NCUA 2011 Letters to Credit Unions (LTCUs)
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Letter to Credit Unions No.: 11-CU-17 NCUA Office of Consumer Protection
NCUA's LTCU 11-CU-17 provides information regarding NCUA’s new Office of Consumer Protection (OCP). This new office, designed to segregate consumer protection and compliance responsibilities from those involving safety and soundness, became fully functional in 2010. NCUA intends for the OCP to:
- Provide a core element within NCUA focused solely on consumer protection;
- Serve as a strong advocate for consumer safeguards and education;
- Serve as a liaison to other government agencies on consumer protection issues;
- Provide dedicated resources to the role of the Ombudsman; and
- Centralize field of membership processing
OCP is organized in two divisions:
1) Consumer Compliance and Outreach (CCO) Division
- Consumer compliance policies, program and rulemaking;
- Interagency liaison on consumer protection and compliance issues;
- Fair lending examinations;
- Consumer call center;
- Financial literacy and outreach programs; and
- Ombudsman duties.
As part of OCP’s outreach initiative, NCUA launched a consumer-oriented website in March 2011 (www.mycreditunion.gov). The website provides information about credit unions, NCUA, federal share insurance, and financial tips involving savings and credit. The website also provides credit union members with procedures to follow in resolving a dispute with their credit union including how to file an on-line complaint with OCP.
CCO processes member complaints filed against federal credit unions:
- Complaints may be submitted in writing on-line, by e-mail, by fax or by regular mail;
- Upon receipt of a compliant, CCO contacts the FCU about the issue and requests the FCU respond within 21 day and notifies the complainant of the timeframe for the FCU's response
- Once the FCU responds, CCO reviews the response to ensure it adequately addresses the member’s complaint and that the action(s) taken, if any, are consistent with consumer protection laws and regulations;
- If needed, CCO will request additional information and/or clarification from the FCU
- Ultimately, the complaint process concludes in one of the five following manners:
i) The FCU resolves the issue to the member’s satisfaction and the case is closed;
ii) The FCU is found to have not violated a consumer protection law nor a consumer compliance regulation and the case is being closed;
iii) The dispute is litigated;
iv) The issue involves state law and is not within NCUA's purview; or
v) The FCU is found to have violated either a consumer protection law or consumer compliance regulation and is cited by CC) and required to take corrective action(s)
If the CCO receives complaints regarding state-chartered credit unions or other types of financial institutions it will forward those to the appropriate state or federal regulator for disposition.
2) Consumer Access Division
The second division within the Office of Consumer Protection is Consumer Access and is responsible for:
- New federal credit union charters;
- Charter conversions;
- Field-of-membership expansions;
- Share insurance conversions;
- Bylaw amendments; and
- Low-income designations
Letter to Credit Unions No.: 11-CU-16 State of the Credit Union Industry
NCUA Letter to Credit Unions 11-CU-16 is NCUA's quarterly update on the status of the federally insured credit union system. The LTCU and the accompanying enclosure analyze credit union financial trends for the first six months of 2011 and identifies supervisory concerns. NCUA notes that credit union lending grew for the first time in four quarters and return on average assets increased to 77 basis points during the half of 2011 (+26bp). NCUA notes the agency's continued concerns related to elevated levels of credit risk, interest rate risk, and concentration risk.
- Credit risk – NCUA notes that while overall delinquencies and net charge-offs have declined, delinquencies in real estate, business, and participation loans remain elevated. Citing increasing real estate and business loan modifications, NCUA reminds credit unions that modified loans remain at risk for future delinquency and refers industry to previously published guidance on prudent loan modification policies and procedures. NCUA refers credit unions to previous LTCUs 09-CU-19, 09-CU-04, 10-CU-07, and 07-CU-06.
- Interest rate risk - Many credit unions have a significant amount of long-term, fixed-rate loans and investments with longer maturities. When interest rates begin to rise, the interest rate risk present in credit union balance sheets will have a serious negative impact on earnings. NCUA notes that 58% of credit union share balances are in rate sensitive accounts. NCUA refers credit unions to LTCU 10-CU-14.
