ALEXANDRIA, Va.-A new review of the 2007 failure of Norlarco CU criticizes NCUA's role in monitoring the multi-billion dollar market for loan syndications, known among credit unions as participations, especially the more than $250 million of loans in speculative south Florida real estate loans the Fort Collins, Colo., credit union sold off to at least 18 other credit unions.
The report by NCUA's Office of the Inspector General says the one-time $360-million credit union's abused its field of membership restrictions by reaching all the way to Florida, and failed to perform due diligence of its residential construction loan program in Florida's Gulf Coast.
"Examiners did not associate the rapid rise of loans sold through participations as a potential safety and soundness concern to Norlarco, or to the NCUSIF, but rather examiners merely viewed participations as a means to manage Norlarco's balance sheet risk," said the report on the Norlarco failure, which could cost NCUA more than $100 million to resolve and was one of the biggest credit union failures ever.
The failure of Norlarco, which was eventually sold to Public Service CU, prompted dozens of lawsuits from borrowers and from at least one credit union that believes it was not paid enough for its share of participations.
The failures to monitor loan participations sold by Norlarco are reminiscent of the Centrix Financial case, where hundreds of credit unions wracked up losses on the participations they bought in subprime auto loan pools.
NCUA told the inspector general in the Norlarco case the inadequacies found in its oversight of the participations market were more systemic in nature due to not having a formal program in place to review participations
As a result, in November 2008, NCUA issued a supervisory letter to NCUA field staff indicating that loan participation credit and concentration risks were increasing more rapidly than credit unions' overall loan portfolio risk. The letter included guidance and a questionnaire for examiners to use in evaluating loan participation programs.
The IG's report also says Norlarco abused its field of membership to enable it to sell speculative real estate loans in south Florida. As a result, 97% of the properties the Colorado credit union financed through its residential construction loan program were in Florida and 40% of the borrowers were residents of Florida's Dade and Broward counties.
The report says the Colorado credit union was allowed to lend to Florida borrowers through three select groups: Rocky Mountain Bird Observatory; Boys and Girls Club of Larimer County, Colo.; and Legacy Land Trust, all of which were accessible through a minimum membership fee.
"We believe Norlarco management took undue advantage of its field of membership in order to not only help Norlarco fulfill its $30 million per month funding commitment, but also to financially benefit from what economists believe was the largest real estate boom in U.S. history," said the highly critical report. "As a result, management concentrated a significant portion of its loan portfolio in a distant and unfamiliar geographic location. In addition, the RCL program in Florida grew in a rapid and uncontrolled manner and created significant credit and concentration risks."
