NCUA's Supervisory Priority Letter to Credit Unions

Credit Union Regulatory Guidance Including: NCUA, CFPB, FDIC, OCC, FFIEC

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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. We are sponsored by Credit Union Exam Solutions Incorporated, whose team has over two hundred and Forty years of National Credit Union Administration experience. We assist our clients with N C U A so they save time and money. If you are worried about a recent, upcoming or in process N C U A examination, reach out to learn how they can assist at Mark Treichel DOT COM. Also check out our other podcast called With Flying Colors where we provide tips on how to achieve success with N C U A.

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 margin—a 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

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