- Concentration risk – NCUA notes the need for concentration risk mitigation strategies, citing elevated levels of real estate loans as a percentage of total loans combined with declining real estate values nationwide.
Some other highlights from the LTCU 11-CU-16 include:
- Assets increased by $28.13 billion (6.15%) to a total $942.48 billion
- Slower asset growth pushed up net worth ratios from 10.06% to 10.14%
- Loans declined $714.80 million (-0.25% annualized) and loans to share ratios decreased from 71.81% to 69.44%
- Loan delinquency as a percentage of total loans declined from 1.76% to 1.58%, including declines in real estate loan delinquencies from 2.10% to 1.98%, declines in delinquent business loans to total business loans (less unfunded commitments) from 4.01% to 3.64%, and declines in delinquent loan participations as a percentage of total loan participations from 3.90% to 3.58%
As of June 30, 2011, there were 2,705 federally insured state-chartered credit unions and 4,534 federal credit unions.
NCUA Letter to Credit Unions No.: 11-CU-15 Changes to US Savings Bonds Sales
NCUA's LTCU 11-CU-15 notified credit unions that Treasury Department has announced the elimination of over-the-counter sales of paper savings bonds after December 31, 2011. Beginning January 1, 2012, electronic savings bonds, available to consumers for purchase through TreasuryDirect, will be the sole available bonds available for purchase. Credit unions may accept paper bond applications until the close of business on December 21, 2011.
NCUA's letter recommends credit unions be prepared to answer member questions and help guide them thru the transition to the electronic bonds. Members may be directed to http://www.treasurydirect.gov/where they can purchase, manage, and redeem electronic savings bonds online.
After the transition to electronic bonds, credit unions should continue redeeming paper bonds presented by their members. Credit unions seeking more information may access a free toolkit on the Treasury Direct website listed above.
NCUA Letter to Credit Unions No.: 11-CU-14 Temporary Corporate Credit Union Stabilization Fund Assessments
LTCU 11-CU-14 announces the 2011 Temporary Corporate Credit Union Stabilization Fund assessment. Credit union will be assessed 25 basis points based on insured shares as of June 30, 2011. Payment is due September 27, 2011. NCUA states that the agency anticipates the Stabilization Fund assessment in 2012 will be between 8-11 basis points and in the single digits in the remaining years.
NCUA states in the letter that the assessment will reduce ROA for 2011 by 21 basis points and reduce the net worth ratio by 15 basis points. The assessment expense should be recorded on the September 2011 Call Report using the Temporary Corporate CU Stabilization Fund Assessment line (account code 311) on the Statement of Income and Expense.
NCUA LTCU 11-CU-14 also presents new forecasts for the total cost of the Corporate Credit Union Stabilization program. NCUA states that based on a new analysis, the cumulative total projected cost for the corporate resolution has decreased, leaving a projected range of future assessments between $1.9 billion and $6.2 billion.
Letter to Credit Unions No.: 11-CU-13 Emergency Financial Services for Disaster Victims
NCUA's LTCU 11-CU-13 notified federal credit unions (FCUs) that in the aftermath of hurricane Irene, in addition to providing services to their members, FCUs may provide emergency financial services to nonmembers as part of their authority to engage in charitable activities under their incidental powers. Because NCUA permits this activity as a charitable incidental power, FCUs may not charge fees for the services in excess of direct costs.
Emergency financial services include check cashing for nonmembers, nonmember access to the credit union's ATM networks, or other means to access cash to meet the short-term, emergency needs of persons who are in the areas affected by Hurricane Irene.
NCUA also notes that FCUs may provide services to persons who are members of other credit unions under their correspondent services authority. This authority permits FCUs to provide services to other credit unions that it is authorized to perform for its own members or as part of its operation. FCUs may derive income from correspondent activities.
