NCUA Examiners to Expand Review of Overdraft Programs

Agency chairman reveals supervisory policies for 2023 in letter to credit unions.

As examiners visit credit unions this year, their consumer protection reviews will include expanded examinations of overdraft policies—a controversial issue in the financial services industry.

“In 2023, examiners will expand the review of credit unions’ overdraft programs, including website advertising, balance calculation methods, and settlement processes,” NCUA board Chairman Todd Harper wrote, in a letter to credit unions this week.

Each year, the NCUA board chairman outlines the agency’s supervisory policies, with Harper releasing this year’s letter Wednesday.

In his letter, Harper wrote that the NCUA will conduct examinations and supervision both onsite and offsite. He added that the agency’s exam flexibility initiative will continue this year, with certain credit unions qualifying for an extended exam cycle.

The agency also will continue its Small Credit Union Exam Program for credit unions with assets under $50 million, with examiners implementing the agency’s risk-focused examination procedures.

Overdraft Programs at the Forefront

Discussing overdraft policies, Harper said that last year, examiners requested information about credit unions’ programs. This year, examiners will evaluate any changes that credit unions have made to their overdraft programs to address consumer compliance risk and potential consumer harm from any unanticipated fees.

Harper has made it clear that he believes many overdraft programs do not adequately assist members. President Biden has said he wants regulators to attack “junk fees” that financial institutions and others charge. And the CFPB has signaled that it too may issue rules governing overdraft programs.

As the lone Biden appointee on the board, Democrat Harper likely does not currently have the votes for any type of overdraft rule. However, that could change this year since the term of Republican board member Rodney Hood is set to expire in August. At that time, Biden will be able to nominate a second Democrat to serve on the three-member board.

Climate Risk and Fair Lending Policies

Harper wrote further that examiners will continue to review credit union compliance with Flood Disaster Protection Act requirements, as the agency continues to develop an understanding of climate risks to credit unions and members. 

In their consumer protection exams, NCUA officials also will evaluate a credit union’s fair lending policies, including a review of residential real estate appraisals for any bias. A Biden Administration interagency task force last year reported continuing problems with racial bias in appraisals. 

Additionally, examiners will review credit union compliance with the Truth in Lending Act and the Fair Credit Reporting Act. 

What Else Does the Letter Cover?

Harper further identified several other areas on which examiners are expected to focus:

Interest Rate Risk

The sharp increase in interest rates has amplified market risks because a credit union’s assets and liabilities do not reprice equally, potentially impacting net economic values and projected earnings, the chairman wrote.

With the April addition of Sensitivity to Market Risk, or the “S” component of the CAMELS rating system, the agency formalized the separation of interest rate risk from liquidity risk.

Liquidity Risk

Higher interest rates have caused a slowdown in prepayments for some loans and investment holdings, which has resulted in reduced cashflows.

“In evaluating the “L” component of the CAMELS rating to determine the adequacy of your credit union’s liquidity risk management framework, examiners will consider the current and prospective sources of liquidity compared to funding needs,” Harper wrote.

Credit Risk

The letter notes that with high inflation and rising interest rates, credit union members are feeling the pinch. High inflation could result in increased unemployment rates and higher loan repayments for borrowers.

Harper said that examiners will review existing lending programs and any adjustments credit unions may have made to address the issue, writing, “NCUA examiners will carefully consider all factors in evaluating your credit union’s efforts to provide relief for borrowers, including whether the efforts were reasonable and conducted with proper controls and management oversight.”

Fraud Prevention and Detection

This year, the NCUA will implement a management questionnaire intended to enhance identification of fraud problems, supervisory concerns or other risks. Harper said that fraud risks remain elevated.

Information Security (Cybersecurity)

“Cybersecurity risks remain a significant, persistent, and ever-evolving threat to the financial system,” Harper wrote. “Credit union technology-related operating environments are increasing in complexity. Your credit union can protect itself with a cybersecurity program that evolves and adapts to the changing threat environment.”

Succession Planning

Harper stated that succession planning continues to be an issue in the credit union community, and specifically that a credit union’s failure to plan for the transition of its management and board “could come with high costs.”

While examiners will request information about a credit union’s succession planning, the NCUA will not sanction credit unions for a lack of a succession plan.

Other Issues

The agency will continue its Small Credit Union and Depositor Institutions support program, according to Harper.

“Credit unions with less than $100 million in assets and MDIs are uniquely positioned to improve the financial well-being of underserved communities by offering their members access to safe, fair, and affordable credit and other financial services and products,” the letter reads.

He added that the agency has developed MDI-specific exam procedures to guide examiners.

The NCUA also will update its post-examination survey to continue seeking feedback from credit unions. Federal credit unions also may record their exam exit meetings as long as they comply with applicable laws and the NCUA is given a copy of the recording.

Board Vice Chairman Kyle Hauptman has urged the agency and credit unions to record their exams.