WASHINGTON - The industry's largest trade group is weighing whether to challenge a revamping of the National Credit Union Administration's performance rating system.

The agency said Dec. 21 that it plans to let examiners grade credit unions according to how well they serve their members - a step the Credit Union National Association has rejected in the past.

"It's questionable as to whether these are safety and soundness issues," said William F. Hampel Jr., chief economist for the Madison, Wis., trade group.

The revisions, which also include a rejiggering of examination ratios, will be enforced once NCUA moves to its automated examination program in July.

Under NCUA's revised rating system, examiners will grade service to members by how well management promotes and generates loan demand, how deeply the institution has penetrated its potential membership, and how competitive its rates are.

Also, credit unions must perform cost/benefit analyses on their services to ensure the bulk of the membership isn't subsidizing services used only by a few.

In 1992, after some debate, CUNA decided that the regulatory agency had no business dictating what qualified as good service. The trade group also said service should not be a factor in safety-and-soundness reviews.

This Thursday and Friday, CUNA officials will review the changes and how to respond to them.

Besides adding a whole new area of concern for credit unions, the changes give examiners more flexibility in assigning grades.

Examiners can now increase or decrease any rating as much as they deem necessary; previously, they could only alter ratings by one notch.

This expanded power fits in with NCUA Chairman Norman D'Amours' proclaimed goal of encouraging credit unions to take on more lending risk. But the wider latitude could be bad news for credit unions, Mr. Hampel said.

"It allows examiners to use bad judgment" in downgrading credit unions, he said.

NCUA evaluates institutions according to a rating system known as Camel, which stands for capital adequacy, asset quality, management, earnings, and asset-liability management (formerly liquidity). It rates credit unions on a 5-point scale, with 1 being the highest grade.

Examiners also will be working with a different set of key ratios. There are now five key ratios, down from seven in 1991 and 11 in 1987.

The key ratios are: capital-to-assets, net capital-to-assets, delinquent loans-to-loans, net chargeoffs-to-average loans, and return on average assets.

Because there are fewer key ratios, the 29 supporting ratios - including 12 new ones - could become more important than in the past, Mr. Hampel said.

The new Camel system could make it harder for credit unions with underwater collateralized mortgage obligations to get 1, 2, or 3 ratings than in the past, according to Pat Keefe, spokesman for the National Association of Federal Credit Unions.

The new system integrates the agency's mark-to-market accounting rule so that capital-asset ratios must take into account unrealized losses on investments.

"This might be felt at some of the larger credit unions," Mr. Keefe said.

The new Camel rating system also reduces the importance of the net operating expenses-to-average assets ratio, categorizing it as a supporting ratio, not a key ratio.

This means that credit unions will be less likely to earn points for low operating expense ratios, Mr. Keefe said.

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