SAN DIEGO — Despite being staged in “America's Finest City,” theNCUA's three-city Town Hall tour ended on a somber note here onOct. 5. The agency repeated much of the same information presentedat its two previous meetings, but thanks to the close proximity ofthe failed Western Corporate Federal Credit Union and the pooreconomy in California, Arizona and Nevada, attendees got an extradose of sobering news.
NCUA Chairman Debbie Matz said she was “very concerned” about thelosses credit unions are expected to suffer in 2010, particularlythose that stem from “inordinate portfolio risk” in business andindirect lending. Matz said of the 90 credit unions currently onthe NCUA's troubled list, 80 participate in business lending.
In an attempt to shore up losses, NCUA examiners will check 5300reports for red flags, such as an unusually high percentage ofrepossessed vehicles compared to auto loans, particularly if thecredit union participates in indirect auto lending. Businesslending will also be closely scrutinized. Some credit unions willreceive a visit or call from the NCUA in addition to theirregularly scheduled annual exam.
“Even if you're well-capitalized, if you're doing these otherthings, you'll get a visit,” Matz said. “We've seen cases of creditunions going from well-capitalized to shuttered within one year,and that can't continue.”
Greg Badovinac, assistant vice president of compliance andgovernment relations for the $2 billion Western Federal CreditUnion, expressed concern about the subjective practices of someexaminers and said it was unfair to expect credit unions to be incompliance with undefined red flag standards.
Matz countered that the red flags are not cases of complianceexceptions but, rather, management issues like poor due diligence.Specifically, Matz said some credit unions ineffectively outsourceddue diligence to third parties, assumed deals with other creditunions didn't require due diligence or assumed the other party hadsufficiently evaluated the risk.
Scott Hunt, director of the Office of Corporate Credit Unions, toldattendees that the NCUA is monitoring some large credit unions onthe brink of failure. “The credit unions that have failed so farhave been relatively small,” Hunt said, “but that will change in2010.”
Adding to the bad news was the revelation that WesCorp willprobably suffer additional permanent impairments in the nextquarter or two because it purchased so many front-loadedinvestments. Hunt said that while U.S. Central Federal CreditUnion's investments have longer weighted average lives, WesCorp'ssecurities will mature sooner, which gives the market lessopportunity to recover.
Hunt was even less optimistic when answering a question from theaudience regarding the potential for WesCorp investments to recoverlosses. He said based on the NCUA's and third-party's expertise,WesCorp investments are highly unlikely to perform better thancurrently estimated.
The seized WesCorp purchased securities backed by mortgagesconcentrated in the nation's hardest hit real estate markets,including Los Angeles, Phoenix and Miami, Hunt said. Home valuesare still sinking in those areas, and lenders have so manyforeclosures in the pipeline, they can't even process themall.
The losses will drive the $20 billion WesCorp even further into thehole, as the San Dimas, Calif.-based corporate has no membercapital left and as of July 31, reported a $4.3 billion retaineddeficit.
Audience members questioned what the losses mean for their annualNCUSIF assessments. Deputy Executive Director Larry Fazio said theNCUA board is “not currently envisioning multiple assessments,”just one. Matz said the agency will provide a “best guess estimate”of the 2010 annual assessment next month to help credit unionsbudget.
The NCUA said it plans to make its proposed corporate regulationspublic on Nov. 19 during a scheduled open board meeting. Theindustry will have either 60 or 90 days to comment, said GeneralCounsel Bob Fenner.
As discussed at previous town halls, regulatory changes will focuson increased capital requirements, investment concentration riskand credit risk, liquidity strategies and governance, as well asmanagement transparency and accountability.
Fenner also mentioned the regulator is considering setting limitson corporate indemnification payouts.
Allowing corporates to require paid-in capital as a condition ofmembership is also under consideration by the NCUA.
The NCUA will not require all corporates to collect PIC frommembers, but Fenner said the NCUA may let corporates choose whetheror not to require permanent capital contributions frommembers.
Downsides of the proposal include the possibility that inconsistentPIC requirements will cause “corporate shopping” within the system,Hunt added, and could additionally encourage credit unions to shopoutside the corporate system.
NCUA representatives chose their words carefully when answeringquestions about alternative capital, suggesting there is potentialfor the balance sheet Band-Aid but also stressing that hurdlesstill remain.
Matz said she is anticipating reading a joint CUNA-NAFCUrecommendation on alternative capital and said she is “personallynot opposed to it.” Board member Gigi Hyland said she expects topresent her white paper on the topic to the NCUA board in December.Hyland stressed that any new forms of alternative capital mustqualify under GAAP accounting rules or they won't beeffective.
California Credit Union League CEO Bill Cheney said that hisorganization is dedicated to assisting the NCUA in the effort andwill work with the regulator to consider new ideas. Matz thankedCheney for his support and said the NCUA is “open to looking at alloptions.”
NCUA Director of Congressional and Public Affairs John McKechnieadded that there are “credit union champions” on Capitol Hill thatsupport the idea and called the current Congress “the bestenvironment I've seen in a long time.”
“However, even if we go to the Hill with a unified position onalternative capital, there's no guarantee,” he said.
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