In case you missed NCUA’s announcement on March 16th, it has approved the charter for a new low-income credit union – Inspire Community Development FCU. Regrettably, NCUA made a not-so-subtle change in its field of membership for community charters. Not only can this credit union serve people who live, work, worship, and attend school in the city of Battle Creek, but it also includes people who volunteer and transact in the city of Battle Creek.
According to NCUA’s field of membership manual, NCUA only “recognizes four types of affinity on which a community charter can be based – persons who live in, worship in, attend school in, or work in the community.” Neither “volunteer in” nor “transact in” is on the list.
While I have previously seen where NCUA has bent its rules on limited occasions by adding volunteer in as an affinity group, I’ve never seen “transact in” as an affinity group. So, now if you ever bought gas at a service station in Battle Creek, this qualifies you for membership in this credit union.
Give me a break! Purchasing a good or service from a business in Battle Creek does not qualify as an affinity group.
NCUA should have never permitted “transact in” to be an affinity group. But I guess being a rogue agency is part of NCUA’s culture. What’s the next new affinity group for a community charter – if you ever “drove through” a community?
Tuesday, March 30, 2010
Monday, March 29, 2010
Inspector General: Examiners Did Not Raise Problems to Superiors
“Insanity: doing the same thing over and over again and expecting different results.” Albert Einstein
A common theme has emerged from the NCUA’s Office of Inspector General (IG) reports on the failures of New London Security FCU and High Desert FCU – examiners failed to elevate repeated problems to their superiors for stronger supervisory actions after the credit unions’ managements repeatedly did not take corrective actions.
In the case of New London Security FCU, examiners repeatedly expressed concerns over and provided recommended corrective actions regarding the lack of a safekeeping agreement and an inactive supervisory committee. In four of the six examinations reviewed by the IG, these issues were identified in Documents of Resolutions (DORs). But the IG found that examiners did not ensure the credit union took corrective action on these repeat DOR issues and examiners did not elevate these issues to their superiors for stronger supervisory actions such as a Regional Director’s Letter or a Letter of Understanding and Agreement. As a result, the IG concludes they missed an opportunity to uncover suspected investment fraud at the credit union.
In the case of High Desert FCU, examiners on more than one occasion issued DORs related to the credit union's member business loan and construction loan portfolios. Items of concern included underwriting of member business loans, impermissible member business loans, the training of credit union loan officers, and monitoring waivers associated with its construction loan portfolio. While these problems were repeatedly cited, they were not resolved. But the examiners never elevated these issues to their supervisors for stronger supervisory actions. “Consequently, examiners did not expand examination procedures when they should have done so, which could have mitigated the loss to the NCUSIF.”
How many second chances were these NCUA examiners going to give the management of these credit unions?
At the end of its report on the failure of High Desert FCU, the IG wrote that NCUA should consider giving examiners clearer “guidance on when a DOR is required, detailed follow-up procedures and documentation requirement on repeat findings, and a defined process to elevate issues within the NCUA that have not been appropriately resolved.”
It sounds like the IG believes that this is an issue across NCUA’s examiner force.
As a related thought, I suspect that the failure to elevate problems for stronger supervisory actions explains the dearth of enforcement actions being reported by NCUA. Unfortunately, this also means that credit union members are being kept in the dark about repeated problems at their credit unions.
A common theme has emerged from the NCUA’s Office of Inspector General (IG) reports on the failures of New London Security FCU and High Desert FCU – examiners failed to elevate repeated problems to their superiors for stronger supervisory actions after the credit unions’ managements repeatedly did not take corrective actions.
In the case of New London Security FCU, examiners repeatedly expressed concerns over and provided recommended corrective actions regarding the lack of a safekeeping agreement and an inactive supervisory committee. In four of the six examinations reviewed by the IG, these issues were identified in Documents of Resolutions (DORs). But the IG found that examiners did not ensure the credit union took corrective action on these repeat DOR issues and examiners did not elevate these issues to their superiors for stronger supervisory actions such as a Regional Director’s Letter or a Letter of Understanding and Agreement. As a result, the IG concludes they missed an opportunity to uncover suspected investment fraud at the credit union.
