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ALEXANDRIA, Va. – The NCUA has put federally insured credit unions on notice: they should expect to hear from their NCUA regional directors “in the near future” and be prepared to discuss with them the controls and practices in place at the credit union concerning third-party subprime indirect lending activities. In the Risk Alert letter sent to FICUs dated June 2005 and signed by NCUA Chairman JoAnn Johnson and Board member Deborah Matz, they stated that, “Since September 2004, there has been a sharp increase in the number of credit unions engaged in outsourced, indirect, subprime automobile lending, and participation activity in such loans. We have a heightened concern that credit unions engaged in this type of lending activity may not have effective controls and monitoring systems in place. Based on the volume of activity, engaging in this type of lending without effective controls and monitoring systems may pose a risk to your credit union’s net worth. “As a result of NCUA’s heightened concern, your examiner will contact you in the near future to discuss your controls and practices relative to this risk alert. Your examiner may also conduct on-site supervision contacts to evaluate your program in accomplishing appropriate due diligence, as reflected in this risk alert.” Johnson and Matz made it clear in their letter that, “Subprime lending is an activity that, if properly implemented and controlled, can be an acceptable segment of your lending portfolio in meeting your members’ needs. Still if your credit union engages in subprime lending or purchases participations in such loans, adequate due diligence and control measures are required.” At a minimum, they stated that credit unions involved with subprime lending should: * regularly analyze the program’s impact on the CU’s net worth. * properly evaluate and oversee any third-party vendor’s subprime underwriting criteria; * limit any third-party vendor’s authority to alter loan terms; * test the accuracy of any third-party vendor’s reports, and if appropriate, * include an exit clause in any third-party vendor’s servicing agreement. “Failure to implement effective controls and monitoring systems will result in frequent supervision contacts and may result in a CAMEL downgrade and other appropriate administrative actions,” they warned FICUs. The NCUA Board’s letter comes about 10 months after Chairman Johnson issued a Letter No. 04-CU-13, “Specialized Lending Activities” which strongly advised FICUs involved with higher risk lending activities which were defined as “subprime lending, indirect lending, and outsourced lending relationships,” to ensure proper controls and monitoring systems are in place at the CU because of high risk levels of these lending activities. Along with that letter, NCUA enclosed the revised examiner questionnaires examiners were going to use to evaluate CUs’ programs, and CUs were encouraged to review the questionnaires, “compare them to your existing and/or planned activities, and then be in a position to effectively respond to and address questions that may arise.” In its more recent June 2005 letter, the NCUA Board advised FICUs that, “Adoption of any third-party’s subprime underwriting criteria without careful and comprehensive evaluation is unsafe and unsound. For federal credit unions, this is a violation of the board’s responsibility under 113 of the Federal Credit Union Act to establish lending policies and internal controls. For all federally-insured credit unions, this is an unsafe and unsound practice subject to possible NCUA action under 206 of the Act.” [email protected]

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