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.

NCUA Denies Request on Bids for Two Failed Taxi Medallion Lending CUs

The National Credit Union Administration (NCUA) denied my request for information on bids for failed taxi medallion lenders LOMTO Federal Credit Union and Melrose Credit Union.

Teachers Federal Credit Union assumed the members and most shares as well as some loans and other assets of LOMTO FCU and Melrose CU.

In early October, I contacted NCUA seeking information on the bids for the two failed credit unions.

An NCUA spokesperson replied:

Q: Was Teachers FCU the only bidder for LOMTO? If not, how many bidders were there? If there were multiple bidders, how did Teachers bid compare to others?

A: Decline comment.

Q: Was Teachers FCU the only bidder for Melrose? If not, how many bidders were there? If there were multiple bidders, how did Teachers bid compare to others?

A: Decline comment.

Subsequently, I filed a Freedom of Information Act (FOIA) request seeking written documents, such as a bid summary of winning and losing bids shared with the NCUA Board .

On November 23, NCUA denied my FOIA request citing exemptions at 5 U.S.C. 552(b)(4), (5), (6), and (8).

But why this lack of transparency?

Unlike NCUA, the Federal Deposit Insurance Corporation discloses a bid summary regarding all bids to purchase a failed bank.

It appears that NCUA is abusing FOIA exemptions to deny access to information that another federal agency openly discloses.

10 Most Expensive NPCU Failures to the NCUSIF

Based upon information obtained from the National Credit Union Administration through a Freedom of Information Act, the following table lists the 10 most expensive natural person credit union (NPCU) failures to the National Credit Union Share Insurance Fund (NCUSIF).

The losses to the NCUSIF are based upon estimates at the time of the credit union's failure that was from public documents.

However, estimated versus actual losses may diverge.

Estimated Loss to NCUSIF and Reasons for CU Failures, Oct 2017 thru Mar 2018

The National Credit Union Administration Office of the Inspector General (OIG) reported that there were 8 credit union failures between October 1, 2017 and March 31, 2018 that were not subject to a Material Loss Review.

A Material Loss Review is initiated, if the National Credit Union Share Insurance Fund (NCUSIF) incurs a loss of at least $25 million.

During this time period, no credit union failures were subject to a Material Loss Review.

According to the OIG's Semiannual Report to Congress. these 8 failures resulted in an estimated loss of $27.1 million to the NCUSIF.

The following chart provides information on the estimated loss to the NCUSIF and reasons for the failure for each credit union between October 1, 2017 and March 31, 2018 (click on image to enlarge).

Two Assisted Mergers Impose Small Losses on the NCUSIF

The National Credit Union Administration's Office of the Inspector General (OIG) recently reported that the National Credit Union Share Insurance Fund (NCUSIF) incurred small losses associated with the assisted merger of two credit unions between April 1, 2017 and September 30, 2017.

According to the Semiannual Report to the Congress, Love Gospel Assembly Federal Credit Union (Bronx, NY) and Madco Credit Union (Edwardsville, IL) imposed an estimated loss to the NCUSIF of $30,771 and $25,000, respectively.

Love Gospel Assembly FCU failed due to poor record keeping and inadequate management. The credit union was closed on August 2. The NCUA approved a voluntarily assisted merger with USAlliance Federal Credit Union (Rye, NY).

Madco Credit Union failed due to severe operational concerns and potential unrecorded liabilities and unrecognized losses. NCUA approved an involuntary assisted merger with with 1st MidAmerica Credit Union (Bethalto, IL).

Read the report.

Overwhelming Majority of CUs that Received Section 208 Assistance No Longer Active

The National Credit Union Administration (NCUA) reported that an overwhelming number of credit unions that received Section 208 assistance exited the credit union industry, according to the agency's emergency merger proposal.

In recent years, Section 208 assistance has taken the form of capital notes, cash advances, and non-cash guarantees.

