No Record on Loan Limit Waiver by Quorum

On November 6, I reported that Quorum FCU's timeshare lending may have excessive exposure to a single borrower and wondered if NCUA's Region I Regional Director had granted the credit union a waiver from the aggregate loan to one borrower limit.

I filed a Freedom of Information Act on October 24 with NCUA seeking any information related to a waiver being granted to Quorum FCU by the Regional Director and what was the new lending limit.

On December 9, NCUA replied that "we have no responsive records."

I interpret that to mean Quorum did not apply for a waiver and NCUA is clueless about Quorum's exposure to the timeshare industry.

Furthermore, I was tipped off that Quorum is increasing its exposure to the timeshare industry. Hyatt Residence Club recently announced that its members are now eligible to join Quorum.

Undercapitalized Credit Unions, Q3 2013

At the end of the third quarter of 2013, there were 68 credit unions that were undercapitalized. This is down from 82 credit unions as of June 2013 and 104 credit unions from a year ago.

Three credit unions were critically undercapitalized and 13 credit unions were significantly undercapitalized, as of September 30th.

In addition, several complex credit unions were classified as undercapitalized because their risk-based net worth ratios exceeded their net worth ratios.

Local Government FCU to Partially Fund 10-Day Legislative Fact Finding Trip to India

Local Government FCU (Raleigh, NC) is partially paying the expenses for 10 North Carolina lawmakers to participate in an junket international study trip to India planned for February 7-17, 2014.

According to a State Ethics Commission Advisory Opinion Letter, the funds were donated to The Center for International Understanding at University of North Carolina, which is organizing the trip.

The contributions from Local Government FCU and two other organizations "will cover the cost of the plane flight to India for 10 legislators and meals, lodging, and ground transportation while those participants are in India."

No information was disclosed on the amount donated by Local Government FCU.

This is not the first international fact finding trip funded by a donation from Local Government FCU. In 2013, the credit union helped to pay a portion of the expenses for a trip to China.

However, I wonder how this donation is necessary to enable Local Government FCU to effectively carry on its business or is in the best interest of the credit union's members.

If NCUA had not eliminated its Charitable Contribution Rule in 2012, would this donation have been permissible?

Read the advisory opinion letter.

ABA Comment on NCUA's Stress Test Proposal

In a comment letter to the the National Credit Union Administration (NCUA), the American Bankers Association (ABA) expressed its support for a proposal to subject a federally insured credit union (FICU) with over $10 billion in assets to annual stress testing, just as banks of similar size are required to do under the Dodd-Frank Act.

ABA noted that stress testing is an important and beneficial tool for both institutions and regulators in developing appropriate risk-management decisions and providing valuable information to both parties.

The proposal would require FICUs with assets of $10 billion or more to submit capital plans annually to NCUA. If the supervisory stress test shows that a covered FICU does not have the ability to maintain a stress test capital ratio of at least 5 percent under expected and stressed conditions throughout a nine-quarter stress test period, NCUA will require the credit union to take steps to enhance capital and/or may take other supervisory actions against the FICU.

However, ABA called for NCUA to revise the net ratio to 6 percent, which is “the mandated statutory level to be adequately capitalized”; at 5 percent, a FICU would be “undercapitalized.” This would ensure comparability with the bank stress test, which requires a bank to be adequately capitalized to pass the test.

ABA also said that FICUs should be held to the same public disclosure requirements about the results of their stress tests that banks are. ABA wrote: "Credit union members/owners deserve to have the same information available to them ... so they may determine — with complete and consistently reported information — the best place for their money and business."

If the proposed rule is adopted by the NCUA Board it would immediately affect four credit unions.

Read the letter.

TCCUSF Refund: Not Until After 2021

Although the net remaining assessments range from negative $0.2 billion to $1.6 billion as of the second quarter for the Temporary Corporate Credit Union Stabilization Fund, the transcript from the November 21 NCUA Board meeting indicates that credit unions should not expect a refund anytime soon.

Chairman Debbie Matz: Okay. And for the first time, as you indicated, the range includes a negative number; so will credit unions receive a refund in 2014?

