The Washington Department of Financial Institutions (DFI) closed The Union Credit Union (TUCU) and appointed the National Credit Union Administration (NCUA) as the liquidating agent.
Upon being appointed as liquidating agent, NCUA entered into agreements with Alaska USA Federal Credit Union of Anchorage and Numerica Credit Union of Spokane to purchase and assume certain assets and liabilities of TUCU.
Linda Jekel, Director of DFI's Division of Credit Unions, said: “The Union struggled primarily due to the unemployment of its members. This resulted in a high number of delinquencies, loan charge-offs, negative earnings and low net worth.”
TUCU was insolvent with a net worth ratio of -0.35 percent as of September 2009. The failed credit union reported that 6.78 percent of its loans were 60 days or more delinquent and had losses of almost $474,000 through the first 9 months of 2010.
At the time of liquidation, TUCU had approximately $11,909,715 in assets and served 3,115 members.
This is the 17th federally insured credit union liquidation in 2010.
Saturday, October 30, 2010
Friday, October 29, 2010
Did Politics Influence Which Credit Unions Received TARP Funds?
Did political influence play a role as to which community development credit unions received funds from the TARP Community Development Capital Initiative (CDCI)?
This is the conclusion of a paper published by Linus Wilson at the University of Louisiana at Lafayette.
Forty-eight community development credit unions received almost $70 million in funds through CDCI, although 189 credit unions could have participated in the program. The study does state that it does not know which credit unions applied for the program, so it compares credit unions that received the funding to those that were eligible to receive CDCI funds.
The key finding of the paper was "that credit unions eligible for TARP funds were three times more likely selected for those funds if they were headquartered in the district of member of the U.S. House Financial Services Committee even after controlling for other factors. This indicates that political influence may have driven the selection of credit unions."
The study also concludes that credit unions that received CDCI funds had significantly lower loan-to-deposit ratios relative to other eligible credit unions that did not receive TARP investments. The author found this result to be startling, as these institutions were picked "because they would provide much needed loans to the credit union’s underserved communities.”
Furthermore, the study found mixed evidence as to whether regulators and Treasury selected stronger community development credit unions to receive these funds. The selected credit unions had significantly lower tangible net worth ratios; but also, had lower provisions for loans losses and fewer non-performing assets.
This is the conclusion of a paper published by Linus Wilson at the University of Louisiana at Lafayette.
Forty-eight community development credit unions received almost $70 million in funds through CDCI, although 189 credit unions could have participated in the program. The study does state that it does not know which credit unions applied for the program, so it compares credit unions that received the funding to those that were eligible to receive CDCI funds.
The key finding of the paper was "that credit unions eligible for TARP funds were three times more likely selected for those funds if they were headquartered in the district of member of the U.S. House Financial Services Committee even after controlling for other factors. This indicates that political influence may have driven the selection of credit unions."
The study also concludes that credit unions that received CDCI funds had significantly lower loan-to-deposit ratios relative to other eligible credit unions that did not receive TARP investments. The author found this result to be startling, as these institutions were picked "because they would provide much needed loans to the credit union’s underserved communities.”
Furthermore, the study found mixed evidence as to whether regulators and Treasury selected stronger community development credit unions to receive these funds. The selected credit unions had significantly lower tangible net worth ratios; but also, had lower provisions for loans losses and fewer non-performing assets.
Wednesday, October 27, 2010
Excluding Faith-based Business Loans from the Aggregate Business Loan Cap
Should loans to nonprofit religious organizations be excluded from the member business loan cap of 12.25 percent of assets?
Legislation (H.R. 3380) was introduced in the current Congress that would have done just that and will probably be re-introduced in the next Congress.
While these loans would still be subject to NCUA’s Member Business Loan Rules and Regulations, credit unions would be able to expand their business lending portfolio beyond 12.25 percent of assets by assuming more exposure to such faith-based loans.
However, HR 3380 does not define a nonprofit religious organization. So, if the bill ever becomes law, it will be up to National Credit Union Administration to define what a nonprofit religious organization is and that scares me.
Consider a private university or a radio station affiliated with a religious group, or simply a large religious institution. Any of these might be considered “nonprofit religious organizations.” Lending for projects at institutions such as these could be just as risky as lending to a private organization.
In fact, NCUA has repeatedly stated that business loans are riskier than consumer loans. By excluding faith-based loans from the aggregate business loan cap, this could potentially cause an increase concentration in business loans and thus could pose a safety and soundness concern.
While data on church loan delinquencies are difficult to come by, research by Thomson Reuters found that more than 100 churches nationwide have filed for bankruptcy since early 2009, while the foreclosure rate has tripled in the past three years.
For example, Evangelical Christian Credit Union in Brea, California has foreclosed on more than 20 churches over the past three years. The credit union reported that 8.18 percent of its loans were at least 60 days or more past due as of June 2010.
But a bigger question is why should a certain class of business loans be excluded from the aggregate business loan cap? Is there something socially desirable about faith-based loans, so that we want to promote these loans over other form of business loans?
What’s next, excluding loans to green energy?
I personally believe that policymakers should not be making Swiss cheese of the aggregate business loan cap to advance some social engineering objectives.
Legislation (H.R. 3380) was introduced in the current Congress that would have done just that and will probably be re-introduced in the next Congress.
While these loans would still be subject to NCUA’s Member Business Loan Rules and Regulations, credit unions would be able to expand their business lending portfolio beyond 12.25 percent of assets by assuming more exposure to such faith-based loans.
However, HR 3380 does not define a nonprofit religious organization. So, if the bill ever becomes law, it will be up to National Credit Union Administration to define what a nonprofit religious organization is and that scares me.
Consider a private university or a radio station affiliated with a religious group, or simply a large religious institution. Any of these might be considered “nonprofit religious organizations.” Lending for projects at institutions such as these could be just as risky as lending to a private organization.
In fact, NCUA has repeatedly stated that business loans are riskier than consumer loans. By excluding faith-based loans from the aggregate business loan cap, this could potentially cause an increase concentration in business loans and thus could pose a safety and soundness concern.