Letter to Credit Unions No.: 11-CU-12 Disclosing CAMEL Ratings to State Chartered Federally Insured Credit Unions
NCUA issued LTCU 11-CU-12 to inform federally insured state-chartered credit unions (FISCUs) that NCUA was changing a long standing policy and would begin disclosing its CAMEL ratings to FISCUs. Prior to this, if a CAMEL rating was disclosed, it was only the state regulator disclosing their rating to the credit union. To provide greater transparency to FISCUs and share risk perspectives from NCUA as each credit union’s insurer, NCUA examiners were recently instructed to begin sharing NCUA’s CAMEL ratings with FISCUs after all insurance reviews and supervision contacts in which NCUA examiners are on-site.
NCUA examiners will disclose their CAMEL component and composite ratings using guidance published in LTCU 07-CU-12 (discussing the elimination of the CAMEL Matrix), along with sufficient information supporting the basis for the assignment of individual component and composite ratings.
LTCU 11-CU-12 also informs credit unions of the process by which state regulators and NCUA attempt to reconcile differences in CAMEL ratings. Most of the time, state and federal examiners reach the same conclusion as to CAMEL. However when differences remain after discussion between NCUA and the state, NCUA will proceed to disclose NCUA’s CAMEL simultaneously and on schedule with the state regulator.
Finally, NCUA reminds credit unions that CAMEL ratings are confidential and should not be shared with third parties other than the credit union’s state regulator.
Letter to Credit Unions No.: 11-CU-11 Impact of US Debt Downgrade
Letter to Credit Unions No. 11-CU-11 addresses issues raised by the August 5, 2011 downgrade of the long term debt rating of the U.S. government and federal agencies from AAA to AA+ by
Standard &Poor’s (S&P) and includes risk-based capital guidance jointly issued by the banking agencies to reassure regulated institutions that risk weights remain unchanged.
- NCUA examiners continue to assign zero risk weights to credit union investments in Treasury securities, NCUA Guaranteed Notes (NGNs), and other securities issued or guaranteed by the U.S. government
- The downgrade of NGNs will have no impact on NCUA, since all NGNs have already been collateralized and sold
- Credit unions that bought NGNs might be affected in two ways:
- If the credit union plans to hold the NGNs to maturity, the downgrade might nominally affect the securities’ value depending on the accounting treatment used by the credit union; or
- If the credit union had planned to resell the NGNs rather than hold to maturity, the price of NGNs may fall or rise based on changing market conditions.
Another result of S&P’s downgrade was the downgrade of four unsecured debt issues from two corporate credit unions that NCUA guaranteed under the Temporary Corporate Credit Union Liquidity Guarantee Program. However, this downgrade does not affect the costs of these corporate debt obligations to NCUA or credit unions.
S&P reaffirmed its highest rating for U.S. government short-term debt so NCUA believes there should be little impact on money market funds and other short-term lending markets.
LTCU 11-CU-11 notes that the downgrade of U.S. debt may impact consumer confidence and instructs credit unions to be aware of the possible balance sheet fluctuations including unusually large deposit inflows or draws on existing lines of credit.
Credit unions should be prepared to discuss their situation with their regulator if market volatility results in deposit inflow which in turn drives down the credit union’s net worth.
Letter to Credit Union No.: 11-CU-10 Federal Reserve Bank Excess Balance Accounts Fact Sheet
NCUA published LTCU 11-CU-10 to provide credit unions with information on Federal Reserve Bank Excess Balance Accounts (EBAs). Specifically, NCUA notes that EBAs are tools corporate credit unions are using to shrink asset size, and natural person credit unions should understand the implications of EBAs on both the operations of their credit union and their corporate credit union.
In 2009, the Federal Reserve Board approved an amendment to Regulation D authorizing the establishment of limited-purpose accounts at Federal Reserve Banks (FRB) for the purpose of maintaining excess reserve balances. These accounts, known as EBAs, are intended to allow eligible institutions (including natural person credit unions) to earn interest on their excess balances in an account with a FRB without significantly disrupting other established business relationships. In the credit union system, corporate credit unions serve as an agent for the natural person credit union for placement on the natural person credit union’s excess funds in an account at the FRB.
How FRB EBAs Work in the Credit Union Context
Balances in the EBA are an asset of the natural person credit union deposited in the EBA and managed by the corporate credit union agent. The FRB pays interest on the average balance in the EBA and the agent disburses that interest to each participant in accordance with the instructions of the participant and the contractual obligation.
