Credit union regulator’s funds earn ‘clean’ opinions – but big challenges loom in year ahead, report says

While four funds administered by the federal credit union regulator all earned unmodified or “clean” audit opinions for 2020, the agency’s inspector general still outlined a number of 2021 challenges for credit unions that could have an impact on continuing that audit performance, according to a report issued Tuesday.

In making the announcement, the National Credit Union Administration (NCUA) said its auditor, KPMG LLP, issued the unmodified opinions for the National Credit Union Share Insurance Fund (NCUSIF), the agency’s operating fund, the Central Liquidity Facility (CLF), and the Community Development Revolving Loan Fund (CFRLF).

The NCUSIF is the fund that insures savings of members in their credit unions; the operating fund is essentially the pool of money that funds agency operations; the CLF aims to meet liquidity needs of credit unions that are its members (similar to how the Federal Reserve’s discount window operates); the CDRLF provides financial support in the form of awards to low-income credit unions (LICUs).

In issuing the audit opinions, the agency’s office of inspector general (OIG) also outlined as the major challenges in 2021 for credit unions (and the funds) to be: cyber threats, technology-driven changes to the financial landscape, interest-rate risk, membership trends, and a recovery from the coronavirus crisis.

“We believe the economy and credit unions’ recovery from the COVID-19 pandemic will be the NCUA’s greatest management challenge going forward in 2021 and possibly beyond,” the OIG report states.

“Even if the economy continues to recover as expected, the operating environment for credit unions over the next two years could prove to be more difficult than in prior years, and credit union performance could deteriorate,” the report adds. “Credit unions should plan for a range of economic outcomes that could affect their performance and resource needs.”

In the other areas, the report notes:

Cyber threats: “Credit unions’ increasing use of technology exposes the credit union system to increasing cyber-attacks. Specifically, malware, ransomware, distributed denial of service (DDOS) attacks, and other forms of cyber intrusion affect credit unions of all sizes and will continue to require ongoing measures for containment,” and pose significant dangers to the safety and soundness of credit unions, according to the report. The report urges credit unions to continue to harden, monitor, and enhance the security of their systems.

Technology changes: In addition to products that pose competitive challenges to credit unions by mimicking deposit and loan accounts (mobile payment systems, pre-paid shopping cards, peer-to-peer lending), credit unions will also face challenges from financial technology (fintech) companies in underwriting and lending, the report asserts. “Fintech companies may be able to automate these services at a cost below levels associated with more traditional financial institutions but may not be subject to the same regulations and safeguards that credit unions and other traditional financial institutions face. As these companies and products gain popularity, credit unions may have to be more active in marketing their products and services and rethink their business models.”

Interest-rate risk (IRR): NCUA and credit unions will need to focus on managing and mitigating interest-rate risk, the report states. Deposit rates have fallen since the start of 2020 and will likely remain low, pressuring credit unions to offer competitive deposit rates to avoid deposit attrition. Meanwhile, credit unions that rely primarily on investment income may find their net income remaining low or falling.

Membership: NCUA and credit unions face the challenge of an aging demographic, the report states, “and unfortunately, these same membership concerns continue.” The report claims that although overall credit union membership continues to grow strongly, close to half of federally insured credit unions had fewer members at the end of the third quarter of 2020 than a year earlier. “All credit unions need to consider whether their product mix is consistent with their members’ needs and demographic profile,” the report states.

NCUA’s Four Funds Receive Clean 2020 Audit Opinions