In fact, the recent failures of two mid-sized credit unions--Huron River Area Credit Union (Ann Arbor, Mich.) and Norlarco Credit Union (Fort Collins, Colo.)--demonstrate the reason for congressional concern about the risk posed by business lending to the safety and soundness of credit unions. The failure of these two credit unions can be directly attributed to losses arising from their business loan programs.
According to the news reports, both credit unions were actively involved in making construction and land development loans, the riskiest form of commercial real estate lending, in southwest Florida--well outside each of their local market areas.
Norlarco had 1,035 loans worth $238 million in Lee County, Fla. Huron River was also actively making loans in Lee County. While the dollar volume of these Huron River loans has not been made public, reports suggest them to be in the hundreds of millions of dollars. Huron River posted a $59 million loss during the first six months of 2007 after writing off $62 million related to potentially bad loans.
The ability to monitor out-of-market business loans requires considerable resources, particularly when there is no physical presence in the market. It also requires considerable oversight by regulators to assure adequate compliance with federal and state law regarding underwriting standards, loan monitoring standards and reporting accuracy. None of these risk management necessities seem to have been envisioned as part of the usual resources of credit unions or of the NCUA.
The ultimate losses experienced by both Norlarco and Huron River Area credit unions indicate that their business lending programs exposed them to a high level of risk, which was compounded by the fact that these loans were out-of-market and were not adequately underwritten or monitored. Neither do they seem to have been detected by regulatory examination before conditions became critical and losses severe.