Noisy Reaction Follows NCUA's Quiet Takeover

WASHINGTON — When a bank fails, the Federal Deposit Insurance Corp. announces it promptly, usually providing information about how customers can access their insured deposits.

But when a Fort Collins, Colo., credit union collapsed in May, as a result of shaky construction loans in Florida, the National Credit Union Administration stayed mum about it. In fact, members of the $334 million-asset Norlarco Credit Union did not know that federal regulators had taken it over until a local newspaper reported the collapse last month.

The NCUA defended the decision to keep the takeover quiet, claiming that Colorado officials had asked that it be kept under wraps to prevent customer panic. A Colorado law bars state regulators from disclosing failures of state-chartered credit unions, but the NCUA is under no such obligation.

"Basically, the state regulator should know the situation best," NCUA Chairman JoAnn Johnson said in an interview last week. "In this case, we did defer to them."

But critics say the case has reinforced the perception that the agency is more of a cheerleader than a regulator. And as Congress mulls reforms that would expand credit unions' business lending authority, these critics wonder if the NCUA is up to the task of resolving any broader troubles in the credit union sector.

"I have felt for some time that the NCUA is much too close to the industry it regulates," said Norman D'Amours, a former congressman and the agency's former chairman. "It reminds me of the relationship between the S&Ls" and their regulator before the worst of the S&L crisis.

Alan Theriault, a Portland, Maine, consultant who helps credit unions convert to banks, said that banking regulators could never get away with not notifying the public of a bank's failure.

"If the FDIC did this, they'd be in trouble," he said.

Norlarco is one of two credit unions the NCUA put into conservatorship in connection with a defunct real estate project near Fort Myers, Fla. The other was the $268 million-asset Huron River Credit Union in Arbor, Mich., which failed in February and has been run by the agency since. (That failure was disclosed immediately.)

Ms. Johnson said the two credit unions' concentration of assets in the Florida real estate investments — which exceeded the 12.25% ceiling on commercial loans in credit unions' portfolios — and a general "lack of due diligence" by the credit unions led to their downfall.

The loans were made to out-of-state investors who were signed on as credit unions members by third-party brokers. According to court documents, the developers led the borrowers to believe they could profit from investing in $200,000 properties by putting down just $1,000. The land deals, now the subject of lawsuits by borrowers and credit unions that bought participations in the loans, went south as real estate values plummeted.

The NCUA is shopping the two credit unions' assets, including $430 million of loans for which it is now accountable. Ms. Johnson said a hit on the National Credit Union Insurance Share Fund would "potentially" result from the agency's assumption of the assets. However, "it would be premature to speculate on any amounts," she said. "It would be safe to say that this won't affect materially our equity ratio for the insurance fund."

Chris Myklebust, Colorado's commissioner of financial services, said that the law barring disclosure of a credit union failure is meant in part to prevent a mass withdrawal of deposits.

A run "may or may not have happened, but absolutely that is one thing that I was aware of that could be a possibility of making the conservatorship action public," he said. "I would follow the same protocol in any instance."

The decision not to go public about Norlarco's failure was made jointly by his office and the NCUA, Mr. Myklebust said.

"Everything that we do is to preserve and protect the safety and soundness of the assets for the consumer," he said. "Part of that is … I want to keep the assets in the institution to maintain the capital levels that it's going to take to save the institution."

Ms. Johnson said she does not expect her agency to make "a major change" in how it publicizes conservatorships.

"We'll continue to work with our state regulators and take this on a case-by-case basis," she said. "In most cases, if not all, we have gone ahead with the disclosure. For legal reasons mentioned," Colorado officials "chose not wanting to do it in this case."

But the banking industry has seized on the NCUA's lack of disclosure — it also did not notify members when another Colorado credit union failed last year — as a sign the agency is more concerned with appeasing the industry than regulating it. Critics also question whether the regulator is properly scrutinizing loan portfolios of other credit unions. There are 52 credit unions with delinquency totals that exceed their net worth, according to NCUA data.

"NCUA seems to be engaged in regulatory forbearance, rather than really going in and shutting down these insolvent institutions," said Keith Leggett, a senior economist at the American Bankers Association. "There are serious reservations about NCUA's ability to manage a wider-spread credit problem within the credit union industry. They have these conflicting goals of being a safety-and-soundness regulator and an advocate for the industry."

But credit union officials maintain that the recent failures are isolated incidents and are not a sign of a looming crisis.

"The banks are trying to make an issue out of what happened in Colorado and apply it to all credit unions. Our view is this is an anomaly," said Patrick Keefe, a spokesman for the Credit Union National Association. "You cannot use that for an entire industry and say, 'Yes, that's what's happening everywhere.' One could take a variety of things that have happened in the banking world and say, 'Well, there must be some real problems in the banking world.' "

Robert B. Hoban Jr., a credit analyst with Standard & Poor's Corp., agreed that such credit issues can affect banks and credit unions.

"To the extent that these instances are one or two at a time of the 9,000...credit unions, it's an issue, but it's very well contained," Mr. Hoban said. "Largely speaking, credit unions are very healthy. If you look at the industry's performance and profitability, it's very good. But within that there are obviously going to be a few that are not as good."

Ms. Johnson said echoed those thoughts. "In the whole scheme of things, this is a very limited number of credit unions. That doesn't minimize it, but you need to look at the overall picture," she said.

The NCUA has been "very diligent in our guidance to credit unions," she said. "We were about 18 months ahead of others in putting out guidance specifically dealing with subprime lending, and the exotic mortgages in particular. If you look at the overall numbers for the mortgages that credit unions are making, our delinquency rate is very low."

Rep. Paul Kanjorski, D-Pa., who has sponsored a bill that would reform business lending and capital allowances for credit unions to give them more parity with banks, echoed confidence in the agency last week.

He said that the NCUA has "the wherewithal to handle" challenges to its insurance fund, though he believes some credit unions have lost their way.

"There are some people in the credit union movement who get mixed up as to whether it's a co-op or whether it's a business for profit," Rep. Kanjorski said after speaking at a National Association of Federal Credit Unions conference. "It's not a business for profit. You shouldn't get out there in extended risk areas. But they have a mission, and one of their missions would be to help people who are overextended. That they can do very well."

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