Costly Failures Due to Nonmembers

The NCUA’s Inspector General (IG) Reports on the failures of Norlarco Credit Union (Fort Collins, Colo) and Huron River Area Credit Union (Ann Arbor, Mich) highlight the role of nonmembers in the failures of the two credit unions.

The IG found that Huron River Area CU was granting Florida construction loans to borrowers that were outside of its field of membership, which fueled uncontrolled loan growth at the credit union. Florida construction loans were made to borrowers throughout the United States, including Puerto Rico. Applicants purportedly “joined” the credit union, under the aegis of Learn and Earn, LLC. The IG report stated:

"Florida construction loan applicants were not legal members of Huron. NCUA and the Michigan SSA indicated two steps were required to admit an employer or other organized group into Huron‟s FOM. The first step required Huron‟s Credit Union Service Organization (CUSO), Learn and Earn Credit, LLC, to submit a written request for services to Huron. Learn and Earn Credit, LLC met this requirement. The second step required Huron to request, from the SSA, a bylaw amendment to add Learn and Earn Credit, LLC, as an “other organized group”. Huron did not request the amendment; therefore, the Michigan SSA determined Learn and Earn, LLC, was not a legal member of Huron. Consequently, the applicants for Florida loans who were members of Learn and Earn, LLC, were not eligible for membership with Huron. We believe this relatively unrestricted FOM contributed significantly to the rapid and uncontrolled loan growth." (emphasis added)

With respect to Norlarco CU, the IG found management abused its field of membership in order to help fulfill its $30 million per month in Florida construction loan commitments. Norlarco used three Colorado-based associational groups to qualify individuals for membership:

• Rocky Mountain Bird Observatory,
• Boys & Girls Clubs of Larimer County, and
• Legacy Land Trust.

When NCUA examiners pulled a sample of the credit union’s Florida construction loans, they found that over 43 percent of the borrowers resided in the Miami-Dade County, Florida. The last time I looked Miami was not geographically located on the east slope of the Rocky Mountains.

Moreover, Norlarco management sent letters to the borrowers stating that Norlarco would close their accounts at the completion of their construction loans. This letter clearly indicated that these individuals were members only in name and that the credit union had no intention of establishing a banking relationship with these borrowers.

The abuse of its field of membership requirement fueled a rapid and uncontrolled expansion in the credit union’s Florida construction loan program, which ultimately contributed to the credit union’s failure.

This does raise an interesting question – are other credit unions getting into trouble because they have forsaken the requirement that members have an affinity with each other?