NEWS, EVENTS, PUBLICATIONS & EMERGING ISSUES

SW&M EMERGING ISSUE
September 30, 2008

NCUA SUPERVISORY LETTER AND YOUR EXAMINATION REPORT

Given the economy, it is clear based on our experience with credit union regulators that the regulatory climate has changed significantly—this is to say, the pendulum has swung. The NCUA has experienced an increase in credit unions in peril. As such, the NCUA has become more vigilant in its examinations, resulting in what appear to be new methods, requirements, and increased supervision. These changes are highlighted in the NCUA’s recent Letter to Credit Unions, number 08-CU-20, “Supervisory Letter – Evaluating Current Risks to Credit Unions.”

The NCUA had already implemented, and has now clearly communicated, the supervisory standards laid out in the Letter. The Letter is also important to California credit unions, as the DFI may well follow the NCUA’s lead in this regard. You can expect that these standards will be applied in future exams, if you have not already seen them in action. Also, the NCUA has scheduled additional visits outside of normal cycles in response to its concerns. As stated in the Letter, your regulators will likely be paying far more attention to your credit union if you hold a concentration of mortgage loans, especially if any of them may be considered “non-traditional” or “stated income,” or if a large number of your loans are HELOCs or other seconds.

There are aspects of the letter to which credit unions may not be able to respond to the NCUA’s satisfaction without preparation, planning, and careful design of policies and procedures.

• We call your attention to the section on Mortgage Loan workouts. This section contains excellent guidance. In addition, we would also refer you to our Client Pool guidance on foreclosures, loan modifications and working with mortgage borrowers. Loan modifications and programs to work with borrowers are important to comply with California law and to avoid foreclosures, however credit unions must also take care to account for and reflect workouts and modifications accurately in their records.
  
  
• On a more holistic level, credit unions should ensure that they have effective systems for gathering data, reviewing data, and reporting internally and to the credit union’s regulators. In responding to regulatory examinations, your credit union may be asked for data on different segments of its portfolios. The ability to pull, analyze, and assess data on loans, particularly higher risk segments of the credit union’s portfolio, will be important to show the credit union’s regulators that the credit union is accurately and realistically assessing its risk.
  
  
• In terms of relatively new requirements, we note that the NCUA in particular has begun asking for federally insured credit unions to set portfolio and investment limits not based on percentage of loans or percentage of portfolio, but rather in relation to net worth. This added focus on the impact of any decision on net worth displays the NCUA’s concerns about liquidity and the Share Insurance Fund.
  

While we cannot cover the entire Supervisory Letter or every regulatory concern you may encounter here, we again suggest that you review this guidance to assist your credit union in dealing with the current economic and regulatory climate. We have experience with these new requirements and can assist your Credit Union in assessing what information it will need in this changing regulatory environment. We have been on the “front lines” in a number of examinations and assessments of examination reports. Please contact our office if you have concerns about your examination process.

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