Between the first quarter of 2001 and the fourth quarter of 2016, 181 credit unions received at least one type of section 208 assistance. Out of these 181 credit unions, 165 credit unions stopped filing Call Reports.

NCUA further noted that a vast majority of the credit unions that received Section 208 assistance exited the credit union industry prior to or shortly after receiving this assistance.

Of these 165 credit unions, 152 credit unions, or 92.1 percent, stopped filing Call Reports prior to or within 15 months of receiving the section 208 assistance.

Specifically, NCUA found that:

• 13.9 percent of the credit unions that received section 208 assistance began receiving such assistance after they filed their last Call Report. 
• An additional 61 credit unions filed their final Call Report in the same quarter in which they first began receiving section 208 assistance. 
• Another 68 credit unions filed their final Call Report within one year after the quarter they first received section 208 assistance

Based upon this evidence, NCUA believes that Section 208 assistance is a good indicator of a credit union being in danger of insolvency.

IG: Four CUs Caused Losses to NCUSIF Between October 1, 2016 and March 31, 2017

Four credit unions caused losses to the National Credit Union Share Insurance Fund (NCUSIF) between October 1, 2016 and March 31, 2017, according to a Semiannual Report to the Congress issued by the National Credit Union Administration's Office of the Inspector General (IG).

The IG did not perform a material loss review on these failures, because none of the failures resulted in a loss of $25 million or more to the NCUSIF.

The following charts name the credit union, the estimated loss to the NCUSIF, and reasons for the failure of the credit union.

Conserved Valley State CU Closed

The State of Michigan Department of Insurance and Financial Services liquidated Valley State Credit Union of Saginaw, Michigan, and named the National Credit Union Administration (NCUA) as liquidating agent.

ELGA Credit Union of Burton, Michigan, immediately assumed Valley State Credit Union’s members, assets, shares, and loans. ELGA Credit Union is a federally insured, state-chartered credit union with assets of $498,512,717 and 64,058 members, according to its most recent Call Report.

The Department of Insurance and Financial Services made the decision to liquidate Valley State Credit Union and discontinue its operations after determining the credit union was insolvent with no prospect for recovery. The Department placed Valley State Credit Union into conservatorship on Aug. 17, 2016 and named NCUA as conservator on Nov. 9, 2016.

According to the credit union's most recent Call Report, the credit union was significantly undercapitalized with a net worth ratio of 2.90 percent. Delinquent loans were 7.42 percent of total loans and 154.59 percent of net worth. At the end of 2016, the credit union recorded a loss of almost $2.1 million.

Valley State Credit Union is the second federally insured credit union liquidation in 2017 and the first credit union to fail in Michigan since Veterans Health Administration Credit Union (Detroit, MI) on March 29, 2016.

Read the NCUA press release.

MLR: Alleged Fraud Caused Failure of Six Small Pennsylvania CUs

A Material Loss Review (MLR) by the National Credit Union Administration (NCUA) Office of Inspector General (OIG) found that Chester Upland School Employees Federal Credit Union (Chester), O P S EMP Federal Credit Union (OPS), Electrical Inspectors Federal Credit Union (Electrical), Triangle Interests % Service Center Federal Credit Union (Triangle), Cardozo Lodge Federal Credit Union (Cardozo) and Servco Federal Credit Union (Servco) failed due to alleged fraud.

All six Credit Unions outsourced their management, recordkeeping, and maintenance of financial records to a third party provider, Service Center for Credit Unions, Inc. (SCCU), in Bensalem, Pennsylvania.

NCUA liquidated all six credit unions on April 5, 2016. The failure of the six credit unions resulted in an estimated loss of $3.2 million to the National Credit Union Share Insurance Fund (NCUSIF).

The MLR reported that the six credit unions failed due to overstatement of approximately $3.2 million in assets, primarily investments in certificates of deposit (CDs).

