NCUA’s Harper: As Fraud Increases, Onsite Examinations Needed

Agency board meeting focuses on need for in-person examinations, future of the Central Liquidity Facility.

Saying that examiners have discovered problems at credit unions as they return to onsite exams, NCUA Chairman Todd Harper warned Thursday that the agency’s travel budget must increase to accommodate the need for in-person visits.

“As examiners return onsite, they have found an increase in recordkeeping deficiencies, problems with internal controls, and instances of fraud,” Harper said at the agency board’s monthly meeting.

The NCUA staff has proposed an operating budget of $350 million next year, which represents a 9.6% increase over this year’s budget. The proposal includes a travel budget of $23 million, a $5 million boost.

Response From Credit Union Groups

Credit union trade groups have criticized the agency’s budget. Among other issues, they contend that the offsite examinations that were conducted during the pandemic demonstrate that examiners can do an effective job remotely.

However, Harper said that during the first three quarters of this year, four credit unions failed—causing about $7 million in losses.

He noted that fraud was a contributing factor in all of the cases, saying, “Even though we learned during the pandemic that many more of our examination procedures can be completed offsite, it is important that examiners go into credit unions to examine documents, ask questions, interact with staff, and review internal controls.”

“So, as the NCUA Board considers the 2023–2024 budget,” he added, “we must ensure that our efforts to be penny-wise in examinations don’t ultimately result in being pound-foolish when it comes to the strength and stability of the Share Insurance Fund.”

While not commenting on the budget, NCUA board member Rodney Hood agreed that it is important for examiners to return on-site.

The NCUA has not approved a 2023 budget yet; it may be considered at the board’s December meeting.

Future of the Central Liquidity Facility

On another issue, board members renewed their plea for Congress to extend pandemic-related changes to the agency’s Central Liquidity Facility (CLF).

As part of pandemic-related legislation, Congress allowed corporate credit unions to become agent-members for groups of credit unions. Without that agent membership, credit unions with less than $250 million in assets will be much less likely to have access to a federal liquidity backstop when they need it, board members have said.

Harper noted specifically that interest rate and liquidity risk will remain a crucial issue during the rest of 2022 and in 2023.

“Given the stress we are already seeing in financial institutions, the credit union system, financial markets, and economy, now is the time to ensure that the system has the strongest possible liquidity shock absorber,” he stated.

Board member Kyle Hauptman said that, if Congress does not extend the CLF provisions, it will result in a $9.7 billion reduction in reserve liquidity for the credit union system, adding, “That’s a $9.7 billion buffer between the credit union system and the American taxpayer.”

The House included an extension of the CLF provisions in its version of the defense authorization bill, which is considered must-pass legislation. The Senate, however, has not yet considered its own version of the defense bill.