Troubled Credit Unions Break Silence
Two credit unions broke the silence about regulatory discipline when they spoke out about recent consent orders from the California Department of Business Oversight.
The $246 million, 16,000-member San Diego Metropolitan Credit Union, headquartered in San Diego, agreed to an order from the CDBO in May. And the $21 million, 2,700-member Eagle Credit Union, headquartered in Lodi, Calif., agreed to an order in June.
While each credit union's situation was different, legal and public relations executives say they illustrated different approaches credit unions could take when receiving regulatory demerits.
“I think consumers may have greater expectations around transparency and what an institution should be willing to acknowledge since the Great Recession,” said Steve Van Beek, an attorney with the Detroit firm Howard & Howard Attorneys PLLC and former director of regulatory compliance for NAFCU. “This increased expectation might tilt the balance between advantages and disadvantages about coming forward about negative regulatory news.”
In each credit union's case, the state's orders were part of a larger effort to restore the credit unions to complete financial health in the wake of the economic downturn, something each credit union was willing to discuss.
“You need to understand, there were other consent orders before this one. Orders that we fulfilled, every single one of them,” San Diego Metropolitan CEO Stan Abrams said. “We started out with a very big one that we worked to resolve and as we resolved it, it was replaced by smaller ones as we dug ourselves out.”
The four-point order required the credit union to “develop, adopt and implement a plan to materially reduce the risk in its troubled debt restructures portfolio and fully document and support that the member has the ability to repay on future TDRs.” The order also required the credit union to continue working to reduce the concentration in its mortgage loans and investments.
San Diego Metropolitan additionally had to retain leadership the regulator considered qualified to take these actions and commit to monthly reports to the regulator on its progress, according to the order.
Abrams said the credit union had already taken action to reduce the risk in the TDR portfolio and had continued to reduce its concentration in mortgage loans.
Abrams, who took on the CEO job in 2010, said the housing finance crisis and Great Recession hit San Diego Metropolitan especially hard. The now community chartered credit union had been originally chartered in 1934 to serve San Diego city and county government employees. That legacy group remained the core of the credit union's membership, and were hit hard when city and county government cut retiree benefits and laid-off employees in the wake of the housing crisis, Abrams said.
He also described how the sale of other asset portfolios like credit cards and auto loans left the credit union heavily invested in mortgage loans right as the housing bubble burst.
San Diego Metropolitan has been fighting its way into a better financial situation ever since, Abrams said. Broadening the asset base has been high on the list, he said, adding the credit union restarted its indirect auto lending in 2010, shortly before he arrived. The credit union also started offering a credit card, and it has also been selling off its mortgage loan assets, he said.
“We have been working hard for quite a few years now, and we think we are turning the corner,’ Abrams added.
Eagle's situation was a bit different. The credit union's consent order addressed management deficiencies.
“Within 60 days of the date of this order, respondent shall develop and implement a formalized process for evaluating respondent's senior management personnel, to include the accounting manager and the operations manager,” the June order read. “Respondent shall provide a written evaluation of management's performance at least annually, and maintain a copy of the evaluation in the personnel file.”
The six-point order also obliged the credit union to develop a revised strategic plan and budget “to achieve positive earnings and net worth trends by yearend 2014.”
In an email to CU Times, Eagle CEO Dan Robertson explained that the 85-year-old credit union served the residents of three counties primarily through outlets located in postal facilities. Eagle began to build a new facility in 2004 and this, combined with the Great Recession, left it in trouble, Robertson wrote.
“In 2004 the board decided to construct a new facility in Lodi,” Robertson explained. “The goal was to increase the presence in the community and increase the ability to grow with the community. However, the downturn of the economy created a drag on growth, especially loans. The building that was meant to support and further growth was too big for the current economic environment and created a drag on earnings,” he wrote, adding, “[w]e are currently working to grow into this facility under the guidance of the board and the Department of Business Oversight.”
Van Beek noted that while each credit union's situation remained a bit different, each had found something about their situation that they felt important to share.
“I was struck that the CEO of Metropolitan really wanted to let people know how far his credit union had come, even if there was still an order in place,” Van Beek said.
Jay Morris, president of the Alexandria, Va.-based Jay Morris Communications LCC and former senior vice president for marketing and communications at NAFCU agreed that having a good message to convey is important when considering whether to speak publically about a regulatory problem.
“Credit unions should also take a hint from how the regulator treated the issue,” Morris said. “In these cases, CDBO made both consent orders public, so they felt confident their release would not hurt the credit union.”
However, Van Beek doubted whether there would ever be a uniform policy on credit unions going public about regulatory interactions. First, he said, there will likely always be things, such as a CAMEL ratings, regulators will not want made public. Second, there might be things on a case-to-case basis that would not benefit the credit union to make public.
He used San Diego Metropolitan Credit Union's situation as an example. In a scenario where the credit union was found to have too many mortgages and is told to sell some of them, as soon as that is made public it will make it difficult for the credit union to get a fair price for those assets, he pointed out.