[Federal Register Volume 85, Number 127 (Wednesday, July 1, 2020)]
[Notices]
[Pages 39588-39591]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14129]


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NATIONAL CREDIT UNION ADMINISTRATION


Strategies for Future Examination and Supervision Utilizing 
Digital Technology

AGENCY: National Credit Union Administration.

ACTION: Request for information (RFI).

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SUMMARY: The National Credit Union Administration (NCUA) is conducting 
a comprehensive study of alternative procedures to modernize the 
agency's examination program. The objective of modernizing is to 
improve efficiency and effectiveness in achieving the NCUA's mandates 
under the Federal Credit Union Act. The agency seeks to support a 
predominately offsite examination and supervision model by taking 
advantage of new and emerging approaches and techniques to utilizing 
data and technology.
    Through modernization, the NCUA intends to:
     Reduce burden on credit unions and increase agency 
efficiency by reducing onsite examination time;
     Improve offsite supervision capabilities;
     Provide more consistency and standardization for the 
examination and supervision process;
     Improve communication between examiners, credit unions, 
and state supervisory authorities; and
     Explore and evaluate technology utilization and appetite 
for adoption.
    The NCUA is using this RFI as a research tool in its modernization 
efforts. Specifically, this RFI explains the NCUA's objectives and 
seeks assistance identifying the interrelated considerations and 
challenges that could arise if the agency moves forward with doing more 
examination work using technology. The resulting information will 
support a re-engineering of the concept of regulatory examination and 
supervision oversight.
    Recent events, such as the COVID-19 pandemic, have shown that 
adopting modern technology helps make credit unions more resilient to 
economic shocks. In turn, a credit union's resiliency has a positive 
impact on its member-owners and the economy at-large. Further, the 
current social unrest in the United States has exposed the limited 
financial options available to many minorities and underserved areas. 
This modernization effort could reduce the regulatory burden and 
establish technology options that would make it easier for credit 
unions to provide services to these underserved communities and 
populations.
    The NCUA seeks public input on its modernization initiative and is 
eager for feedback from interested stakeholders. The NCUA will use 
stakeholder responses to:
     Refine a strategy for leveraging technology in the future 
examination and supervision process;
     Determine how much onsite examination activity would still 
be required with an examination primarily done offsite; and
     Develop an implementation strategy that reduces burden 
while maintaining the agency's ability to determine whether federally 
insured credit unions are operating safely and soundly and in 
compliance with applicable laws and regulations.
    In addition to this RFI, the agency may seek clearance from the 
Office of Management and Budget to conduct stakeholder calls and form 
focus groups to gather additional information about barriers and 
benefits to the modernization initiative. The NCUA invites interested 
parties to respond generally to this modernization initiative and 
specifically to the questions included in this RFI.

DATES: Comments must be received on or before August 31, 2020.

ADDRESSES: Comments may be submitted using one of the methods below 
(Please do not send comments via multiple methods). Include ``[Your 
name and company name (if any)]--Strategies for Future Examination and 
Supervision utilizing Digital Technology'' in all correspondence.
     Email: [email protected]. Include ``[Your name] 
Comments on Strategies for Future Examination and Supervision utilizing 
Digital Technology'' in the email subject line. Acceptable formats: 
HTML, ASCII, Word, RTF, or PDF.
     Mail: Heather Phelps, National Credit Union 
Administration, 1775 Duke Street, Alexandria, Virginia 22314.
    The NCUA will post all comments received by August 31, 2020 on 
ncua.gov without alteration or redaction. Commenters should not include 
information they do not wish to be made public (for example, personal 
or confidential business information). Marketing materials and spam 
will be discarded without publication.

FOR FURTHER INFORMATION CONTACT: Heather Phelps, Program Analysis 
Officer for Virtual Examination Studies, Office of Examination and 
Insurance, at 1775 Duke Street, Alexandria, VA 22314 or (703) 380-2756. 
Media inquiries should be directed to the NCUA Office of External 
Affairs Communication at ncua.gov">OEACmail@ncua.gov.

[[Page 39589]]


SUPPLEMENTARY INFORMATION:

