NCUA Inspector General Outlines Main Challenges Facing Agency in 2023

Memo to NCUA board focuses on credit union chartering, third-party vendor authority, cybersecurity, diversity and more.

The NCUA’s Inspector General is auditing the agency’s chartering activities to determine whether efforts to streamline the process have made it easier for potential organizers to obtain charters, according to the IG’s annual list of the top management and performance challenges facing the agency this year.

In a memo to the NCUA board, IG James Hagen said the audit also will include an examination of how well the agency has informed possible organizers of the chartering process itself.

The NCUA board on Thursday approved a proposed rule that would streamline field of membership expansions by credit unions as well as simplify the application process for community-based credit unions.

Concerns Over Industry Consolidation

In his memo, Hagen said also that the NCUA should continue to be wary of industry consolidation.

“If current consolidation trends persist, there will be fewer credit unions in operation and those that remain will be considerably larger and more complex,” he wrote, adding that consolidation means the risks posed by individual institutions will become more significant to the Share Insurance Fund.

Third-Party Vendor Supervision

Hagen additionally said, once again, that since the NCUA lacks supervision powers over third-party vendors, the agency cannot accurately assess the actual risks in the credit union system.

“This regulatory blind spot leaves thousands of credit unions, millions of credit union members, and billions of dollars in assets potentially exposed to unnecessary risks,” the memo reads.

He added that the NCUA must currently obtain permission from CUSOs and third-party vendors before the agency can examine them, and that sometimes those vendors decline the request.

According to Hagen, the IG’s office conducted an audit to see if the agency has any authority over vendors, which, “concluded that despite the NCUA’s ability to conduct limited credit union service organization reviews, there is currently nothing in the Federal Credit Union Act that provides the NCUA with the authority to supervise credit union service organizations and vendors to hold them accountable for unsafe and unsound practices that have direct and lasting impact on the credit unions they serve.”

Congress would have to enact legislation to provide the agency with those powers and so far has not done so, with NCUA Chairman Todd Harper renewing the request at the agency board meeting Thursday.

Managing Interest Rate Risk and Liquidity Risk

Hagen wrote that in a weak economy, with rising interest rates, credit unions may face reduced loan demand and higher credit risk, stating, “Credit unions will need to prepare for the possibility of a downturn. Their ability to manage and mitigate interest rate risk is important to their success.”

High levels of interest rate risk can also affect a credit union’s liquidity risks, according to the IG.

Separately, on Wednesday, the three NCUA board members sent a letter to Senate Banking Committee Chairman Sen. Sherrod Brown, D-Ohio, asking him to consider legislation that would restore pandemic-related temporary changes that Congress made to the agency’s Central Liquidity Facility.

“Legislative adjustments to the CLF would provide smaller federally insured credit unions with an important liquidity backstop and bolster the credit union system’s ability to respond to future financial emergencies,” they wrote, adding that the expiration of those previsions decreased the CLF’s borrowing ability by $10 billion.

Cybersecurity and IT Governance

The memo also said the credit union industry’s growing reliance on increasingly complex technology exposes the system to escalating cyberattacks, while noting that the agency has continued to enhance its information security examination program.

Hagen added that his office has contracted with the professional services firm CliftonLarsonAllen, LLP to assess how well the agency is preventing and detecting cyber threats.

That report is expected this Spring.

Supporting Diversity in the Credit Union Industry

Hagen additionally touched on the agency’s MDI program, which he said helps support institutions that serve the needs of racial minorities that historically have not had access to traditional financial services.

He noted further that he is pleased the NCUA will continue both its MDI and Small Credit Union support efforts, writing, “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 primary challenge for the agency, however, according to the IG, is to measure the effectiveness of those efforts.