Only excess balances may be placed in an EBA; the account balance cannot be used to satisfy reserve balances or contractual clearing balance requirements. A natural person credit union seeking to participate in an EBA account thru an agent corporate credit union must undergo analysis to identify funds that would be considered “excess” with assumptions and projections with regard to the level of participation and balances likely to convert to EBAs. An EBA program requires:
- The establishment of participant/agent agreements
- The development of related policies and procedures for the participant and agent
- A system of internal review
- A process continuity plan; and
- A plan for record retention.
In a number of corporate credit unions with existing EBA programs core payment processing system capabilities are utilized to “sweep” the balances in excess of the established thresholds from the member credit union’s account to the EBA account at the FRB. In other corporate credit unions cases, the excess balance is manually swept from the participants’ accounts. In either case, the sweeps are processed near the completion of each business day. Generally, excess balances are returned to the participant’s account near the beginning of the following business day, depending upon the instructions of the participant. More information on these accounts is available from the Federal Reserve at this link.
Letter to Credit Union No.: 11-CU-09 Online Member Authentication Guidance Compliance Required by January 2012
NCUA issued LTCU 11-CU-09 to provide guidance to credit unions on Internet threats such as hacking and organized cyber criminals. These threats are increasingly targeting financial institutions, compromising authentication mechanisms and security controls, and engaging in online account takeovers and fraudulent electronic funds transfers.
The guidance contains an enclosure that is a supplement to authentication guidance that was last issued in 2005 by the Federal Financial Institutions Examination Council (FFIEC). The supplement articulates supervisory expectations for effective member authentication mechanisms, layered security and other controls to combat growing identity theft attacks and online transaction frauds.
Important Note: NCUA states in the LTCU that federally insured credit unions will be expected “to adapt appropriate strategies from the supplement to strengthen and enhance controls by January 2012.” The guidance indicates that beginning in 2012 NCUA intends to include in examinations an evaluation of those controls under the enhanced expectations outlined in the supplement.
Controls listed in the guidance and supplement include:
- A review and update of risk assessments whenever a new electronic financial service is implemented or modified and when conditions warrant [at least every 12 months]
According to the guidance, an updated risk assessment should consider, but not be limited to, the following factors: 1) changes in the internal and external threat environment; 2) changes in the customer base adopting electronic banking; 3) changes in the customer functionality offered through electronic banking; and 4) actual incidents of security breaches, identity theft, or fraud experienced by the institution or industry.
- Implementation of appropriate layered security at the transaction process level based on service operations and threat environment to facilitate fraud detection and respond to suspicious activity
In order to effectively mitigate identity theft and prevent online transaction frauds, the guidance instructs credit unions engaging in high-risk Internet-based transactions [such as utilizing automated payment mechanisms or offering commercial banking services] employ a combination of controls that cover both initial account access and subsequent transaction processing. For higher risk transactions, such as commercial accounts, the guidance strongly recommends multifactor authentication.
For all credit unions, effective controls that may be included in a layered security program include, but are not limited to:
- Fraud detection and monitoring systems that include consideration of customer history and behavior and enable a timely and effective institution response
- Utilization of dual customer authorization through different access devices
- The use of out-of-band verification for transactions
- The use of “positive pay,” debit blocks, and other techniques to limit the transactional use of the account
- Enhanced account activity controls; such as transaction value thresholds, payment recipients, number of transactions allowed per day, and allowable payment windows
- Use of internet protocol (IP) reputation-based tools to control access to banking servers from IP addresses known or suspected to be associated with fraudulent activities
- Enhanced control over changes to account maintenance activities performed by customers either online or through customer service channels
The guidance discusses common authentication methods and their shortcomings. For example device identification can be defeated by fraudsters who can mimic a computer’s cookies and challenge questions may be answered by a fraudster who knows the victim.
