Credit Union Exam Solutions Presents With Flying Colors

Speaker: Hey everyone, this
is Mark TriCal with another

episode of With Flying Colors.

Thinking back to when I started
this podcast and how I actually

discovered podcasts, it.

Was 2020 during the pandemic when I
started listening to podcasts after

having retired, and I followed a Vikings,
Minnesota Vikings podcast, a Minnesota

Timberwolves podcast, which led me to a.

Doing a search for consulting podcast.

'cause I was dip, gonna plan on dipping
my toe into the consulting world.

And I stumbled across a podcast
called Consulting Success.

And then I used a lot of self-education
via other podcasts for starting

the business and other things.

So anyway one of the podcasts that
I discovered early on was one of

the original podcasts out there,
one of the OGs, if you will.

Stuff you should know and stuff you
should know occasionally does live

podcast recordings across the country and
tongue in cheek hat tip to those guys.

I, we will be doing our first live podcast
type event as I'm about to get on a

cruise, the Florida QS cruise for 2026
with two of my team members, Steve Farr.

And Todd Miller, and we're gonna
be talking about a lot of things

NCA, everything you wanted to ask
NCA, but we're afraid to ask and

what we've seen in credit union
relationships over the last years.

And just before we took off, I'm
recording this, friday, January 16th.

A couple days ago, NCOA came out with
their supervisory priority letter, and

that's always one of our most downloaded
episodes when we get back to shore and

when we get back to, to where he reside.

Steve and Todd in that
instance are in Montana.

We're gonna record a podcast the
normal way by looking at our laptops

and bringing our own notes into it and
having some discussions relative to that.

But as a primer for that, I am recording
this on, as I said, Friday, January 16th.

We don't get back from our crews
until next week, and I'm going

to use this episode as a primer
for NCA supervisory priority.

Podcasts and we'll issue
this early next week.

And then after everybody gets settled
we're gonna take what we talked

through at, on the cruise and perhaps
maybe have some recordings from the

cruise if the situation warrants.

But we're gonna talk through that.

And and you'll hear both my thoughts,
Steve's thoughts, Todd's thoughts

on the priorities after digesting
it and discussing it with credit

union folks directly on the crews.

So with that N NCAA's letter on letter
to, and I'm getting texts saying I

need to check in and tell 'em that
I'm healthy, which I already did.

So anyway yeah, the cruise
is upon us, but I am.

Looking at N NCAA's
letter to credit unions.

Of course, they come out
with this every January.

They come out with it.

And as a reminder, as I've
discussed on other podcasts the

NCA chairman has the pen for this.

So when there are three board
members, the chair decide what

goes in this, sometimes they're
collaborative, other times they're not.

In this instance, there's no one
to collaborate with because there

is one board member Kyle Halman,
so he can put into this letter.

What he wants, which will explain
why he made a reference to the

agency's supervisory priorities
being consistent with the agency's

no regulation by enforcement policy.

This letter is meant to assist credit
unions as they plan for this year.

Now that no regulation policy to
me taking what it says, which.

In my opinion is a little convoluted
is to imply that you can, NCA

will only enforce regulations.

They won't import, enforce noten,
enforceable things like an examiner's

opinion like a letter to credit
union, and they have to link

everything back to a regulation.

However, of course, their loophole
that I've discussed in the past is that

safety and soundness is a ginormous.

Loophole that they can link anything to.

So it sounds really good.

And I'm glad to see the letter talks
about they're not gonna do that,

although we see it happen quite a bit.

And then it comes down to the credit
union deciding do I push back?

Or do I not push back now?

They also talked through and put
a positive spin on them being

wiser in using their resources.

Which is really just another way of
saying, Hey, we attacked our budget.

We got rid of 27% of our staff,
we got rid of a lot of talented

staff, and because of that we're
going to tailor our exam program.

Because we were required to by
the presidential executive order.

So he's being consistent with carrying
the water of the Trump administration.

And of course, it a
letter coming out on this.

Not a shocker.

When you see Todd Harper, former
NCH Chairman have the pen, you

see a lot of stuff on consumer
compliance, and I'll get into that.

But when you see Chairman Halman talk
about it, you always know he's gonna bring

something up about Bitcoin or stable coin.

Et cetera.

And they make a reference here too,
including the guide, the Guiding

and establishing National Innovation
for US Stable Coins Genius Act.

And it has a link to the Genius Act.

Stablecoin I'm curious to see what
kind of dialogue I have on the cruise

relative to stable coin and how that
might impact credit unions, whether

credit unions are getting into that,
whether they're fearful of what it's

gonna do to their ability to tap into
member shares, whether it's gonna.

Their ability to tap into, what shall
we say, the youth movement who are more

into stable coins than 80-year-old.

