Member Business Loans Caused Chetco's Failure

The Material Loss Review (MLR) of National Credit Union Administration's Office of the Inspector General (OIG) found that Chetco FCU (Brookings, Oregon) failed because of inadequate management and board oversight of the credit union's member business loan program. In addition, the MLR points out that NCUA examiners missed numerous red flags with regard to Chetco's member business lending.

The loss to the NCUSIF is estimated at $76.5 million.

The report noted that Chetco experienced rapid growth in its business loan portfolio, as it took advantage of its exception to the member business loan cap of 12.25 percent of assets and its waivers of Member Business Loan regulations.

Member business loans grew from $33.2 million (21.5 percent of assets) in 2002 to a high of $212 million in 2009, before leveling off to $189.4 million (56 percent of assets) in 2010. This represented an increase in member business loan concentrations from less than 26.6 percent of total loans as of 2002 to over 60 percent as of December 2009.

The report also notes that Chetco's business lending operation expanded outside its local market area to as far away as New Mexico and North Carolina. The credit union used its wholly-owned credit union service organization (CUSO), Commercial Lending Solutions, to facilitate the growth in its business loan operations.

As economic conditions deteriorated in 2007 and 2008, especially the real estate market, delinquencies rose at Chetco. However, Chetco initially tried to use loan renewals and modification to mask the deterioration in its member business loan portfolio. NCUA examiners were tipped off to this practice by a member's complaint.

The MLR notes that Chetco management funded its rapid loan growth through a combination of borrowed funds and deposit products with above-market rates. However, as Chetco's financial condition deteriorated, its sources of liquidity became restricted.

The report further states that Chetco failed to operate its business lending CUSO in a safe and sound manner by intertwining the operations of the Credit Union and CLS with no clear delineation of each entity’s respective employee responsibilities.

The report is critical of NCUA's supervision of Chetco. It notes the lack of resources and time spent performing a comprehensive review of Chetco's business loan portfolio. Examiners did not do adequate examination of member business loan renewals and modifications.

Also, based upon training records going back to 1999, the MLR found that the Examiner-in-Charge of supervising Chetco from 2005 to 2011 had no training specific to member business lending. This is troublesome given the complexity of the credits in Chetco's member business loan portfolio.

Read the Material Loss Review.