Throughout the worst economic crisis since the Great Depression,a time when many consumers were struggling financially, creditunions provided much-needed financial services to theirmembers.

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Lending in these difficult economic times, however, resulted inhigh delinquency and charge-off rates. In response, NCUA hasfocused on mitigating lending risks – and I am pleased to note thatdelinquencies and charge-offs have stabilized over the pastyear.

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While loan demand remains sluggish, member business lending hassurged in recent years, helping some credit unions to diversifytheir portfolios.

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For most financial institutions, including credit unions, highunemployment and the collapse in the housing market will continueto put pressure on loan portfolios. Credit union officialscan expect that weak loan demand combined with continued lowinterest rates will present earnings and asset-liability managementchallenges in the coming year.

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So how can credit unions prepare for exams in 2012? Generally speaking, NCUA will remain focused on strong duediligence and risk management. Examiners will carefully evaluatethe following aspects of credit union lending and loanportfolios:

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Concentration risk.Credit unions with a largeportion of their loan portfolio in a particular type of loan –especially real estate loans – are exposed to concentrated credit,liquidity, and interest rate risks. Credit unions with large realestate loan portfolios are exposed to potential elevated creditrisk, given high unemployment and ongoing challenges in the housingmarket. NCUA expects credit unions to have in place sound portfoliolimits to prevent excessive concentration risk and to continuallymanage within those limits.

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Long-term, fixed-rate real estate loans. Creditunions with elevated levels of long-term, fixed-rate real estateloans made at historically low interest rates are exposed tosignificant interest rate risk as we prepare now for a rising rateenvironment. Examiners will focus on the ability of these creditunions to develop models and to manage the associated interest raterisk.

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Yield focus. In this low rate environment,credit unions may seek to take on more credit, liquidity, orinterest rate risk to earn a higher yield. Yet, credit unions thattake these risks without proper due diligence, expertise, orexperience are exposed to potentially significant losses. Examinerswill be closely examining the planning and analysis conducted bycredit unions offering new loan products or making decisions toincrease the overall level of risk in their portfolio to generateadditional yield.

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Loans generated by third parties. Credit unionsthat purchase loans from other lenders (including other creditunions), or participate in loans originated by other lenders (alsoincluding other credit unions), must conduct effective duediligence, employ sound underwriting standards in the purchasedecision, and have proper controls in place to monitor thisactivity.

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Loan modifications. Given the recent economicchallenges, there has been a commensurate rise in credit unionsworking with members to adjust loan terms. In addition to enablingborrowers to repay when they have the capability, working withmembers experiencing financial difficulties will keep them in theirhomes and build institutional loyalty. Clearly, this is awin-win. However, making adjustments to loan terms,particularly the past due status of loans that are alreadydelinquent, can mask problems in the loan portfolio. Thus, whileNCUA supports sound member-centric loan modification and workoutprograms, examiners will ensure that those credit unions haveappropriate policies and controls for this activity.

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In 2012, as always, NCUA examiners will focus on evaluating thequality and effectiveness of each credit union’s policies andpractices for identifying, measuring and managing loan portfoliorisk. More than ever, credit unions must be diligent and proactivein managing risk.

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Of course, NCUA will continue to encourage responsible lending.The best service credit unions can offer members during theseuncertain economic times is access to sound and affordable loansthrough a healthy financial institution.

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We at NCUA are committed to working with credit unions topromote healthy loan growth as our nation’s economy recovers. Please contact your examiner or regional office if you would likeadditional information about managing the risk in your loanportfolio. 

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Debbie Matz is chairman of the NCUA.
Contact 703-518-6309 or [email protected]

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