NCUA Supervision & Examination (Ch. 1)

Question 1

How does NCUA’s examination program differ from an audit?

Answer 1

The purpose of the exam is to determine areas of risk to the credit union’s operational and financial health.

• 5300 Call Report
• Compliance With BSA
• Supervisory Committee Audit
• Current & Potential Risk

Question 2

What are the seven types of risk that NCUA examines for?

Answer 2

1. Credit Risk - Current and prospective risk to
   earnings or capital.
2. Liquidity Risk - Risk that the credit union cannot meet its obligations without incurring significant costs and/or
   unacceptable losses.
3. Interest Rate Risk - Risk that changes in market rates
   will adversely affect a credit union’s capital and earnings.
4. Transaction Risk (fraud/operating risk) - Risk to capital or earnings from fraud or error that results in an inability to deliver products or services.
5. Compliance Risk - Risk caused by violations of laws, rules, regulations, internal policies and procedure, and ethical standards.
6. Strategic Risk - Risk due to adverse business decisions, improper implementation of decisions of lack or responsiveness to industry changes.
7. Reputation Risk - Risk to the credit union arising from
   negative public opinion or perception.

Question 3

What are the various administrative tools available to NCUA?

Answer 3

1. Document of Resolution (DOR) - Formally documents plans for the credit union to take in order to reduce areas of unacceptable risk. Examiners are required to follow up with the credit union on outstanding DOR items within 120 days after the timeframe for completion has passed.
2. Letters of Understanding and Agreement - Issued when the credit union has not adequately responded to less severe actions, such as a DOR
3. Cease & Desist Orders - Injuction when the credit union has engaged in unsafe/unsound practices or violations of rule or law
4. Civil money penalties, prohibition orders, removing credit union officials

Question 4

5 components of the CAMEL system

Answer 4

C - CAPITAL ADEQUACY: Amount and quality of capital relative to current and prospective risk profile.

A - ASSET QUALITY: Review of fixed assets, loans, and investments, including: (1) management’s control of credit risk; (2) credit union’s allowance for loan and lease losses policy; (3) quality of loan underwriting policies & procedures; (4) internal controls in place to review new and existing loan programs; (5) existence of significant loan concentrations; (6) the appropriateness of investment policies & practices

M - MANAGEMENT: Evaluation of whether management is operating under sound business practices

E - EARNINGS: Past and current earnings, as well as future earnings

L - LIQUIDITY & ASSET-LIABILITY MANAGEMENT: Sufficient liquidity to meet the credit union’s financial
obligations

Question 5

What is the difference between NCUA and CFPB authority when it comes to examining credit unions.

Answer 5

• NCUA maintains examination authority over all credit unions for safety and soundness purposes
• For compliance with consumer regulations, CFPB has direct examination authority for credit unions with more than $10 billion in assets
• For federal credit unions with $10 billion or less in assets, NCUA will examine for both compliance with consumer regulations and overall safety and soundness
• For state-chartered credit unions that are federally insured and have $10 billion or less in assets, NCUA will examine for safety and soundness and the state regulator will examine for compliance with consumer regulations
• All credit unions are subject to the CFPB’s regulations, even if they are examined by a different regulator