Remember when you were in high school, and a teacher told you what a final exam would cover? If you were smart, you took copious notes and then used them as a study guide.

Well, last month National Credit Union Administration Chairman Todd Harper portrayed that high school teacher, sending credit unions a laundry list of what to expect when examiners show up. Then he elaborated on the list during a presentation earlier this month at the Brookings Institution.

If you’re smart, you’ll pay attention.

From consumer protection to liquidity risks, Harper outlined the issues that the NCUA has identified as being worthy of its attention.

Harper wrote in his letter that the credit union system has remained strong during the past year and has been relatively resilient against economic disruptions, the rise in interest rates and liquidity risks that resulted in an increase in the number of composite CAMELS code 3, 4, and 5 credit unions.

“In recent quarters, the NCUA has also seen growing signs of financial strain on credit union balance sheets and in household budgets, along with growing consumer financial stress,” Harper said in his Brookings Institution presentation.

In his Brookings speech, he said, “The NCUA, therefore, continues to watch credit union performance closely and urges credit unions to remain diligent in managing the potential risks on their balance sheets and when monitoring economic conditions and the interest rate environment.”

Today’s economic environment requires active, not passive, management by credit unions, Harper said: “We all need to be paying attention.”

In case you didn’t read Harper’s letter or watch his Brookings speech online, here is an outline of the NCUA’s supervisory priorities for the year.

Credit risk

Many people are having problems repaying their debts. That is nothing new. But Harper wrote in his letter that “inflation, high interest rates and borrowing costs, declining savings levels, and the end of pandemic-era stimulus and relief programs have negatively impacted some members’ ability to repay their debts.”

In addition, the NCUA has said that the resumption of student loan payments by borrowers has put those members under even more strain. Harper said that credit union loan portfolios expanded faster during 2022 than any year in the past 30 years.

Agency examiners will review existing lending programs’ soundness and credit risk management practices. At the same time, they will consider all factors in evaluating a credit union’s efforts to provide relief for borrowers.

Interest rate risk

The tightening of U.S. monetary policy during the past two years has increased the importance of interest rate risk management, Harper wrote. He said that examiners will evaluate whether a credit union manages its interest rate risk and the related risks to capital, asset quality, earnings, and liquidity.

Examiners will review credit union interest rate risk efforts, including making sure that credit unions are able to measure their interest rate risk and that results are communicated to key decision makers.

Liquidity risk

Increased uncertainty about interest rates and economic conditions means that credit unions will have to maintain strong liquidity risk management practices in 2024, according to Harper. “Increased liquidity risk and uncertainty heighten the need for credit unions to prepare for contingency funding needs,” he wrote.

Harper said that examiners will evaluate the adequacy of a credit union’s “liquidity risk management framework relative to its size, complexity, and risk profile.”

In his Brookings speech, Harper lamented the expiration of pandemic-related changes to the NCUA Central Liquidity Facility and renewed his call for Congress to reinstitute them.

“In this current economic environment of heightened interest rates and liquidity risk for credit unions, including several with over $1 billion in assets, the role of the NCUA’s Central Liquidity Facility as a liquidity backstop has taken on greater importance,” Harper told those attending the Brookings session.

As a result, membership in the Central Liquidity Facility declined from 3,990 consumer credit unions to 399 consumer credit unions, according to Harper. He added that 3,222 credit unions with less than $250 million in assets lost access to the facility. “This development comes at a time when the need for the Central Liquidity Facility’s role as a liquidity backstop has grown,” Harper said.

NCUA board members have joined Harper in his call for Congress to renew the now-expired provisions, but so far Congress has not acted.

Information security

NCUA board members have said that worries about cybersecurity threats keep them up at night. And so, Harper listed cybersecurity as a supervisory priority for 2024.

“The evolving cybersecurity threat landscape poses persistent risks to credit unions,” Harper wrote in his letter. “As credit union technology-related operating environments become ever more complex, it is crucial to establish a cybersecurity program that can adapt and evolve to counter these threats effectively.”