70-year-old, 60 year olds.

Pick a number.

But halman, that's his baby.

So of course, that baby got woven
into the supervisory priorities.

Why?

Because of Trump, because
the chair drives the agenda.

The chair dries this letter.

It also says, Hey, gives them the,
not the cop out, but the subtle nuance

that yeah, they just, because this is
what we say we're gonna do based on

your personal risk at your institution,
we may pivot and do other things.

Balance sheet management
is one broad category.

They talk about the fact that they
can look at and plan to look at Cecil.

They talk about how the
delinquency and charge offs are at.

10 year, what is it?

10 year the overall delinquency rate
within federal credit unions is at

its highest point in over a decade.

So clearly they're thinking that.

Something they need to watch.

That means that's something
that you need to watch.

And then of course when they issue these
letters, they're 4, 5, 6 pages long.

And then they have links to all sorts
of guidance, adding pages and pages.

And so under lending they make
reference to the commercial

real estate loan accommodations.

We've seen a lot of things on that.

We'll be talking about that on the cruise.

Update to interagency policy statement
on allowance for credit losses.

They're saying, Hey,
don't forget to do this.

And we're seeing that in
some of our contacts as well.

Home equity line of credits
nearing their end of drop period.

A letter to credit unions from oh
eight and that, so that goes back to

the great recession when NCAA had some
insurance fund losses and did some IG

audits on some West coast disasters, if
you will, that cost the insurance fund

money because of home equity loans that
weren't properly managed, which led to

that letter to credit unions coming up.

As always, evaluating
third party relationships.

That's their hat tip
to to indirect lending.

And they're linking that that letter to
credit unions, which, which is from 2013.

And then they go all back, all the way
back to 2001 loan charge off guidance.

And.

2003, supervisory letter
on concentration risk.

And concentration risk is
something that we've talked a

lot about on the podcast here.

We're gonna probably hit that pretty hard
on the cruise, and when we circle back

with Todd and Steve to talk through their
take on this letter after this week we'll

have a lot more details relative to that.

So again, this is a 10,000 foot level.

This is a mark.

Just read the letter, just printed it
off and is getting ready to put his

notes together for our first live ever.

Podcast on the cruise.

Sensitivity and market risk
and liquidity were all boiled

up into one major category.

And I've mentioned in the past that
at some junctures, NCA has listed

13 priorities in this letter.

And when everything's a
priority, nothing's a priority.

They've gotten better at scaling
it back, but one of the ways they

scale it back is instead of having.

A category of li liquidity
and a category on sensitivity.

They roll it into one, so they make
it a little bit more user friendly,

but they are basically pointing out
anything and everything that could

be a risk that they might look at.

So sensitivity and market risk and
liquidity, of course, a lot of credit

unions with with the influx of COVID money
and then going longer term on investments.

They make a hat tip to the fact that
the underwater situation, because

of interest rates has improved in
that arena, but they're still seeing

some liquidity issues, and we're
still seeing it in our conversations

with credit unions where NCUA is.

Pushing strategies to reduce NEV
pushing strategies to become more member

focused and less less borrowing focused,
or less non-member deposit focused.

Even though all of those sources
are legitimate tools, sometimes NCOA

will beat you up if you don't have
good corporate governance over that.

Earnings and ca capital adequacy is
always in the letter to credit unions.

And they highlight it here and they
indicate when evaluating a credit

union's earnings, NCA Examiners
will assess whether the current and

prospective sources of earnings are
sufficient to support capital targets

under a range of interest rates,
credit and liquidity stress scenario.

NSU examiners may focus on policies,
procedures, risk limits, and capital

planning practices, including how
credit unions incorporate interest

rate, risk funding constraints
and concentration risks into their

capital adequacy assessments.

We're seeing a lot of how much capital
is enough in our discussions with

credit unions and credit unions,
having a plan to show their board,

their members and their regulator why
the level that they have is adequate.

Sometimes NCA.

We'll say yes, you are well
capitalized, but we think you

have other risks in certain areas.

Sometimes in my opinion, they go on
rabbit holes that, that aren't justified.

I've seen that a lot this year in some
instances where their support in the

exam and their approach in the exam was
a little bit more, examiner opinion then

what Halman said at the top end that
they're only gonna regulate regulations.

So again stay tuned for more details
on our thoughts on that post cruise.

Interestingly, payment systems has been
highlighted as a standalone area, and

I've got a chart that I've put together.

That shows what topics have
been covered over certain years,

and there are perpetual topics
like loan quality, occasional.

Topics like like payment
systems and new topics which

come up every once in a while.

Payment systems was a
priority for NCUA in 2019.

