ALEXANDRIA, Va. -
CU Journal: These problematic loans are pretty substantial, how long has this issue been on NCUA's radar?
Johnson: NCUA has issued explicit guidance regarding subprime lending for over a decade, beginning in 1995 with a Letter to Credit Unions. That communication outlined the potential advantages and disadvantages to federally insured credit of programs where subprime credit could be offered. Subsequent letters in 1999-2004 set forth agency guidance on risk-based lending aimed at credit union members of all income levels, supervisory controls over subprime and other types of specialized lending, and also introduced a specific questionnaire on Subprime Lending Controls. In 2005, NCUA specifically addressed emerging risks in mortgage lending and concerns about alternative or exotic mortgage products in the overall mortgage market when a Supervisory Alert was issued to examiners. The alert focused on the evolution of products in the mortgage market, the unusual volume of originations of variable rate mortgage products in a low interest rate environment, and the market trend toward liberalization of underwriting standards. The alert outlined potential issues with "interest-only," "payment-option," and "hybrid" adjustable rate mortgages with illustrations of payment shock for each of the products discussed.
Finally, in 2006, NCUA issued Nontraditional Mortgage Guidance and began work on Proposed Subprime Lending Guidance, both in tandem with other regulators. While nontraditional and subprime mortgage lending are not major components of federally insured credit union mortgage portfolios, NCUA has been concerned that predatory and unsound lending in other areas of the marketplace may increase consumers' monthly debt burdens significantly, resulting in a "ripple effect" that would not only impact credit union members but also federally insured credit union asset quality. NCUA continues to work with other regulators to finalize proposed consumer illustrations that outline ways to clearly disclose the risks of Nontraditional Mortgage products.
CUJ: Do you anticipate additional conservatorships or other regulatory action related to some of these types of loans?
Johnson: It would be premature to speculate on future conservatorships from an industry-wide perspective; conservatorships occur for a wide variety of reasons in credit unions of varying types, and while there is no generally applicable prediction that would be valid for this question, I can say that NCUA continues to carefully monitor the balance sheets of all federal charters. If, during the course of our examination process NCUA notes a problem such as overconcentration of lending or trends that suggest financial difficulty, we take immediate corrective actions.
CUJ: How are state and federal regulators working together on these issues?
Johnson: NCUA continues to work with state and federal regulators through the Federal Financial Institution Examination Council (FFIEC), Conference of State Bank Supervisors (CSBS), and separately with NASCUS to provide subprime lending guidance to state and federally regulated financial institutions.
CUJ: Is there any movement to create a working group or task force on this?
Johnson: An FFIEC working group already exists and has worked with CSBS to produce recent mortgage lending guidance and responses to congressional inquiries. To date the working group has developed interagency guidance and illustrations of consumer information for Nontraditional Mortgage Product Risk, an interagency statement on subprime mortgage lending, statements on working with subprime borrowers for institutions and servicers, and a proposed illustrations of consumer information for subprime mortgage lending.
Additionally, the interagency Task Force on Supervision normally considers important issues such as this during regular meetings.
CUJ: Any sort of special review of CU loan portfolios in the offing?
Johnson: NCUA has already begun evaluations of credit union exposure to subprime mortgage lending. At this point, we are evaluating credit union exposure during the normal course of examination and supervision. Credit unions offering subprime or nontraditional mortgages should familiarize themselves with the guidance that has been recently issued, including NCUA Letters to Credit Unions 06-CU-16, 07-CU-06, and 07-CU-09.
CUJ: Given what happened with indirect subprime auto lending followed by some of these problematic mortgage loans, what does this mean for credit union lending, especially to lower-income individuals?
Johnson: Credit unions have two equally strong mandates: remain the highest degree of safety and soundness possible; and provide a full range of service to their members, particularly those of modest means. These are not mutually exclusive concepts, and credit unions have a clear mission to work with their members to lend responsibly and prudently.
This satisfies not only the outreach expectation that lawmakers view as central to the public policy mission of credit unions, but also the safety and soundness facet of credit unions as financial institutions making sound loans that can be repaid. Add to this an emphasis on financial education that enables members of all income levels to be aware of the wise use of credit, and a picture emerges of a credit union industry serving its members safely, soundly and responsibly.
CUJ: Some have suggested NCUA should have caught this earlier-do you agree? Why or why not?
Johnson: With respect to recently conserved institutions, NCUA does not have regulatory authority over state-chartered CUs. NCUA periodically reviews state examination reports, and relies on state information compiled by the state supervisory authority.
