At a time when the NCUA and the trade groups are pushing Congress to raise the cap on member business loans, the agency's inspector general faulted its examiners for insufficient oversight of the business lending at now-shuttered High Desert Federal Credit Union.
The examiners "did not adequately evaluate the risk" in the credit union's real estate construction portfolio, and although examiners noted violations of NCUA regulations, they failed to take adequate steps to punish the credit unions, according to the inspector general's report.
The NCUA placed High Desert FCU, which was headquartered in Apple Valley, Calif., into conservatorship in October 2008. Its assets and some of its liabilities were purchased and assumed by Alaska USA FCU and the cost to the NCUSIF was $24.1 million. Real estate construction loans made up 60% of the credit union's loan portfolio in 2005, 2006 and 2007.
The report also found that agency examiners didn't ensure that the credit union took corrective action on documents of resolution or monitor waivers granted to the credit union.
It also said that the examiners became overly familiar with the credit union staff and this "created a lack of objectivity" in their ability to evaluate risks.
NCUA Executive Director David Marquis wrote in an e-mail response that the agency's examiners were aware of the problems and noted that a March 2008 exam reported serious issues, "including construction loans outside the field of membership, weak underwriting process, inaccurate reporting of delinquencies and lack of owner occupancy verification." He also wrote that the agency recently issued updated guidance to examiners on MBL.
The credit union's business lending portfolio fueled its growth from $60 million in assets in 2000 to more than $180 million in 2006.
High Desert's executives and board members enjoyed the results of the growth but didn't respond effectively to NCUA examiners, and senior management "showed a significant lack of involvement and knowledge of the credit union and its risks," the report said.
The credit union participated in such risky practices as funding spec houses-houses built on speculation without a known buyer.
Credit unions are pushing lawmakers to change the law to allow them to raise the cap on member business lending from 12.25% of assets to 25%. Bills to accomplish this have been introduced in both the House and Senate and could be included in job-creation bills that lawmakers may consider later this year.
NCUA Chairman Debbie Matz has endorsed the idea and urged the Treasury Department to do the same. In November, she wrote Gene Sperling, counselor to Treasury Secretary Timothy Geithner, that the agency has "reasonable regulatory standards," including a loan-to-value limit of 75% or 80% and a loan-to-one-borrower limit of 15% of a credit union's assets or $100,000, whichever is higher, and a two-year direct-lending experience requirement for the credit union's business lending officer.