In no, in 2022, and not before
that for the last four years,

and then not for 23, 24, 25.

And they're raising it again.

And the language here.

That they say is the payments environment
continues to evolve rapidly as consumer

expectations shift toward more efficient
methods that provide for immediate

access to funds and fund transfers.

Payment systems relying on increasingly
complex integrations of applications,

information systems interfaces, security
features, and internal controls.

This complexity introduces the
potential for added operational

and security risk exposures.

The risks of fraudulently induced
payments, elicit use of consumer data

and cybersecurity breaches targeting
payment systems continue to grow.

And CA examiners will continue
to assess whether credit unions

have effective governance.

Risk assessments, vendor management
and security frameworks in place to

support payment system operations.

Protect member data and ensure
resilience against fraud and cyber

threats inherent in payment ecosystems
for more payment systems Information,

refer to the retail payment systems
and the wholesale payment systems.

Topics in the F-F-I-E-C council's
IT exam handbook info base.

So there's another a hundred
pages that they link.

To this letter, and again, that the
fact that they're highlighting this

is that they're probably seeing some
situations where they're having to deal

with this and downgrade credit unions.

They're probably having discussions
in their skiffs, their their

secured secured compartmentalized
information facility where they talk

about top secret things that might
be happening by foreign players.

But obviously the fact that it's
risen its head for the first time.

Is that they're seeing some things.

They're hearing some things
and they're worried about this.

And of course, when you've got, when
you've got all these different systems

of pulling money here, pulling mon
money there the link back to the

third party due diligence it's all
intertwined and it all creates risk.

And it all layers onto the stresses
that you have in running your

credit union to keep your membership
safe and your members' funds safe.

And your regulator at bay.

It also has a section on fraud prevention
and detection and just quickly fraud

remains a pervasive and elevated
risk in the US financial system.

NCUA Examiners will continue to review
credit union efforts to deter and

detect fraud, including the adequacy
of internal controls and separation of

duties to guard against insider abuse.

In 2026, the agency will review its
examination procedures to ensure internal

control and other reviews areas align
with the ever-changing fraud landscape.

And CUA will continue to work with
key stakeholders in the credit

union, regulatory and law enforcement
communities to enhance fraud

prevention and detection awareness.

And capabilities where possible visit enc
Sue's Fraud Prevention resources page,

which again has hundreds and hundreds of
pages on it that they've incorporated by

reference into this letter to credit use.

So fraud wasn't brought up in 25, 24.

It wasn't 23, it wasn't 22,
it wasn't in 21, 20 or 19.

So it comes and it
goes, when does it come?

It comes when they have losses that
show fraud or they hear things that.

That show fraud.

They have a specific reference to
internal fraud management insider

abuse, which means that something
happened in some credit union that

led somebody to say either staff.

Or the board who might, they get
frustrated, they see a loss, they see a

review showing why something happened.

Then they weave it in here
with a subtle reference.

So clearly somewhere somebody
felt this needed to be raised or

they just said, Hey, we haven't
brought it up in three years.

Let's highlight it again.

I doubt that's the case.

I think it's the former, not the latter.

Compliance risk management.

This is probably the
biggest differentiation.

BSA is always in some way, shape, or
form highlighted as a separate item or

woven into consumer financial protection.

And over the Biden years, the
consumer financial protection area

was expanded on what was covered.

They did more fair lending exams.

They did sorts of all sorts
of things that were happening.

And by the way, the office that did
that, from my understanding, although

NCA has not been public about it, is
going to be merged into the region.

So they're getting, allegedly getting
rid of wands, allegedly getting rid of

cure, allegedly getting rid of consumer
oCFP, office of Consumer Financial

Protection and spinning that back up
into the regions, and you can argue

whether or not that makes sense or not.

You can argue whether or not they're
just doing it because they gutted

themselves and got rid of so many
people, but they're, I'm being

told, they're doing it nonetheless.

Eventually, hopefully they'll plan on
telling the credit union industry that.

But they've totally deemphasizing
consumer compliance and focusing

specifically on BSA and a ML type items.

And then Kyle Halman has always been
a champion since he showed up of

weaving something in here about the
appropriateness of recording your meetings

with NCUA, giving a copy of those to NCUA.

And of course, if you're a state charter,
checking with your state regulator

before recording because some states.

Some state banking, credit union
divisions don't allow that.

So that's my quick take on
this letter to credit unions.

I'm looking forward to getting on
stage and record not recording,

but having a live podcast with
interaction from the crowd.

With my team members, Steve and Todd.

And when we get back we'll have
some other things that we'll discuss

about how the crews went and the
interactions that we had there.

So again, as always, thanks for listening.

Thanks for watching.

This is Mark TriCal signing
off with flying colors.