Finally, the guidance emphasizes the need to educate members regarding what protections are, and are not, provided relative to electronic fund transfers under Regulation E, and a related explanation of the applicability of Regulation E to the types of accounts with Internet access. Members should also be provided information on the following:
- An explanation why, and how, the credit union may contact the member on an unsolicited basis and request the customer’s electronic banking credentials
- A listing of risk control mechanisms that members may consider implementing to mitigate their own risk or a listing of where such information can be found
- Contact information for members to use if they notice suspicious account activity or experience customer information security-related events. In addition, commercial members should be encouraged to perform their own risk assessments and controls evaluations.
Letter to Credit Union No.: 11-CU-08 Voluntary Prepayment of Assessments Program
NCUA’s LTCU 11-CU-08 explains the parameters of the Voluntary Prepayment of Assessments Program (Program). The Program is an effort to level out the assessments arising from the Temporary Corporate Credit Union Stabilization Fund (Stabilization Fund) in the next few years. NCUA projects it will need $8.44 billion in funds for the Stabilization Fund within the next year. The agency would access those funds by drawing $5.5 billion from their $6 billion borrowing authority, and assessing credit unions the remaining $2.94 billion needed. The result was a projected 20-35 basis point Stabilization Fund assessment for credit unions.
NCUA’s LTCU 11-CU-08 contains several enclosures that detail the Program, including
Program Terms and Conditions. Among the key elements of the Program:
- Participation is purely voluntary and nearly all federally insured credit unions are eligible
- The minimum individual credit union commitment amount is the greater of $1,000 or 0.05 percent of insured shares as of March 31, 2011
- The maximum individual credit union participation amount is 0.48 percent of insured shares as of March 31, 2011
- The threshold commitment level for the Program to proceed is $500 million.
NCUA states that voluntarily prepaid assessments would reduce the amount of 2011 assessments on a dollar for dollar basis. The $500 million program goal equates to 6.4 basis points of system-wide insured shares, and would reduce the 2011 regular assessment dollar-for-dollar from 24.9 basis points to 18.5 basis points.
LTCU 11-CU-08 states the Program goal of $500 million preserves NCUA’s flexibility to:
- Manage the regular annual assessments over the life of the Stabilization Fund (especially in the next 4 to 5 years), which are an expense to credit unions, in as counter-cyclical a manner as possible
- Manage the cash needs and contingency funding available to the Stabilization Fund
However, NCUA emphasizes that while the Program provides flexibility in the timing of assessments over the period 2011 through 2014, it does not provide flexibility with respect to the aggregate amount of assessments that need to be collected: total costs estimates remain in the range of $7 billion to $9.2 billion.
Credit unions seeking to participate in the Program must notify NCUA by July 29, 2011. Details concerning the commitment collection process are included in the Program Agreement enclosed with the letter. NCUA will notify participating credit unions if the Program will proceed on August 9, 2011.
NCUA notes the credit union system has substantial liquidity, with federally insured credit unions holding more than $80 billion in liquid balances. NCUA believes the maximum individual credit union limit of 48 basis points for participation is low enough to be considered immaterial to liquidity and earnings.
Letter to Credit Unions No.: 11-CU-07 State of the Credit Union Industry
NCUA Letter to Credit Unions 11-CU-07 was NCUA quarterly update on the status of the federally insured credit union system. The LTCU and the accompanying enclosure analyze credit union financial trends for the first three months of 2011 and identifies supervisory concerns. NCUA notes that credit union return on average assets increased to 74 basis points during the first quarter (+23bp). However, NCUA also notes continued negative trends related to loan growth and income sources as well as the agency’s concerns related to elevated levels of credit risk, interest rate risk, and concentration risk.
- Credit risk – NCUA notes that while overall delinquencies and net charge-offs have declined, delinquencies in real estate, business, and participation loans remain elevated. Citing increasing real estate and business loan modifications, NCUA reminds credit unions that modified loans remain at risk for future delinquency and refers industry to previously published guidance on prudent loan modification policies and procedures.
- Interest rate risk - Many credit unions have a significant amount of long-term, fixed-rate loans and investments with longer maturities. When interest rates begin to rise, the interest rate risk present in credit union balance sheets will have a serious negative impact on earnings.
