WASHINGTON – A new report issued Wednesday by the NCUA Inspector General’s Office cites both the federal regulator and the Michigan credit union supervisor for lax oversight in last year’s failure of Huron River Area CU, one of three credit union failures tied to a controversial real estate speculation scheme in southwest Florida.
As a result of the Huron River failure, the Inspector General recommended that NCUA increase its efforts to monitor federally insured state chartered credit unions, an area that has always been closely guarded by state regulators.
The failure of the one-time $360 million credit union, which was eventually merged into Detroit Edison CU, cost the National CU Share Insurance Fund as much as $100 million to resolve. That includes a $40 million payment to Detroit Edison to make up for zero capital being acquired in the deal, and losses on some $220 million in failed Florida loans assumed by NCUA.
NCUA Executive Director Len Skiles said in a response to the report he agrees the federal agency should more closely monitor potential risks posed by federally insured state charters. In fact, as part of an expanded examination program, NCUA will now examine federally insured state charters that show weaknesses, instead of leaving it to state examiners.
In a highly critical report, the Inspector General found both NCUA and state examiners failed to adequately monitor and react fast enough to trends that may have saved the Ann Arbor, Mich., credit union, even after they learned Huron River had extended hundreds of millions of dollars in loans to fund real estate speculation in far flung Florida, well outside of its field of membership.
"We believe financial ratios and trends revealed Huron’s worsening liquidity position well before NCUA and the Michigan (regulator) officially identified the severity of the issue during the January 2007 joint examination," said the IG, noting the credit union’s liquidity position had been deteriorating rapidly for the prior 18 months.
Huron River was one of three credit unions that failed in the last two years after making speculative loans in the same Florida developments under a scheme known as "Millionaire University." The others were Norlarco CU, in Ft. Collins, Colo., and New Horizons Community FCU, in Denver. Both credit unions were liquidated by NCUA and their remnants sold off to healthy credit unions at great expense to the National CU Share Insurance Fund.
The Inspector General particularly faulted the Huron River management and board, saying they did not exercise due diligence in evaluating the Millionaire U program; had concentrated a majority of the credit union’s loans in the Florida projects; strayed from their field of membership; misclassified loans in order to exceed NCUA limits on member business loans; and had inadequate liquidity to fund the projects. They also said Huron River’s management misled NCUA and state examiners and ignored warnings of the coming Florida real estate bust.
