Credit unions can expect a proposed rule from the NCUA this year that will require more risk-based net worth for credit unions with riskier MBL portfolios.
That’s the response the regulator gave its Office of Inspector General in a Material Loss Review on the failed Telesis Community Credit Union, posted on the NCUA’s website Wednesday.
The March 15 report blamed inadequate management and supervision of the $318 million Telesis’ concentration risk in business loans, particularly commercial real estate, for its failure and resulting $77 million hit to the share insurance fund.
The NCUA liquidated Telesis on June 1, 2012, after the California Department of Financial Institutions seized the failed Chatsworth, Calif., credit union on March 24, 2012. The federal agency soon after put $177 million into a purchase and assumption deal with the $1.3 billion Premier America CU, also in Chatsworth.
In the report released by Deputy Inspector General James W. Hagen, the OIG recommended the NCUA amend capital rules to require a higher level of risk-based net worth for credit unions with higher levels of concentration or other risks in their member business loan portfolio.
“In the case of TCCU, examiners estimated that the capital needed to support the risk in TCCU’s heavily concentrated loan portfolio would have needed to be at least 15%,” the report said.
The NCUA has latitude to adjust risk-based net worth components under Part 702, which came up in rotation this year as part of the NCUA’s three-year revolving regulatory review. However, the NCUA doesn’t have the authority to adjust net-worth requirements for all credit unions, the report said, because those levels are driven by statute.
“We are currently reviewing Part 702 in relation to risk-based net worth requirements to improve the efficacy of the risk-based net worth schema in several areas, especially pertaining to risk concentrations like member business loan concentrations,” Executive Director Mark Treichel wrote in the NCUA’s response to the report.
The OIG reported that examiners expressed frustration with the NCUA’s reliance on 6% to define an “adequately capitalized” institution.
Telesis management shrunk its balance sheet to maintain its capital ratio, and examiners told the OIG they felt they had no ground to employ enforcement actions until the Telesis broke the 6% benchmark.
The OIG wasn’t buying it, however, saying its review of NCUA regulations doesn’t support that stance. It cited Section 702.1 of the rules which says the net worth requirements don’t limit “the authority of the NCUA Board or appropriate state official” to “take additional supervisory actions to address unsafe or unsound practices or conditions, or violations of applicable law or regulations.”
The OIG further pressed the need for the NCUA to expand its examination authority to include CUSOs, because Telesis’ overreliance upon CUSO revenue created a credit union business model that was unsustainable without it.
The OIG also scolded the NCUA for having made the same recommendation in a previous Material Loss Review of Eastern New York FCU, another credit union whose CEO invested heavily in CUSOs. That credit union was liquidated in January 2012.
The NCUA responded, saying it agrees exams should “ensure regulatory compliance and adequately identify the degree of risk a CUSO poses.”
NCUA management further said it would “evaluate the feasibility of expanding examination procedures over CUSOs and whether to include a review of the credit union and CUSO as standalone entities with regards to profitability.”