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ALEXANDRIA, Va. – Eight months after NCUA issued its Risk Alert 05-RISK-01 concerning “Specialized Lending Activities – Third-Party Subprime Indirect Lending and Participations,” the agency has issued a white paper designed to provide examiners with a discussion on measuring and predicting the effect of vehicle loan performance on credit unions’ indirect vehicle loan portfolios. The measurement and prediction is facilitated using the NCUA Static Pool Analysis Tool that was developed by the agency. “Since the Risk Alert was issued, many credit unions engaged in third-party subprime indirect lending have taken steps to perform static pool analysis. Therefore, the NCUA developed this paper to assist examiner staff in understanding static pool analysis and to better prepare you for evaluating static pool analysis conducted by or on behalf of credit unions,” the white paper introduction states. The white paper starts out by making it clear that the yield on a pool of loans is not the same as the loan rate. In fact, it explains, “Several factors may reduce the yield below the average loan rate. Borrowers may fail to make timely or full payments. Borrowers in default make no interest payments. Or a lender may restructure loan terms, reducing the loan rate, to facilitate workout of troubled debt. Proceeds from the sale of a repossessed car, including any insurance recovery, may be less than the principal amount due. Borrowers may file bankruptcy petitions. The bankruptcy court may reduce the loan principal amount and/or loan rate. Finally, when a credit union pays fees to acquire loans, the yield will be less than the average loan rate because the credit union must recover the premium from the interest rate.” Lastly, “prepayments may severely affect the overall yield of the portfolio,” it reads. Regarding what analysis examiners should expect CUs to perform before investing in a pool of loans, NCUA explains, “A static pool is comprised of loans originated with the same underwriting criteria during the same month, quarter, or year. Ideally, all loans originated in the same period are included in the performance data.” NCUA emphasizes that the white paper “is not intended to replace management’s due diligence, but is meant to augment existing practices. Use of this model by a credit union does not in and of itself constitute successful due diligence of static pool analysis referenced in the Risk Alert.” It further concludes that, “Static pool analysis is a useful tool to enable credit union managers to make informed decisions regarding lending programs based on actual and expected performance of the loans. The process discussed in this paper is one method for examiners to review such an analysis. Examiners are not expected to complete this model for credit unions, but can use it to vary assumptions as deemed necessary to validate assumptions made by credit unions.” -

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