The MLR cited three reasons for the failure of these six credit unions:

• Management displayed a lack of integrity and did not manage the six credit unions in the best interest of their members; 
• The Supervisory Committees failed to obtain Supervisory Committee Audits that included confirmation of investments; and 
• The Boards of these six credit unions exercised weak oversight.

The MLR further stated that the alleged fraud could have been discovered sooner, if examiners "had followed National Supervision policies and identified the Supervisory Committee Audits as unacceptable, confirmed account balances directly with institutions, and addressed risks related to the failures of the Supervisory Committees and Boards of Directors." This would have potentially mitigated the loss to the NCUSIF.

Read the Material Loss Review.

NCUSIF Estimated Losses of $5.4 Million Between April 1, 2016 and September 30, 2016

The National Credit Union Administration Office of the Inspector General (OIG) reported that losses to the National Credit Union Share Insurance Fund (NCUSIF) between April 1, 2016 and September 30, 2016 were approximately $5.4 million.

In its Semi-Annual Report to Congress, the OIG provided estimates of NCUSIF losses and grounds for closing arising from the liquidation of one credit unions and emergency merger of another credit union.

Also, the OIG had contracted with Moss Adams LLP to conduct a Material Loss Review (MLR) regarding the failures of six federally insured credit union located in Bensalem and Chester, Pennsylvania. All six credit unions outsourced the management, recordkeeping, data processing, and maintenance of financial records to a third party provider, which allegedly caused each institution to fail. The MLR will: (1) determine the cause(s) of the credit unions’ failure and the resulting estimated $3.2 million loss to the Share Insurance Fund; (2) assess NCUA’s supervision of the credit unions; and (3) provide appropriate recommendations and suggestions to prevent future losses.

Are NCUSIF Reserves Underestimated?

At the end of the first quarter of 2016, the National Credit Union Administration (NCUA) reported that the National Credit Union Share Insurance Fund (NCUSIF) had reserves of $152.2 million as of March 31, 2016 -- $9.9 million is for specific natural person credit unions and $142.3 million is for general reserves. This is down by $10.7 million from $162.9 million, as of February 29, 2016.

According to the NCUA, the NCUSIF contingent liability is derived by using an internal econometric model that applies estimated failure and loss rates and takes into account the historical loss history, CAMEL ratings, credit union level financial ratios, and other conditions. In addition, specific analysis is performed on those insured credit unions where failure is imminent or where additional information is available that may affect the estimate of losses.

However, I believe NCUA may be underestimating the reserves needed to cover future losses to the NCUSIF, as past performance is not an indicator of future performance.

NCUA's internal econometric model might not accurately capture the estimated losses arising from the disruption of Uber and Lyft to taxi medallion lending credit unions.

The prices of taxi medallions -- the collateral backing the medallion loans -- have collapsed since the beginning of 2015.

This suggests that the loss rates to the NCUSIF from a failure of a taxi medallion lending credit union could be higher than past historical loss rates from other credit union failures.

In addition, at the end of the first quarter, there was not a single credit union with assets of at least $1 billion in assets with a CAMEL rating of 4 or 5.

But that is a head scratcher, because there is one taxi medallion lending credit union with $1.9 billion in assets which has seen a clear deterioration in its performance.

Once again, this would suggest that reserves are understated.

So, are NCUSIF premium assessments in the offing?

Net Recoveries from Corporate CU Lawsuits -- Who Knows?

National Credit Union Administration (NCUA) has boasted in press releases that its gross recoveries from settlements associated with its corporate credit union lawsuits are $3.1 billion.

However, the agency has failed to disclose its net recoveries from these lawsuits.

Publishing information about net recoveries would enable the public to estimate how much NCUA has paid in contingency fees to outside law firms with respect to its litigation over the failure of five corporate credit unions.

On April 8, I filed a Freedom of Information Act request regarding the agency's net recoveries associated with its litigation over the failure of five corporate credit unions.

On May 20th, NCUA denied my request.

Whe Doesn't NCUA Publish Bid Summaies for Failed CUs?