- Concentration risk – NCUA notes the need for concentration risk mitigation strategies, citing elevated levels of real estate loans as a percentage of total loans combined with declining real estate values nationwide.
Some other highlights from the LTCU 11-CU-07 include:
- Assets increased by $24.86 billion (10.87%) to a total $939.28 billion
- Strong asset growth pushed down net worth ratios from 10.06% to 9.96%
- Loans declined $4.88 billion (-3.45% annualized) and loans to shares ratios decreased from 71.82% to 68.99% (All loan categories declined, except 1st mortgage real estate loans/lines of credit and leases receivable)
- Loan delinquency as a percentage of total loans declined from 1.75% to 1.62%, including declines in real estate loan delinquencies from 2.08% to 2.00%, declines in delinquent business loans to total business loans (less unfunded commitments) from 3.93% to 3.76%, and declines in delinquent loan participations as a percentage of total loan participations from 3.86% to 3.64%
Letter to Credit Union No.: 11-CU-06 Technical Assistance Initiatives
NCUA LTCU 11-CU-06 announces that the 2011 Community Development Revolving Loan Fund (CDRLF) Technical Assistance Initiatives will make available $1.74 million for technical assistance. The CDRLF supports credit unions with a low-income designation that serve low-income communities by providing loans and technical assistance to those credit unions.
There are six categories of technical assistance initiatives:
- Financial Education and Financial Literacy in Schools
- Partnerships and Outreach
- Building Internal Capacity and Technology
- Volunteer Income Tax Assistance
- Staff, Official and Board Training
- Student Internship and Job Creation
State credit unions seeking technical assistance funds must be designated low-income by their state regulator with concurrence from NCUA pursuant to NCUA Rules and Regulations Part 741.204 and 701.34.
Guidelines for applying for the technical assistance grants may be found here.
Letter to Credit Unions No.: 11-CU-05 Planning and Preparedness for a Potential Government Shutdown
NCUA published LTCU 11-CU-05 to provide guidance to federally insured credit unions in the event the federal government shut down. NCUA is not funded by Congressional budget appropriations, therefore the agency would be unaffected by a government shutdown.
NCUA recommended credit unions:
- Ensure policies provide flexibility to respond to members’ financial needs in the event of a federal government shutdown;
- Prepare for service interruptions if a shutdown affects access to credit union offices and branches located in federal buildings;
- Take steps to prudently work with members affected by a shutdown, including providing advances to individuals receiving direct deposits from the federal government;
- Develop contingency plans for what will happen with respect to participation in government programs in the event of a shutdown. For example, some credit unions offer loans backed by the Federal Housing Administration (FHA). Individual credit unions will therefore need to decide whether to proceed with scheduled FHA loan closings and whether to hold and guarantee new FHA loans until any impasse on federal spending ends; and
- Communicate your credit union’s response plans and efforts before, during and after any shutdown to keep members, volunteers and employees informed.
NCUA also recommends credit unions prepare to work with their members to address any shutdown related financial difficulties and consider:
- Offering special programs to assist members who may need short-term loans or other financial assistance;
- Creating loan programs with special loan terms and rates; and
- Offering payment flexibility for existing loans to federal employees affected by any shutdown.
While encouraging credit union to prepare to work with any shutdown affected members, NCUA emphasizes that any forbearance or special programs must be implemented within safe and sound parameters.
Letter to Credit Unions No.: 11-CU-04 Financial Education and Financial Literacy Initiative
NCUA LTCU 11-CU-04 announces the availability of the Financial Education and Financial Literacy Initiative, a new technical assistance grant (TAG) initiative under the Community Development Revolving Loan Fund (CDRLF) through which NCUA will make $200,000 in grants available to low-income credit unions ($5,000.00/grant). The goal of the program is to encourage credit unions to collaborate with schools, community organizations, and other financial institutions to broaden the delivery of financial literacy and financial education training.
An eligible credit union may receive up to $5,000 under the Financial Education and Financial Literacy Initiative. Programs that would potentially be funded under the initiative include:
- Partnerships with schools, teacher associations, and parent groups to educate children and youth in schools.
- Partnerships with credit counseling organizations to offer training to help members improve their credit scores and access to credit.