Brian Heitman: No. Even after we make the repayment with settlement proceeds, NCUA will still owe several billion dollars in borrowings to the U.S. Treasury as a result of the Corporate Resolution Program. The Treasury debt must be fully repaid before any remaining funds will be distributed to credit unions. This is not likely to occur prior to expiration of the Stabilization Fund in 2021.

The timing of potential refunds is also contingent upon monetization of the legacy assets after NGN maturity. Disposition options include re-securitization, outright sales, and holding the legacy assets until maturity.

Chairman Debbie Matz: So in other words, credit unions should not expect any refund, if there ever is going to be one, until after 2021? Is that correct?

Larry Fazio: Yes, for the most part.

Private Student Loans, Q3 2013

While a small portion of the credit unions industry's loan portfolio is in private student loans, non-federally guaranteed student loans grew by almost 32 percent over the last year to slightly more than $2.5 billion in outstanding private student loans at federally insured credit unions.

However this growth in private student loans caused NCUA to issue a supervisory letter because "private student loans have unique features and risk characteristics that are unlike most other consumer loan products." The supervisory letter notes some of the unique issues associated with private student loans including that student loans have a deferral of repayment; borrowers often have little credit history; and repayment is often dependent on future employment and income.

For example, at the end of the third quarter of 2013, 39.28 percent of all private student loans ($986 million in private student loans) were in deferral status. This was up from 35.3 percent at the end of the second quarter.

Out of the 623 federally-insured credit unions that reported outstanding private student loans in the third quarter, 44 credit unions reported that all of their loans were currently in deferral repayment status.

NCUA reported that $36.2 million in private student loans were at least 60 days past due with a delinquency rate of 1.44 percent at the end of the third quarter. However, the agency is understating the true delinquency rate because it is including loans in deferral status it its calculation. If the delinquency rate is adjusted for loans in deferral status, the delinquency rate jumps to 2.38 percent.

In addition, another $29.8 million in non-federally guaranteed student loans were between 30 days and 59 days past due.

NCUA also reported that the net charge-offs of private student loans was $11.5 million or 0.68 percent of average private student loans. Once again, the net charge-off rate understates the rate of losses on private student loans; because the agency includes loans in deferral status in its calculation.

The following table shows the 25 credit unions with the most delinquent private student and their deferral adjusted delinquency rate.



Read the letter.

MECU's Acquisition of Advance Bank Finalized

At the close of business on December 12, 2013, Municipal Employees Credit Union of Baltimore, Incorporated (MECU) assumed all of Advance Bank’s deposits and essentially all of its assets subject to completion of certain closing requirements.

Read the statement from Advance Bank.

Bagumbayan Credit Union Placed into Conservatorship

The National Credit Union Administration, in cooperation with the Illinois Department of Financial and Professional Regulation, assumed control of service and operations at Bagumbayan Credit Union in Chicago.

Normal member services will continue uninterrupted through a management agreement between NCUA and Great Lakes Credit Union of North Chicago.

Earlier this year, NCUA placed the credit union under a cease and desist order.

Chartered in 1964, Bagumbayan Credit Union is a federally insured, state-chartered credit union with 44 members and $55,140 in assets, according to the credit union’s most recent Call Report. The credit union provides limited financial services to members of the Bagumbayan community.

Read the press release.

Article Exposes Cozy Relationship Between CU Regulator and Industry

An investigative report by Daniel Wagner, senior reporter for The Center for Public Integrity, exposes the cozy relationship between the National Credit Union Administration (NCUA) and the credit union industry.

The article begins with the newest NCUA Board member, Rick Metsger, attending a luncheon in his honor at Credit Union House, a $4 million party and meeting space on Capitol Hill funded by the industry, shortly after being sworn into office. The event was attended by credit union regulators, leaders, and advocates toasting "one of their own, a fellow-true believer in credit unions who would now police the industry full-time."

The article highlighted the clubby world of the credit union movement where the regulators are ideologically in sync with the companies they regulate. This results in NCUA often acting as a cheerleader and enabler for the credit union industry.

