NCUA's Supervisory Priority Letter to Credit Unions
Hello, this is Samantha Shares.
This episode covers N C U A's
2025 Supervisory Priorities.
The following is an audio version
of Letter to Credit Unions 25-CU-01.
This podcast is educational
and is not legal advice.
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And now the Supervisory Priority Letter.
Dear Boards of Directors and
Chief Executive Officers:
This letter outlines the N C U A's
supervisory priorities and other updates
to the agency's 2025 examination program.
Our priorities focus on the areas
posing the highest risk to credit union
members, the credit union industry,
and the National Credit Union Share
Insurance Fund (Share Insurance Fund).
There continued to be signs of
financial stress on credit union
balance sheets during 2024.
Aggregate loan performance began
to deteriorate in 2022, and the
trend has continued through 2024.
The overall loan delinquency rate is
currently at its highest point since
year-end 2013, while the rolling 12-month
net charge-off rate is at its highest
point since the second quarter of 2012.
Additionally, the return on average
assets continues to experience pressure
from the interest rate environment and
provision for loan and lease loss expense.
Even considering these trends, the credit
union system remains stable and relatively
resilient against economic disruptions.
With that economic landscape in
mind, below are the N C U A's primary
areas of supervisory focus for 2025.
Supervisory Priorities for 2025
Credit Risk
Credit risk will remain a
supervisory priority for 2025.
Loan growth moderated during
2024 while overall delinquencies
and charge-offs increased.
Most notably, the performance
within credit card portfolios has
deteriorated much more rapidly than
other aspects of federally insured
credit union loan portfolios.
The current delinquency rate and
rolling 12-month net charge-off rate
for credit card loans both exceed the
peak that was reached during the global
financial crisis fifteen years ago.
Used vehicle loan performance
has also materially deteriorated.
The delinquency rate and rolling
12-month net charge-off rates for
used vehicle loans are currently
at the highest levels on record.
To address these matters, N C U A
examiners will continue to review
your credit union's lending and
related risk-management practices.
This priority will include reviewing the
sufficiency of your loan underwriting
standards, collection programs,
Allowance for Credit Losses reserves,
charge-off practices, management and
board reporting, and management of
any concentrations of credit risk.
To the extent possible, examiners
will also review your credit
union's third-party risk-management
practices when lending, servicing, or
collection functions are outsourced.
Moreover, it is important for your
credit union to work with borrowers
encountering financial difficulties.
These efforts are consistent with the
credit union system's statutory mission
of meeting the credit and savings needs of
members, especially those of modest means.
Accordingly, examiners will assess your
credit union's modification and workout
strategies for borrowers experiencing
financial difficulty, including assessing
whether your credit union's efforts were
reasonable and conducted with proper
controls and management oversight.
For more resources, refer to
the Examiner's Guide and the
following Letters to Credit Unions:
23-CU-05, Commercial Real Estate
Loan Accommodations and Workouts
23-CU-04, Update to Interagency Policy
Statement on Allowances for Credit Losses
14-CU-08, Home Equity Lines of Credit
Nearing Their End-of-Draw Period
10-CU-03, Concentration Risk
09-CU-19, Evaluating Residential Real
Estate Loan Modification Programs
07-CU-13, Evaluating
Third Party Relationships
03-CU-01, Loan Charge-off Guidance
91-CU-120, Interest Rate
Adjustment Errors for A R M Loans
Balance Sheet Management and
Risk to Earnings and Net Worth
Credit unions are exposed to various risks
affecting their earnings and net worth.
Among the most significant are
credit, liquidity, and market risk.
These risks are tied to the institution's
ability to manage its financial assets
and liabilities and have a direct
effect on earnings and net worth.
For credit unions, the primary market
risk element is interest rate risk.
Interest rate changes can affect
the income credit unions generate
from their lending and funding
activities, which can affect the credit
union's ability to build net worth.
Loan losses can also diminish a
credit union's earnings and net worth.