While data on church loan delinquencies are difficult to come by, research by Thomson Reuters found that more than 100 churches nationwide have filed for bankruptcy since early 2009, while the foreclosure rate has tripled in the past three years.
For example, Evangelical Christian Credit Union in Brea, California has foreclosed on more than 20 churches over the past three years. The credit union reported that 8.18 percent of its loans were at least 60 days or more past due as of June 2010.
But a bigger question is why should a certain class of business loans be excluded from the aggregate business loan cap? Is there something socially desirable about faith-based loans, so that we want to promote these loans over other form of business loans?
What’s next, excluding loans to green energy?
I personally believe that policymakers should not be making Swiss cheese of the aggregate business loan cap to advance some social engineering objectives.
Monday, October 25, 2010
Loans Going to Nonmembers
In an article in the Las Vegas Review Journal, John Edwards writes about three partners that invested in commercial real estate in Las Vegas and received financing through Ensign FCU, which was later seized by NCUA. The partners defaulted on the loan and NCUA is foreclosing on the property and is suing to enforce the personal guarantees.
The article points out that none of the three partners were members of Ensign and that they were referred to the credit union by a broker. The amount borrowed was $1.4 million.
This raises an important question:
How did these partners qualify to get a $1.4 million loan from Ensign FCU?
Moreover, this is not the first instance of loans going to people who were not credit union members.
NCUA has noted that loans went to people who were nonmembers of Norlarco CU and Huron River Area CU and that both credit unions subsequently failed. Air Force FCU is under a Letter of Understanding and Agreement for serving people who were not qualified for membership.
If this is an emerging pattern of credit unions flaunting their membership requirements, then this is very troubling and requires a closer examination of their preferential tax treatment.
The article points out that none of the three partners were members of Ensign and that they were referred to the credit union by a broker. The amount borrowed was $1.4 million.
This raises an important question:
How did these partners qualify to get a $1.4 million loan from Ensign FCU?
Moreover, this is not the first instance of loans going to people who were not credit union members.
NCUA has noted that loans went to people who were nonmembers of Norlarco CU and Huron River Area CU and that both credit unions subsequently failed. Air Force FCU is under a Letter of Understanding and Agreement for serving people who were not qualified for membership.
If this is an emerging pattern of credit unions flaunting their membership requirements, then this is very troubling and requires a closer examination of their preferential tax treatment.
Friday, October 22, 2010
IG Report: Key Risks Not Adequately Identified or Corrected in U.S. Central's Failure
A report on the failure of U.S. Central Federal Credit Union from the National Credit Union Administration's (NCUA) Inspector General (IG) found that examiners from the Office of Corporate Credit Unions (OCCU) and staff from Office of Capital Markets (OCM) failed to "adequately identify or correct key risks to U.S. Central's investment portfolio." As of June 30, 2010, NCUA stated that the Temporary Corporate Credit Union Stabilization Fund had recorded a loss of $1.45 billion for U.S. Central.
Excessive exposure to risky securities caused U.S. Central's failure.
The study largely did not reveal anything that was not already publicly known about the demise of U.S. Central. The failure of U.S. Central arose from its excessive holdings of private label sub-prime and Alt-A mortgage-backed securities (MBS).
The report noted U.S. Central's business strategy shifted in 2006 towards more aggressive growth. To help fuel this growth agenda, the IG report states that twice in 2006 at the recommendation of management, the Asset/Liability Committee and the Board approved increasing the limits on non-agency MBS that could be held in portfolio. In April 2006, the limits were increased from 7 times capital to 8 times capital. Later that year, limits rose from 8 times to 10 times capital. Setting the limit at 10 times capital meant that approximately half of U.S. Central's assets were in non-agency MBS. In other words, U.S. Central was increasing its exposure to these non-agency MBS just at the time the market for non-prime, non-agency MBS became dislocated.
The report also states that management did not recognize the impact of potential deterioration of the value of the underlying collateral on U.S. Central’s capital and ability to meet its liquidity needs. As U.S. Central’s investment portfolio declined in value, so did its borrowing capacity, as established lenders reduced their lines. As result, U.S. Central became heavily dependent on discount window borrowings from the Federal Reserve Bank of Kansas City in 2008. The report further discloses that the NCUSIF was required to lend U.S. Central $3.7 billion in December, 2008 to ensure that the U.S. Central could met year end liquidity demand.
An interesting nugget from the IG study is that in April 2007, U.S. Central launched Sandlot Funding LLC (Sandlot), an off-balance sheet asset-backed commercial paper (ABCP) conduit, which was the first of its kind in the corporate credit union network. Aside from the bad timing to form an ABCP conduit in 2007, the report questions "whether U.S. Central’s management and Board had the expertise to venture into the business of issuing commercial paper and managing an ABCP conduit."
The IG report concluded: "[W]e believe this growth strategy and accompanying investment decisions to purchase higher yielding securities to such extraordinary levels was contradictory to U.S. Central’s fundamental purpose as a wholesale corporate credit union, which was serving as a secure investment option and a source of liquidity for retail corporate credit unions, and support for the not for profit credit union structure." (page 2).
Examiners failed to identify and correct key risks in timely manner.
The study points out that a corporate credit union that qualifies for Type III supervision, which U.S. Central met the requirement, is assigned an on-site capital market specialist on a full-time basis to monitor and evaluate the corporate credit union's financial condition. (see footnote 7 on page 7)
Prior to the March 2008 examination, there were few criticisms of U.S. Central's management or operations. In fact, OCCU examiners and OCM staff noted no significant concerns regarding U.S. Central’s investment function or its strategy to purchase large amounts of securities backed by sub-prime residential loans. The report cites the following from an earlier exam report.
By the time the OCCU examiners and OCM staff identified and required corrective action on U.S. Central’s investment portfolio related to its concentration of mortgage-backed securities, it was too late. The IG report states that when the Document of Resolution was issued in July 2008, the MBS market had deteriorated to the point where these securities were no longer being actively traded.
The report is critical of the heavy reliance by OCCU examiners and OCM staff, as well as U.S. Central's management, on high credit ratings to determine credit risk in the portfolio.