In the case of High Desert FCU, examiners on more than one occasion issued DORs related to the credit union's member business loan and construction loan portfolios. Items of concern included underwriting of member business loans, impermissible member business loans, the training of credit union loan officers, and monitoring waivers associated with its construction loan portfolio. While these problems were repeatedly cited, they were not resolved. But the examiners never elevated these issues to their supervisors for stronger supervisory actions. “Consequently, examiners did not expand examination procedures when they should have done so, which could have mitigated the loss to the NCUSIF.”
How many second chances were these NCUA examiners going to give the management of these credit unions?
At the end of its report on the failure of High Desert FCU, the IG wrote that NCUA should consider giving examiners clearer “guidance on when a DOR is required, detailed follow-up procedures and documentation requirement on repeat findings, and a defined process to elevate issues within the NCUA that have not been appropriately resolved.”
It sounds like the IG believes that this is an issue across NCUA’s examiner force.
As a related thought, I suspect that the failure to elevate problems for stronger supervisory actions explains the dearth of enforcement actions being reported by NCUA. Unfortunately, this also means that credit union members are being kept in the dark about repeated problems at their credit unions.
Friday, March 26, 2010
IG Report on Failure of High Desert FCU
NCUA’s Office of the Inspector General (IG) released this week its report on the failure of High Desert FCU (HDFCU). The IG estimated that the failure of HDFCU resulted in a $24.3 million loss to the NCUSIF.
According to the report, an excessive concentration in real estate construction loans combined with the collapse in real estate values caused the failure of HDFCU. The rapid growth in HDFCU's construction loan program was fueled by a waiver granted by the Regional Director in 2003 from NCUA’s minimum equity interest requirements associated with construction loans. The failure by management to take corrective actions and by examiners to elevate concerns to superiors for stronger supervisory actions increased the ultimate cost of the failure.
The report makes it clear that HDFCU’s management and board were engaged in extend and pretend with respect to its construction loan program. The IG wrote that “the number of loans reported as more than 12 months past their original maturity date grew from nine in March 2004 to 158 in September 2007. In September 2007, nearly 45 percent of the total construction loan portfolio was greater than 12 months past the original maturity date. This was due to management simply extending a loan once it matured. In many cases, management extended loans numerous times rather than start foreclosure procedures.”
The risk associated with excessive concentrations caused the IG to write that “NCUA should consider developing a more specific process to identify, analyze, and monitor loan concentration during exams as well as between exams. The NCUA should give strong consideration to a more detailed breakout of loan types on the 5300 Call Report to facilitate this analysis. Additionally, NCUA should consider developing concentration guidelines to assist both examiners and the credit unions in identifying and monitoring concentration risk.” (emphasis added)
Also, the IG wrote that NCUA granted a waiver in 2003 from the minimum equity interest limits to HDFCU with respect to its construction loan program. However, examiners did not require the credit union to implement a tracking system to monitor compliance with respect to the waiver until 3 years after the waiver was granted. The IG report recommended the following changes to enhance the waiver process:
1. NCUA should consider the ability of the region or credit union to track waivers. If a waiver requires the generation of detailed information from the recipient credit union that is not already captured in the Call Report or other financial reporting system, the NCUA should take into account the ability of credit union and the region's staff to adequately monitor the waiver.
2. Implementation of the monitoring process should be in place before granting a waiver.
3. Failure by a credit union to properly monitor and track a waiver, or noncompliance with a waiver during an examination, should result in suspension of activity allowed under the waiver until the credit union can reestablish an appropriate tracking model or become compliant with the waiver.
4. NCUA should consider a renewal period and/or a sunset provision for waivers granted related to significant risk areas of a credit union. At a minimum, this would include waivers related to loan concentrations, liquidity management, capital, or certain regulatory matters.
According to the report, an excessive concentration in real estate construction loans combined with the collapse in real estate values caused the failure of HDFCU. The rapid growth in HDFCU's construction loan program was fueled by a waiver granted by the Regional Director in 2003 from NCUA’s minimum equity interest requirements associated with construction loans. The failure by management to take corrective actions and by examiners to elevate concerns to superiors for stronger supervisory actions increased the ultimate cost of the failure.
The report makes it clear that HDFCU’s management and board were engaged in extend and pretend with respect to its construction loan program. The IG wrote that “the number of loans reported as more than 12 months past their original maturity date grew from nine in March 2004 to 158 in September 2007. In September 2007, nearly 45 percent of the total construction loan portfolio was greater than 12 months past the original maturity date. This was due to management simply extending a loan once it matured. In many cases, management extended loans numerous times rather than start foreclosure procedures.”
