CHICAGO - Credit unions in all regions of the country should be revisiting and thoroughly documenting the thinking behind all policies and procedures as state and federal regulators toughen the examination process, according to one CPA firm.
NCUA and state examiners have both told Credit Union Journal in recent months they are putting special emphasis on lending and liquidity. The key, according to McGladrey & Pullen, is not to wait until the examiners arrive to pull together detailed documentation.
"The risks that worry credit unions are the risks that concern the regulators, and right now that's lending," said Assurance Leader Tracy Whetstone. "Home equity is a primary concern."
Better Documentation
Regulators are asking for better documentation supporting allowance for loan loss, said Whetstone, whose company serves 750 credit unions nationwide. "They are asking for more robust documentation of the qualitative or economic factors that impact loan loss. Regulators are also asking credit unions to prepare liquidity risk assessments, something fairly new for credit unions."
Credit unions that may not have the experience to do this in-house are turning to consultants, according to Whetstone. "Most have the ability," she added. "They have been doing this all the time-just not taking credit for it and documenting it. Now regulators want to see this memorialized."
In preparation for exams, Whetstone advised credit unions to look at controls around their processes for underwriting and making loans.
"You don't want to fail on the controls side," offered Whetstone. "Credit unions should also look at the underlying collateral when they are not in the first position and understand if they have any exposure, and make sure those files are appropriately documented. If you are preparing for your exam, make sure your controls, policies and procedures are tightened up and you don't have a lot of exceptions you can't explain."
Greg Schwartz, partner in McGladrey & Pullen's national CU practice, advised "tightening up" ALM models.
"One of the things we've noticed over time is credit unions will build their ALM model, shock it up and down 300 basis points, but not put any weight on scenarios they think will never happen. But credit unions should actually spend a moment or two to think about those unlikely occurrences, given the economic environment. Who would have thought 10 years ago we'd see $4 gas prices...When you run your model, shock it up and down, really give it the chance that these things could actually occur."
Prepare For More Detailed Exam
Credit union management should also prepare for what will likely be a more detailed exam, according to what McGladrey has seen.
"The examiners are either extending the duration of the exam or they are sending more people," said Schwartz, who explained that examiners want "better documentation around what you were thinking about when you developed a policy or procedure. For example, credit unions today whose investments are underwater may not have had clear documentation about what their plan was. Management maybe went out and got a little more risky than the board understood."(c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved.http://www.cujournal.com/ http://www.sourcemedia.com/