However, the report does strike a somewhat sympathetic tone noting that NCUA examiners and staff did not have the appropriate regulatory support, such as more specific investment concentration limits, and lacked the regulatory leverage to limit or stop the growth of U.S. Central’s purchase of sub-prime MBS.
Excessive exposure to risky securities caused U.S. Central's failure.
The study largely did not reveal anything that was not already publicly known about the demise of U.S. Central. The failure of U.S. Central arose from its excessive holdings of private label sub-prime and Alt-A mortgage-backed securities (MBS).
The report noted U.S. Central's business strategy shifted in 2006 towards more aggressive growth. To help fuel this growth agenda, the IG report states that twice in 2006 at the recommendation of management, the Asset/Liability Committee and the Board approved increasing the limits on non-agency MBS that could be held in portfolio. In April 2006, the limits were increased from 7 times capital to 8 times capital. Later that year, limits rose from 8 times to 10 times capital. Setting the limit at 10 times capital meant that approximately half of U.S. Central's assets were in non-agency MBS. In other words, U.S. Central was increasing its exposure to these non-agency MBS just at the time the market for non-prime, non-agency MBS became dislocated.
The report also states that management did not recognize the impact of potential deterioration of the value of the underlying collateral on U.S. Central’s capital and ability to meet its liquidity needs. As U.S. Central’s investment portfolio declined in value, so did its borrowing capacity, as established lenders reduced their lines. As result, U.S. Central became heavily dependent on discount window borrowings from the Federal Reserve Bank of Kansas City in 2008. The report further discloses that the NCUSIF was required to lend U.S. Central $3.7 billion in December, 2008 to ensure that the U.S. Central could met year end liquidity demand.
An interesting nugget from the IG study is that in April 2007, U.S. Central launched Sandlot Funding LLC (Sandlot), an off-balance sheet asset-backed commercial paper (ABCP) conduit, which was the first of its kind in the corporate credit union network. Aside from the bad timing to form an ABCP conduit in 2007, the report questions "whether U.S. Central’s management and Board had the expertise to venture into the business of issuing commercial paper and managing an ABCP conduit."
The IG report concluded: "[W]e believe this growth strategy and accompanying investment decisions to purchase higher yielding securities to such extraordinary levels was contradictory to U.S. Central’s fundamental purpose as a wholesale corporate credit union, which was serving as a secure investment option and a source of liquidity for retail corporate credit unions, and support for the not for profit credit union structure." (page 2).
Examiners failed to identify and correct key risks in timely manner.
The study points out that a corporate credit union that qualifies for Type III supervision, which U.S. Central met the requirement, is assigned an on-site capital market specialist on a full-time basis to monitor and evaluate the corporate credit union's financial condition. (see footnote 7 on page 7)
Prior to the March 2008 examination, there were few criticisms of U.S. Central's management or operations. In fact, OCCU examiners and OCM staff noted no significant concerns regarding U.S. Central’s investment function or its strategy to purchase large amounts of securities backed by sub-prime residential loans. The report cites the following from an earlier exam report.
“U.S. Central’s investment function remains conservative with the portfolio consisting of primarily the highest rated securities. Investment transactions are subject to reasonable pre-purchase analysis in accordance with regulatory and policy requirements. Additionally, U.S. Central’s credit function provides adequate ongoing monitoring of all investment exposures which subject the corporate to credit risk.”
By the time the OCCU examiners and OCM staff identified and required corrective action on U.S. Central’s investment portfolio related to its concentration of mortgage-backed securities, it was too late. The IG report states that when the Document of Resolution was issued in July 2008, the MBS market had deteriorated to the point where these securities were no longer being actively traded.
The report is critical of the heavy reliance by OCCU examiners and OCM staff, as well as U.S. Central's management, on high credit ratings to determine credit risk in the portfolio.
However, the report does strike a somewhat sympathetic tone noting that NCUA examiners and staff did not have the appropriate regulatory support, such as more specific investment concentration limits, and lacked the regulatory leverage to limit or stop the growth of U.S. Central’s purchase of sub-prime MBS.
Thursday, October 21, 2010
Problem Credit Unions Rose in September 2010
During the October 21 NCUA Board meeting, NCUA reported that the number of problem credit unions increased, as did assets and shares (deposits) in problem credit unions. A problem credit union is defined as having a CAMEL 4 or 5 rating.
NCUA reported that the number of problem credit unions increased by 14 during the month of September to 374. A year earlier, there were 326 problem credit unions.
Shares and assets in problem credit unions rose by $500 million each in September to $40 billion and $45.3 billion, respectively.
Approximately 5 percent of the industry’s assets and 5.32 percent of shares are in problem credit unions.
The number of $1 billion plus problem credit unions was 13 as of September -- a reduction of one -- and these 13 credit unions held $18 billion in shares (or 45 percent of the shares in problem credit unions). The net increase in problem credit unions came from institutions with $500 million or less in assets, which added 15 credit unions with $1.3 billion in shares.
NCUA reported that the number of problem credit unions increased by 14 during the month of September to 374. A year earlier, there were 326 problem credit unions.
Shares and assets in problem credit unions rose by $500 million each in September to $40 billion and $45.3 billion, respectively.
Approximately 5 percent of the industry’s assets and 5.32 percent of shares are in problem credit unions.
The number of $1 billion plus problem credit unions was 13 as of September -- a reduction of one -- and these 13 credit unions held $18 billion in shares (or 45 percent of the shares in problem credit unions). The net increase in problem credit unions came from institutions with $500 million or less in assets, which added 15 credit unions with $1.3 billion in shares.
Sunday, October 17, 2010
Interesting Thoughts from Credit Union CEO on NCUSIF
Henry Wirz, CEO of SAFE Credit Union in North Highlands, California, expressed some interesting thoughts about the National Credit Union Share Insurance Fund (NCUSIF) in a letter to the Credit Union Journal. He advocated that credit unions should change the way they fund the NCUSIF from the one percent capitalization deposit to expensing premiums. He also writes that having the insurer and regulator under a single entity, NCUA, is a problem. He believes that this structure has contributed to regulatory forbearance.
Below is the letter.
Reprinted with Permission, Credit Union Journal, Oct. 11, 2010.
Below is the letter.