Background

    Examiners from the NCUA and the states have historically conducted 
annual (or 18-month) onsite examinations of federally insured credit 
unions, scheduling onsite supervision contacts throughout the year as 
warranted. During an onsite visit, agency examiners gather information, 
conduct analysis, review documents and controls, hold meetings, develop 
recommendations, and deliver a final report to a credit union's board 
of directors.
    During an examination, credit unions provide data from multiple 
sources and in multiple formats. Collectively, this data provides 
examiners with essential information used to evaluate risks in 
federally insured credit unions, and are integral to risk supervision. 
Likewise, risk supervision is central to safeguarding the National 
Credit Union Share Insurance Fund. Before 1995, the NCUA collected data 
from credit unions in written format. In 1995, the agency initiated its 
first electronic data collection program, and encouraged federally 
insured credit unions to provide member data to examiners 
electronically. (See NCUA Letter to Credit Unions 95-CU-179, AIRES 
Examination Program, issued September 1995.) Over time, as examinations 
and technology progressed, credit unions began providing examiners 
additional information electronically.
    In May 2016, the NCUA Board established the Exam Flexibility 
Initiative internal working group to evaluate the agency's examination 
and supervision program. This working group sought input from credit 
unions and others to obtain opinions and advice regarding the existing 
examination and supervision program. In late 2016, this working group 
provided the NCUA Board with ten recommendations to consider. One of 
these recommendations encouraged the agency to evaluate alternative 
approaches to our current examination program by seeking ways to reduce 
our onsite presence.
    Consistent with the NCUA Board promoting modernizing the 
examination program and reducing our onsite presence, the Flexible 
Examination Program, commonly referred to as FLEX, was piloted in 2017 
to assess examiners' ability to work remotely on elements of 
examinations of well-run credit unions that have appropriate technology 
and platforms to securely provide electronic data. On average, 
examiners were able to reduce their time onsite by 30 percent. One of 
the issues noted during the FLEX pilot was the need for a secure file 
transfer portal to support the transmission of data remotely and 
securely. The agency deployed a secure file transfer portal in July 
2018. However, most of the review of credit union information and data 
is still conducted onsite.
    In November 2017, the NCUA Board approved funding for virtual 
examination exploration and research and, in 2018, the Virtual 
Examination Program was established. The Virtual Examination Program is 
part of a series of interrelated programs to transform the agency's 
operations to meet core mission objectives. Currently, the Program is 
in the research and discovery phase. During this phase, the team is 
researching ways the agency can harness new and emerging data, assess 
advancements in analytical techniques, and utilize innovative 
technologies. Additionally, the team is identifying ways to improve its 
supervisory approach and to move to a more virtual-based examination 
model in the next five to ten years.
    In response to the recent COVID-19 Pandemic, the agency moved to an 
offsite posture in March 2020. During this time, for credit unions that 
were able, examiners worked with credit union staff to facilitate the 
secure exchange of information needed to conduct offsite examination 
and supervision functions. Examiners were able to successfully perform 
many elements of the examination program that would otherwise have been 
performed onsite at the credit union.
    In support of the ongoing examination modernization initiatives, 
the NCUA anticipates adopting an examination model that enables 
examiners to review a credit union's operational and financial 
condition from an alternate worksite, such as a home office. In 
addition to reviewing data offsite, the agency is looking for 
innovative methods to augment the agency's evaluation of a credit 
union's financial and operational condition.

Context

    The credit union industry is dynamic, with federally insured credit 
unions growing larger and more complex each year. The NCUA must ensure 
its examination approach evolves with industry practices and 
technological advances to:
     Evaluate all material risk exposures and compliance 
matters fully;
     Leverage new data and analytical techniques to achieve 
desired supervisory outcomes efficiently and effectively;
     Optimize the benefits of utilizing technology for 
examinations without increasing the risk to the safety and soundness of 
the credit union system; and
     Minimize the burden on supervised institutions.
    Increasing complexity, a desire for more effective supervision, and 
evolving technologies necessitate a review of the agency's current 
examination process. Table One illustrates the evolution of the 
federally insured credit unions over the last 15 years. While the 
number of institutions has declined, credit unions overall continue to 
grow in assets, loans, shares, membership, and complexity.

                            Table One--15-Year Federally Insured Credit Union Trends
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                                        12/31/2005                  12/31/2019                  % Change
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# Federally Insured Credit      8,695.....................  5,236....................  (39.78%).
 Unions.
Total Assets..................  $678.98B..................  $1,566.91B...............  130.77%.
Total Loans...................  $458.56B..................  $1,107.99B...............  141.62%.
    Real Estate Loans \1\.....  $218.42B..................  $557.98B.................  155.46%.
        % CU involved in RE...  68.8%.....................  76.1%....................  10.56%.
    Auto Loans................  $170.56 B.................  $375.11 B................  119.93%.
        % CU involved in Auto.  96.2%.....................  97.2%....................  1.08%.
    Indirect Loans............  $64.82B...................  $228.13B.................  251.94%.
        % CUs involved in IL..  19.9%.....................  35.8%....................  80.28%.
    Commercial/MBL............  $16.31B...................  $81.85B..................  401.84%.
        % CU involved in MBL..  21.5%.....................  34.9%....................  62.59%.
    Credit Cards..............  $23.91 B..................  $66.03 B.................  176.16%.
        % CU involved in CC...  50.6%.....................  62.5%....................  23.51%.
    Participation Loans.......  $7.49B....................  $41.15B..................  449.40%.

