LAS VEGAS — Safety and soundness and due diligence always have been paramount for credit unions, but NCUA officials said how to achieve these pillars has all changed since the onset of the financial crisis.
"Due diligence in this market may mean entirely different things than in years past," said Margaret Dengler Ross, a Member Business Lending Program officer at NCUA. "Are [credit unions] asking the right questions? In evaluations, market conditions are inserting an urgency. NCUA is asking credit unions to look at risks in their credit portfolio."
Ross was one member of a panel at NACUSO's recent annual conference here on NCUA's view on the role of credit unions and CUSOs in the economic recovery and corporate bailout. She was joined by Michael McKenna, office of the general counsel for NCUA, and Frank Kressman, staff attorney.
Guy Messick NACUSO's general counsel and partner in Messick & Weber, served as host and moderator.
Kressman said appraiser issues play a big part in due diligence for CUs today. "A danger sign is a lack of appraiser independence or overzealous optimism as to what a property is worth," he said. "An appraisal is not a tablet that came down from the mountain; it is one person's opinion."
Agreed Ross: "Appraisals are an issue, such as using commercial property as a comp for residential property. "There is a fine line sometimes regarding independence of appraisers," she added.
Messick asked the panel what CUs should be doing as an industry in regards to the corporate stabilization effort, and what might the role of CUSOs be. McKenna said the program is "going well" at this point, and NCUA has received 455 comment letters on the topic.
"Many of these letters were long, and many of them were angry," he reported. "We want credit unions to know NCUA does not have a preconceived notion of what will happen with the corporate system. We do not know how many corporates will remain."
Kressman said an important principle to keep in mind is NCUA administers the Federal Credit Union Act, and regulations must be consistent with the Act. "From a regulatory perspective, safety and soundness dictates a common-sense approach," he began. "Credit unions exist to make loans, but they must be good loans. Credit unions must know the borrower, because they take the loss if there are problems.
"We all agree CUSOs are a wonderful concept." Kressman continued. "Increasingly, credit unions are using CUSOs for underwriting, due diligence and loan participations. In the relationship between CUSO and credit union, where is the appropriate line for responsibility? It is important for credit unions to recognize their role in the CUSO/credit union relationship. Credit unions cannot turn over responsibility; they must see the CUSO as a tool."
Member delinquencies increased as the recession deepened, Ross noted, "some credit unions that never had a loss cannot say that any more. More than ever, credit unions need to see financial statements [of potential borrowers]. Documents are the first line of defense if something goes wrong, and part of due diligence is evaluating documents. Risk-rating systems are only as good as the degree they are implemented."
An audience member asked how NCUA can give CUSOs the flexibility to provide additional services. Kressman said the answer lies in the statutes. "I am not the chairman of NCUA, and can't speak for the board, but the Federal Credit Union Act provides a laundry list of what are acceptable investments. And sometimes NCUA prohibits some of those in certain contexts."
NCUA currently is pursuing a pilot program that allows some CUs to invest in certain types of investments that are deemed "risky." Kressman said this program is intended to be short in duration. Chimed in McKenna: "Every couple years, the rules are reviewed."
Messick asked how NCUA views the value of collaboration and/or scale CUSOs can offer to the credit union movement. McKenna said he thinks "it is more important than ever that credit unions collaborate." Kressman said it is not his opinion, but a fact demonstrated by NCUA's regulatory history, that CUSOs have gotten a number of additional considerations that have allowed them to expand their offerings. Ross said one suggestion she would offer to CUs and CUSOs is: "document any collaboration."
