Tuesday, September 28, 2010

IG Report on Clearstar Financial CU Failure

The NCUA's Inspector General (IG) issued its Material Loss Review on the failure of Clearstar Financial Credit Union in Reno, Nevada.

The failure resulted in an estimated $12.2 million loss to the National Credit Union Share Insurance Fund (NCUSIF).

The IG found that "Clearstar failed because its Board and management did not implement proper risk management policies and procedures related to credit and concentration risk. Specifically, management originated and funded a significant amount of loans that were both poorly underwritten and to many borrowers that had poor credit histories."

In order to accelerate growth in its loan portfolio, liberal credit policies, minimum underwriting standards, and excessive loan modifications were approved and implemented. The credit union was extending 100 percent financing for RV, new and used motorcycle loans, jet ski and real estate loans. Its lending policy allowed loan-to-value ratio on indirect auto loans of up to 135 percent.

The report noted that Clearstar "used modified borrower classification matrixes that allowed them to approve loans to borrowers that were of a much higher credit risk than industry standards." (See Table 1 in the IG Report).

Additionally, a large portion of the loans originated between 2004 and 2008 were through an indirect loan program in partnership with new and used automobile and recreational vehicle (RV) dealers. The report notes that approximately 34 percent of the indirect vehicle loan portfolio was considered subprime.

A December 2008 examination found that "approximately $22.5 million (approximately 20 percent) of Clearstar‟s loan portfoilo had credit scores of less than 600, with a probability of default ranging from 21 to 57 percent."

Moreover, the report also cited that management in late 2008 to slow the flow of collection issues from delinquent loans started to extend an inordinate number of delinquent loans even when it was obvious that borrowers did not have the ability to meet their obligations.

As a result of the poor credit administration and assumption of excessive credit risk, between July 2007 and September 2009, Clearstar charged off in excess of $9 million in loans, which ultimately contributed to the credit union's failure. Fifty-three percent of the charge-offs were associated with indirect auto loans.

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