MBL Risks Are Assessed Even Before the Exam Begins
PORTLAND, Ore. — When a loan officer was arrested and charged with participating in a business loan kickback scheme that ultimately led to AEA Federal Credit Union’s conservatorship in December 2010, the cooperative’s outcome looked bleak.
Fast forward to Aug. 2, when the NCUA reported that the Arizona-based credit union is on the road to recovery with its provision for loan losses expenses down 68% and year-to-date net income of $2.2 million.
Elizabeth Whitehead, NCUA Region V director, said “positive progress in business loan delinquency and recoveries” are among the primary contributors to AEA’s restoration.
AEA’s status report came one day before Linda Vick, NCUA supervisory examiner, spoke on assessing the safety and soundness of member business lending programs during the CU Business Group LLC’s National Business Services Conference.
Vick is in the thick of spotting troubled loans having joined the NCUA in 1999 as an examiner and later as both an agricultural and commercial loan specialist and problem case officer for Region IV.
She shared the process of what happens prior to an NCUA examiner coming onsite, including conducting a preliminary assessment of risk. By looking at the financial performance report, an examiner can review that a credit union is compliant within regulatory limits, loan growth, delinquencies, loan participations and unfunded commitments.
Risk reports generated from Call Report data and other credit union-specific reports are used to help determine “the preliminary scope” used during the onsite exam, according to Vick.
In AEA’s case, the NCUA said the agency’s priority had always been to restore the credit union’s net worth and to remain operational for its members. That plan included streamlining operations and improving management practices.
Meanwhile, once onsite, Vick said one of the goals is to develop a strategic plan for both the department and the credit union regarding MBLs. Policy and procedure reviews as well as assessing the skill level and risk appetite of management are looked at.
In ensuring the program’s safety and soundness, the credit union’s MBL risk management tools are reviewed in addition to concentration risk versus staff expertise. Internal control processes are scrutinized.
Other MBL portfolio areas an NCUA examiner will delve into include underwriting, loan documentation, credit presentation and loan file reviews. Vick said examiners will then draw conclusions on the soundness of the program, document specific corrective actions and communicate and agree on a plan with management.
Vick cited a number of resources that credit unions can tap regarding the monitoring of their MBL programs. Among them, NCUA supervisory letters that point to areas such as concentration risk and MBL sound practices. Financial performance reports and Automated Integrated Regulatory Examination System questionnaires on MBLs, participation loans and construction lending controls are another tool.
At a November 2009 NCUA webinar on MBL delinquencies, more than 1,000 participants tuned into hear where examiners were focusing their efforts. At the time, Vick said inadequate management systems, inappropriate risk-rating systems give the size of a portfolio, uncontrolled growth, and insufficient due diligence with third party providers were some of the main causes of struggling MBL loan programs.
Vick also noted that when NCUA examiners arrive onsite, they will expect to see “well-qualified” managers in place. Former commercial lenders at banks are the pool that some credit unions pull from to find the right talent, she added. However, she cautioned that looking at someone with just one area of expertise may not be ideal.