[[Page 39590]]

 
        % CU involved in PL...  13.7%.....................  36.3%....................  166.09%.
    Student Loans \2\.........  Not collected.............  $5.47B...................  Not available.
        % CU involved in SL...  Not available.............  13.2%....................  Not available.
Total Shares..................  $577.42B..................  $1,319.75B...............  138.02%.
Average Assets................  $78.06M...................  $299.22M.................  283.32%.
Median Assets.................  $11.95M...................  $35.19M..................  194.48%.
# Loans.......................  42.47M....................  70.71M...................  66.49%.
# Shares Accounts.............  149.22M...................  223.0M...................  55.48%.
# Members.....................  84.5M.....................  120.39M..................  42.47%.
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\1\ Total real estate loans includes commercial/member business loans secured by real estate.
\2\ Non-federally guaranteed student loans as reported on the 5300 Call Report. The NCUA began collecting this
  information with the March 31, 2011 Call Report. Credit unions reported a total of $1.02B non-federally
  guaranteed student loans as of March 31, 2011. Since then, these loans have increased 536%.

    Today, examiners request documentation and data electronically. 
Documents requested typically include policies, board minutes, budgets, 
business plans, audits, accounting records, and various reports. Data 
requests typically relate to loans, shares, and investment portfolios. 
The level of information requested has increased due to the increased 
range of products and services most credit unions provide.
    The agency recognizes that advances in technology may enable new 
practices or approaches that would achieve the objectives more 
efficiently or effectively and reduce the supervision burden for credit 
unions. Technological advances and modern approaches to examinations, 
including offsite examination procedures, may enhance the examination 
experience for both credit unions and examiners, while supporting the 
NCUA's mission of ensuring the safety and soundness of the credit union 
community.
    We also anticipate that moving offsite could save credit union 
resources--such as staff time, money spent on manually preparing 
examination materials, among others. Given the history of credit 
unions, we anticipate that the savings to the credit union would be 
passed on to members in the form of dividends, improved services or 
that credit unions will use these resources to expand their reach to 
new members. We would hope many of these new members would be those who 
are currently not in the mainstream financial system.
    Through existing modernization efforts, the NCUA has improved the 
loan and deposit portfolio analysis tools examiners use to support a 
more consistent analysis of risk within and across institutions in 
order to mitigate losses to the National Credit Union Share Insurance 
Fund. The NCUA is also replacing legacy systems and developing a 
central user interface to help credit unions and examiners communicate 
and share documents. The agency hopes to use its new systems to aid the 
examination process by using vendors for analytics and reporting. This 
will also provide the groundwork for exploration of future examination 
and supervision using technology.

Request for Comment

    The questions identified below are intended to prompt suggestions 
to inform the agency's development of an examination program that 
benefits all parties. The questions are not intended to limit 
discussion; responders may explore any issue relevant to this 
examination initiative. Commenters are also invited to report any 
concerns, issues, or comments they have regarding the program.
    Responses that contain references to studies, research, or data not 
widely available to the public should include copies of referenced 
materials. When responding, please provide a description of the 
commenter's organization and its interest in this concept to help the 
NCUA use the feedback for the future examination model.

Questions for Future Examination and Supervision Utilizing Digital 
Technology

    1. What capabilities can federally insured credit unions adopt to 
facilitate the NCUA's transition toward more offsite exam work?
    2. What capabilities do you recommend the NCUA adopt to be able to 
conduct more examination work offsite?
    3. How would such offsite capabilities increase the efficiency and 
effectiveness of the exam and supervision process from the credit union 
perspective?
    4. Do you think the NCUA can do significantly more offsite work 
without compromising its safety and soundness responsibilities?
    5. What credit union data can be provided to examiners to 
facilitate more offsite supervision and reduce time onsite during the 
examination?
    6. What credit union data is currently provided to other parties 
that NCUA could potentially leverage to reduce the burden on credit 
unions? To ease the administrative burden, should the NCUA ask third 
party service providers for data on credit unions directly?
    7. Are credit unions moving from a physical presence in member 
services to more reliance on digital or mobile banking platforms? How 
should the examination program evolve to accommodate these changes?
    8. What other methodologies or approaches should NCUA include in 
this exam study?
    9. Would credit unions benefit from more clarity and consistency on 
the timing and types of documents and data examiners need to conduct 
examinations?
    10. Would it be easier or less burdensome for credit unions to 
provide documents and data to the NCUA on a more scheduled, flow basis 
throughout the year so the time spent onsite would be more efficient 
and the majority of the examination/supervision could primarily be 
conducted offsite? If this process could lead to more frequent/offsite 
contacts using technology and reduce the time and frequency of full-
scope onsite examinations, do you think this would be an improvement 
and/or less burdensome than the current examination process or cause 
more disruption?
    11. What do you see as the most significant challenges facing the 
NCUA's move to an offsite examination/supervision model that utilizes 
technology?
    12. What difficulties do you foresee with moving to a future 
examination model for federal and state charted credit unions? How 
could we better coordinate with the states in this approach?

