Net Worth Assistance Coming to Troubled Credit Unions

The NCUA Board approved net worth assistance for credit unions that are in danger of failing.

Section 208 of the Federal Credit Union Act allows the Board, in its discretion, to make loans to, or purchase the assets of, or establish accounts in insured credit unions the Board has determined are in danger of closing or in order to assist in the voluntary liquidation of a solvent credit union.

ABA believed that this assistance should only be provided in the case of a merger of a failing credit union into a healthy credit union. It was not meant to be used as a vehicle to prop up credit unions that are in danger of failing.

According to NCUA Chairman Matz's December 2010 testimony, she pointed out that when a healthy credit union acquires a failing credit union, this resoluted in a delusion of the healthy credit union's net worth. Without the ability of counting assistance from NCUA as net worth, this "necessitates more outright liquidations instead of mergers," which would increase the resolution cost.

However, NCUA disagreed with ABA's viewpoint. NCUA wrote that there was no language limiting section 208 assistance to situations only involving a merger. Therefore, section 208 assistance can be provided directly to a troubled credit union and be counted as part of a credit union’s net worth.

Furthermore, NCUA stated that it would not disclose the name of credit unions receiving section 208 assistance and will not include a line item regarding section 208 assistance in the 5300 Call Report.

NCUA wrote that if it made public information about credit unions receiving section 208 assistance, there was a strong possibility that members may perceive the credit union as weak and unstable. Let me make one thing clear -- if a credit union is getting section 208 assistance, it is because it is weak and unstable.

Perhaps, the news media will mount a legal challenge to NCUA's decision to not disclose which credit unions receive section 208 assistance.

Chetco FCU Placed into Conservatorship

The National Credit Union Administration (NCUA) assumed control of service and operations at Chetco Federal Credit Union of Harbor, Ore.

Chetco FCU had approximately $333 million in assets at the end of June 2011.

Chetco FCU reported a loss of almost $17 million for 2010 and a loss of $212,215 for the first six months of 2011.

As of the end of June 2011, the credit union was undercapitalized with a net worth ratio of 5.02 percent. Chetco reported that $57.8 million in loans that were 60 days past due or 19.02 percent of its loans were delinquent.

Part of Chetco's problems arose from loan participations. Chetco FCU had $70.5 million in outstanding loan participations (about 23 percent of its loan portfolio) and almost 17.5 percent of these loan participations were delinquent.

The credit union reported holding $10.1 million in foreclosed real estate loans.

Read the press release.

Problem CU Update

NCUA reported today that the number of problem credit unions, assets in problem credit unions, and deposits (shares) in problem credit unions fell in August.

A problem credit union has a CAMEL rating of 4 or 5.

At the end of August, there were 369 problem credit unions -- down from the recent high of 381 credit unions in June.

Assets and shares in problem credit unions were to $34.8 billion and $30.9 billion, respectively. The percentage of the industry's assets and shares in problem credit unions were 3.5% and 3.96%.

The decline in assets and deposits in problem credit unions in August arose from one $1 billion plus credit union and two credit unions with between $500 million and $1 billion no longer being rated as a CAMEL 4 or 5. These three institutions accounted for a combined $5.7 billion decline in deposits on the problem list.

NCUA Tapped Line of Credit at Treasury on July 27

According to the August 29 transcript from the NCUA Board meeting, NCUA tapped its line of credit at the Treasury in July.

NCUA Chief Financial Officer, Mary Ann Woodson, stated:

"On July 27 NCUA borrowed $3.5 billion from Treasury to satisfy the balance of the bridge note payable and other miscellaneous obligations which were paid on October 1, excuse me, which were paid on August 1, 2011."

Mary Ann Woodson also acknowledges that NCUA anticipates borrowing a total of $5.5 billion from the Treasury of its $6 billion line of credit to meet near-term cash flow needs.

While credit unions will ultimately repay this borrowing, tax-exempt credit unions are receiving valuable assistance from the U.S. Treasury and ultimately the American taxpayer.

This borrowing does not count other assistance that came from the Treasury. For example, Treasury lent funds to the Central Liquidity Facility that were funneled to two corporate credit unions to keep them afloat and prevent a systemic collapse of the credit union industry.

So whether credit unions want to recognize it or not, they were bailed out.

NCUA Announces Upcoming Regulatory Agenda

In a speech on September 19 before the National Association of Federal Credit Unions, NCUA Chairman Debbie Matz announced the forthcoming regulatory agenda for the NCUA.

Debbie Matz said in her speech: "[M]y goal is to target risky behaviors in credit unions, not credit unions themselves."

The NCUA chair stated that the agency will move forward with its plans to finalize its CUSO transparency and interest rate risk rules. Additionally, Chairman Matz noted some new proposed regulations that will be issued this fall or next year.

First, NCUA Board plans to consider a Loan Participation Protection rule, which will cover both originators and buyers of loan participations. NCUA will require originators to keep some “skin in the game” so as to provide "a disincentive for the kinds of reckless behavior that puts the Share Insurance Fund at risk." The proposed rule would also require participating credit unions to investigate these loans thoroughly – not just at origination, but over the life of the loan.

Second, NCUA will propose an Investment Concentration Exposure Limits rule, which will be aimed at limiting concentrations in the riskiest investments, like private-label mortgage-backed securities and collateralized debt obligations.

Third, NCUA will propose extending six of the seven remaining Regulatory Flexibility (RegFlex) provisions to all federal credit unions. The seven remaining RegFlex provisions are:

1. charitable contributions;
2. nonmember deposits;
3. ownership of fixed assets;
4. zero coupon securities;
5. borrowing repurchase transactions;
6. commercial mortgage related securities; and
7. purchase of obligations from federally-insured credit unions.

Ms. Matz also called on credit unions to lobby Congress for the authority to issue secondary capital and lifting the business loan cap.

Read the speech.

Governor Perry Calls for Lifting Business Loan Cap

Speaking before the Iowa Credit Union League’s annual convention, Governor Rick Perry called for the federal government to lift the 1998 cap that limits credit union business loans to 12.25 percent of their assets, which he called arbitrary.

Read more.

Unpublished Enforcement Actions

On September 1, the NCUA's Office of the Inspector General (IG) issued two Material Loss Reviews on the failures of Certified FCU and Constitution Corporate FCU. The reports noted that both credit unions were under enforcement actions at the time of their failure.

The IG report on Certified FCU states that credit union was issued a Letter of Understanding after its June 2009 examination.

In a separate IG report, a Letter of Understanding and Agreement (LUA) was issued to Constitution Corporate FCU following its August 2008 examination. The consent order "contained several provisions pertaining to policies and strategies to address liquidity, credit concentration limits, and capital adequacy concerns."

However, these enforcement actions were never published. According to a footnote in the Certified FCU Material Loss Review, when an enforcement order is unpublished, the administrative remedy is considered an informal action.

I know that I sound like a broken record on this subject. But if NCUA believes that credit unions are owned and controlled by their members, then publish the enforcement actions. The members have a right to know.