Reprinted with Permission, Credit Union Journal, Oct. 11, 2010.
(Washington league CEO) John Annaloro is right (see related story [paid subcription]). The insurance fund deposit is procyclical. The insurance fund has an operating level of between 1.20 and 1.30% of insured shares. But only about one-sixth of the fund has been expensed by credit unions, the rest is carried as an asset. When a big crisis occurs we have to either take a big expense hit or we amortize the cost over the next seven years as we did with the corporate expense. Either alternative is bad accounting. GAAP calls for matching the expense with the period in which the expense is incurred. We should switch to a premium-based insurance fund and incur an annual premium.
The other problem with the insurance fund is that we have the regulator and the insurance fund as one entity. NCUA has failed to exercise prompt corrective action, because it is in NCUA's best interest to hide failures and to get rid of problems through mergers. The NCUA Inspector General has repeatedly cited NCUA for contributing to credit union failures through bad examination procedures. Granted, the main cause of failures is bad management, but forbearance and lack of prompt corrective action increases the cost of failures and the frequency of failures. NCUA has no incentive to be transparent about the costs of failures because that too is a sign of failure. FDIC is transparent and is prompt with corrective action because FDIC is independent of the regulator.
John Annaloro is right and the rest of the trades should support major changes to the insurance fund. We need a premium-based insurance fund and we need an independent insurance fund. We also need more changes in the NCUA examination and oversight function.
Friday, October 15, 2010
Examiners Missed Business Loan Red Flags in St. Paul Croatian Failure
Reading the NCUA Inspector General's report on the failure of St. Paul Croatian FCU made me madder than a wet hen.
The report demonstrates the unintended consequences associated with the Congressional decision in 1998 to exclude loans secured by shares (deposits) from the definition of a member business loan (MBL). I know that suspected fraud was present; but if it were not for this exemption from the MBL definition, it would have been more difficult for the alleged fraud to be perpetrated.
The IG report stated that although member business loans were present, these loans were not viewed as member business loans; because "examiners apparently took at face value that these loans were share secured and therefore not MBLs."
All I can say is that I’m sure glad these NCUA examiners are not arms control inspectors.
You shouldn’t take the credit union’s word at face value. President Reagan said it best --“Trust, but Verify.”
Examiners did not take any further action even though red flags were present, including:
• During the December 31, 2004 examination, the examiner stated “there were two loans that might have been business loans”;
• The examiner noted for the December 31, 2007 examination that a large number of share secured loans were for large dollar amounts and it appeared that this was a way for the credit union to make business loans without a lot of documentation;
• The December 31, 2008 examination noted there was evidence of MBLs, but all the loans were apparently share secured and therefore, not subject to NCUA MBL Rules and Regulations; and
• NCUA examiners did not take exception to many issues until after the FBI and IRS met with NCUA staff in January 2010. For example, during the December 31, 2009 examination the examiners found that the credit union had $68.6 million in member business loans - almost 29 percent of the credit union’s assets. Some of these business loans had been on the books of the credit union for years.
Moreover, examiners in the December 2009 examination found that the credit union did not have an MBL policy; did not have the data processing system to track MBLs; and business loans were not supported by adequate documentation such as corporate designation of authority to borrow.
A business loan policy is important because it addresses issues such as types of business loans that the credit union will make, concentration limits by type of business loans, trade area, collateral requirements, and so on. This is part of any sound banking practices. However, because these loans were treated as exceptions to the agency’s MBL Rules and Regulations, the credit union did not have to establish such policies.
We should keep an eye on the other exceptions to the definition of member business loans including: a loan fully secured by a lien on a 1 to 4 family dwelling that is the member’s primary residence or loan(s) to a member or an associated member which, when the net member business loan balances are added together, are equal to less than $50,000.
It makes me wonder how many other cases like St. Paul Croatian are out there; but have not been unearthed.
The report demonstrates the unintended consequences associated with the Congressional decision in 1998 to exclude loans secured by shares (deposits) from the definition of a member business loan (MBL). I know that suspected fraud was present; but if it were not for this exemption from the MBL definition, it would have been more difficult for the alleged fraud to be perpetrated.
The IG report stated that although member business loans were present, these loans were not viewed as member business loans; because "examiners apparently took at face value that these loans were share secured and therefore not MBLs."
All I can say is that I’m sure glad these NCUA examiners are not arms control inspectors.
You shouldn’t take the credit union’s word at face value. President Reagan said it best --“Trust, but Verify.”
Examiners did not take any further action even though red flags were present, including:
• During the December 31, 2004 examination, the examiner stated “there were two loans that might have been business loans”;
• The examiner noted for the December 31, 2007 examination that a large number of share secured loans were for large dollar amounts and it appeared that this was a way for the credit union to make business loans without a lot of documentation;
• The December 31, 2008 examination noted there was evidence of MBLs, but all the loans were apparently share secured and therefore, not subject to NCUA MBL Rules and Regulations; and
• NCUA examiners did not take exception to many issues until after the FBI and IRS met with NCUA staff in January 2010. For example, during the December 31, 2009 examination the examiners found that the credit union had $68.6 million in member business loans - almost 29 percent of the credit union’s assets. Some of these business loans had been on the books of the credit union for years.
Moreover, examiners in the December 2009 examination found that the credit union did not have an MBL policy; did not have the data processing system to track MBLs; and business loans were not supported by adequate documentation such as corporate designation of authority to borrow.
A business loan policy is important because it addresses issues such as types of business loans that the credit union will make, concentration limits by type of business loans, trade area, collateral requirements, and so on. This is part of any sound banking practices. However, because these loans were treated as exceptions to the agency’s MBL Rules and Regulations, the credit union did not have to establish such policies.
We should keep an eye on the other exceptions to the definition of member business loans including: a loan fully secured by a lien on a 1 to 4 family dwelling that is the member’s primary residence or loan(s) to a member or an associated member which, when the net member business loan balances are added together, are equal to less than $50,000.
It makes me wonder how many other cases like St. Paul Croatian are out there; but have not been unearthed.
