Four CU Liquidations Cause $3.3 Million in NCUA Share Insurance Losses

Four credit union liquidations led to $3,312,779 in estimated losses to the NCUA’s Share Insurance Fund.

According to the NCUA’s Office of Inspector General’s Semiannual Report to the Congress for Oct. 1, 2021 to March 31, 2022, posted on the federal agency’s website in late May, the liquidated credit unions included Indianapolis Newspaper Federal Credit Union ($2.29 million loss), Portsmouth Schools Federal Credit Union ($806,089 loss); Prairie View Federal Credit Union ($200,000 loss) and Empire Financial Federal Credit Union ($16,690 loss).

INFCU failed because of alleged fraud by the former CEO, ex-board chair and employees allegedly involved in a loan lapping scheme that included falsifying internal loan records to conceal misappropriated cash, according to an OIG Material Loss Review released last December.

Cash proceeds from the phony loans, or alleged fraudulent advances on loans, were used to make payments on existing loans, which hid the credit union’s levels of delinquencies. Approximately $1.3 million of alleged fake loans were identified as part of the loan lapping scheme from July through September 2020. By the end of that year, the credit union posted a loss of nearly $1 million, according to NCUA financial performance reports. The federal agency determined INFCU to be insolvent and liquidated it on March 31, 2021.

INFCU, chartered in 1961, held $6.2 million in assets and had 1,143 members.

While the OIG primarily blamed the fraud losses on management and the board, it also blamed NCUA examiners, noting that they may have identified the alleged fraud sooner and mitigated the losses had they more thoroughly addressed certain loan concentration and credit risks identified through completion of the Small Credit Union Examination Program (SCUEP) and performed suggested additional procedures as a response to the risks identified.

For example, the OIG said INFCU consistently granted loans to one member, or one household, which was greater than 25% of the credit union’s net worth. Interestingly enough, NCUA examiners noted during an examination the level of loan concentrations to one member that was 47% of INFCU’s net worth, according to OIG.

What’s more, INFCU did not evaluate unsecured debt in relation to income to manage credit risk. Although examiners communicated the issues as a concern, the credit union failed to implement adequate credit risk management policies addressing elevated concentration risk or risks related to unsecured lending.

The OIG recommended that the NCUA enhance its annual SCUEP training related to concentration risk.

The Semiannual Report also revealed that the NCUA has not implemented a recommendation from a February 2020 Material Loss Review of CBS Employees Federal Credit Union’s $40 million fraud case. OIG recommended that the NCUA should amend guidance to require reconciliation from the print processor to the share and loan subsidiaries when a statement verification is performed.

The OIG also alleged fraud contributed to the liquidation of the $2.3 million Portsmouth Schools Federal Credit Union in Portsmouth, Va., in December 2021 and the $3.1 million Prairie View Federal Credit Union in Prairie View, Texas in February 2022.

PSFCU was liquidated involuntarily by an emergency purchase and assumption agreement with the $2.3 billion Newport News Shipbuilding Employees Credit Union in Newport News, Va., (dba, Bayport CU). PSFCU was insolvent with a net worth that continued to deteriorate due to record keeping losses and alleged fraud perpetrated by a former supervisory committee chair, according to the OIG.

The NCUA liquidated PVFCU and conducted an emergency assisted merger with the $346 million Cy-fair Federal Credit Union in Houston because of PVFCU’s declining net worth, which was made worse by alleged fraud that was committed by a former PVFCU manager, the OIG reported.

The NCUA conserved the $5.1million Empire Financial Federal Credit Union and then it was involuntarily liquidated via an emergency purchase and assumption agreement with the $3.9 billion Jovia Financial Federal Credit Union in Westbury, N.Y., in March.

The OIG said the New York City-based EFFCU was insolvent because of its alleged failure to have an adequate Bank Secrecy Act/Anti-Money Laundering compliance program, which included alleged failure to file numerous required related regulation reports.