Ill-Fated HELOCs Doomed California CU, Cost NCUSIF $205 Million
CONCORD, Calif. – A poorly timed foray into home equity lines of credit ended up burying Cal State 9 CU and wiping out almost $250 million in equity – including $205 million of it accruing to the National CU Share Insurance Fund – after the failed credit union was taken over by NCUA in July 2008.
NCUA Chairman Debbie Matz used the example of the one-time $465 million credit union to illustrate why the agency has incurred added expenditures to implement a 12-month examination schedule for all federally insured credit unions. Matz told more than 4,000 attendees to CUNA’s Government Affairs Conference yesterday that Cal State 9 was rated a CAMEL 2, a notch from the highest financial grade, by California regulators after a March 2004 exam. But by the time regulators returned to the credit union 21 months later, the credit union had embarked on an ambitious HELOC program “with no internal controls and no concentration limits.”
“In the next exam, examiners found the home equity program had grown nearly 500%,” said Matz. “However, by that point, management was unable to undo the damage in time.”
“So by the final exam, the credit union’s financial condition had deteriorated past the point of no return. The impaired portfolio had to be sold for only 16 cents on the dollar. The credit union failed; and the Share Insurance Fund lost two $205 million,” said Matz, of the biggest natural person credit union loss ever. Included in that loss was $107.4 million in assistance NCUA had to provide Patelco CU to induce the San Francisco credit union to take over the remnants of Cal State 9. The NCUA payment made up for the negative capital Cal State 9 held, which would have diluted Patelco’s own capital.