Thursday, October 14, 2010
Massive Fraud Leads to Failure of St. Paul Croatian
The NCUA's Office of the Inspector General (IG) issued its Material Loss Review regarding the failure of St. Paul Croatian FCU. The IG concluded that suspected fraud was the direct cause of St. Paul Croatian's failure, which resulted in a loss of $170 million to the National Credit Union Share Insurance Fund.
The report notes that a substantial majority of the credit union's loans were supposedly secured by members' shares. Specifically, 52 percent of all loans were share secured in 2004, 70 percent in 2005, 66 percent in 2006, 76 percent in 2008, and 88 percent in 2009. However, many of the loans were secured by deposits (shares) of members unrelated to the loan recipients.
But a December 31, 2009 examination discovered that "the majority of the loans were not actually share secured and a number of them were allegedly fraudulent."
A number of these supposed share secured loans were actually member business loans, even though the credit union did not have a member business loan (MBL) policy. In fact, "St. Paul had an MBL portfolio of 133 loans valued at $68.6 million with $2.4 million originated prior to 2008, $18.6 million in 2008, $41.8 million in 2009, and the remainder during 2010." As of the end of 2009, almost 29 percent of its assets were in business loans. But because these loans were supposedly shared secured, they were not subject to NCUA's MBL Rules and Regulations.
The report also found that the chief executive officer (CEO) of the credit union "manipulated loan records and masked the suspected loan fraud by constantly refinancing certain loans or making advance payment on those loans."
The IG report states:
The IG report also noted that there was a lack of segregated duties as the CEO performed most of the accounting and lending processes. As a result, there was no institutional constraints to prevent the suspected loan fraud.
The report points out that the credit union did not have the data processing system "to freeze shares used to secure loans." In addition, the data processing system truncated large numbers, when printing loan documents with large amounts.
Moreover, the credit union's data processing system failed to generate reports related to compliance with the Bank Secrecy Act. It could not differentiate between cash and check transactions and inadequately monitored for suspicious activities. St. Paul's Board did not complete the required BSA training. In addition, Office of Foreign sset Control (OFAC) "lists of suspicious persons were not verified against the recipients of out-going wire transfers; the wire transfer log was manually kept; documentation for wire transfers was inadequate; and St. Paul staff did not update the OFAC list on a regular basis."
A disturbing finding of the report was after the credit union was placed into conservatorship, the credit union's staff lacked the basic knowledge to run the credit union's operations without the direction from the CEO.
The IG report faults NCUA for not adequately identifying the risk at St. Paul Croatian. The report notes that examiners missed warning signs. For example, one red flag was that "the credit union reported zero delinquency and charge-offs from, at least, 2004 through 2009. Examiners believed this was reasonable, stating that faith-based credit unions ... usually have low delinquency."
The report notes that a substantial majority of the credit union's loans were supposedly secured by members' shares. Specifically, 52 percent of all loans were share secured in 2004, 70 percent in 2005, 66 percent in 2006, 76 percent in 2008, and 88 percent in 2009. However, many of the loans were secured by deposits (shares) of members unrelated to the loan recipients.
But a December 31, 2009 examination discovered that "the majority of the loans were not actually share secured and a number of them were allegedly fraudulent."
A number of these supposed share secured loans were actually member business loans, even though the credit union did not have a member business loan (MBL) policy. In fact, "St. Paul had an MBL portfolio of 133 loans valued at $68.6 million with $2.4 million originated prior to 2008, $18.6 million in 2008, $41.8 million in 2009, and the remainder during 2010." As of the end of 2009, almost 29 percent of its assets were in business loans. But because these loans were supposedly shared secured, they were not subject to NCUA's MBL Rules and Regulations.
The report also found that the chief executive officer (CEO) of the credit union "manipulated loan records and masked the suspected loan fraud by constantly refinancing certain loans or making advance payment on those loans."
The IG report states:
"According to credit union employees, during previous examinations when NCUA examiners requested loan files, the CEO stated the files were stored at the other branch and the CEO would have them available the next morning. The credit union employees alleged the CEO gathered the entire staff that evening and directed them to create loan documentation to support the loans the examiners selected. Since a majority of the loans was supposedly share secured, the CEO instructed the staff to find a member with sufficient shares in their account to cover the pledged shares. This account was listed on the share pledge security agreement for that borrower. Credit union staff would then allegedly “witness” forged signatures on the share pledge agreement. Furthermore, credit union staff members stated they would have members with large share balances sign blank share pledge agreements in the event credit union members needed a loan in a hurry.
According to NCUA staff, the CEO would then deliver the alleged fraudulent loan documents to the examiners the following day."
The IG report also noted that there was a lack of segregated duties as the CEO performed most of the accounting and lending processes. As a result, there was no institutional constraints to prevent the suspected loan fraud.
The report points out that the credit union did not have the data processing system "to freeze shares used to secure loans." In addition, the data processing system truncated large numbers, when printing loan documents with large amounts.
Moreover, the credit union's data processing system failed to generate reports related to compliance with the Bank Secrecy Act. It could not differentiate between cash and check transactions and inadequately monitored for suspicious activities. St. Paul's Board did not complete the required BSA training. In addition, Office of Foreign sset Control (OFAC) "lists of suspicious persons were not verified against the recipients of out-going wire transfers; the wire transfer log was manually kept; documentation for wire transfers was inadequate; and St. Paul staff did not update the OFAC list on a regular basis."
A disturbing finding of the report was after the credit union was placed into conservatorship, the credit union's staff lacked the basic knowledge to run the credit union's operations without the direction from the CEO.
The IG report faults NCUA for not adequately identifying the risk at St. Paul Croatian. The report notes that examiners missed warning signs. For example, one red flag was that "the credit union reported zero delinquency and charge-offs from, at least, 2004 through 2009. Examiners believed this was reasonable, stating that faith-based credit unions ... usually have low delinquency."
Wednesday, October 13, 2010
SEC Issues No-Action Letter on Corporate CU Legacy Assets Guaranteed Securities
Here is the link to the September 24 letter from the NCUA to the Securities and Exchange Commission (SEC) requesting a No-Action Letter from the SEC that the Guaranteed Securities to be issued regarding the resolution of the corporate credit union legacy assets "will be considered to be securities which are (i) guaranteed by an instrumentality of the United States Government for purposes of Section 3(a)(2) of the Securities Act and (ii) obligations guaranteed as to principal or interest by the United States for purposes of Section 3(a)(42)(A) of the Exchange Act, thus qualifying as "exempted securities" as defined in Section 3(a)(l2) of the Exchange Act and therefore not subject to registration under Section 12 of the Exchange Act."
