NEW YORK - The former deputy superintendent of banks for the New York State Banking Department's Consumer Services Division has a warning for CUs: strict new regulations are on the way.
Edward Kramer, EVP-regulatory programs for Minneapolis-based regulatory compliance consultancy Wolters Kluwer, stressed the importance of credit unions being proactive as troubled times affect every financial institution.
CUJ: What sort of risk management strategies should credit unions be taking?
Kramer: It was only a little over a year ago I spoke with credit union folks at the NAFCU Annual Conference about monitoring their loan portfolios. I was trying to suggest to both banking and credit union groups I spoke to about the critical importance of risk management. There is likely to be a much stricter regulatory standard put in place in the near future. Credit unions must be proactive and they must be ready for a difference with the new presidential administration. I think it is safe to say things will be more aggressive and more focused on lending at banks and credit unions.
CUJ: Do you think CUs need to change their approach to risk management?
Kramer: Maybe some do, maybe some don't. Some already have employed proactive approaches and are utilizing self-testing approaches. NCUA has come a long way in employing more sophisticated analytical tools for examining credit unions. They have trained examiners to better perform an exam, and they are using technology better.
Some credit unions have tried to put in place good, fair honest lending processes, but they come to us asking if they can make them better. It is a matter of self testing and evaluation.
CUJ: What sort of "risks" need to be managed?
Kramer: In addition to focusing on HMDA, credit unions are doing a large volume of indirect auto loans. Direct auto loans are to members who come into the credit union to take out an auto loan. With indirect loans made at auto dealers, credit unions are taking responsibility for the discretion dealers have in making rates. If the dealers give different interest rates to different buyers due to discriminatory practices, or any factor that does not have to do with credit factors, then credit unions are responsible.
CUJ: Do you believe there are any "risks" in the market that CUs are overlooking or need to think about differently?
Kramer: No credit union wants to see its good name in their community hurt by unfair loans done at auto dealers. There is a risk, due to added regulatory oversight, in the Department of Justice taking on auto dealers and banks over discriminatory auto loans.
I really feel credit unions have done a good job and have served their communities in a good way. Still, if they used third parties, they must watch to see those loans are safe and were done in a non-discriminatory manner.
Many credit unions that have failed in the last few months were due to their getting into commercial lending activities, especially construction loans in Florida and Southern California. Most credit unions have not dealt with mortgage brokers, many of whom had lax practices. They didn't check what are known as the "three Cs of lending: credit, collateral and capacity to repay.
NCUA has gotten more aggressive about fair lending practices, so credit unions need to identify problems themselves, fix them, and make restitution when necessary.(c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved.http://www.cujournal.com/ http://www.sourcemedia.com/
