GAO Study on Supervison of Corporate CUs and Implementation of PCA

Legislation enacted in 2011 (Public Law 111-382) instructed the Government Accountability Office (GAO) to conduct a study of the National Credit Union Administration’s supervision of corporate credit unions and implementation of prompt corrective action (PCA).

GAO examined the failures of 5 corporate credit unions and 85 credit unions from January 1, 2008 through June 30, 2011.

The report found that poor investment and business strategies contributed to the corporate credit union failures. The study notes that NCUA took a number of steps to stabilize, resolve, and reform the corporate credit union system. However, GAO found:

"While NCUA has estimated the losses to the Stabilization Fund, it could not provide adequate documentation to allow NCUA’s Office of Inspector General or GAO to verify their completeness and reasonableness. Without well-documented cost information, NCUA faces questions about its ability to effectively estimate the total costs of the failures and determine whether the credit unions will be able to pay for these losses."[emphasis added]

In the 85 credit union failures, GAO cited poor management as a key factor.

*Operation risk was cited in 76 of the failures.
*Fraud or alleged fraud at credit unions contributed to 29 of the 85 credit union failures.
*Credit risk played a role in 58 credit union failures.
*Business lending played a role in 13 credit union failures. GAO found that failed credit unions had more business loans as a percentage of assets than peer credit unions that did not fail or the credit union industry.
*Liquidity risk contributed to 31 of the 85 credit union failures.
*Concentration risk was cited in 27 of the failures.

GAO found mixed results with respect to the implementation of PCA and also discovered that other enforcement actions were initiated either too late or not at all for many of the failed credit unions. For example, in 49.4 percent of the 85 credit union failures, "NCUA did not take any formal or informal enforcement action (non-PCA) on credit unions within 2 years prior to their failure." In a another 14.1 percent of the failures, an initial formal or informal non-PCA enforcement action did not occur until 180 days or less before the failure.

GAO recommended that NCUA should (1) provide its Office Inspector General the necessary documentation to verify loss estimates and (2) consider additional triggers for PCA that would require early and forceful regulatory action and make recommendations to Congress on how to modify PCA, as appropriate.

Read the report.