Here is the SEC's No-Action Letter to NCUA.
Here is the SEC's No-Action Letter to NCUA.
Tuesday, October 12, 2010
Credit Unions with Net Worth Ratios Below 6 Percent, June 2010
As of June 2010, there were 182 federally-insured credit unions that had net worth leverage ratios below 6 percent.
A net worth ratio below 6 percent is associated with being undercapitalized.
These 182 credit unions held approximately $26.8 billion in assets.
Fifteen of these 182 credit unions were critically undercapitalized -- net worth ratio below 2 percent. Most of these critically undercapitalized credit unions have either failed or been merged into a healthy credit union.
Below is a list of credit unions with net worth ratios below 6 percent. (click on images to enlarge).
A net worth ratio below 6 percent is associated with being undercapitalized.
These 182 credit unions held approximately $26.8 billion in assets.
Fifteen of these 182 credit unions were critically undercapitalized -- net worth ratio below 2 percent. Most of these critically undercapitalized credit unions have either failed or been merged into a healthy credit union.
Below is a list of credit unions with net worth ratios below 6 percent. (click on images to enlarge).
Saturday, October 9, 2010
Whistleblower Lawsuit Alleges Financial Improprieties at Hawaii Community FCU
Former Vice President of Finance, Renee Inaba, filed a whistleblower lawsuit against Hawaii Community Federal Credit Union (HCFCU).
The complaint alleges insider enrichment by managers, use of HCFCU funds for personal expenses, and conflicts of interest arising from undocumented relationships with vendors.
The lawsuit claims that while implementing cost cutting measures, Ms. Inaba found "rampant, endemic corruption, financial improprieties, conflicts of interest and breaches of fiduciary duty by managers of HCFCU."
According to the complaint, HCFCU managers went to Mixx Bar and other bars charging the bar tabs for food and drinks to the credit union as a business expense.
Ms. Inaba questioned the propriety of using of credit union funds to fly management and the board to a luxury resort -- the Grand Wailea on Maui. She was rebuffed by management and told "it's not that bad, not like we have corporate jets like the guys on the mainland."
Paragraphs 27 through 32 outlines alleged conflicts of interest associated with the use of vendors for printing, mailing and cleaning services.
The lawsuit further alleges that management had pushed through a prior Board of Directors a compensation package that would benefit the managers at the expense of credit union members. The planned payments would range from planned payments to insiders of $750,000 and over $1,000,000.
If it was not for the lawsuit, members of HCFCU would be clueless about these alleged practices by management, especially management's compensation.
This raises an interesting point -- whatever happened to NCUA's Outreach Task Force recommendation that total compensation to senior executive officers be disclosed to the credit union members annually. NCUA, when it issued the report, stated that such transparency would provide credit union members with information to evaluate a material expense, as well as those officials responsible for establishing the compensation package.
The complaint alleges insider enrichment by managers, use of HCFCU funds for personal expenses, and conflicts of interest arising from undocumented relationships with vendors.
The lawsuit claims that while implementing cost cutting measures, Ms. Inaba found "rampant, endemic corruption, financial improprieties, conflicts of interest and breaches of fiduciary duty by managers of HCFCU."
According to the complaint, HCFCU managers went to Mixx Bar and other bars charging the bar tabs for food and drinks to the credit union as a business expense.
Ms. Inaba questioned the propriety of using of credit union funds to fly management and the board to a luxury resort -- the Grand Wailea on Maui. She was rebuffed by management and told "it's not that bad, not like we have corporate jets like the guys on the mainland."
Paragraphs 27 through 32 outlines alleged conflicts of interest associated with the use of vendors for printing, mailing and cleaning services.
The lawsuit further alleges that management had pushed through a prior Board of Directors a compensation package that would benefit the managers at the expense of credit union members. The planned payments would range from planned payments to insiders of $750,000 and over $1,000,000.
If it was not for the lawsuit, members of HCFCU would be clueless about these alleged practices by management, especially management's compensation.
This raises an interesting point -- whatever happened to NCUA's Outreach Task Force recommendation that total compensation to senior executive officers be disclosed to the credit union members annually. NCUA, when it issued the report, stated that such transparency would provide credit union members with information to evaluate a material expense, as well as those officials responsible for establishing the compensation package.
Thursday, October 7, 2010
Credit Unions Paid Higher Premiums in 2010 Than FDIC-Insured Banks
I was recently asked how would FDIC premium assessment rates compare to premium rates paid by credit unions.
The short answer is that a well run (CAMEL 1 or 2) and well capitalized credit union had a higher premium assessment rate in 2010 than comparably situated FDIC-insured banks. The same is likely to be true for 2011 and 2012.
Currently, the base assessment rate for FDIC-insured banks ranges between 12 and 16 basis points (depending on supervisory evaluations and financial ratios) for banks that are well capitalized and have a CAMELS composite rating of 1 or 2. But the actual risk-based premium rate includes adjustments for secured liabilities, brokered deposits and capitalization (and unsecured debt), which can increase or lower the premium rate paid. The ultimate range is between 7 and 24 basis points. If you go here, you can see the risk-based premium matrix for FDIC insured banks.
In comparison, credit unions faced a combined NCUSIF and Temporary Corporate Credit Union Stabilization Fund (TCCUSF) assessment of 25.82 basis points for 2010.
Going forward, the base assessment rate for FDIC-insured institutions will be raised 3 basis points beginning in 2011. So, the base rate will be between 15 and 19 basis points. But the actual premium rate will be subject to the same adjustments.
NCUA on the other hand stated that the resolution of toxic assets in the corporate credit unions means that "credit unions can expect higher assessments in 2011 and 2012 with assessments anticipated to level off thereafter." Go to page 5 (question 15) of the FAQ.