The risk associated with excessive concentrations caused the IG to write that “NCUA should consider developing a more specific process to identify, analyze, and monitor loan concentration during exams as well as between exams. The NCUA should give strong consideration to a more detailed breakout of loan types on the 5300 Call Report to facilitate this analysis. Additionally, NCUA should consider developing concentration guidelines to assist both examiners and the credit unions in identifying and monitoring concentration risk.” (emphasis added)
Also, the IG wrote that NCUA granted a waiver in 2003 from the minimum equity interest limits to HDFCU with respect to its construction loan program. However, examiners did not require the credit union to implement a tracking system to monitor compliance with respect to the waiver until 3 years after the waiver was granted. The IG report recommended the following changes to enhance the waiver process:
1. NCUA should consider the ability of the region or credit union to track waivers. If a waiver requires the generation of detailed information from the recipient credit union that is not already captured in the Call Report or other financial reporting system, the NCUA should take into account the ability of credit union and the region's staff to adequately monitor the waiver.
2. Implementation of the monitoring process should be in place before granting a waiver.
3. Failure by a credit union to properly monitor and track a waiver, or noncompliance with a waiver during an examination, should result in suspension of activity allowed under the waiver until the credit union can reestablish an appropriate tracking model or become compliant with the waiver.
4. NCUA should consider a renewal period and/or a sunset provision for waivers granted related to significant risk areas of a credit union. At a minimum, this would include waivers related to loan concentrations, liquidity management, capital, or certain regulatory matters.
Wednesday, March 24, 2010
Will NCUA Cage Federal Credit Unions?
Could federal credit union officials and employees be held personally liable if a federal credit union (FCU) seeks to change its charter or insurance status?
This could become a new reality, if a proposed NCUA rule becomes finalized.
The NCUA Board is proposing that credit union officials and employees cannot be indemnified against liability based on an aggravated breach of the duty of care when such breach may affect fundamental member rights and financial interests. NCUA defines that matters affecting the fundamental rights and interest of federal credit union (FCU) members include charter and share insurance conversions and terminations.
NCUA states throughout its proposed rule that a change in charter or insurance status may significantly impact the members’ financial interest. NCUA insinuates that credit union officials and management are putting their personal financial interest ahead of the members’ financial interest when they consider such choices.
Therefore, any attempt by credit union officials and employees to exit the NCUSIF could be construed as a breach of their fiduciary responsibilities and as a result, they could be held liable, if a court determines they engaged in gross negligence, recklessness, or willful misconduct.
It seems that this is meant to be another weapon in NCUA’s arsenal to bully any credit union from seeking to change its charter or insurance status. This threat of personal liability is just a continuation of NCUA's campaign to effectively make federal credit unions a prisoner of the NCUSIF.
As Maya Angelou wrote in I Know Why the Caged Bird Sings,
So, will federal credit unions stand on the grave of dreams or name the sky as their own?
This could become a new reality, if a proposed NCUA rule becomes finalized.
The NCUA Board is proposing that credit union officials and employees cannot be indemnified against liability based on an aggravated breach of the duty of care when such breach may affect fundamental member rights and financial interests. NCUA defines that matters affecting the fundamental rights and interest of federal credit union (FCU) members include charter and share insurance conversions and terminations.
NCUA states throughout its proposed rule that a change in charter or insurance status may significantly impact the members’ financial interest. NCUA insinuates that credit union officials and management are putting their personal financial interest ahead of the members’ financial interest when they consider such choices.
Therefore, any attempt by credit union officials and employees to exit the NCUSIF could be construed as a breach of their fiduciary responsibilities and as a result, they could be held liable, if a court determines they engaged in gross negligence, recklessness, or willful misconduct.
It seems that this is meant to be another weapon in NCUA’s arsenal to bully any credit union from seeking to change its charter or insurance status. This threat of personal liability is just a continuation of NCUA's campaign to effectively make federal credit unions a prisoner of the NCUSIF.
As Maya Angelou wrote in I Know Why the Caged Bird Sings,
“The free bird thinks of another breeze
and the trade winds soft through the sighing trees
and the fat worms waiting on a dawn-bright lawn
and he names the sky his own.
But a caged bird stands on the grave of dreams
his shadow shouts on a nightmare scream
his wings are clipped and his feet are tied
so he opens his throat to sing.”
So, will federal credit unions stand on the grave of dreams or name the sky as their own?
