GAO: Room for improvement in NCUA supervision of credit unions

While credit unions’ assets grew and failures declined over the past 10 years, the inspector general at the National Credit Union Administration (NCUA) “commonly cited” weaknesses or failures in NCUA oversight as one of the causes for failures, leading the congressional watchdog to urge improvements in the agency’s oversight of the member-owned cooperatives.

From 2010 through 2020, 145 credit unions failed, causing more than $1.55 billion in losses to the National Credit Union Share Insurance Fund (NCUSIF), the Government Accountability Office (GAO) said in a report Thursday. The agency’s supervisory weaknesses plus emerging risks for credit unions during the COVID-19 pandemic “illustrate the importance of NCUA improving its oversight of credit unions,” the report states.

The GAO conducted a review of the NCUA’s material loss reviews (MLRs) in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). It said its objectives in this review was to examine credit union failures since 2010; and the NCUA’s use of supervisory information for deteriorating credit unions and its reporting on failures.

The report notes that the NCUA has taken some steps to make improvements, including developing new risk-monitoring tools. It also identifies ways for the agency to strengthen its analytical capabilities and “better position itself to execute timely and aggressive enforcement actions.”

The report notes, for example, that the NCUA places emphasis on the CAMEL composite ratings to guide its enforcement actions, but the GAO found that if one of the credit union’s component ratings (Capital Adequacy, Asset Quality, Management, Earnings, or Liquidity/Asset-Liability Management) is worse than the composite, that credit union is more likely to deteriorate or fail. “NCUA’s policies do not explicitly address how to more fully leverage the component ratings individually to determine an appropriate enforcement action,” the report states. “By more fully leveraging the additional predictive value of the CAMEL component ratings, NCUA could take earlier, targeted supervisory action to help address credit union risks and mitigate losses to the NCUSIF.”

The GAO also found that the NCUA did not always conduct post mortem reviews (13 of 44 were not completed as of April 2021) of certain failed credit unions (to determine causes for failure) and did not complete most reports (that is, 30 out of 44) in the required time frame. “NCUA’s policies and procedures do not specify which office should ensure that reports are done and issued on time,” the GAO said. “Documenting the responsible office would help ensure reviews are conducted and provide useful and timely information.”

The GAO’s recommendations for executive action, and to which the NCUA agreed, are:

  • The NCUA executive director should consider how to more fully leverage the information content from CAMEL component ratings into its composite ratings and informal and formal enforcement decisions, and update NCUA’s policies and procedures, as appropriate.
  • The executive director should take steps to improve the accuracy and reliability of supervisory data, such as by implementing the Modern Examination and Risk Identification Tool (MERIT) to readily aggregate supervisory data and incorporating all relevant data into the tool, including past administrative or enforcement actions. (Currently, supervisory tracking – such as tracking historical enforcement actions – is not included in the planned system but is planned for future releases.)
  • The executive director should document which NCUA office is responsible for ensuring completion of post mortem reports in the time frame required under NCUA policies and procedures and a process for compliance reviews by that office.

Regarding MERIT, the GAO noted that the NCUA was pilot-testing the new system this July, with training and implementation of the new tool anticipated to be completed by November. It said NCUA officials noted that training and implementation had been delayed because of the COVID-19 pandemic.