Credit unions can expect a proposed rule from the NCUA this yearthat will require morerisk-based net worth for credit unions with riskier MBLportfolios.

That's the response the regulator gave its Office of InspectorGeneral in a Material Loss Review on the failed Telesis CommunityCredit Union, posted on the NCUA's website Wednesday.

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The March 15 report blamed inadequate management and supervisionof the $318 million Telesis' concentration risk in business loans,particularly commercial real estate, for its failure and resulting$77million hit to the share insurance fund.

The NCUA liquidated Telesis on June 1, 2012, after theCalifornia Department of Financial Institutions seized the failed Chatsworth, Calif., credit union on March 24,2012. The federal agency soon after put $177 million into apurchase and assumption deal with the $1.3 billion Premier AmericaCU, also in Chatsworth.

In the report released by Deputy Inspector General James W.Hagen, the OIG recommended the NCUA amend capital rules to requirea higher level of risk-based net worth for credit unions withhigher levels of concentration or other risks in their memberbusiness loan portfolio.

“In the case of TCCU, examiners estimated that the capitalneeded to support the risk in TCCU's heavily concentrated loanportfolio would have needed to be at least 15%,” the reportsaid.

The NCUA has latitude to adjust risk-based net worth componentsunder Part 702, which came up in rotation this year as part of theNCUA's three-year revolving regulatory review. However, the NCUA doesn't have theauthority to adjust net-worth requirements for all credit unions,the report said, because those levels are driven by statute.

“We are currently reviewing Part 702 in relation to risk-basednet worth requirements to improve the efficacy of the risk-basednet worth schema in several areas, especially pertaining to riskconcentrations like member business loan concentrations,” ExecutiveDirector Mark Treichel wrote in the NCUA's response to the report.

The OIG reported that examiners expressed frustration with theNCUA's reliance on 6% to define an “adequately capitalized”institution.

Telesis management shrunk its balance sheet to maintain itscapital ratio, and examiners told the OIG they felt they had noground to employ enforcement actions until the Telesis broke the 6%benchmark.

The OIG wasn't buying it, however, saying its review of NCUAregulations doesn't support that stance. It cited Section 702.1 ofthe rules which says the net worth requirements don't limit “theauthority of the NCUA Board or appropriate state official” to “takeadditional supervisory actions to address unsafe or unsoundpractices or conditions, or violations of applicable law orregulations.”

The OIG further pressed the need for the NCUA to expand itsexamination authority to include CUSOs, because Telesis' overreliance upon CUSO revenue createda credit union business model that was unsustainable withoutit.

The OIG also scolded the NCUA for having made the samerecommendation in a previous Material Loss Review of Eastern New York FCU, another credit union whose CEO investedheavily in CUSOs. That credit union was liquidated in January2012.

The NCUA responded, saying it agrees exams should “ensureregulatory compliance and adequately identify the degree of risk aCUSO poses.”

NCUA management further said it would “evaluate the feasibilityof expanding examination procedures over CUSOs and whether toinclude a review of the credit union and CUSO as standaloneentities with regards to profitability.”