No Evidence that NCUA Asked for Authority to Curb Concentration in Taxi Medallion Loans

The National Credit Union Administration (NCUA) did not ask Congress for the authority to curb excessive speculative lending in taxi medallions, according to the agency's Office of Inspector General.

Speaking before an Oregon Credit Union CEOs in December 2017, NCUA Board Member Metsger stated that NCUA’s ability to curtail speculative taxi medallion lending was limited by a provision in the Credit Union Membership Access Act. Metsger noted that the Senate Report specifically mentioned taxi medallion lending as an example of loan activity that was exempt from the Member Business Loan (MBL) cap of 12.25 percent of assets.

The Office of the Inspector General wrote:

"We found no evidence of NCUA directly communicating a recommendation to congress to rescind or modify the exception to NCUA's Rules and Regulations Part 723 for aggregate MBL limits."

The Office of Inspector General concluded that such recommendations could have mitigated the loss to the National Credit Union Share Insurance Fund by slowing the growth in taxi medallion portfolios or diversifying lending practices at the three failed taxi medallion lending credit unions.

So why didn't NCUA make a recommendation to Congress?

Marketplace Radio: Relaxed Rules Spur CU Membership Growth

A story on NPR’s “Marketplace” program last night illustrated how credit unions have used ever-looser field of membership regulations to expand beyond their intended communities.

These lax membership rules have helped credit union membership to grow by almost 60 percent over the past 20 years.

The centerpiece of the story is what reporter Nancy Marshall-Genzer calls a “daisy chain” of members—a group of several young people in the D.C. suburbs with no military connection who became members of Navy Federal, the nation’s largest credit union with nearly $100 billion in assets and one with a stated mission of serving “the military community.” In this case, a four-person chain of successive roommates used Navy Federal’s household member loophole to become members.

Read the transcript.

IBM Southeast Employees CU Completes Acquisition of Oculina Bank

IBM Southeast Employees Credit Union (Delray, FL) completed its acquisition of Oculina Bank (Vero Beach, FL) on April 3, 2019.

The combined institution, will have almost $1.5 billion in assets.

According to documents obtained from the Florida office of Financial Regulation, the credit union will not engage in any nonconforming or impermissible activities. IBM Southeast Employees CU will not conduct commercial banking powers under Oculina Bank's charter. Within six months of the merger being consummated, the Florida Office of Financial Regulation will be submitted documentation verifying that depositors and borrowers of Oculina Bank have opted-in to become a member of the credit union, have moved their account relationship to another financial institution, closed their account or paid off their loan.

Read the press release.

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.

Op-Ed Calls for the End of CU Tax Exemption

Congress cannot proclaim its support for community banks while allowing tax-subsidized credit unions to continue growing and competing against banks on a tilted playing field, Florida Bankers Association President and CEO Alex Sanchez wrote in a Fox Business op-ed.

“Congress cannot have it both ways, publicly proclaiming support for community banks while allowing corporate welfare for credit unions to continue,” he wrote. “Credit unions, awash in cash because of their tax-exempt status, are buying banks in cash deals. Since 2012, credit unions have purchased 29 banks.”

In Florida, Sanchez noted that since the beginning of 2018, credit unions have either bought or announced deals to buy seven banks, with four deals announced in 2019 alone.

Read the op-ed.

Overdraft Revenues Soar at Credit Unions in 2018

A study found that overdraft (OD) revenues soared at credit unions in 2018.

According to Moebs Services, credit union OD revenues soared +5.72 percent to $6.9 billion. However, OD revenues fell at banks and thrifts by 0.73 percent and 1.83 percent, respectively.

The study, The Moebs OD Revenue Study, found that OD transactions at credit unions rose by 2.19 percent, while OD transaction fell for banks by 6.93 percent and at thrifts for 0.53 percent.

Summit CU's New HQ Open for Business

Summit Credit Union (Madison, WI) officially opens its new 152,000-square-foot, six-story headquarters facility and campus.

The new headquarters building is in Cottage Grove.

The new building features improved workspaces for employees, highlighted by eco-friendly flooring and lighting. There is also a 17,500-gallon rainwater harvest cistern to capture and reuse rainwater, as well as electric car chargers for Summit employees and members.

The campus has outdoor recreational spaces, including sand volleyball courts and a bike path.