ARLINGTON, Va. - When examiners visit state-chartered credit unions in the coming months management should expect tougher scrutiny of member business lending, vendor relationships, indirect lending, and HELOC portfolios, according to the trade group representing state agencies.
Mary Martha Fortney, president of the National Association of State Credit Union Supervisors (NASCUS), and a number of state regulators, acknowledged to Credit Union Journal that the sluggish economy and mounting CU losses are affecting examination approaches. But Fortney pointed out that state regulators had been taking tougher stances before the recent economic problems hit.
"The current economic conditions surely accelerated any regulatory due-diligence, emphasis, and oversight," Fortney said.
State regulators are exercising "heightened monitoring in a measured manner," Fortney continued. "The states continue to focus on the risk in their institutions through their examination and supervision process-risk-focused exams, rigorous off-site monitoring, and follow-up on corrective action."
As has been the case with federal regulators (CU Journal, July 21, 2008), tightened exam procedures has been a topic discussed among state regulators and NASCUS, Fortney said, reminding that each state sets its own policies. She expects the topic to be a key discussion point this week during the NASCUS State System Summit in Seattle.
Fortney noted that regulators are monitoring credit unions that have high growth levels, expanded member business lending programs, and loan participations. Regulators are also looking at CUs that use vendors to provide loan operations, credit administration, or other credit-related functions.
"Those relationships will be analyzed to make sure credit unions are maintaining adequate due diligence in monitoring these vendors," she said.
In Ohio, Rose Bartolomucci, deputy superintendent for credit unions for the Ohio Division of Financial Institutions, says her Columbus-based office has been reducing the amount of time between exams for the last 14 months.
"Let's say you're a CAMEL 1 or 2 and we'd been going 18 months between exams, we're shortening that to 12 months for many credit unions," she said.
CUs experiencing "issues" will receive quarterly visits and increased off-site monitoring, where the division examines 5300 Call Report data to spot emerging issues, said Bartolomucci, a former credit union CEO. "This process has been extremely helpful to us because our examiners can pick up the phone and call a credit union if they see a trend line not going the way it should be," Bartolomucci said.
Credit unions facing "real issues" can expect regulators at monthly board meetings. "We're there to monitor and help the credit union answer questions from the board," Bartolomucci said.
MBLs, Indirect Get Scrutiny
As the Ohio Division of Financial Institutions steps up its exam cycle, the office is looking more closely at member business lending and indirect auto lending.
"For indirect auto lending portfolios, we are looking at concentrations-looking at what kind of paper credit unions are buying and what their policies state," Bartolomucci said. "We are doing the same with member business lending."
Home equity is another "key area" the Ohio regulator is scrutinizing.
"Credit unions are going to have to take closer looks at appraisal values and maybe take new appraisals," Bartolomucci said. "We are trying to get the message out to credit unions to make sure the member is not upside down when they draw on their line of credit."
Neither Bartolomucci nor Fortney acknowledged the tougher stances will lead to CAMEL downgrades, choosing to say that upgrades and downgrades occur every year.
But Linda Jekel, director of credit unions for the Division of Credit Unions in the state of Washington, reports that CAMEL downgrades are already occurring. "We have 13 credit unions that have negative earnings," Jekel said. "That by itself is not a problem. They have strong capital. But the question is are they being reactive or proactive regarding negative earnings, and how are they going to work themselves through this housing cycle, which we don't think has bottomed out yet."
Jekel said much of the corrective action is focused on business planning and budgeting, but did not disclose how many CUs are on corrective action.
The Norlarco collapse has Colorado's Division of Financial Services focused even more closely focused on risk, explained David Francis, supervisory examiner. "Every time we learn a lesson we apply that lesson going forward," Francis said. "What we learned from Norlarco is that just because something might be allowed and permissible, it doesn't mean it's safe and sound. Even if you haven't lost a dime in the program, there can be risk."
To help examiners better understand risk and to avoid potential problems, NASCUS' Fortney encourages CU management to communicate with regulators before they visit.
"I think dialogue between the credit union and the examiner is key," Fortney said. "Regulators want to be advised of a problem or a new venture beforehand. So picking up the phone and talking to your examiner or regulator is important."(c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved.http://www.cujournal.com/ http://www.sourcemedia.com/
