The management of Cal State 9 Credit Union made "poor strategic decisions," and lacked the experience to understand the risks of subprime lending and its HELOC program while NCUA examiners failed to recognize the risks and take corrective action.
Those were among the conclusions of the NCUA Inspector General's report on the 2008 failure of Cal State 9 Credit Union. The estimated loss to the NCUSIF was $206 million.
The report, which was released yesterday, said the credit union's management funded excessive indirect HELOCs that were "rife with risky loan elements." It also agreed with the previous conclusions of state and federal examiners that the credit union's weak underwriting standards created unnecessary credit risk and that the concentration risk was exacerbated by funding its indirect HELOC portfolio with subprime loans and letting that portfolio become a significant portion of Cal State 9's assets.
Management also created liquidity risk through "rapid and excessive," funding of high risk subprime indirect HELOCs.
The report also concluded that the NCUA and state examiners had "inadequate," responses, especially in light of the significant problems facing the California real estate market. Examiners didn't monitor Cal State 9's liquidity position and missed opportunities to slow or stop the growth of the HELOC program.
NCUA Executive Director David Marquis said in a written response that while examiners escalated some of their risk assessments and issued warnings, federal and state regulators should have taken "stronger administrative actions to compel the credit union to alter or cease the HELOC program."
State regulators placed Cal State 9 into conservatorship on November 2, 2007 and the NCUA Board placed it into federal conservatorship on November 15, 2007. The NCUA Board involuntary liquidated the credit union on June 30, 2008 and executed a purchase and assumption agreement with Patelco Credit Union.