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Concentration Risks, Examinations Highlighted in NCUA OIG Letter
WASHINGTON (6/27/13)--There are currently 19 recommendations by the National Credit Union Administration  Office of Inspector General (OIG) that are open and unimplemented and, according to the OIG,  the top three in importance concern issues regarding concentration risks and examination procedures.

The NCUA OIG identified the unimplemented or partially unimplemented recommendations in response to a June 17 inquiry by Rep. Darrell Issa (R-Calif.), who heads the House Oversight and Government Reform Committee.

Named number one on the OIG's list of priorities is its recommendation that the NCUA determine whether to propose or change regulatory guidance to establish limits or other controls for concentrations that pose "an unacceptable safety and soundness risk," and to determine an appropriate range of examiner response to high risk concentrations.

The inspector general's letter notes that the agency agreed with the recommendation. The NCUA has provided training to examiners and issued a Supervisory Letter to credit unions (see resource link)  advising them how to evaluate and manage concentration risk.  

"NCUA further anticipates issuing--later in 2013--a proposed revision to update the risk-based net worth component of its current Prompt Corrective Action (PCA) regulation. In this regard, the agency has created a new taskforce to propose revisions to PCA and, to achieve this end, the taskforce is monitoring closely similar rulemaking in the banking industry," the letter notes.

Second on the open-actions list is an OIG recommendation for the NCUA to develop a "more specific process, such as trigger reports or standards, so examiners can better identify, analyze, and monitor loan concentrations during exams, as well as between exams."

The OIG notes that the NCUA has "current and future plans" to update its Automated Integrated Regulatory Examination Software (AIRES) to better guide examiners to the review of concentration risk.

To date, the OIG says, the agency has "enhanced the quarterly regional risk reports to better detect excessive growth of various loan investment products; updated the national risk reports to identify concentration risk, including excess levels in products such as real estate and (member business loans) and issued credit union and supervisory guidance addressing concentration risk and how to mitigate it."  

Final on the top three list is OIG's recommendation to require that examiners document and retain the "specific procedures and analysis performed during their quarterly review of the 5300 Call Reports" and then forward the analysis should then to the Supervisory Examiner for review.

Thus far, the OIG told Issa, the agency has added a worksheet to exam.xls within AIRES to help identify increasing levels of concentration. Further, the March 31, 2013, AIRES update included risk.xls, which is an excel workbook that provides a review for several key risk areas and helps determine appropriate risk-based examination scope steps.

"As with the first open recommendation noted above, we are continuing to monitor the agency's implementation efforts in this area as we plan and conduct current and future audits and (material loss reviews)," the letter concludes.


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