- Addition or enhancement of online financial education modules.
- Partnerships with city and state housing agencies to provide first-time home buyer counseling and foreclosure prevention counseling.
- Development or work with a coalition of asset development organizations to offer ongoing financial literacy and education events.
Information on qualifying as a low income credit union for TAG awards, applications for grants and guidance are available on NCUA’s website.
Applications for grants under the program discussed in LTCU 11-CU-04 will be accepted from April 18 through May 20, 2011.
Letter to Credit Unions No.: 11-CU-03, State of the Credit Union Industry
NCUA Letter to Credit Union No.: 11-CU-03 and its enclosure summarizes the condition and trends of federally insured credit unions. The letter also notes three issues that continue to concern NCUA and attract heightened regulatory scrutiny:
- Credit risk – NCUA notes increased real estate and business loan delinquencies as well as increasing real estate, consumer, and business loan modifications ($3.1 billion increase since March 2010).
- Interest rate risk – NCUA states that interest rate risk will be an area of emphasis during examinations in 2011, noting that credit unions continue to hold significant amounts of long-term, fixed-rate loans and other longer-term assets, while shares are primarily in short-term accounts with a majority of those accounts being rate sensitive.
- Concentration risk – Concentration risk will remain an area of emphasis for NCUA examiners as the high level of real estate loans to assets coupled with the stresses in real estate values demonstrate the need for effective concentration risk mitigation practices.
NCUA’s letter also highlighted the following trends and statistics based on changes from December 2009 to December 2010:
- Assets increased $29.87 billion (3.38%) to a total of $914.47 billion
- Net Worth dollars increased $4.51 billion to $92.07 billion (5.15% growth)
- The net worth to assets ratio also increased from 9.89% to 10.06%
- Earnings, as measured by the return on average assets ratio, increased from 0.18% to 0.51%
- Loans declined $7.68 billion (-1.34%) and loans to shares ratio decreased from 76.06% to 71.82%
- Delinquent Loans as a percentage of total loans declined from 1.84% to 1.74%; however,
- Delinquent real estate loans as a percentage of total real estate loans increased from 1.99% to 2.07%; while,
- Delinquent business loans to total business loans increased from 3.71% to 3.92%; and,
- Delinquent loan participations as a percentage of total loan participations increased from 3.49% to 3.83%
On December 31, 2010, there were 7,339 federally insured credit unions (2,750 state-chartered federally insured credit unions).
Letter to Credit Unions No.: 11-CU-02 Call Report Modifications
NCUA’s LTCU 11-CU-02 and its enclosure inform credit unions of numerous changes to the 5300 Call Report that take effect March 31, 2011. The revised Call Report contains additional detail in the Business Lending section of Schedule A. The section is expanded to nine categories under each of two sections: member business loans and business loans to nonmembers. These categories include the supplemental information formerly reported under the two main business loan classifications -- such as construction and development, unsecured, and agricultural related business loans.
The reporting of off-balance sheet commitments on the Liquidity, Commitments and Sources page of the Call Report has also been significantly amended. For each type of unfunded commitment, both the amount committed directly by the credit union and the amount committed through a third party (indirect) will be reported. In the context of the Call Report, the term “indirect” applies to relationships in which third parties perform lending activities for the credit union.
NCUA has also added two new questions to collect CUSO information including total loans of CUSOs and whether a CUSO has a subsidiary CUSO.
Other changes for the March 31 Call Report include:
- New terminology added relating to capital accounts at corporate credit unions
- New category added for non-federally guaranteed student loans
- Removed NCUSIF stabilization income account
- Reintroduced collection of credit union facility expansion plans
- Added new category to capture foreclosure information
- Established new section to capture information on modified loans in one location
- Added categories for additional investment accounts
The enclosure to LTCU 11-CU-02 contains a complete list of all Call Report changes being implemented on March 31. Credit unions with hardware or system questions, or that need assistance retrieving user names and passwords may call the NCUA Information Desk at 1-800-827-3255.