The National Credit Union Administration (NCUA) should start publishing the bid summaries for credit unions in receivership just like the Federal Deposit Insurance Corporation (FDIC) does for failed banks.

Since November 12, 2009, the FDIC has disclosed the results of bids for failed banks in FDIC receivership. The FDIC Board decided that disclosing this information was in the public interest and also met the Congressionally mandated objective that resolutions of failed banks are at the lowest cost.

For example, here is the bid summary for North Milwaukee State Bank (Milwaukee, WI). The summary discloses the name of the winning bidder and a summary of the winning bid. It also shows the other bids received and it lists the name of the other bidders. [Note: not all bank failures have multiple bidders].

Federally-insured credit unions should request that the NCUA Board begin disclosing summaries of bids for failed credit unions. Disclosing this information would provide more accountability and transparency with regard to the resolutions of failed credit unions by the NCUA.

Estimated Losses to NCUSIF, October 1, 2015 to March 31, 2016

Between October 1, 2015 and March 31, 2016, the National Credit Union Share Insurance Fund (NCUSIF) incurred almost $6.3 million losses from the failures of seven credit unions, according the NCUA OIG Semiannual Report to the Congress.

Alleged or potential fraud was listed as a factor in six of the seven failures.

The following table states the name of the credit union, the estimated loss to the NCUSIF, and reasons for the failure.

Morgan Stanley Settles Lawsuit with NCUA over Failed Corporate CUs

The National Credit Union Administration (NCUA) announced a settlement with Morgan Stanley for $225 million to resolve claims arising from losses related to corporate credit unions’ purchases of faulty residential mortgage-backed securities.

The settlement covers claims asserted in 2013 by the NCUA Board on behalf of U.S. Central Federal Credit Union, Western Corporate Federal Credit Union, Members United Corporate Federal Credit Union and Southwest Corporate Federal Credit Union.

NCUA will dismiss pending lawsuits against Morgan Stanley in federal district courts in New York and Kansas. Morgan Stanley does not admit fault in the settlement.

Read the press release.

CUs Received More Than $120 Billion in Emergency Liquidity and Guarantees During Financial Crisis

Testifying before the House Financial Services Committee on December 8, National Credit Union Administration (NCUA) Chairman Debbie Matz provided information about the extraordinary measures that were taken by NCUA to support the credit union system during the financial crisis and Great Recession.

Chairman Matz noted consumer-oriented, member-owned credit union system suffered sizable losses, as a result of the financial crisis. Ninety retail credit unions failed because they were not holding sufficient capital to cover their risks.

Chairman Matz went on to state that the failure of five corporate credit unions had near-catastrophic consequences for all surviving credit unions, causing Congress to create the Temporary Corporate Credit Union Stabilization Fund.

Furthermore, she stated NCUA injected more than $120 billion of emergency liquidity and guarantees to stabilize the credit union system - more than $20 billion in liquidity assistance through the Central Liquidity Facility and over $100 billion in guarantees.

She also pointed out that NCUA borrowed $5 billion from the U.S. Treasury to support the credit union system.

Read the testimony.

NCUSIF Losses for 7 CU Failures Between April 1 and September 30

The National Credit Union Administration's Office of the Inspector General in its Semiannual Report to the Congress published the estimated losses to National Credit Union Share Insurance Fund (NCUSIF) from the failure of seven credit unions during the second and third quarter of 2015.

These seven credit union failures were not subject to Material Loss Reviews.

Below is the names of the credit unions and the estimated NCUSIF losses.

• TLC Federal Credit Union, $1,210,000;
• 65 Family Federal Credit Union, $135,713;
• Kolmar NY Employees Federal Credit Union, $310,137;
• Trailblazer Federal Credit Union, $1,072,233;
• Lakeside Federal Credit Union, $1,665,434;
• SCICAP Credit Union, $2,057,766; and
• Quemado Federal Credit Union, $245,840.

Director Liability

Should credit union directors be held professionally liable, if their conduct contributed to the failure of a credit union?