Over the last few years, the rising
interest rate environment increased
some credit unions' cost of funds
faster than the returns on loans and
investments, squeezing the net interest
marginâa key driver of earnings.
In 2023 and 2024, this increase in funding
costs put pressure on earnings until loan
and investment returns could catch up.
If interest rates continue to
decline, higher yielding loans
and investments are prone to
prepayment, which could accelerate
as rates drop, reducing interest
income from longer-duration assets.
For the last several quarters, net
interest margins have only slightly
exceeded operating expenses.
Any increase in operating expenses or
further decline in loan performance
could put earnings and net worth at risk.
In evaluating your credit union's
earnings and net worth risk-management
frameworks, examiners will weigh
the current and prospective sources
of earnings and the composition of
net worth relative to your credit
union's approved plans and thresholds.
This approach will help examiners focus
on trends in earnings and develop a
better understanding of concentration
risks for both earnings and net worth.
Also, examiners will continue to
consider the current and prospective
sources of liquidity compared to
funding needs to determine the
adequacy of your credit union's
liquidity risk-management framework.
Examiners will review your credit union's
policies, procedures, risk limits, and
evaluate the adequacy of your credit
union's risk-management framework relative
to its size, complexity, and risk profile.
Liquidity resources and guidance can be
found in the N C U A's Examiner's Guide
and the Liquidity Risk Resources webpage.
For interest rate risk-related resources,
refer to the Examiner's Guide and
the following regulatory guidance:
Letter to Credit Unions
22-CU-09, Updates to Interest
Rate Risk Supervisory Framework
Supervisory Letter 22-01, Updates to
Interest Rate Risk Supervisory Framework
Earnings resources and guidance
can be found in the N C U A's
Examiner's Guide and the following
Letters to Credit Unions:
09-CU-23, Reviewing Adequacy of Earnings
06-FCU-04, Evaluation of Earnings
For resources on net worth and capital
adequacy, refer to the following N C U A
Regulatory and Compliance Resources pages:
Risk-Based Capital
Capital Planning & Stress Testing
Net Worth Ratio & Prompt Corrective Action
Cybersecurity
Cybersecurity remains a top supervisory
priority as cyberattacks against all
industries, including credit unions
and the vendors they use, become
more frequent and sophisticated.
The risk of a cybersecurity
incident rises as dependence on
networks and technology increases.
A loss or compromise in confidentiality,
integrity, or availability of systems
or information may lead to fraud, as
well as financial and reputational loss.
It is thus crucial for your credit
union to manage its information
security programs and continuity of
operations plans proactively, and
to conduct ongoing due diligence
of your critical service providers.
In 2025, examiners will continue to use
the information security examination
procedures to assess whether your credit
union has implemented robust information
security programs to safeguard both
members and the credit union itself.
The N C U A will continue to support
credit unions' voluntary use of the
Automated Cybersecurity Evaluation Toolbox
to assess their cybersecurity maturity.
For access to more cybersecurity
information and resources, including
detailed information on examination
procedures, credit unions are
encouraged to visit the N C U A's
Cybersecurity Resources webpage.
These resources provide valuable insights
and guidance to help your credit union
strengthen its cybersecurity stance and
stay abreast of the latest developments.
As a reminder, your federally insured
credit union is required to report
cyber incidents to the N C U A within
72 hours after you reasonably believe a
reportable cyber incident has occurred.
This reporting includes notifying
the N C U A if a third-party
provider experiences a cyber
incident affecting your credit union.
More information can be found in N C
U A Letter to Credit Unions 23-CU-07,
Cyber Incident Notification Requirements.
Your credit union is also encouraged
to reference Appendix B to Part
748 â Guidance on Response Programs
for Unauthorized Access to Member
Information and Member Notice for
guidance on cyber incident response.
The N C U A urges your credit union's
board of directors to prioritize
cybersecurity as a top oversight
and governance responsibility, as
outlined in N C U A Letter to Credit
Unions 24-CU-02, Board of Director
Engagement in Cybersecurity Oversight.