Examiners will assess whether credit unions have implemented a “robust” information security program to safeguard members and credit unions, he wrote.

Harper also reminded credit unions that the NCUA last year implemented a new Cyber Incident Notification Reporting Rule, which requires credit unions to notify the NCUA within 72 hours after a cyber incident has occurred.

“Credit unions are strongly advised to maintain a high level of vigilance and continually enhance their ability to respond to evolving cybersecurity threats,” Harper wrote.

Consumer financial protection

For the past couple of years, Harper, as chairman, has pushed the NCUA to increase its exam focus on consumer financial protection. However, the two Republicans who made up the board’s majority, Kyle Hauptman and Rodney Hood, were skeptical of such an idea.

Credit union trade groups generally have said that the NCUA should concentrate on safety and soundness issues at credit unions. Consumer groups, on the other hand, have supported Biden Administration efforts to increase and improve consumer protection efforts.

Hood, whose term expired in August, has left the board. He was replaced by Democrat Tanya Otsuka, who made it clear during the January NCUA board meeting that she agrees with Harper. Credit unions can expect an increased focus on consumer financial protection enforcement soon.

In his letter, Harper explained how the agency decided which consumer protection areas examiners should review now: “To determine areas of supervisory focus, the NCUA considers trends in violations identified through examinations and member complaints, emerging issues, and any recent changes to regulatory requirements.”

Examiners will review credit union policies and practices for redlining, marketing, and price discrimination risks. In auto lending, the agency will review disclosures, policies, and practices to ensure compliance with the Truth in Lending Act.

The agency intends to increase the number and focus of its fair lending exams and will continue to evaluate credit union compliance with flood insurance rules, according to Harper.

In his speech at Brookings, Harper said the agency is working on a proposal to require credit unions with more than $1 billion in assets to report their income from overdraft and nonsufficient funds fees on their call report. Harper already had written in his letter that, in reviewing overdraft programs, examiners will focus on website advertising, balance calculation methods and settlement processes.

The NCUA is not the only federal agency reviewing overdraft policies at credit unions and banks. The Consumer Financial Protection Bureau recently issued a proposed rule that would allow the bureau to regulate overdraft programs at the largest financial institutions.

Other areas

Harper said that Bank Secrecy Act compliance continues to be a supervisory interest for the NCUA. “A credit union’s deficiency in or failure to comply with the BSA’s programmatic, recordkeeping, and reporting requirements can pose a significant risk to the institution, its members, and the Share Insurance Fund,” he wrote. “Credit unions play an important role in safeguarding our financial system and must remain vigilant in maintaining and updating their BSA policies, procedures, programs, and controls.”

Harper wrote that the NCUA remains committed to adopting innovations and implementing efficient practices in its exam program: “Our top objective of ensuring a safe and sound credit union system that protects credit union members can only be fulfilled when we adapt to the ever-changing economic and technological landscape.”

The NCUA will continue to conduct onsite and offsite examination activities, according to Harper. He added that examiners may be able to conduct some examination activity offsite when it can be conducted efficiently and effectively at credit unions that can accommodate offsite work.

The NCUA remains committed to supporting and preserving small credit unions and minority depository institutions through a specific support program for those institutions, Harper stressed.

“Small credit unions and MDIs face unique risks and hurdles, and the NCUA will continue to offer custom support to eligible credit unions,” he wrote, adding that credit unions may request the tailored assistance by contacting their regional office or examiner. “The NCUA recognizes the value small and MDI credit unions bring to members in underserved communities by offering access to safe, fair, and affordable loans and other financial products and services.”

The agency’s exam flexibility initiative will continue this year, Harper explained. The initiative provides an extended exam cycle for certain credit unions. The NCUA also will continue its Small Credit Union exam program at federal credit unions with assets of $50 million or less. For all other credit unions, NCUA examiners will use the agency’s risk-focused examination procedures.