ALEXANDRIA, Va.-CUNA is working with NCUA to follow up on allegations that examiners have been out of line in their application of NCUA's June Risk Alert (05-Risk-01) regarding third-party subprime indirect lending and participations. Top officials at the trade group had been working behind the scenes with the agency's higher-ups to reign in its examiners in examinations regarding the indirect, subprime lending, but now the trade association has decided to go on the record concerning the matter. "First, I want to make clear, as I have indicated in our previous discussions and as I have directed my staff to convey, CUNA strongly agrees that credit unions must perform reasonable due diligence in contracting with a vendor and throughout their course of business with such entities," CUNA President and CEO Dan Mica wrote NCUA Chairman JoAnn Johnson. "Due diligence represents legal and safety and soundness requirements that must be fulfilled, and CUNA has consistently encouraged credit unions to meet those obligations fully. I have also repeatedly stated that if there are safety and soundness problems, then credit union regulators must take appropriate steps, commensurate with the level of risk and the nature of the deficiencies, to address those issues." However, CUNA says agency examiners have been taking the Risk Alert to the extreme. "We have heard from virtually every region that NCUA examiners had been implementing the Risk Alert in a very heavy-handed manner," CUNA Associate General Counsel Mary Dunn said. "In a manner that was extraordinary and in a manner that was not consistent with NCUA's usual level of professionalism. "This is not about due diligence; it is about due process." Dunn explained, specifically, "Some of the problems stem from examiners expecting due diligence compliance on an unrealistic and unreasonable time frame. Some of the problems stem from examiners being very demanding, even when credit unions have cut off-even as long as two years ago-their subprime automobile lending activity. So we feel credit unions want to comply and want to do what is required of this, but reasonableness has to be the order of the day." Mica's letter continued, "In light of these most serious concerns that our members have brought to our attention, I urge NCUA to take immediate action to instruct examiners that they must implement the Risk Alert consistent with their standard procedures of professionalism, affording all credit unions due process as they work to meet their due diligence requirements. In addition, NCUA has not documented sufficient safety and soundness concerns about programs that were the subject of the Risk Alert. Thus, we see no legal reason why well-managed credit unions cannot maintain their programs or disengage in a less hasty manner as they undertake efforts to comply fully with the Risk Alert on a timely basis." CUNA officials were careful to state that the group does not endorse Centrix or any other vendors. In response to CUNA's letter, NCUA Chairman Johnson acknowledged that the agency has had "a number of productive meetings with CUNA staff concerning the Risk Alert" and appreciated the input. She added, "While there has been virtually no disagreement with the substance of the Risk Alert, we do acknowledge the process employed by NCUA has met with some criticism. It is helpful to receive this feedback as we work to ensure the safety and soundness of credit unions. I have again stressed with the management team the need to maintain the highest degree of professionalism and believe in the overwhelming majority of cases this standard has been met in dealing with this sensitive and difficult issue. I am pleased that credit unions are responding to ensure compliance with the risk alert." Dunn assured that CUNA's Examination and Supervision Subcommittee will follow up with NCUA on the matter. Feeling the Impact Centrix Financial is certainly feeling the impact of the Risk Alert and surrounding circumstances. "I think that what we're seeing after the Risk Alert came out is some of the disconnect between the central office and the examiners," Centrix Executive Vice President for Governmental Affairs Geoff Bacino, a former NCUA Board member, said. He pointed out that examiners could make their career at NCUA while board members are politicians and temporary and, therefore, might view things differently. In fairness to the agency, Bacino added, the last batch of documents that went out to Centrix' credit union clients were much more reasonable. However, he said, they were previously "on the harsh side." He emphasized, "When it comes to the due diligence aspect, we support them 110%." According to Bobby Lazenby, principle of Lazenby & Associates, NCUA's Risk Alert, itself, is not anything "that would be considered extraordinary." Lazenby & Associates is a consulting firm that specializes in due diligence on other than prime auto loans and has recently picked up a handful of the largest credit union clients since auditing Centrix for some larger banks. The Risk Alert stated, "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." It required credit unions engaged in indirect subprime lending through a vendor to: * Regularly analyze the program's impact on your credit union'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," the alert warned. "I don't know if their concern is unwarranted," Lazenby said of NCUA. "I think that the protocol that they've outlined should be considered typical and usual." He admitted that looking at a credit union's program that was cut off two years ago may seem a bit "far-reaching," but, if the loans remain on the books, they still need to be considered. "I was a little bit surprised frankly by other credit unions in the industry and CUNA and the trade associations in their arrogance," Lazenby commented. He had participated in a number of conference calls with the agency and trades on the matter and noted, "their tone is not very helpful." He also added that Centrix does a good job of providing data to its clients but credit unions would be unwise not to verify it all independently. A big issue for credit unions with smaller indirect, subprime portfolios is the cost of compliance with the Risk Alert. Lazenby estimated that any credit union with less than a $5 million portfolio would not find the programs cost effective to keep. These credit unions will have to look to another option. "Credit unions will have to recognize that noncompliance is not an option," he asserted. The cost to do due diligence on a $5 million versus $50 million portfolio is virtually the same, he explained since much of the same work needs to be done. Lazenby said the cost of compliance could roughly be between $50,000 to $75,000. Lazenby & Associates is working with one of the largest banks to bring liquidity options to those credit unions leaving the indirect, subprime auto lending arena and is working with another lender to provide credit unions servicing alternatives. -

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