GAO Report Says NCUA Needs to Strengthen Credit Union Oversights

From 2010 to 2020, 145 credit unions failed, resulting in more than $1.55 billion in losses to the NCUSIF, according to a U.S. General Accounting Office report, which made specific recommendations for the NCUA to strengthen credit union oversight that may help prevent future failures.

The NCUA agreed with the GAO in acknowledging that improvements in supervisory approaches in some of these cases would have helped mitigate the corresponding losses to the NCUSIF.

In a letter to the GAO, NCUA Executive Director Larry Fazio said the federal agency is committed to ensuring sound oversight of insured credit unions and will take appropriate measures to adopt the recommendations in the report.

The GAO’s three key findings included: The NCUA does not fully leverage supervisory information to mitigate risk of credit union deterioration; the federal agency lacks a process to reliably aggregate supervisory data and ensure timely reports; and the NCUA lacks a designated office to help ensure that post-mortem reports are completed in a timely manner.

READ MORE: The full report from the U.S. General Accounting Office.

However, the GAO report released in late September also found that from 2010 to 2020, credit union failures generally decreased as did the size of losses to NCUSIF with the exception of notable increases in 2012 and 2018. During the 11-year period when the industry lost 145 credit unions, there was a high of 28 failures in 2010 (out of 7,339 operating federally-insured credit unions) and a low of one failure in 2020 (out of 5,099 operating credit unions). Losses to the NCUSIF also declined significantly, from $257.5 million in 2010 to $1.6 million in 2020.

However, losses spiked in 2012 to $207 million and to $841.3 million in 2018. The huge losses in 2018 stemmed mostly from the failure of three credit unions: Melrose Credit Union, Progressive Credit Union and LOMTO Federal Credit union, which managed heavily concentrated portfolios collateralized by taxi medallions. Those credit unions were responsible for 99% of the year’s losses of $831.7 million, according to the GAO report.

Failed credit unions tended to be smaller than the industry’s median and held higher loan portfolio concentrations. For example, from 2010 through 2020, median assets of failed credit unions ranged between $2.2 million and $8.3 million, while median assets of non-failed credit unions ranged between $17.6 million and $40.7 million. What’s more, median loan portfolio concentrations for failed credit unions were higher than for non-failed credit unions in all but two years (2019 and 2020), reaching highs of 0.4 in 2010 and 2015. In contrast, median industry loan portfolio concentration remained between 0.32 and 0.33 from 2010 through 2020.

The report noted that the NCUA’s Office of Inspector General material loss review reports attributed credit union failures due to the lack of timely and aggressive NCUA action and insufficient credit union board oversight.

“Using information from (the) NCUA OIG and (the) NCUA, we determined which causes were associated with the largest total losses and median losses across multiple failures,” the OAG report read. “Specifically, OIG-identified causes of failure associated with the largest total losses to the NCUSIF were insufficient credit union board or committee oversight ($1.4 billion in 2020 inflation-adjusted dollars), lack of timely and aggressive NCUA action ($1.3 billion in 2020 dollars), credit union lending practices ($1.2 billion in 2020 dollars), credit union risk management practices ($1.1 billion in 2020 dollars), credit union loan portfolio concentration ($1 billion in 2020 dollars), and weak or missing NCUA guidance ($1 billion in 2020 dollars).”

The GAO report made three key recommendations to the NCUA: No. 1, that it more fully leverage the CAMEL ratings that indicate a credit union’s deterioration; No. 2, improve the accuracy and reliability of supervisory data, including past administrative or enforcement actions and, No. 3, designate which NCUA office should ensure timely completion of post-mortem reports on failed credit unions.

NCUA examiners rate credit unions according to five individual components, capital adequacy, asset quality, management, earnings and liquidity/asset-liability management, otherwise known as the CAMEL rating.

The GAO report said the federal agency places an emphasis on the CAMEL composite ratings to guide its enforcement actions. However, the report also found that when one of a credit union’s component ratings is worse than its composite rating, that credit union is more likely to deteriorate or fail.

“(The) NCUA’s policies do not explicitly address how to more fully leverage the component ratings individually to determine an appropriate enforcement action,” the report said. “By more fully leveraging the additional predictive value of the CAMEL component ratings, (the) NCUA could take earlier, targeted supervisory action to help address credit union risks and mitigate losses to the NCUSIF.”

During the Oct. 21 NCUA board meeting, after the GAO report came out, the board approved a final rule updating the CAMEL rating system to the CAMELS rating system in a 3-0 vote. In the final rule, the “S” was added to signify sensitivity to market risk into the component. The board also approved redefining the “L” in the liquidity risk component of the system.

According to the NCUA, the benefits of adding the “S” component were “to enhance transparency and allow the NCUA and federally insured consumer and corporate credit unions to better distinguish between liquidity risk (L) and sensitivity to market risk (S).”

The GAO report also determined that the NCUA’s supervisory data about credit unions and examiner interactions are maintained on multiple systems across multiple offices, or are not electronically stored.

“Supervisory data (the) NCUA initially provided to us, which were manually aggregated from the sources described above, were incomplete and inaccurate,” according to the GAO. “Specifically, (the) NCUA did not initially provide us with CAMEL data and NCUSIF loss amounts for seven failed credit unions. (The) NCUA also did not provide us data on some administrative actions, such as documents of resolution for all failed credit unions, civil money penalties for 11 failed credit unions and prompt corrective actions for 29 failed credit unions.”

What’s more, when the federal agency provided updated data, some administrative actions were missing for each of the 145 failed credit unions, including all documents of resolution except for the most recent for each credit union, and some of the data provided also were inaccurate, according to the report.

Finally, the GAO report determined that the NCUA did not always conduct post-mortem reviews (13 of 44 as of April 2021) of certain failed credit unions (to determine causes for failure) and did not complete most reports (30 of 44) in the required time frame. The NCUA’s policies and procedures did not specify which office should ensure that reports are done and issued on time.

“Without designating an office and process to conduct such analyses and recommendations for improvement, (the) NCUA may miss opportunities to improve supervision at credit unions and help prevent future losses to the NCUSIF,” the GAO report said.