Areas of Regulatory Concern

In a letter to credit union directors on the mid-year performance of the credit union industry, NCUA stated that credit unions with elevated levels of credit, interest rate, concentration, and strategic risk will be subjected to greater regulatory scrutiny.

Credit risk remains a supervisory concern as it constrains the performance of many credit unions. While the overall delinquency and charge-off rates have declined through mid-year 2011, delinquencies in real estate, business, and participation loans remain high. Additionally, loan modifications are increasing. Modified loans have a high rate of re-defaulting and this could become delinquent in the future.

Interest rate risk is also a supervisory concern. NCUA notes that many credit unions are holding a significant amount of long-term, fixed-rate loans, as well as low-rate loan modifications. NCUA also is concerned that some credit unions are beginning to chase yields by purchasing investments with longer maturities. At the same time, most member shares are in short-term accounts and 58 percent of credit union share balances are less stable, rate-sensitive accounts.

Concentration risk is another supervisory concern, especially with regard to real estate loans and investments. NCUA advises that sound risk mitigation and diversification strategies are necessary to prevent loan concentrations from reaching unsafe levels.

Finally, strategic risk will be a focus of credit union examinations. This will include looking at management philosophy, plans, decisions, and actions, such as performing initial and ongoing due diligence of third-party vendors. A recent NCUA Inspector General report noted that 23 percent of 26,000 unresolved documents of resolution dealt with management issues.

Read the letter.