I know that this is a sensitive subject. Credit union advocates will say that since directors are volunteers and most directors are not compensated, it would be unfair to hold them personally liable for a credit union's failure.

However, after reviewing a number of the Material Loss Reviews conducted by NCUA's Inspector General, there is a re-occurring theme that the board of directors were negligent in their oversight of the credit union. These reports note that the board of directors failed to exercise adequate oversight of management and/or exposed the failed credit union to excessively risky business models.

Here are some excerpts from recent Material Loss Reviews.

In the case of the failure of Taupa Lithuanian Credit union, the NCUA Inspector General found that "Taupa’s Board of Directors failed in its duties to adequately oversee the activities of management. During the scope period of our review, multiple examinations identified the need for more consistent Board of Directors meetings and adequate minutes. Examiners cited Board deficiencies in examinations effective June 30, 2006; December 31, 2007; March 31, 2009; June 30, 2010; December 31, 2011; and December 31, 2012."

The Material Loss Review (MLR) for Vensure FCU concluded that "Vensure’s management and Board exposed the credit union to excessive amounts of financial risk due to its affiliation with high risk members and a high risk business model. Specifically, Vensure’s management and Board failed to manage the credit union’s risk related to its ACH payment processing activity for a member that processed payments for internet gambling websites."

NCUA's Inspector General cited weak Board of Directors oversight in the failure of G.I.C. FCU. The MLR reported that "[a]lthough the supervisory committee is the entity charged with primary responsibility over the records of the Credit Union, the Board of Directors acts as control over the supervisory committee by providing a forum for receiving the audit report and minutes of the Committee meetings. We believe G.I.C.’s Board failed in these responsibilities as evidenced by the Board’s failure to keep complete and accurate minutes or to obtain Board packets with information sufficient to execute its duties."

The MLR for Chetco FCU found that the "Board of Directors and management exposed the credit union to excessive amounts of credit and liquidity risk due to its failure to set appropriate limits and maintain the appropriate risk management infrastructure to support the growth in the Member Business Loan (MBL) portfolio."

As these MLRs demonstrate, the actions of these directors contributed to the failures of these credit unions.

NCUA has the authority to pursue these credit union directors, as well as officers, if their gross negligence led to the demise of the credit union. However, outside of a lawsuit suing the directors of WesCorp, it is unclear whether NCUA has chosen to exercise this power.

At a minimum, NCUA's Office of the Inspector General should conduct a study, just like the study performed by the Inspector Generals for the federal banking agencies, on enforcement actions and professional liabilities claims against institution-affiliated parties and individuals associated with failed institutions.

NCUSIF Losses from Eight Small CU Failures, October 2013 - March 2014

The Office of the Inspector General (OIG) of the National Credit Union Administration (NCUA) recently reviewed eight failed credit unions that are not subject to a Material Loss Review.

The Dodd-Frank Act requires the NCUA OIG to perform a limited review where the National Credit Union Share Insurance Fund (NCUSIF) incurred a loss below the $25 million threshold with respect to an insured credit union.

The OIG reviewed eight failed credit unions that incurred losses to the NCUSIF under $25 million between October 1, 2013, and March 31, 2014.

The following tables comes from the OIG's Semiannual Report to Congress and identifies the estimated loss to the NCUSIF and the reason for the failure of each credit union (click on the image to enlarge).

Three NCUA Assisted Mergers in First Quarter of 2014

Three credit unions were merged with assistance from the National Credit Union Administration during the first quarter.

The credit unions were Jayhawk FCU (Lawrence, KS), Union Settlement Federal Credit Union (New York, NY) and Oldham Family Alliance Federal Credit Union (Baltimore, MD).

Jayhawk was merged into Mid America CU; Union Settlement was absorbed by Lower East Side People's; and Oldham Family Alliance was merged into Members First of Maryland.

NCUA did not disclose the nature of the assistance provided to the three closed credit unions.