Consumer Financial Protection
The N C U A will continue to
prioritize reviewing compliance
with consumer financial protection
laws and regulations during every
federal credit union examination.
In addition to reviewing any areas
specific to your credit union identified
during the risk-focused examination
scoping process, in 2025 examiners
will, in particular, assess your credit
union's compliance with the following
consumer financial protection areas:
Overdraft programs.
Examiners will continue a review of
credit union overdraft programs, including
policies, procedures, disclosures, fees,
account statements, member complaints,
internal reviews, and websites.
Fair lending.
Examiners will assess policies and
practices for identifying and mitigating
potential discrimination in residential
real estate valuation practices.
Home Mortgage Disclosure
Act and Regulation C.
Examiners will evaluate compliance
with Home Mortgage Disclosure
Act data collection and reporting
policies and practices, including
transaction testing, for credit
unions above the reporting threshold.
Military Lending Act.
Examiners will review compliance
with the Military Lending Act
requirements, including policies
and procedures, compliance
management systems, and checking
and monitoring for military status.
Electronic Fund Transfer
Act and Regulation E.
Examiners will assess policies
and procedures related to
payments and error resolution.
Other Updates
Exam Updates
In 2025, the N C U A will update its
exam flexibility initiative to provide
an extended exam cycle for credit
unions over $1 billion in assets where
the N C U A rated the credit union a
CAMELS composite 1 or 2 with no change
in C E O since the last examination.
These institutions will now be eligible
for a 12- to 16-month exam cycle.
Additionally, the extended exam
cycle for eligible federal credit
unions will be shortened from 14
to 20 months to 14 to 18 months.
The agency will continue conducting
the defined scope Small Credit Union
Exam Program in most federal credit
unions with assets of $50 million or
less, and risk-focused examination
procedures for all other credit unions.
Examiners will continue to perform
examination and supervision activities
onsite and offsite, as appropriate.
While new programs and evolving risks
related to third parties, technology,
and cybersecurity may receive additional
attention, your credit unions is
encouraged to review and maintain
fundamental controls over lending,
recordkeeping, and internal controls.
The N C U A also encourages your credit
union to remain aware of changing Bank
Secrecy Act, anti-money laundering, and
countering the financing of terrorism
regulatory requirements, as the federal
financial institution regulators
and the Financial Crimes Enforcement
Network continue to implement the
Anti-Money Laundering Act of 2020.
Minority Depository Institution
(M D I) Preservation Program
The N C U A recognizes the important
role that M D Is play in the credit union
system and in the daily lives of the
members they serve across the country.
The N C U A is committed to supporting
the ongoing success of M D Is, including
the need to support some M D Is more or
differently than other credit unions.
Examinations will consider the
unique strategies and member
needs of M D I credit unions.
Additionally, the N C U A will
continue to offer customized support
to credit unions with less than $100
million in assets and M D Is of all
asset sizes through its Small Credit
Union and M D I Support Program.
The N C U A recognizes the value
these institutions bring to members
in underserved communities by offering
access to safe, fair, and affordable
financial products and services.
If eligible, your credit union can
request assistance through your examiner,
regional office, or the Office of
Credit Union Resources and Expansion.
This assistance may be used to support the
board, supervisory committee, or managers
with a variety of credit union needs.
Conclusion
The N C U A will continue to
evolve and improve its methods to
supervise and support credit unions.
We are committed to productive
communication, adopting innovations,
such as recording official meetings
(exit conferences and joint
conferences), and implementing
efficient practices in our exam program.
Our primary objectivesâensuring a safe and
sound credit union system and protecting
credit union membersâcan only be fulfilled
when we adapt to the ever-changing
economic and technological landscape.
Please contact your N C U A examiner
or regional office if you have
any questions about the N C U A's
supervisory priorities for 2025.
This concludes the letter.
If your Credit union could use assistance
with your exam, reach out to Mark Treichel
on LinkedIn, or at mark Treichel dot com.
This is Samantha Shares and
we Thank you for listening.