Letter to Credit Unions No.: 11-CU-01 Residential Mortgage Foreclosure Concerns
NCUA LTCU 11-CU-01 addresses problems facing the mortgage industry related to foreclosures and urges credit unions to undertake an in-depth review of their mortgage documentation and foreclosure management policies and procedures. The letter identifies the main foreclosure issues, outlines appropriate practices for effectively managing foreclosures, and discusses future NCUA actions related to foreclosure issues.
1) Mortgage Electronic Registration System Challenges
In order to streamline the securitization and transfer of mortgages, the large mortgage lenders created the Mortgage Electronic Registration System (MERS) to track the servicing rights and ownership of mortgages in the secondary market. If a credit union sold a loan to Fannie Mae or Freddie Mac that loan was likely registered or transferred through MERS. Generally speaking, municipal real estate records reflect MERS as the owner of a mortgage while MERs’ internal records track the actual ownership and servicer rights affixed to a given mortgage.
Several concerns related to MERs have been raised by the volume of foreclosures in the past years:
- Several court cases have questioned whether MERS, as record owner of the mortgage, has the legal standing to initiate foreclosure in its own name.
- There is also a question whether MERS reassigning its interest in the mortgage to the lender holding the note allows the lender to legally initiate foreclosure on its own, or whether listing MERS as the mortgage owner of record irrevocably splits the mortgage and note preventing anyone from legally foreclosing on the property.
2) Missing and Defective Loan Documents
NCUA notes that during the run up in the residential mortgage market, some lenders failed to properly document and record mortgages. Flawed documentation, missing notes, and improper assignments of necessary legal documents have led to allegations of inappropriate action or in some cases resulted in the unenforceability of a claim.
The robo-signing of foreclosure affidavits without verifying whether the information supporting the foreclosure is accurate led lenders and servicers to execute flawed or inaccurate affidavits during foreclosure. As a result, some lenders and servicers had to suspend foreclosures until internal reviews could be conducted.
4) Contractual Put-Back Risks
Contractual put-backs are another concern. Under a put-back clause, an investor or purchaser of a mortgage can the lender (such as a credit union) to repurchase the mortgage at face value if the loan did not conform to representations and warranties about the loan quality or documentation. A significant put-back requirement could materially impact a credit union’s net worth, earnings and liquidity.
5) Credit Union Due Diligence
While NCUA believes that few credit unions would be affected by any of the issues discussed above, LTCU 11-CU-01 directs any credit unions that use MERS or have sold residential mortgage loans in the secondary market to evaluate the potential impact that the foreclosure developments may have on the credit union and its members. In addition, NCUA expects every credit union evaluate its foreclosure process to ensure:
- Appropriate policies and procedures for all aspects of the foreclosure process are in place, tailored to comply with the laws of each state in which the credit union does business;
- Experienced and knowledgeable staff are qualified to handle foreclosures;
- The foreclosure process is governed by effective internal controls;
- Adequate oversight, due diligence, and control of third-party servicers performing foreclosures on behalf of the credit union;
- Legally compliant documentation to support foreclosure actions; and
- Appropriate reporting to the board of directors of the number and volume of foreclosure actions and their financial impact on the credit union.
NCUA’s letter also reminds credit unions that the agency expects:
- Each credit union will “work with delinquent residential mortgage borrowers by modifying the terms of their loans if modification is determined to be less costly than foreclosure.”
- Each foreclosure action to contain a documented evaluation of the feasibility of a loan modification prior to proceeding with the foreclosure.
In 2011, NCUA is expanding examination procedures to include in-depth reviews of residential mortgage foreclosure practices to assess the safety and soundness of a credit union’s procedures and evaluate the extent to which credit union management has sought alternatives to foreclosure. Updated examination questionnaires for foreclosures will be released in March. Future examination procedures for foreclosures will emphasize appropriate due diligence on vendors, quality control reviews on foreclosure processes, and stress event analysis and reporting.
Finally, the LTCU refers credit unions to two previously issued guidance from NCUA, LTCU 07-CU-13, Evaluating Third Party Relationships, and LTCU 09-CU-19, Evaluating Residential Real Estate Mortgage Loan Modification Programs.