For example, it was NCUA policies at the behest of the credit union lobby that led to the failure of five corporate credit unions requiring a $19.2 billion bailout of the industry.

This coziness between the regulator and the regulated in part arises from the revolving door between NCUA and credit union movement, as all three current NCUA Board members worked in or represented the industry. Wagner wrote: "There are no meaningful safeguards to prevent the NCUA from being completely filled with the industry veterans and allies."

In addition, Wagner points out that credit unions have erected a sprawling advocacy machine to protect their tax exemption, which is funded at the expense of credit union members to the tune of more than $100 million per year.

Read the article.

Rose Bowl Loans, Really?

"Just in case current and former students didn't have enough debt to deal with after their college days are over, a zealous Michigan State Spartans fan might be tacking some more money onto his or her loan balance soon.

The Michigan State University Federal Credit Union is offering Spartans fans a chance to borrow money to be able to make it to the school's first trip to the Rose Bowl since 1988."

However, are loans to the Rose Bowl consistent with the purpose of federal credit unions, which is promoting thrift among its members and creating a source of credit for provident and productive purposes?

Read the story.

ASI and Federal Home Loan Bank Advances

H.R. 3584 would permit privately insured credit unions to join a Federal Home Loan Bank. But what needs to be discussed is the financial viability of a private insurer to a failure of a non-federally-insured credit union with a significant level of secured advances from a Federal Home Loan Bank (FHLB).

Advances provided by the FHLBs are secured and have priority in any financial institution failure. In other words, the interest of deposit insurers -- whether the Federal Deposit Insurance Corporation (FDIC), National Credit Union Share Insurance Fund (NCUSIF), or American Mutual Share Insurance (ASI) -- are subordinated to the claims of FHLBs, which means greater losses for deposit insurers in a failure.

In fact, the FHLB system has never lost a penny on advances in its history.

However, there are major differences between both federal deposit insurers and ASI. Both the FDIC or NCUSIF have large and geographically diversified memberships; but also have the full faith and credit backing of the Federal government.

On the other hand, ASI has a small number of state chartered credit unions as members and lacks geographic diversification. There are 137 privately insured credit unions as of June 30th located in 9 states with almost 95 percent of the deposits of privately insured credit unions concentrated in five states. In addition, ASI does not have any federal backing.

Given ASI's limited resources, a failure of any institution with an exposure to FHLB advances would likely have a significantly larger impact on ASI relative to losses faced by the FDIC or NCUSIF. The cost of such a failure would be difficult for privately insured credit unions to absorb, given the small pool of privately-insured credit unions.

Suncoast Converts to a State Charter; Will Expand Field of Membership

Suncoast Schools Federal Credit Union will convert to a state chartered credit union and expand its field of membership.

A preliminary vote total shows 77 percent of the voting members of the $5.4 billion credit union approved a proposal to convert from a federal charter to a state charter.

In justifying the change from a federal to state charter, the credit union stated that the state's fields of membership rules are more flexible than the federal rule allowing individuals who live within the 15 counties that Suncoast currently serves to be eligible to join the credit union. In addition, Suncoast will is add Sarasota and Highlands Counties to its footprint.

The credit union also noted that the straightforward eligibility criteria provided by the state charter will provide the credit union with greater clarity and consistency in its marketing message.

The credit union noted that it will incur a one time expense associated with the conversion of almost $1 million.

The conversion to a state charter should take place within 90 days and the credit union will be called Suncoast Credit Union.

Read the story.

House Passes Patent Troll Bill

The House of Representatives passed bipartisan legislation that would restrain patent trolls. The bill (H.R. 3309) was supported by banks and credit unions.

Patent trolls are non-practicing entities that bring abusive patent litigation against banks and other businesses.

The bill, which passed by a 325-91 vote, would allow the Patent and Trademark Office to waive the costly fee for a review of the validity of an underlying patent. This provision would help small firms targeted with abusive letters demanding payment for the supposedly infringing patents.

The bill also included an amendment by Rep. Jared Polis (D-Colo.) that would require patent holders to disclose more information about the corporate identity and parent entities in a demand letter. This amendment was supported by bank and credit union trade groups.

