goal is to minimize the burden on state-chartered credit unions resulting from having a separate financial regulator and insurer. In addition, the group is tasked with evaluating the efficiency, appropriateness, and feasibility of adopting an alternating examination approach for state charters.

The working group is developing a pilot program to explore and evaluate the effectiveness of the alternating examination concept. A pilot like this will allow the NCUA, state regulators, and stakeholders to evaluate the potential benefits and challenges prior to finalizing a decision on an alternating exam program. Such a pilot will need to run about three years in order to evaluate one full alternating exam cycle.

For joint examinations of federally insured, state-chartered credit unions, the working group is exploring ways to minimize duplication and overlap through process improvements and greater use of technology. The working group is also evaluating other areas, such as loan participations, CUSOs and third-party vendor reviews, and other supervisory matters where the work of the state and the NCUA can be better leveraged when examining and supervising state-chartered credit unions.

 

Enterprise Solution Modernization Program

In November 2015, the NCUA Board authorized the Enterprise Solution Modernization Program. This effort will replace legacy applications such as the Automated Integrated Regulatory Examination System, or AIRES, and the Call Report data collection tool, Credit Union Online. The Enterprise Solution Modernization Program will also introduce emerging and secure technology that will support the NCUA’s examination, data collection, and reporting efforts. The result will be a flexible technology architecture that integrates modernized systems and tools across the agency. These new systems will streamline processes and procedures helping create a more effective, less burdensome examination process.

The Enterprise Solution Modernization Program is also providing the essential upgrades to the NCUA’s technology infrastructure that support the FLEX and Virtual Examination (see page 11) programs with:

  • More secure and efficient ways to communicate with credit unions;
  • Updated tools such as workflow management, data integration, document management, and customer relationship-management capabilities; and
  • A flexible framework that will allow for future systems and technology so the NCUA’s supervisory program can evolve with changes to regulations, data and analytical needs, and the activities credit unions engage in.

The first of a series of technology upgrades from this initiative are scheduled to begin in 2019. Throughout the program’s multi-year implementation period, the NCUA will continue to provide updates and engage stakeholders. More information about this initiative, including the history of the program, can be found on the program’s webpage.

 

Virtual Examination Program

In 2017, the NCUA Board approved a project to research ways to conduct as many aspects of the examination and supervision process offsite as possible. The virtual exam project team is researching ways to harness new and emerging technology advancements in analytical techniques, and improvements in supervisory approaches.

If the agency is able to develop alternative examination methods that have the equivalent or improved effectiveness of our current examination procedures, it may be possible to reduce the frequency and scope of onsite examinations significantly. Onsite examination activities could potentially be limited to periodic data quality and governance reviews, interventions for material problems, and meetings or other examination activities that need to be handled in person.

The virtual exam concept should lead to greater use of standardized interaction protocols, advanced analytical capabilities, and subject matter experts. This will result in more consistent and accurate supervisory determinations, provide greater clarity and consistency with respect to how the agency conducts its supervisory oversight, and improve coordination between agency and institution staff.

To be successful, it is likely that our examination staff will need to analyze more information about credit unions and communicate more frequently with credit union management. However, it is not the agency’s intent to intervene in the day-to-day operations or strategic planning of credit unions.

The virtual examination team will deliver a report to the NCUA Board discussing possible alternative methods for remotely analyzing aspects of the financial and operational condition of a credit union by the end of 2020. The agency’s goal is to transform the examination and supervision program into a predominately virtual one within the next five to ten years for credit unions that are compatible with this approach.

 

Summary

Modernizing the NCUA’s systems and processes will reduce the burden on the credit union community and increase the effectiveness of the NCUA, without sacrificing safety and soundness. In order for these initiatives to be successful, the agency must have ongoing communication with stakeholders and continued transparency in our efforts. As these programs are implemented, agency staff will continue the burden of the supervisory process.

Please consult the NCUA’s website for additional information and ongoing status updates. Additionally, you can contact the NCUA at exammodernization@ncua.gov if you have questions, comments, or suggestions on these initiatives.