NCUA Missed Red Flags On Big Failures

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ALEXANDRIA, Va. – NCUA and state examiners missed numerous signs of problems at some of the biggest credit union failures over the last two years and could have reduced losses to the National CU Shares Insurance Fund, a new study by NCUA Office of Inspector General concludes.

Examiner deficiencies in quality control efforts, examination procedures and enforcing supervisory orders helped push losses for 10 cited failures since 2008 to some $522 million, the report, released Friday concludes. “We believe had examiners acted more aggressively in their supervision actions over these critical issues, the looming safety and soundness concerns that were present early-on in nearly every failed institution, could have been identified sooner and the eventual losses to the NCUSIF could have been stopped or mitigated,” said the IG.

But the report says bad management–some of it attributed to fraud–was the main cause of every one of the failures: Norlarco FCU, Huron River Area FCU, Eastern Financial Florida CU, Cal State 9 CU, St. Paul Croatian FCU, Ensign FCU, Clearstar Financial CU, New London Security FCU, High Desert FCU and Center Valley FCU.

The IG attributed three major shortcomings to management in the big failures: poor strategic planning and decision making; inadequate oversight and fraud. The IG identified fraud as the main cause of at least three of the failures: St. Paul Croatian, which is projected to cost the NCUSIF a $170 million loss; Center Valley, a $16.4 million loss; and New London Security, a $12 million loss.

Examiners were slow to see and react to emerging problems in almost every one of the big failures, the study, which is derived from the IG’s 10 Material Loss Reviews, finds.

It said NCUA examiners missed the huge real estate speculation loans made by Colorado’s Norlarco FCU in south Florida that eventually sunk the one-time $260 million credit union.

State examiners failed to see the affects the crashing California real estate market had on the HELOC portfolio of Cal State 9 CU before the one-time $320 million credit union went under.

And Florida state and NCUA examiners were slow to reign in risky practices, including big business loans in the overheated south Florida market, by Eastern Financial Florida CU before the crash of the one-time $1.6 billion credit union.

Examiners in Nevada, said the IG, were slow to respond to the deteriorating liquidity at Clearstar Financial CU, referring to management of the former $175 million Reno credit union as “capable” where there was “obvious and serious continuing liquidity issues.”

In several of the cases, NCUA and state examiners were unable to grasp the risks posed by new and expanding credit union activities. In the case of Cal State 9 it was home equity lending in the overheated California market. In the case of Eastern Financial it was investments in risky collateralized mortgage obligations, or CDOs, which cost the credit union a loss of almost 100% of its $140 million investment.

Consequently, the IG recommended that NCUA examiners monitor new business strategies more closely, even for highly rated CAMEL 1 and 2 credit union.

The IG also recommended that NCUA move to enforce supervisory directives more actively, instead of letting certain situations linger or worsen before taking action.

The study also recommends that NCUA issue a national instruction to examiners placing more emphasis on quarterly Call Reports to develop “red flags”.

The IG also recommended that each region’s supervisory examiner conduct a documented secondary review of final CAMEL ratings for all credit unions over $100 million before sending it to management.

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