CUNA Urges Examiner Training on ‘Subprime’

January 8, 2008

FOR IMMEDIATE RELEASE
Contact: Patrick Keefe -- (202) 508-6765 pkeefe@cuna.com

NCUA examiners must be well-versed in provisions of “workout arrangements” for subprime mortgage loans at credit unions and be given adequate training to recognize reasonable workout plans and adequacy of risk mitigation efforts on the loans, CUNA has urged all three of the NCUA Board members in a letter today.

The letter was also copied to the chairmen and ranking members of the Senate Banking and House Financial Services Committees.

Further, CUNA wrote, any guidelines and training information provided to examiners in this area “should be shared with credit unions as soon as possible.”

In the letter, CUNA pointed to NCUA’s letter 07-CU-09, which transmitted the “Joint Statement on Subprime Mortgage Lending,” adopted by the agency last July in conjunction with other federal financial regulators. CUNA noted that it was encouraged by the agency’s adoption of the letter, which included the “workout arrangements.”

Nevertheless, CUNA wrote, credit unions are concerned that while they want to extend flexibility to address members’ mortgage workout issues, “it is very unclear how examiners will respond.”

CUNA outlined a number of practical considerations that last July’s statement did not address, but that NCUA should provide more direction on for its examiners.

“Helping members in times of financial difficulties is a hallmark of the credit union system, but credit unions may not be able to assist to the extent they might otherwise if NCUA does not take a proactive role in making sure examiners, as well as credit unions, understand the Agencies’ meaning of the workout provisions in the Statement on Subprime Mortgage Lending,” CUNA President and CEO Dan Mica stated in the letter.

The complete text of CUNA’s letter follows:

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January 8, 2008

The Honorable JoAnn Johnson
Chairman
National Credit Union Administration Board
1775 Duke Street
Alexandria, VA 22314

Dear Chairman Johnson:

As NCUA ably testified to Congress on several occasions last year, credit unions have for the most part avoided the kinds of adjustable rate subprime mortgage loans that banks and others initiated to the detriment of so many consumers, our economy and the global financial marketplace.

While credit unions have generally not been involved in making such nontraditional loans, we anticipate that borrowers will increasingly be seeking help from their credit unions to restructure mortgage loans they obtained elsewhere. They may also be turning to their credit union to refinance traditional mortgages the credit union or other lender originated but which have become problematic due, for example, to the decreasing value of homes in the borrower’s area.

We believe well-managed credit unions can, in a number of instances, be an important source of home financing for borrowers caught in the subprime morass, particularly for members with an acceptable payment history who are able to document income that is sufficient to service a new, more favorable loan or handle restructured terms such as payment agreements.

Credit unions are concerned, however, that while they want to extend flexibility to address members’ mortgage workout issues, it is very unclear how examiners will respond.

We are encouraged by NCUA Letter No. 07-CU-09 which transmitted the Joint Statement on Subprime Mortgage Lending that the agency adopted in July with the other federal financial regulators. The Statement contains a number of important directives, including provisions on “Workout Arrangements,” beginning on page four of the Statement, such as:

…(T)he Agencies encourage financial institutions to work constructively with residential borrowers who are in default or whose default is reasonably foreseeable. Prudent workout arrangements that are consistent with safe and sound lending practices are generally in the long-term best interests of both the financial institution and the borrower….The Agencies will not criticize financial institutions that pursue reasonable workout arrangements with borrowers. Further, existing supervisory guidance and applicable accounting standards do not require institutions to immediately foreclose on the collateral underlying a loan when the borrower exhibits repayment difficulties. Institutions should identify and report credit risk, maintain an adequate allowance for loan losses and recognize credit losses in a timely manner.

These provisions reflect prudence and sound financial management while leaving latitude for institutions to actually help mortgage borrowers in need. Our concern, however, is there has been no guidance to examiners that the agency has shared with credit unions on how this letter is being implemented.

We urge NCUA to ensure examiners are well-versed in the provisions of the Statement regarding workout arrangements and are provided adequate training to recognize reasonable plans and the sufficiency of risk mitigation efforts. Guidelines and training information provided to examiners on this matter should be shared with credit unions as soon as possible.

Further, there are a number of practical considerations the Statement does not address and NCUA should provide more direction on these concerns to credit unions and examiners. While not meant to be exhaustive, some examples of such uncertainties include:

• Will credit unions be permitted to assist members when the value of their home has declined to less than the balance of the current mortgage?
• Could such assistance include second mortgages that cover the excess balance over the appraised value of the home?
• What latitude do credit unions have to work with their members to lower payments and determine the time period to which the reduced payments apply?
• What flexibility will credit unions have to alter other terms of the loan, such as the interest rate, or vary the loan to value ratio?
• Will credit unions have leeway to determine what they reasonably consider are sufficient risk mitigation steps, including the appropriate amount of loan loss reserves?
• Will credit unions that provide mortgage assistance be subjected to additional reviews from the examiner or more reporting requirements?
• The Statement indicates credit unions should follow GAAP in accounting for workout arrangements but is there more accounting guidance that could be provided?

Helping members in times of financial difficulties is a hallmark of the credit union system, but credit unions may not be able to assist to the extent they might otherwise if NCUA does not take a proactive role in making sure examiners, as well as credit unions, understand the Agencies’ meaning of the workout provisions in the Statement on Subprime Mortgage Lending.

Thank you for your attention to this very important issue.

Sincerely,

Daniel A. Mica
CUNA President and CEO

Copyright © 2008 - Credit Union National Association, Inc.