ALEXANDRIA, Va. — NCUA said it is instructing its examiners to put less emphasis on the "E" or earnings component in the so-called CAMEL code, as long as a credit union has a long-term strategic plan to weather the current economic environment.
The move comes while as many as half of all credit unions are expected to report negative earnings this year, due to the recession and billions of dollars of costs passed down to them from the corporate credit union bailout.
The new approach was described to key lawmakers in a letter from NCUA Chairman Deborah Matz, who also explained increased examiner flexibility on residential mortgage loan modifications and on commercial real estate lending, an emerging concern for credit union and bank regulators.
"Our view is that in certain circumstances it may be appropriate for a credit union to forego short-term earnings so that a high level of member service can be maintained," Matz said in a letter to House Financial Services Committee Chairman Barney Frank, who asked regulators last week how they are balancing ongoing stress among banks and credit unions with the growing need for credit.
The NCUA Chairman told Frank the agency is currently drafting a supervisory letter to all of its examiners explaining this approach. The letter will encourage NCUA examiners to show flexibility in the earnings component of CAMEL, if a credit union appears to have an adequate long-range plan.
NCUA rates all federally insured credit unions on a scale of one to five based on CAMEL, which stands for capital adequacy, asset quality, management, earnings and liquidity. Credit unions rated 4 or 5 are considered problem institutions.
Matz also told the lawmakers NCUA examiners are continuing to emphasize flexibility in residential loan modifications, while stressing safety and soundness. NCUA, said Matz, has also joined banking regulators in a new policy to ease stress on commercial real estate borrowers who are experiencing diminished cash lows, depreciated collateral values and delays in selling or renting commercial properties. The guidance stresses less reliance on collateral values in falling markets.
"NCUA understands the importance of increasing lending to stimulate the economy, while ensuring the safety and soundness of the institutions NCUA regulates and insures," said Matz in her letter. "There is a fine balance, but I firmly believe an achievable balance, between these two objectives that NCUA is encouraging the credit union industry to seek."
