SAN DIEGO - Credit unions that have long been strong CAMEL 1 and CAMEL 2 operations could see downgrades during the rest of the year, according to a supervisory examiner with NCUA.
In addition, ongoing balance sheet problems, risks, and a sluggish economy will combine to lead to more Documents of Resolution that many credit unions have ever experienced, as well, said Linda Thompson, a supervisory examiner in the agency’s Region V office.
Thompson acknowledged many credit unions are expressing surprise and frustration at the documentation being demanded, even with loan portfolios that have been examined in the past. “In some cases have looked at the same real estate portfolio for years and years and have not asked you to take some of the steps we’re now asking you to take,” she said. Thompson urged credit unions to take the following steps prior to examination:
* Measure risk. “The first thing you can look at is your LTVs at origination and at what they are today, especially if you’re in a declining real estate market. With FICO scores, you will want to know what kind of mix is in your portfolio.”
* Review mortgages. “With hybrid loans or non-conforming loans, you probably want to identify what those loans are. There are also some ARMs out there with some unusually long-terms, such as a 10/1 that present some unique risks. With home equities, you need to also investigate that first-mortgage term.”
* Look for warning signs. “One of the best practices I’ve seen is from a credit union that has started a system for monitoring the volume of transactions on the home equity line. If you have a borrower who is starting to make a high volume of transactions on the home equity line of credit, they may be tapping it to pay their first mortgage or other bills,” an early indicator of problems that won’t show until later on a credit report.
* Aggregate loans. “Once identified, you want to aggregate those loans and come up with an assessment of what you’re holding.”
* Workout loans for members in trouble. “Workouts are something we’re seeing a lot of, and we’re seeing more creative approaches to work-outs. We’re encouraging credit unions to use work-out loans where appropriate. The main thing there is to assess the borrower’s ability to repay and intention to repay. You’ll need to identify those on your balance sheet as well and assess amount of risk you have.”
* Risk-based pricing. “Evaluate your risk-based pricing by looking at charge-offs by score.”
* Interest rate risk. “We know a lot of credit unions are still putting real estate loans on the books today and we’re seeing some longer-term investing to make a profit, and we want to make sure you have the IRR processes in place and which are appropriate for your credit union.”(c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved.http://www.cujournal.com http://www.sourcemedia.com
