San Diego Town Hall Hits Somber Notes

SAN DIEGO — Despite being staged in “America’s Finest City,” the NCUA’s three-city Town Hall tour ended on a somber note here on Oct. 5. The agency repeated much of the same information presented at its two previous meetings, but thanks to the close proximity of the failed Western Corporate Federal Credit Union and the poor economy in California, Arizona and Nevada, attendees got an extra dose of sobering news.NCUA Chairman Debbie Matz said she was “very concerned” about the losses credit unions are expected to suffer in 2010, particularly those that stem from “inordinate portfolio risk” in business and indirect lending. Matz said of the 90 credit unions currently on the NCUA’s troubled list, 80 participate in business lending.In an attempt to shore up losses, NCUA examiners will check 5300 reports for red flags, such as an unusually high percentage of repossessed vehicles compared to auto loans, particularly if the credit union participates in indirect auto lending. Business lending will also be closely scrutinized. Some credit unions will receive a visit or call from the NCUA in addition to their regularly scheduled annual exam.“Even if you’re well-capitalized, if you’re doing these other things, you’ll get a visit,” Matz said. “We’ve seen cases of credit unions going from well-capitalized to shuttered within one year, and that can’t continue.”Greg Badovinac, assistant vice president of compliance and government relations for the $2 billion Western Federal Credit Union, expressed concern about the subjective practices of some examiners and said it was unfair to expect credit unions to be in compliance with undefined red flag standards.Matz countered that the red flags are not cases of compliance exceptions but, rather, management issues like poor due diligence. Specifically, Matz said some credit unions ineffectively outsourced due diligence to third parties, assumed deals with other credit unions didn’t require due diligence or assumed the other party had sufficiently evaluated the risk.Scott Hunt, director of the Office of Corporate Credit Unions, told attendees that the NCUA is monitoring some large credit unions on the brink of failure. “The credit unions that have failed so far have been relatively small,” Hunt said, “but that will change in 2010.”Adding to the bad news was the revelation that WesCorp will probably suffer additional permanent impairments in the next quarter or two because it purchased so many front-loaded investments. Hunt said that while U.S. Central Federal Credit Union’s investments have longer weighted average lives, WesCorp’s securities will mature sooner, which gives the market less opportunity to recover.Hunt was even less optimistic when answering a question from the audience regarding the potential for WesCorp investments to recover losses. He said based on the NCUA’s and third-party’s expertise, WesCorp investments are highly unlikely to perform better than currently estimated.The seized WesCorp purchased securities backed by mortgages concentrated in the nation’s hardest hit real estate markets, including Los Angeles, Phoenix and Miami, Hunt said. Home values are still sinking in those areas, and lenders have so many foreclosures in the pipeline, they can’t even process them all.The losses will drive the $20 billion WesCorp even further into the hole, as the San Dimas, Calif.-based corporate has no member capital left and as of July 31, reported a $4.3 billion retained deficit.Audience members questioned what the losses mean for their annual NCUSIF assessments. Deputy Executive Director Larry Fazio said the NCUA board is “not currently envisioning multiple assessments,” just one. Matz said the agency will provide a “best guess estimate” of the 2010 annual assessment next month to help credit unions budget.The NCUA said it plans to make its proposed corporate regulations public on Nov. 19 during a scheduled open board meeting. The industry will have either 60 or 90 days to comment, said General Counsel Bob Fenner.As discussed at previous town halls, regulatory changes will focus on increased capital requirements, investment concentration risk and credit risk, liquidity strategies and governance, as well as management transparency and accountability.Fenner also mentioned the regulator is considering setting limits on corporate indemnification payouts.Allowing corporates to require paid-in capital as a condition of membership is also under consideration by the NCUA.The NCUA will not require all corporates to collect PIC from members, but Fenner said the NCUA may let corporates choose whether or not to require permanent capital contributions from members.Downsides of the proposal include the possibility that inconsistent PIC requirements will cause “corporate shopping” within the system, Hunt added, and could additionally encourage credit unions to shop outside the corporate system.NCUA representatives chose their words carefully when answering questions about alternative capital, suggesting there is potential for the balance sheet Band-Aid but also stressing that hurdles still remain.Matz said she is anticipating reading a joint CUNA-NAFCU recommendation on alternative capital and said she is “personally not opposed to it.” Board member Gigi Hyland said she expects to present her white paper on the topic to the NCUA board in December. Hyland stressed that any new forms of alternative capital must qualify under GAAP accounting rules or they won’t be effective.California Credit Union League CEO Bill Cheney said that his organization is dedicated to assisting the NCUA in the effort and will work with the regulator to consider new ideas. Matz thanked Cheney for his support and said the NCUA is “open to looking at all options.”NCUA Director of Congressional and Public Affairs John McKechnie added that there are “credit union champions” on Capitol Hill that support the idea and called the current Congress “the best environment I’ve seen in a long time.”“However, even if we go to the Hill with a unified position on alternative capital, there’s no guarantee,” he said.–[email protected]