In an effort to reduce losses to the NCUSIF, the NCUA on Wednesday announced a pilot program in which institutions that acquire failing credit unions can purchase and service loan pools and the NCUA would reimburse a percentage of any loan losses.
The agency said it hopes the loss share program will make it easier to handle the resolution of large credit unions that are facing financial difficulty and aren't viable as free standing institutions. In recent months, the agency has reported an increase in the number of larger credit unions rated CAMEL 3 or higher.
"This pilot represents an innovative and sensible effort by NCUA to minimize losses to the NCUSIF and foster a lower-cost, market-based solution to the problems associated with failures," NCUA Chairman Debbie Matz said in a statement.
The program is modeled after a similar program that the FDIC has operated since 1991.
According to the FDIC, when it calculates the cost of a bank failure it calculates all the expected losses on assets covered in loss share agreements.
For commercial assets, the loss share program covers an eight-year period, the first five for losses and recoveries and the final three for recoveries. The FDIC reimburses 80% of the losses incurred by the acquiring institution and that institution absorbs the other losses.
For residential assets, the program covers a 10-year period. The FDIC reimburses 80% of the losses incurred by the acquiring institution and that institution absorbs the other losses.