On December 4th, ABA, ICBA and CUNA wrote Speaker Boehner and Minority Leader Pelosi in support of the bill. Read the letter.

The bill now moves to the Senate.

IG Report: G.I.C. FCU Failed due to Fraud

NCUA's Office of the Inspector General (IG) determined that fraud led to the failure of G.I.C. Federal Credit Union of Euclid, Ohio.

According to the Material Loss Review, the failure of G.I.C. resulted in an estimated loss of $7 million to the National Credit Union Share Insurance Fund.

The IG report found that the credit union overstated its assets by $8.1 million, primarily through the misstatement of certificates of deposit held as investments and cash held on deposit.

The report noted that several factors contributed to the fraud going undetected, including

• senior management displaying a lack of integrity and not managing the credit union in the best interest of its members;

• supervisory committee failing to obtain supervisory committee audits for three consecutive fiscal years; and

• the Board of Directors of the credit union failing to exercise its responsibilities.

The IG report pointed out that only federal credit unions with $500 million or more in total assets are required to have a financial statement audit performed by a licensed independent auditor. However, the report makes the observation that "smaller credit unions ... often have less sophisticated supervisory committees, Boards of Directors, and/or management." The report suggested that NCUA management review various Material Loss Reviews and consult with various stakeholders whether the $500 million asset threshold is too high.

Read the Material Loss Review.

CUs Increase Their Exposure to Long-term Assets

The third quarter financial data show that credit union industry is increasing its investments in long-term assets at the same time long-term interest rates have begun to rise.

Between September 30, 2012 and September 30, 2013, the net long-term asset to asset ratio for the industry rose by 275 basis points from 32.96 percent to 35.71 percent. The net long-term asset ratio for the industry as of September 30, 2013 is 522 basis points above the 10-year average of 30.49 percent.

Additionally, over the last year, the supervisory interest rate risk threshold to net worth ratio increased by 10.97 percentage points from 262.96 percent to 273.93 percent.

In addition, rising rates have caused the market value of the available for sale portfolio at credit unions to fall. Over the course of the last year, the credit union industry has gone from having an unrealized gain on its available for sale securities portfolio of slightly more than $2.6 billion at the end of September 2012 to an unrealized loss of $1.1 billion on its available for sale securities at the end of September 2013. Credit unions will only have to recognize these losses, if they sell these securities.

As NCUA Chairman Debbie Matz cautioned, credit unions "have been making longer-term investments to increase yield. If credit unions haven’t planned carefully, the value of those investments could decline when rates rise."

Bill Would Grant Privately-Insured CUs Access to Federal Home Loan Banks

Rep. Steve Stivers (R – OH) introduced a bill (H.R. 3584) to amend the Federal Home Loan Bank Act authorizing privately insured credit unions to become members of a Federal Home Loan Bank; but only if the privately insured credit union meets all the eligibility requirements for federal deposit insurance.

However, the bill seems to be more directly targeted at American Mutual Share Insurance (ASI) of Dublin, Ohio, which is the only primary insurer of non-federally insured credit unions.

The number of privately insured credit unions has dropped by one-third over the last decade, from 212 institutions to 137 credit unions as of June 2013. Most of these credit unions are located in five states.

In this case, this trend is not the friend of ASI.

By granting privately-insured credit unions access to the Federal Home Loan Bank system, the bill hopes to make private insurance more attractive for state chartered credit unions that are currently federally insured. This would provide ASI with an opportunity to maintain a critical mass of credit unions to remain viable.



Read the bill.

Net Income Up $1.8 Billion in Q3

Earnings growth slowed in the third quarter for federally-insured credit unions.

Net income at federally insured credit unions increased $1.8 billion in the third quarter, a drop from the $2.2 billion increase recorded in the second quarter and the $2.1 billion increase recorded in the third quarter of 2012.

The credit union industry’s return on average assets ratio stood at an annualized 80 basis points at the end of the third quarter; but down slightly from a year earlier when it was 86 basis points.

Much of the year-over-year decline is due to continued downward pressure on net interest margins created by the current interest rate environment.