Therefore, credit unions should anticipate a premium rate higher than the 13.42 basis points they paid in 2010 to the corporate credit union stabilization fund in 2011 and 2012. On top of that, credit unions should prepare for a NCUSIF assessment, which NCUA will disclose in November during its Board meeting.
Moreover, this analysis does not take into consideration the opportunity cost associated with the one percent NCUSIF capitalization deposit, which is a non-earning asset.
The short answer is that a well run (CAMEL 1 or 2) and well capitalized credit union had a higher premium assessment rate in 2010 than comparably situated FDIC-insured banks. The same is likely to be true for 2011 and 2012.
Currently, the base assessment rate for FDIC-insured banks ranges between 12 and 16 basis points (depending on supervisory evaluations and financial ratios) for banks that are well capitalized and have a CAMELS composite rating of 1 or 2. But the actual risk-based premium rate includes adjustments for secured liabilities, brokered deposits and capitalization (and unsecured debt), which can increase or lower the premium rate paid. The ultimate range is between 7 and 24 basis points. If you go here, you can see the risk-based premium matrix for FDIC insured banks.
In comparison, credit unions faced a combined NCUSIF and Temporary Corporate Credit Union Stabilization Fund (TCCUSF) assessment of 25.82 basis points for 2010.
Going forward, the base assessment rate for FDIC-insured institutions will be raised 3 basis points beginning in 2011. So, the base rate will be between 15 and 19 basis points. But the actual premium rate will be subject to the same adjustments.
NCUA on the other hand stated that the resolution of toxic assets in the corporate credit unions means that "credit unions can expect higher assessments in 2011 and 2012 with assessments anticipated to level off thereafter." Go to page 5 (question 15) of the FAQ.
Therefore, credit unions should anticipate a premium rate higher than the 13.42 basis points they paid in 2010 to the corporate credit union stabilization fund in 2011 and 2012. On top of that, credit unions should prepare for a NCUSIF assessment, which NCUA will disclose in November during its Board meeting.
Moreover, this analysis does not take into consideration the opportunity cost associated with the one percent NCUSIF capitalization deposit, which is a non-earning asset.
Tuesday, October 5, 2010
NCUA Creates Two Bridge Corporate CUs
The National Credit Union Administration announced the creation of two bridge corporate credit unions to assume operations of U.S. Central Corporate Federal Credit Union (US Central) and Western Corporate Federal Credit Union (WesCorp). The new entities will be known as U.S. Central Bridge Corporate Federal Credit Union and Western Bridge Corporate Federal Credit Union.
NCUA has been running US Central and WesCorp, since placing them into conservatorship on March 20, 2009.
The creation of these two bridge corporate credit unions is part of NCUA's "Good Bank/Bad Bank" model for resolving the toxic assets held by the corporate credit union system.
The bridge corporate credit unions (“good banks”) will purchase and assume “good” assets and member share deposits from the conserved corporate credit unions (“bad banks”).
NCUA stated that the new bridge corporate credit unions will not be able to add new services, will not be able to accept new members, and will focus on payment and settlement services.
Additionally, bridge corporates will not offer investment products other than short-term certificates. The maturities for term deposits will be restricted to 180 days or less. Investments will be restricted to cash held in correspondent accounts or Treasury and Federal Agency Security with maximum (bullet) maturities of 180 days.
NCUA stated that these bridge corporates will have a limited life span, probably no more than 24 months. NCUA believes that this will give the members of the bridge corporate credit union enough time to either charter a new corporate credit unions or sell the operations to another entity.
NCUA has been running US Central and WesCorp, since placing them into conservatorship on March 20, 2009.
The creation of these two bridge corporate credit unions is part of NCUA's "Good Bank/Bad Bank" model for resolving the toxic assets held by the corporate credit union system.
The bridge corporate credit unions (“good banks”) will purchase and assume “good” assets and member share deposits from the conserved corporate credit unions (“bad banks”).
NCUA stated that the new bridge corporate credit unions will not be able to add new services, will not be able to accept new members, and will focus on payment and settlement services.
Additionally, bridge corporates will not offer investment products other than short-term certificates. The maturities for term deposits will be restricted to 180 days or less. Investments will be restricted to cash held in correspondent accounts or Treasury and Federal Agency Security with maximum (bullet) maturities of 180 days.
NCUA stated that these bridge corporates will have a limited life span, probably no more than 24 months. NCUA believes that this will give the members of the bridge corporate credit union enough time to either charter a new corporate credit unions or sell the operations to another entity.
Sunday, October 3, 2010
CU TARP Recipients (Update)
Below is a list of more tax-exempt credit unions that received a taxpayer capital infusion from Treasury through the Community Development Capital Initiative. (See prior postings for the other credit unions that have received a capital infusion from Treasury).
