NCUA provides indirect lending guidance
ALEXANDRIA, Va. (8/24/10)--Saying that an "improperly planned or loosely managed indirect lending program can lead to unintended changes in the risk profile and financial performance" of a credit union, the National Credit Union Administration (NCUA) released Letter to CUs 10-CU-15 providing credit unions with guidance on how best to build or review their indirect lending programs.
Risks associated with indirect lending include material shifts in balance sheet composition and increased credit risks, liquidity risks, transaction risks, compliance risks, and reputation risks, the letter said. The NCUA "has seen seemingly healthy credit unions fail in a matter of months due to indirect lending programs that spun out of control," it added.
The agency recommended that credit unions mitigate these risks by properly establishing the goals and portfolio limitations for indirect lending programs, creating and following specific underwriting standards and vendor policies, and maintaining a "comprehensive, effective, and ongoing due diligence program."
Credit unions should also "determine the level of lending and collection staff sufficient to operate and monitor" indirect lending programs. They also should undertake periodic risk-reward or cost-benefit analyses "to determine if the net return to the credit union is sufficient for the risk" and "establish an exit strategy" that could be followed if the risks posed by indirect lending become too great.
Examiners will be monitoring credit unions for high concentrations of indirect loans to total loans, "inadequate analysis of overall indirect loan portfolio performance," and insufficient loan documentation, and those examiners may contact credit unions if these or other assorted "red flags" are noticed, the NCUA said.
The NCUA has also recently provided credit unions with guidance on liquidity risk management and the Secure and Fair Enforcement for Mortgage Licensing Act. For the NCUA letters, use the resource links.
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