[[Page 39591]]

    13. What concerns do you have, if any, about a diminished NCUA 
onsite presence, and can these be mitigated?
    14. What impact, positive or negative, do you anticipate this 
future examination program strategy will have on your credit union and 
its operation?
    15. Will moving offsite create any noticeable change in credit 
unions' ability to provide services to members, particularly during 
major disruptions, like pandemics?
    16. Are there resiliency tests that can be performed by examiners 
offsite that could not be performed when examiners are onsite? If so, 
please detail them.
    17. If rebuilding the examination process from scratch, how might 
you redesign what is currently done today in order to reduce the burden 
on credit unions and/or minimize time that examiners need to be onsite 
at credit unions?
    18. What new or emerging technologies could enable the NCUA to 
examine a credit union with less time onsite?
    19. Are video and telecommunications capabilities sufficient to 
maintain good lines of communication between examiners and credit union 
management and officials with reduced in-person meeting opportunities? 
What other methods of communication or communication protocols would 
support quality communications between the credit union and examination 
staff?
    20. What types of artificial intelligence and/or machine learning 
techniques are you currently using or anticipate using?
    21. Does the NCUA have regulations/policies that are sufficiently 
flexible to allow you to leverage various technological advances such 
as artificial intelligence, machine learning, process robotics, 
Fintech, Regtech, and Suptech etc.?
    22. Do the current regulations/policies create unnecessary hurdles 
or burdens with respect to adopting technology? Are there ways we can 
update our regulations/policies to help facilitate a greater use of 
technology?
    23. Do you feel comfortable using the NCUA's secure file transfer 
portal as a means to transfer data electronically, including personally 
identifiable information and confidential credit union data, to NCUA 
staff? If not, please provide details regarding your concerns and 
recommendations on ways the NCUA could mitigate these concerns.
    24. What issues are unique to smaller institutions regarding the 
use and implementation of innovative products, services, or processes 
that the NCUA should consider? Additionally, by moving to an offsite 
exam posture, will this negatively affect small credit unions that may 
not have the technology required to transmit requested documentation? 
Are you exploring any types of services, products or technologies to 
offer to your members in the future?
    25. With respect to the future examination model, should the NCUA 
consider alternative exam approaches for smaller credit unions?
    26. Are there better ways for the NCUA to support your financial 
inclusion and financial education mission through the use of 
technology? Additionally, are there better ways for the NCUA to use 
technology to help low-income designated credit unions and minority 
depository institutions to better serve their members?
    27. Do you feel there are circumstances that would disqualify or 
preclude a credit union from participating in this examination model 
where the majority of work is completed offsite?
    28. What documentation and measures should be collected and used to 
assess a credit union's financial education efforts or programs?
    29. Are there better ways for the NCUA to receive important 
contextual information regarding how you serve the low-income, 
underserved, and unbanked communities in your field of membership?
    30. What baseline data protection and privacy safeguards would 
enable credit unions to comply with consumer protection statutes and 
federal/state law when sharing data for remote examinations?
    31. How could an offsite posture affect the oversight of consumer 
financial protection and BSA/anti-money laundering laws and regulations 
at your credit union? What changes should the NCUA make to address your 
concerns?
    32. All technology is coupled with internal and external security 
risks. As credit unions remain diligent in addressing these risks, what 
can the NCUA do to support credit unions' security posture?
    33. What cybersecurity challenges do you see with the NCUA moving 
to this future examination model?
    34. Are there digital banking activities or issues that are not 
covered by this RFI that the NCUA should address?
    35. In response to the pandemic, the NCUA moved to an offsite 
posture. Did you participate in an exam during this time?
    a. From your perspective, what has worked well?
    b. What exam steps could continue to be completed offsite after we 
return to an onsite posture?
    c. Were there parts of the exam, during the offsite posture that 
did not work well?
    36. Are there issues the NCUA should consider in light of changes 
in the banking system that have occurred in response to the COVID-19 
pandemic?
    Commenters are also encouraged to discuss any other relevant issues 
they believe the NCUA should consider with respect to this examination 
study.

    By the National Credit Union Administration Board on June 25, 
2020.
Gerard Poliquin,
Secretary of the Board.
[FR Doc. 2020-14129 Filed 6-30-20; 8:45 am]
BILLING CODE 7535-01-P