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NCUA reviews Huron failure causes
ALEXANDRIA, Va. (12/8/08)—In a study to determine reasons behind the 2007 failure of Huron River Area CU of Ann Arbor, Mich., the National Credit Union Administration’s (NCUA’s) Office of Inspector General (OIG) found blame could be laid at the feet of credit union management, as well as state and federal regulators. In November 2007, the NCUA announced liquidation of Huron River CU saying the action was being taken to protect member assets while addressing operational issues within Huron River. A lawsuit had been filed earlier against the $362 million-asset credit union and a homebuilder, First Home Builder, alleging fraud in the way their home construction loans were set up. The NCUA subsequently tasked its OIG with reviewing Huron to determine causes of the failure, the resultant loss to the National CU Share Insurance Fund, and to assess the NCUA’s and Michigan State Supervisory Authority’s supervision of the credit union. In the report made public last month, the OIG found that on the part of regulators, action could have been more direct and more timely. NCUA Director of Public and Congressional Affairs John McKechnie said Friday that since that time, "The unprecedented volatility and rapid deteriorations in balance sheets experienced by some credit unions during this economic downturn has necessitated changes to NCUA's examination processes.” He added, “Recent steps, such as the 12-month examination program and the increases in the exam staff reflect our recognition of the need to adapt practices in accordance with the times. NCUA is committed to taking every appropriate action to maintain the highest standards in safe and sound regulation of credit unions." Regarding credit union management, the review found that credit risk and strategic risk were major factors in Huron’s failure and that Huron management did not adequately manage and monitor the credit risk within its loan program. In addition, the OIG reported that Huron management made strategic decisions that put Huron’s continued financial viability at significant risk. State and federal examiners found, and OIG concurred, that the credit union’s management:
* Did not exercise due diligence by evaluating the third party relationship held with its lender, the Construction Loan Company (CLC); * Allowed CLC to concentrate a majority of the credit union’s loan portfolio in a speculative Florida real estate construction project; * Allowed CLC to make construction loans to applicants outside the credit union’s approved field of membership; * Misclassified construction loans and violated NCUA’s Member Business Loan (MBL) limits; * Did not have adequate liquidity controls in its ALM Policy; and *Failed to develop or follow adequate plans to guide the direction of the credit union and the Florida construction loan program.
The OIG also said it found that Huron management was “not forthcoming with the Michigan SSA and NCUA examiners about the Florida construction loan program” and may have ignored warnings regarding the “expected decline of housing values, in particular those in the Florida real estate market." As mentioned, the OIG also found that the NCUA and Michigan SSA examiners “may not have adequately monitored or reacted prudently or timely to trends indicating the safe and sound operation of Huron may have been in jeopardy." “Consequently,” the OIG report surmised, “NCUA did not adequately and timely address the credit and strategic risks Huron management caused by entering Huron into an inherently risky and uncontrolled.” The report noted the NCUA recently “reinforced the need for aggressive investigation and protection against perceived risks” in Letter to Credit Unions No.: 08-CU-20 Evaluating Current Risks to Credit Unions. It noted the letter included supervisory guidance given to NCUA examiners “about diligent examination and supervision when potential risk to a credit union is identified.”
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