NCUA Examiners to Continue Emphasis on Risk Concerns

Mortgage & Real Estate

NCUA examiners in 2013 will continue to focus on issues that have been a priority the last two years: general credit risk and interest rate risk from the increasing number of mortgages being booked by credit unions.

NCUA director of examinations and insurance Larry Fazio said that in addition to credit risk and IRR, he would like to see credit unions exercise more caution when adding new programs and doing business with new vendors. “In these cases credit unions need more due diligence,” Fazio said during a town hall meeting hosted by the agency. “This has been a weakness that our examiners have observed.”

As for the timing of a new rule on hedges credit unions can take against interest rate risk, Fazio said, “We continue to look at derivative authority. It is a complicated issue and we are studying it. When the board is ready to bring something forward we will do so.”

Several CUs inquired about the proposed emergency liquidity rule, with one asking specifically why the rule excluded Federal Home Loan Banks and CUSOs as liquidity sources. Fazio said it is illustrative to think of liquidity as coming from three buckets: on-balance sheet liquidity; off-balance sheet contingent sources, such as a line of credit with a bank or corporate; and federal backstops.

“The third bucket includes the Federal Reserve Discount Window, since it can just print money, or the CLF [Central Liquidity Facility],” said Fazio. “As we saw during the recent credit crisis, sometimes these are the only sources of liquidity in a crisis.”

During the session, NCUA chairman Debbie Matz added, “Federal Home Loan Banks were not chartered for emergency liquidity needs. That is what the proposed rule intended to address. It is a proposed rule, we will read all comments and may make changes.”

While NCUA sent a letter to federal credit unions they are qualified for a low-income CU designation, Kent Buckham, director of NCUA’s Office of Consumer Protection, said at this point state charters that are similarly qualified have not been sent such a letter. Instead, he urged qualified SCCUs to contact the agency if interested.

There are two lists of frequently asked questions regarding LICU designation on the NCUA website.

Fazio said the expected range for 2013 assessments for the Corporate Stabilization Fund and the NCUSIF will be announced after the agency’s November board meeting. The fact credit unions cannot accrue for assessments on a monthly basis prior to the announcement is a GAAP issue, Fazio added in response to a question.

With regulations governing financial literacy for directors coming in recent years, one CU asked if this issue would be an exam focus. Matz said directors must be minimally financially literate, defined as able to read an income statement and a balance sheet, and CUs must have a policy in effect stating so. “But examiners are not going to test any board members, and they are not going to interrogate board members,” she said.

The $170 million NCUA has recovered from settlements with large banks from lawsuits over mortgage backed securities sold to corporate credit unions was returned to the Corporate Stabilization Fund. “This reduces assessments going forward,” said Matz.

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