Letters to Credit Unions No.: 17-CU-08 Interagency Supervisory Guidance for Institutions Affected by a Major Disaster
NCUA issued this Letter to Credit Unions (LTCU) to provide federally insured credit unions (FICUs) with a copy of guidance given to all NCUA examiners regarding supervising and examining credit unions affected by a major disaster. Specifically, the guidance establishes practices for NCUA examiners as they assess the financial and operational condition of FICUs that have been directly affected by an event that results in a Presidential declaration of a major disaster. NCUA’s guidance stresses the importance of examiner flexibility in addressing issues faced by affected institutions and the critical need to accurately portray the financial and operating condition of those institutions.
Some highlights from the guidance include:
- Reminder to examiners that a disaster can affect not just FICUs physically located in the disaster zone, but also FICUs with loans or investments with individuals or entities located in the disaster zone.
- Direction that examiners give particular attention to the FICU management’s response plans and the reasonableness and practicality of those plans given the nature of the particular disaster and disruption. While the assessment of the management response may warrant a lower CAMEL rating, the supervisory response to the lower rating should consider the extent to which the disaster is causing the weaknesses in response.
- Instructions for examiners to expect management at affected FICUs to conduct initial risk assessments reflecting management’s best estimate of the institution’s asset quality, given the prevailing economic conditions and explaining the disaster’s implications on earnings and capital, as well as its effect on funding, liquidity, operations, and sensitivity to market risk.
- Reminder that capital adequacy may suffer as a result of an influx of deposits from insurance funds or other sources and the FICU should have a plan to address the resulting decline in net worth.
- Instructions to sample new loans (loans made after the disaster) to ensure underwriting standards remain appropriate, while noting that there are legitimate reasons to have eased underwriting standards in the aftermath of a disaster.
The guidance notes elements of each of the CAMEL components that would be affected by a disaster. NCUA also refers examiners to guidance on evaluating compliance risk issued earlier this year.
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