Monday, March 22, 2010
To Conserve
NCUA on Friday, March 19th placed $24 million Tracy FCU into conservatorship.
The Federal Credit Union Act authorizes the NCUA Board to appoint itself conservator when necessary to conserve the assets of a federally insured credit union, protect members’ interests or protect the National Credit Union Share Insurance Fund.
Tracy FCU reported a loss of $890,261 for 2009 and was undercapitalized with a net worth ratio of 4.99 percent as of December 2009.
I will be the first to admit that I don’t know all the details associated with Tracy FCU’s conservatorship. However, the absence of any formal enforcement actions on NCUA's website makes Tracy FCU's conservatorship troubling.
It is possible that new information came to light about Tracy FCU since the end of 2009 that necessitated NCUA act quickly to seize control of the institution.
But on Tracy FCU's website is a statement by Valley First Credit Union, which is now running the day to day operations of Tracy FCU, that it anticipates the two credit unions will be merged.
So, is NCUA using its conservatorship powers to force an arranged merger with Valley First Credit Union?
The Federal Credit Union Act authorizes the NCUA Board to appoint itself conservator when necessary to conserve the assets of a federally insured credit union, protect members’ interests or protect the National Credit Union Share Insurance Fund.
Tracy FCU reported a loss of $890,261 for 2009 and was undercapitalized with a net worth ratio of 4.99 percent as of December 2009.
I will be the first to admit that I don’t know all the details associated with Tracy FCU’s conservatorship. However, the absence of any formal enforcement actions on NCUA's website makes Tracy FCU's conservatorship troubling.
It is possible that new information came to light about Tracy FCU since the end of 2009 that necessitated NCUA act quickly to seize control of the institution.
But on Tracy FCU's website is a statement by Valley First Credit Union, which is now running the day to day operations of Tracy FCU, that it anticipates the two credit unions will be merged.
So, is NCUA using its conservatorship powers to force an arranged merger with Valley First Credit Union?
Saturday, March 20, 2010
Unhappy Anniversary
One year ago, NCUA placed U.S. Central FCU and Western Corporate FCU into conservatorship.
Since then, NCUA has been operating these two corporate credit unions.
Unfortunately, it does not appear that NCUA is any closer to an exit strategy.
Since then, NCUA has been operating these two corporate credit unions.
Unfortunately, it does not appear that NCUA is any closer to an exit strategy.
Thursday, March 18, 2010
20 Fewer Problem Credit Unions in February
NCUA reported that the number of problem credit unions fell in February by 20 to 337 credit unions. NCUA defines a problem credit union, as a credit union with a CAMEL 4 or 5 rating. (click on image to enlarge)
Assets in problem credit unions decreased by $700 million in February to $47.6 billion. NCUA estimates that 5.38 percent of all credit union assets are in CAMEL 4 and 5 credit unions.
Additionally, the percentage of insured shares (deposits) in problem credit unions declined by 10 basis points in February to 5.72 percent. NCUA reported that problem credit unions held $41.6 billion in shares.
NCUA is reporting that as of February 2010, there were 9 credit unions with over $1 billion in assets on the problem list with $15.6 billion in shares. Eleven credit unions holding $500 million to $1 billion in assets were on the problem list. For credit unions between $100 million and $500 milion in assets, there were 57 credit unions on the problem list.
The following two graphs shows the change in the distribution of assets and shares by CAMEL codes over the last 5 years and the first two months of 2010.
NCUA reported that 6 credit unions have failed during the first two months of 2010.
Assets in problem credit unions decreased by $700 million in February to $47.6 billion. NCUA estimates that 5.38 percent of all credit union assets are in CAMEL 4 and 5 credit unions.
Additionally, the percentage of insured shares (deposits) in problem credit unions declined by 10 basis points in February to 5.72 percent. NCUA reported that problem credit unions held $41.6 billion in shares.
NCUA is reporting that as of February 2010, there were 9 credit unions with over $1 billion in assets on the problem list with $15.6 billion in shares. Eleven credit unions holding $500 million to $1 billion in assets were on the problem list. For credit unions between $100 million and $500 milion in assets, there were 57 credit unions on the problem list.
The following two graphs shows the change in the distribution of assets and shares by CAMEL codes over the last 5 years and the first two months of 2010.
NCUA reported that 6 credit unions have failed during the first two months of 2010.
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