ALEXANDRIA, Va. – A report issued Tuesday by NCUA’s Office of the Inspector General found NCUA examiners failed to spot red flags predicting last year’s failure of High Desert FCU, a one-time $190 million credit union located in Apple Valley, Calif., that cost the National CU Share Insurance Fund more than $24 million in losses after the failed credit union was acquired by Alaska USA FCU.
NCUA took High Desert under conservatorship in October 2008, then assigned its remnants to Alaska USA FCU in July 2009 in a purchase and assumption agreement. By then, High Desert's assets had shrunk all the way to just $94 million and its net worth to negative $14 million, making up more than half of the $24 million the failure would end up costing the NCUSIF.
The report found that NCUA’s examiners did not adequately evaluate the risk of High Desert’s real estate construction loans, categorized as member business loans, which accounted for more than 60% of the credit union’s loans for three straight years, 2005 through 2007.
NCUA examiners noted the high concentration of construction loans, or MBLs, and lack of proper underwriting and monitoring controls, but “failed, however, to elevate these repeated issues for stronger supervisory actions,” wrote the Inspector General.
Release of the report comes as credit unions are lobbying Congress for authority to double the amount of business loans they can make.
Among the red flags missed by examiners in the High Desert case included: the number of delinquencies among the real estate construction loans remained unchanged for the three-year period; and, the number of loans reported as more than 12 months past their original maturity dates grew from just nine in March 2004 to 158 in September 2007, according to the Inspector’s report.
The Inspector also noted that NCUA’s Regional Director in 2003 granted the credit union waivers from its loan-to-value requirements for MBLs, allowing it to take on increasing risk in its lending.
The NCUA examiners, the IG found, also did not ensure that High Desert management took corrective action to repeated documentation of resolution issues concerning its business loan portfolio.
In addition, the examiners in charge of the then-troubled credit union remained the same for eight years, becoming “overly familiar with the credit union, management, staff, processes, and culture, which created a lack of objectivity in the evaluation of the risks impacting the credit union,” found the inspector.
High Desert was chartered in 1951 to serve personnel and employees of George Air Force Base in Victorville, Calif., and it eventually became a regional leader in residential real estate construction and development lending. In 1982 the credit union converted to a community charter, and in 2004 it expanded to serve all of San Bernardino County. In 2003 the credit union began to expand its real estate construction lending, which helped push its assets from $60 million in 2000 to a peak of more than $190 million by 2009. During those years the average home prices in the area more than doubled, followed by a swift and dramatic decline in real estate prices in 2007.
