"We know we have a challenging year ahead of us, but we're on track and continuing our strategic initiatives. We've cut some operating expenses by 8.6% and are negotiating with our vendors on contracts to save where we can." said Brown. "We're also dealing with some staffing issues. But our capital is strong at 10.83% so we'll weather this storm." Brown added that the CU would put aside $600,000 for loan losses.

High Desert, with a charter that includes all of San Bernardino County had $172 million in assets and nearly 14,000 members at year-end 2007. HDCU is located on the northern edge of California's Inland Empire and wasn't a part of the real estate bubble as other southern California areas, said Brown. "The views are beautiful here on the northern side of the San Gabriel and San Bernardino Mountains and the housing isn't as expensive, compared to other parts of California," Brown said.

HDCU's developed the features of its construction loan program over the years by creating partnerships with builders, said Brown. "We work with multiple builders, who bring us members in many cases, and they only deal with us because of our service level. We can turn a voucher and pay a subcontractor in five minutes once the paperwork is complete."

Another critical factor is having three general contractor inspectors that inspect the ongoing construction twice monthly and report back to the CU on progress. "Usually, credit unions do a draw system," explained Brown. "But ours is line-item controlled. It's more time-consuming because people pay cash and we do the funds control and take two-points off the top [deposit]."

High Desert has also funded a few spec houses–built on speculation without a known buyer–for contractors they've worked with over the years with whom it has developed a good relationship, Brown said. "We can also do owner-occupied and multiple-occupancy houses, but require that one of the borrowers must be the owner," he said.

The NCUA examiner that works with HDCU suggested they might consider partnering with other CUs in California and as of last May the CU had seven such partners (all with assets under $250 million) and currently has 12, said Brown. High Desert does the business development and manages the program for those partners. It also services the loans. "It's a short term contract of 1-18 months, interest only. Once construction is complete, the mortgage is purchased from the credit union–we need a commitment–then it's sold off or kept in the portfolio."

Last summer, before the real estate bubble burst, Brown felt it was the "perfect time" to develop the program for other CUs. There was even a plan to expand the program into Oregon, he said. That project is still on the table. "We consider how we do these loans to be a proprietary system. We worked with attorney Bruce Pearson from Syskal Weiss on our partner agreement," said Brown. He also said that the software for monitoring loans was re-coded from a design by Fair Isaac by IT specialist Mark Hart, specifically for High Desert.

Brown's initial concern was to prevent the kind of fraud that some dishonest contractors can perpetrate by using a draw system. "One contractor diverted money to his Las Vegas gambling habit. That was five years ago and NCUA stepped in, so my first task was to do the research on all general contractors and put third-party funds control in place."

Brown did all that, he allowed, but he can't exert any control over the slumping economy. "All I can do is be here for my members, to be a source of stability when they need help. We'll get through this hard time together, I've no doubt about that."

–[email protected]