Southern Chautauqua Federal Credit Union (Lakewood, NY) $1,709,000
Fidelis Federal Credit Union (New York, NY) $14,000
Bethex Federal Credit Union (Bronx, NY) $502,000
Shreveport Federal Credit Union (Shreveport, LA) $2,646,000
Carter Federal Credit Union (Springhill, LA) $6,300,000
Workers United Federal Credit Union (New York, NY) $57,000
North Side Community Federal Credit Union (Chicago, IL) $325,000
East End Baptist Tabernacle Federal Credit Union (Bridgeport, CT) $7,000
Community Plus Federal Credit Union (Rantoul, IL) $450,000
Border Federal Credit Union (Del Rio, TX) $3,260,000
Opportunities Credit Union (Burlington, VT) $1,091,000
First Legacy Community Credit Union (Charlotte, NC) $1,000,000
Union Settlement Federal Credit Union (New York, NY) $295,000
Southside Credit Union (San Antonio, TX) $1,100,000
D.C. Federal Credit Union (Washington, DC) $1,522,000
Faith Based Federal Credit Union (Oceanside, CA) $30,000
Greater Kinston Credit Union (Kinston, NC) $350,000
Hill District Federal Credit Union (Pittsburgh, PA) $100,000
Freedom First Federal Credit Union (Roanoke, VA) $9,278,000
Episcopal Community Federal Credit Union (Los Angeles, CA) $100,000
Vigo County Federal Credit Union (Terre Haute, IN) $1,229,000
Renaissance Community Development Credit Union (Somerset, NJ) $31,000
Independent Employers Group Federal Credit Union (Hilo, HI) $698,000
Brooklyn Cooperative Federal Credit Union (Brooklyn, NY) $300,000
Southern Chautauqua Federal Credit Union (Lakewood, NY) $1,709,000
Fidelis Federal Credit Union (New York, NY) $14,000
Bethex Federal Credit Union (Bronx, NY) $502,000
Shreveport Federal Credit Union (Shreveport, LA) $2,646,000
Carter Federal Credit Union (Springhill, LA) $6,300,000
Workers United Federal Credit Union (New York, NY) $57,000
North Side Community Federal Credit Union (Chicago, IL) $325,000
East End Baptist Tabernacle Federal Credit Union (Bridgeport, CT) $7,000
Community Plus Federal Credit Union (Rantoul, IL) $450,000
Border Federal Credit Union (Del Rio, TX) $3,260,000
Opportunities Credit Union (Burlington, VT) $1,091,000
First Legacy Community Credit Union (Charlotte, NC) $1,000,000
Union Settlement Federal Credit Union (New York, NY) $295,000
Southside Credit Union (San Antonio, TX) $1,100,000
D.C. Federal Credit Union (Washington, DC) $1,522,000
Faith Based Federal Credit Union (Oceanside, CA) $30,000
Greater Kinston Credit Union (Kinston, NC) $350,000
Hill District Federal Credit Union (Pittsburgh, PA) $100,000
Freedom First Federal Credit Union (Roanoke, VA) $9,278,000
Episcopal Community Federal Credit Union (Los Angeles, CA) $100,000
Vigo County Federal Credit Union (Terre Haute, IN) $1,229,000
Renaissance Community Development Credit Union (Somerset, NJ) $31,000
Independent Employers Group Federal Credit Union (Hilo, HI) $698,000
Brooklyn Cooperative Federal Credit Union (Brooklyn, NY) $300,000
Friday, October 1, 2010
IG Report on Ensign FCU Failure
NCUA's Inspector General issued a Material Loss Review on the failure of Ensign FCU in Henderson, Nevada. The expected losses to the NCUSIF from this failure should not exceed $30 million.
Ensign failed because management adopted a high-risk strategy that allowed up to 80 percent of its loan portfolio to be concentrated in real estate secured loans. The combination of rapidly declining real estate values and increasing unemployment caused the delinquency rates by September 2009 to exceed 13.6 percent compared to 0.30 percent two years earlier.
The IG study found that there was little evidence in the monthly Board minutes to suggest that management was actively monitoring the concentration levels and the associated risks.
The report also concluded that management had flawed allowance for loan loss methodology and lenient lending policies allowing loan-to-value ratios on Home Equity Lines of Credit (HELOC) loans up to 100 percent and 40-year terms on mortgages.
Additionally, management failed to implement an effective collection program.
Ensign experienced significant losses in its real estate loan portfolio, as 80 percent of all losses coming from the real estate secured loans.
The report noted that in December 2007, examiners identified violations governing Member Business Loan (MBL) limitations for Construction and Development loans, MBLs to one individual or associated group, and aggregate MBLs, respectively. The credit union was cited for the same violations during a 2004 examination. Ensign also granted certain MBLs in excess of 15-year terms in violatation of the FCU Act.
For example, the credit union approved two large member business loans ($2.2 million and $3.6 million), one of which represented 25 percent of net worth when it was approved, and ultimately foreclosed, costing the Credit Union over $1.5 million in losses due to property devaluations.
The report noted that Ensign exceeded the fixed asset limit. At failure, fixed assets were 11 percent of total assets.
Management also demonstrated poor liquidity strategies. In December 2007, management accepted a $12 million share account from one member and did not establish a contingency plan in the event this money was withdrawn. In January 2009, the member requested to close this account but Ensign did not have sufficient liquidity to process the withdrawal. With NCUA's assistance, Ensign obtained a $12.5 million 30-day loan from the Central Liquidity Fund (CLF).
The IG report states that the credit union signed a Letter of Understanding and Agreement (LUA) on February 26, 2009 and agreed to seek a merger partner. The LUA was never published by NCUA.
Ensign failed because management adopted a high-risk strategy that allowed up to 80 percent of its loan portfolio to be concentrated in real estate secured loans. The combination of rapidly declining real estate values and increasing unemployment caused the delinquency rates by September 2009 to exceed 13.6 percent compared to 0.30 percent two years earlier.
The IG study found that there was little evidence in the monthly Board minutes to suggest that management was actively monitoring the concentration levels and the associated risks.
The report also concluded that management had flawed allowance for loan loss methodology and lenient lending policies allowing loan-to-value ratios on Home Equity Lines of Credit (HELOC) loans up to 100 percent and 40-year terms on mortgages.
Additionally, management failed to implement an effective collection program.
Ensign experienced significant losses in its real estate loan portfolio, as 80 percent of all losses coming from the real estate secured loans.
The report noted that in December 2007, examiners identified violations governing Member Business Loan (MBL) limitations for Construction and Development loans, MBLs to one individual or associated group, and aggregate MBLs, respectively. The credit union was cited for the same violations during a 2004 examination. Ensign also granted certain MBLs in excess of 15-year terms in violatation of the FCU Act.
For example, the credit union approved two large member business loans ($2.2 million and $3.6 million), one of which represented 25 percent of net worth when it was approved, and ultimately foreclosed, costing the Credit Union over $1.5 million in losses due to property devaluations.
The report noted that Ensign exceeded the fixed asset limit. At failure, fixed assets were 11 percent of total assets.
Management also demonstrated poor liquidity strategies. In December 2007, management accepted a $12 million share account from one member and did not establish a contingency plan in the event this money was withdrawn. In January 2009, the member requested to close this account but Ensign did not have sufficient liquidity to process the withdrawal. With NCUA's assistance, Ensign obtained a $12.5 million 30-day loan from the Central Liquidity Fund (CLF).
The IG report states that the credit union signed a Letter of Understanding and Agreement (LUA) on February 26, 2009 and agreed to seek a merger partner. The LUA was never published by NCUA.
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