Risk-Based Examination Scheduling Policy

16-CU-12 / December 2016
Risk-Based Examination Scheduling Policy
Subject
Examination Program
Status
Active
To
Federally Insured Credit Unions

Dear Board of Directors and Chief Executive Officer:

On November 17, 2016, the National Credit Union Administration (NCUA) Board approved a 2017 budget. The 2017 budget includes examination scheduling policy and supervision process changes recommended by NCUA’s Exam Flexibility Initiative (EFI) internal working group. The adopted changes outlined in this letter become effective on January 1, 2017. The changes will allow NCUA to:

  • Provide more flexibility to both address risk and be more responsive during economic downturns;
  • Improve coordination with state supervisors to better align with respective state scheduling practices that largely range between 12 and 18 months;
  • Increase efficiency through joint examinations, enhanced exam planning, and data sharing; and
  • Better address numerous risk factors and priorities using available resources, without compromising the safety and soundness of credit unions.

The EFI internal working group also made recommendations to improve examination efficiency, by requiring more deliberate examination preplanning by examiners.

Note that the changes to examination and supervision policies discussed below do not limit NCUA’s authority to examine any federally insured credit union as frequently as the agency deems necessary. NCUA will continue to consider financial trends, risks and other facts or circumstances to determine if a more frequent examination or supervision contact is required on a case-by-case basis.

2017 Changes to Permit an Extended Examination Cycle

NCUA will adopt changes to the examination cycles for both federal credit unions and federally insured state charted credit unions as follows:

1. Federal Credit Unions

Examinations for those federal credit unions meeting eligibility requirements for an extended cycle will begin between 14 and 20 months from the prior examination completion date. Examinations for all other federal credit unions will begin between 8 and 12 months from the prior examination completion date.

A federal credit union is eligible for an extended examination cycle if it meets all of the following criteria:

  • Assets less than $1 billion;
  • CAMEL code 1 or 2, in both the composite rating and the management component rating;
  • “Well capitalized” under prompt corrective action (PCA) regulations;
  • No outstanding documents of resolution (DOR) items related to significant recordkeeping deficiencies; and
  • Not operating under a formal or informal enforcement or administrative order, such as a cease and desist order (C&D), letter of understanding and agreement (LUA), preliminary warning letter (PWL), or a PCA directive.

Please note that small credit unions with limited segregation of duties that are otherwise eligible for an extended exam cycle may receive more frequent examinations on a random sample basis.

NCUA anticipates a full transition to this extended examination cycle for eligible credit unions within two years. The agency will make best efforts to operate within the exam cycle timeframes noted above. However, some credit unions may receive examinations earlier than the timeframes noted above during the 2017 transition period.

2. Federally Insured State-Chartered Credit Unions

Federally insured state-chartered credit unions meeting any one of the following three criteria will receive NCUA exams that will begin between 8 and 12 months from the prior examination completion date:

  • Assets greater than $1 billion;
  • Composite NCUA CAMEL code 4 or 5 with assets greater than $50 million; or
  • Composite NCUA CAMEL code 3 with assets greater than $250 million.

All other federally insured state-chartered credit unions will receive an NCUA examination based on risk, but no less frequently than once every five years.

NCUA will make every effort to conduct examinations of federally insured state-chartered credit unions jointly with the appropriate state supervisory authority. Only when a joint examination cannot be coordinated would NCUA conduct an independent insurance review.

A joint NCUA-state supervisory authority working group is being formed to evaluate and recommend further changes to the agency’s examination program for federally insured, state-chartered credit unions. The working group’s goals in particular are to:

  • Consider ways to improve coordination and scheduling of joint exams;
  • Reduce any unnecessary redundancy related to examination and supervision approaches; and
  • Evaluate the appropriateness and feasibility of adopting an alternating examination approach for the supervision of federally insured state chartered credit unions.

2017 Changes to Examination Procedures

NCUA will continue to conduct examinations for federal credit unions with less than $30 million in assets using NCUA’s Small Credit Union Examination Procedures, and use risk-focused examination for larger credit unions. NCUA field staff continue to have discretion to use the Small Credit Union Examination Procedures for credit unions with assets between $30 million and $50 million.

However, NCUA will implement the following improvements to examination procedures in 2017:

  • Providing credit unions with at least four weeks advanced notice when scheduling the examination (unless concerns related to the credit union warrant shorter or no notice, which would require NCUA management prior approval to waive the four week advance notice requirement);
  • Improving coordination of document requests tailored to a credit union’s risk profile and product offerings; and
  • Separating and emphasizing pre-examination planning and scoping from the beginning of onsite examination work.

The above improvements address concerns documented by the EFI internal working group, and should help reduce burden on credit unions and produce more effective and efficient examinations. In particular, NCUA will emphasize the importance of timely, ongoing and open communications between examiners and credit union management and officials. We will also continue to focus training efforts on the consistent application of examination standards.

Conclusion

These Board-approved 2017 examination scheduling policy changes will permit NCUA to allocate our resources to higher risk areas, be more responsive to the needs of individual credit unions, manage resources more efficiently, and reduce the examination burden on credit unions. NCUA will provide an appropriate level of supervision, including more frequent on-site contacts, for credit unions exhibiting adverse economic trends or other risk factors, or where off-site monitoring systems indicate higher relative risk. NCUA will maintain regulatory safeguards to protect the credit union system, the deposits of credit union members, and the National Credit Union Share Insurance Fund.

If you have any questions regarding examination scheduling for your credit union, please contact your regional office.



Sincerely,


/s/


Rick Metsger
Chairman