Poor decisions by management, including risky investments and inadequate oversight by examiners, caused the failure of Ensign FCU and Clearstar Financial CU, which cost the NCUSIF $42 million, according to reports by the NCUA's Office of Inspector General.
The failure of Ensign, which is likely to cost the NCUSIF $30 million, was caused by management's failure to "implement appropriate risk-management practices." These included allowing 40-year mortgages, allowing loan-to-value ratios on HELOCs to rise to as high as 100%, and not having a proper allowance for loan loss methodology.
In addition, the NCUA's examiners didn't downgrade the credit union's CAMEL ratings quickly enough as its problems escalated and thus "missed opportunities to mitigate losses to the NCUSIF."
Ensign FCU was closed last November and assigned to EDS CU, which has since changed its name to In Touch Credit Union.
The NCUA said Clearstar Financial CU also failed because of poor risk management by its executives. Specifically, the credit union originated too many loans that were insufficiently underwritten and made to borrowers with poor credit histories. It also extended an "inordinate amount" of delinquent loans when borrowers clearly lacked the ability to repay them. Many of these were subprime automobile loans.
The failure is likely to cause the NCUSIF at least $12.2 million, according to the agency.
The agency also said that while federal and state regulators identified issues that caused the credit union's failure, they did not "require management and the board to make substantive changes in their lending practices."
Clearstar Financial CU was closed in September 2009 and acquired by Michigan United FCU.
NCUA Executive Director David Marquis wrote in separate responses to the reports that the agency has "intensified its monitoring and supervision efforts in all credit unions to ensure more timely corrective action."
To read the reports go to: