Friday, October 15, 2010

Examiners Missed Business Loan Red Flags in St. Paul Croatian Failure

Reading the NCUA Inspector General's report on the failure of St. Paul Croatian FCU made me madder than a wet hen.

The report demonstrates the unintended consequences associated with the Congressional decision in 1998 to exclude loans secured by shares (deposits) from the definition of a member business loan (MBL). I know that suspected fraud was present; but if it were not for this exemption from the MBL definition, it would have been more difficult for the alleged fraud to be perpetrated.

The IG report stated that although member business loans were present, these loans were not viewed as member business loans; because "examiners apparently took at face value that these loans were share secured and therefore not MBLs."

All I can say is that I’m sure glad these NCUA examiners are not arms control inspectors.

You shouldn’t take the credit union’s word at face value. President Reagan said it best --“Trust, but Verify.”

Examiners did not take any further action even though red flags were present, including:

• During the December 31, 2004 examination, the examiner stated “there were two loans that might have been business loans”;

• The examiner noted for the December 31, 2007 examination that a large number of share secured loans were for large dollar amounts and it appeared that this was a way for the credit union to make business loans without a lot of documentation;

• The December 31, 2008 examination noted there was evidence of MBLs, but all the loans were apparently share secured and therefore, not subject to NCUA MBL Rules and Regulations; and

• NCUA examiners did not take exception to many issues until after the FBI and IRS met with NCUA staff in January 2010. For example, during the December 31, 2009 examination the examiners found that the credit union had $68.6 million in member business loans - almost 29 percent of the credit union’s assets. Some of these business loans had been on the books of the credit union for years.

Moreover, examiners in the December 2009 examination found that the credit union did not have an MBL policy; did not have the data processing system to track MBLs; and business loans were not supported by adequate documentation such as corporate designation of authority to borrow.

A business loan policy is important because it addresses issues such as types of business loans that the credit union will make, concentration limits by type of business loans, trade area, collateral requirements, and so on. This is part of any sound banking practices. However, because these loans were treated as exceptions to the agency’s MBL Rules and Regulations, the credit union did not have to establish such policies.

We should keep an eye on the other exceptions to the definition of member business loans including: a loan fully secured by a lien on a 1 to 4 family dwelling that is the member’s primary residence or loan(s) to a member or an associated member which, when the net member business loan balances are added together, are equal to less than $50,000.

It makes me wonder how many other cases like St. Paul Croatian are out there; but have not been unearthed.


  1. Madder than a wet hen? Sounds more like a timely opportunity to slam MBLs at credit unions. Based on the info you provided, it seems like this would have been missed, MBL or not. And I suspect, given that examiners are also human, FDIC, et al have their fair share of unearthed mistakes as well. How many banks have been taken down by business loans this year? Or fraud? Or poor portfolio management?

  2. If you look at the info on bank failures, a common these has been concentration in commercial real estate loans, especially construction and land development loans. These exposures were known, although the IGs of the various banking regulatory agencies cited examiners for not addressing the problems in a timely manner.

    The issue with St. Paul Croatian is that NCUA did not know the CU's exposure to MBLs until after the December 2009 examination, which was conducted between February and April 2010. There is a clear lack of transparency that arises from the fact that shared secured loans for business purposes are not treated as member business loans and are not subject to NCUA's MBL rules. If these shared secured loans for business purposes were reported, NCUA would at least know the credit union's exposure and could have evaluated much earlier whether these loans are within the risk tolerances adopted by the CU's board.

  3. Hello Gentlemen,
    I am extremely familiar with this issue, being I've been fighting NCUA for about a year now, because of Tony's "lax business practices" quote from damage & loss report by the they are trying to forclose on my $150,000.00 home!!! Because Tony apparently DID NOT Refinance my mortgage like he verbally promised!! Or did he?!? So my point is, it was NOTjust business loans he was fudging, it was 1000's of innocent shareholders he was screwing as well!!!! N if either of you would like to contact me, please leave a comment with an email address!! Thanx!! Signed, The End of My Rope



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