Loss to NCUSIF Was $765.5 Million from the Failures of Bay Ridge FCU, LOMTO FCU, and Melrose CU

The National Credit Union Administration (NCUA) Office of the Inspector General (OIG) released its Material Loss Review on the failure of taxi medallion lenders Melrose Credit Union (Briarwood, NY), LOMTO Federal Credit Union (Woodside, NY), and Bay Ridge Federal Credit Union (Brooklyn, NY).

The report found that the aggregate loss to the National Credit Union Share Insurance Fund (NCUSIF) from the failure of these 3 credit unions was $765.5 million. The OIG estimates that the losses to the NCUSIF from the failure of Melrose CU and LOMTO FCU was approximately $726 million; but NCUA will not know the final cost until all assets are sold. The failure of Bay Ridge FCU resulted in a preliminary loss of $39.5 million to the NCUSIF.

The OIG determined the failures were due to: (1) significant concentration of loans collateralized by taxi medallions, (2) unsafe and unsound lending practices, and (3) weak Board and management oversight and inadequate risk management practices.

The report noted that all three credit unions qualified for an exception from the aggregate member business loan cap, because the credit unions were either chartered for the purpose of making member business loans or have a history of primarily making member business loans prior to September 1998.

As of June 30, 2018, all three credit unions had significant concentration in tax medallion loans.

• Bay Ridge FCU had approximately 40 percent of its loan portfolio in taxi medallion loans;
• LOMTO FCU had approximately 93 percent of its loan portfolio in taxi medallion loans, and
• Melrose CU reported almost 71 percent of its loan portfolio was made up of taxi medallion loans.

The report stated that the 3 credit unions failed to monitor and appropriately monitor loans to associated members, thereby increasing concentration risk. NCUA's Member Business Loan Regulation limits lending to associated members to 15 percent of net worth. Examiners noted several instances when the credit unions violated the associated borrower limit. Because the credit unions did not identify and document loans made to associated borrowers, the OIG wrote it is not clear how often the associated borrower regulatory limit was breached.

In fact, Melrose requested forbearance in regard to the associated borrower limitation in July of 2014, requesting the 15 percent limitation be increased to 25 percent. The forbearance request was formally denied in October of 2015. However, prior to the denial, Melrose had restructured and extended approximately $113 million in loans to two different associated borrower relationships exceeding the 15 percent concentration during 2015. A September 30, 2015 examination, these two associated borrower relationships accounted for approximately $177 million in loans.

The OIG found that the credit unions engaged in inadequate loan underwriting and monitoring of taxi medallion loans. Examples of inadequate loan underwriting included frequent failure to fully analyze financial information of borrowers, did not look at the borrowers' ability to repay the loan, risky loan terms, unsupported cash out refinancings, and failure to identify and account for modified loans as Troubled Debt Restructures.

All 3 credit unions had significantly underfunded their allowance for loan and lease losses accounts.

The OIG also reported that lending decisions were based on inflated market values for taxi medallions rather than on industry accepted best practices for loan underwriting.

The report found that the credit unions did not adequately respond to issues raised by examiners, including lending practices, concentration, liquidity, and overall risk management. Poor Board oversight allowed for weak risk management practices at the 3 credit unions to go unchecked. The report highlighted the credit unions' Board of Directors, specifically Melrose and LOMTO, exhibited a lack of urgency in addressing their rapidly decreasing financial position.

The OIG concluded that if examiners had acted more aggressively through formal enforcement actions for repeat document of resolutions, NCUA may have reduced the size of the loss to the NCUSIF.

The OIG made 3 recommendations to NCUA management to more effectively capture the concentration and other risks on a credit union’s balance sheet.

NCUA management should:

• institute a formal process to regularly identify, analyze, and document concentration risk issues in credit unions or groups of credit unions and develop appropriate thresholds for different concentrations that would require increased levels of risk mitigation.
• revise examination procedures to prioritize assessing and developing risk responses for credit unions with high levels of concentration risk. For repeated unresolved recommendations, informal enforcement actions should be escalated to formal enforcement actions.
• require examiners review credit unions’ lending procedures with respect to analyzing the ability of the borrower to meet debt service requirements.

NCUA agreed to the recommendations.

Read the Material Loss Review.