BIRMINGHAM, Ala. — Is the record number of CU liquidations in 2009 a reflection of regulatory agencies acting quickly-or too late?
Some analysts have questioned whether state and federal regulators have been up to the task as losses have mounted and net worth has declined into low single digits at some credit unions, forcing closures, P&As, and losses to the insurance fund. But regulators told Credit Union Journal they have acted as quickly as possible, and that in cases such as the red numbers posted by some corporate CUs, no one could have projected those scenarios.
"Regulators will inevitably come in after the fact and evaluate the loans. When you've had the type of economic downturn that we've had over the last two years a lot of good loans have gone bad," said consultant and former NCUA chairman Dennis Dollar. "The referee always calls the foul after the play is run; he can't call it before the play is run, because he doesn't know the guy is going to jump offside. He's not out there playing the game."
An uptick in delinquencies and foreclosures can be expected for a number of credit unions, especially those in the states where home values have declined by 50% or more. But instances where credit unions have and are reporting big losses on commercial loans, including out-of-state real estate and golf course communities, have raised questions about where regulators were when credit unions made these calls.
"It's a natural tendency that the regulators are going to come in after the fact and are always going to question loans that were felt by the CU to have been good loans at the time," Dollar explained. "If they had passed on those loans in 2003, 2004 or 2005, someone else would have made the loans and the CUs' loan-to-share ratios would have fallen and earnings would have fallen and regulators would write them up about their earnings problems."
Keeping Regulators Satisfied
The only way to keep regulators satisfied, he said, would be "to make all good loans, and that is not the Utopian world in which financial institutions live."
U.S. Treasury reports and other studies have shown no linkage between regulated financial entities and the massive run-up in assets and subsequent crash, Howard Pitkin, Connecticut Department of Banking Commissioner and former NASCUS chairman contended.
"There was a credit explosion in the mid-90s that led to the housing bubble, and nothing much was done to stop it," he said.
With the real estate bubble in full swing during the mid-2000s and credit agencies stamping AAA ratings on nearly every bond instrument backed by mortgages, loans for residential and commercial development looked like safe and profitable bets.
"It is easy look now and say a credit union should or should not have done this, that or the other with the benefit of hindsight," said Robert Hayes, bureau chief of the Florida Office of Credit Union Regulation.
The Winds of Change?
As has been the case with previous crises, regulatory changes may be likely in the near future. Hayes said Florida state regulators are "paying particular attention to underwriting standards" on all loans going forward and expanding their scope to the operations level. Credit unions with indirect loan programs can expect the relationships they have with the dealers to be probed and careful study done to see how successful those CUs are at converting those new members to primary account holders to mitigate some of the risk these "marginally attached" individuals can bring.
While there may be additional follow-up and scrutiny by regulators when credit unions file their financial reports, CUs should not expect any major changes in how examiners approach their institutions' books, Pitkin said, adding, "The business of credit unions is still the business of credit unions." He dismisses the idea of "change for change's sake."
"It's going back to the basics again," said Linda Jekel Director of Credit Unions with Washington's Department of Financial Institutions, when asked what will be different for credit unions in the post-bubble world. "Are they doing good risk management of their balance sheets? What kind of new loans are they putting on their books and how they are going to work with their real estate borrowers that they've modified to get through this crisis?"
Tom Candon, Vermont's Deputy Commissioner of Banking and Securities and NASCUS chairman-elect, noted that a commercial loan is like a "live wire that is plugged into the economy," and as the economy quickly nose-dived last year, so did many of those loans.
"You've got to develop a specialized staff or outsource the functions that you don't have a staff for like underwriting or loan documentation and servicing," Candon said. "This type of lending is a lot different that the main book of business for credit unions."
He cautioned credit unions against jumping into member business loans without the proper expertise, warning that regulators are tightening their scrutiny of credit union's commercial lending operations.
Market Still Rules
In the end, Dollar pointed out, the marketplace will still dictate what loans should be offered and all financial institutions will figure out ways to be profitable even with tighter scrutiny. Regulators, he said, cannot prevent the next crisis, but they can perhaps put a "governor" on the next bubble and keep the subsequent downturn from being overly harsh.
"Really what the regulator can do in this situation is be perceptive and recognize risk that maybe the CUs management and board can't foresee down the road. If you can point that risk out and ask them what they are going to do to mitigate that risk." Hayes added, noting, "everything the regulator can do cannot take the place of one thing that is most important-and that is personal responsibility."
