ALEXANDRIA, Va. — In the chicken-or-the-egg argument permeating credit unions involved in third-party subprime lending, particularly with Centrix, NCUA officials defended the agency's rare Risk Alert.
NCUA issued Risk Alert 05-RA-01 in June of last year, noting that with the rise in activity in this area, credit unions might not have "effective controls and monitoring systems in place." The alert stated that sound business practices where subprime lending is concerned require:
o regularly analyzing the impact on net worth;
o properly evaluating and overseeing the vendor's subprime underwriting criteria;
o limiting vendor's authority to alter loan terms;
o testing the accuracy of vendor's reports; and, if appropriate,
o including an exit clause in vendor servicing agreements.
The alert continued, "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."
NCUA only issued two risk alerts last year and one so far this year. NCUA did not have historical information going further back on risk alerts available at press time.
Documents of Resolution, which were not released by NCUA to Credit Union Times as of deadline, were also issued to each of the credit unions involved in third-party subprime lending. Earlier this year, NCUA posted matrices to its Web site (www.ncua.gov) to help credit unions comply with the DORs. Andrews Federal Credit Union Chief Operating Officer Debbie Matz, who sat on the NCUA Board at the time of the alert, recalled that some "credit unions were not exercising their due diligence…They were putting all their faith in a vendor." The agency "saw a possible train wreck" and so issued the alert.
Andrews does not do third-party indirect auto lending in the United States, she said.
With some CEOs at credit unions involved with Centrix, which has now announced a merger plan, losing their jobs or credit unions in indirect subprime lending getting into trouble, some in the industry are asking is NCUA a hero for averting a crisis for credit unions or the cause of Centrix's problems. "Let the industry make that determination," NCUA Director of Public and Congressional Affairs John McKechnie stated. "We know what our responsibility is." He added, "We absolutely want credit unions to assess the entire risk in their portfolios…We were erring on the side of caution and safety and soundness. It's the right thing to do."
Dollar Associates Principal Partner Dennis Dollar, a former NCUA chairman who was not on the board at the time of the alert, did some consulting work with Centrix in formulating its responses to the agency, but he has not worked for Centrix in several months, he said. –scooke@cutimes.com
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