Industry win: Reputation risk no longer considered in NCUA exams

In a major win for America's Credit Unions' unified advocacy, the NCUA announced Thursday it has ceased using reputation risk and equivalent concepts in the examination and supervisory process. America’s Credit Unions requested the NCUA exclude such references in a letter to Chairman Kyle Hauptman in June.

"America's Credit Unions appreciates the NCUA heeding our call to eliminate reputational risk as a component of its exams and supervision. As we previously shared, this component invited subjective interpretations and raised concerns about potential abuse. Credit union exams must focus on actual and measurable risks to financial condition. We thank Chairman Hauptman for listening to the industry and addressing this issue. We will continue to work with the agency to ensure exams remain focused on the safety and soundness of credit unions,” said Jim Nussle, America's Credit Unions president/CEO.

The change follows the administration’s Executive Order 14331, which requires federal banking regulators to remove the use of reputational risk or equivalent concepts that could result in politicized or unlawful debanking. It also provides credit unions parity with banks following the Federal Reserve’s similar announcement

NCUA is currently reviewing and updating regulations, manuals, guidance, and training materials to remove references to reputation risk. While these changes are made, the NCUA issued a Letter to Credit Unions that supersedes any prior direction on reputation risk in other NCUA manuals or guidance.

NCUA employees will no longer base supervisory concerns on reputation risk, nor will they refer to or engage in discussions about reputation risk as part of examinations and supervision contacts of a credit union or credit union service organization.

The agency will continue to include key review areas historically classified under reputation risk, like financial liability associated with active litigation and insider abuse, as part of an examination as necessary.

In addition to eliminating reputation risk, NCUA has discontinued the practice of assigning ratings to the Risk Categories for the examination and supervision program. Historically, examiners assessed the amount and direction of risk exposure in seven Risk Categories: Credit, Interest Rate, Liquidity, Transaction, Compliance, Reputation, and Strategic.

NCUA does not expect these changes to materially change a credit union’s examination or examination report, and expects examination reports and other communications with credit unions to be more streamlined with examiners focusing material concerns and explaining the credit union’s CAMELS ratings.