Compliance Blog

Posted by Anthony Demangone

Last week, NCUA's Office of Inspector General released a material loss review (MLR) concerning NCUA's conservatorship of U.S. Central Federal Credit Union.  The MLR tries to determine the reason why NCUA had to conserve U.S. Central.  You should read the MLR yourself, but, in short, the MLR found that U.S. Central's management and board failed to adequately manage the risk involved with its investment strategy, partly due to inadequate oversight.  In addition, the report pointed fingers at NCUA, concluding that examination staff failed to hone in on that risk within the investment portfolio.  By the time NCUA saw the risk, it was too late.

Here's one paragraph that caught my eye:

Since 2001, U.S. Central had modest growth and a generally conservative investment strategy. However, in 2006, U.S. Central’s business strategy shifted towards more aggressive growth that was focused on increasing or maintaining market share of the retail corporate credit union balances by offering competitive investment products and rates. U.S. Central’s assets grew to $44.7 billion by December 31, 2007, an increase of 22 percent from December 31, 2005. U.S. Central’s growth was achieved by offering highly competitive rates to its retail corporate credit union members, encouraging these members to invest their liquid funds with U.S. Central.

This paragraph states that in 2006, U.S. Central moved toward a strategy of aggressive growth.  In order to fund the higher returns needed to grow its assets, U.S. Central had to achieve higher returns on its investments. Arguably, that growth strategy is the event that caused the rest of the dominoes to fall. But there was no discussion within the MLR about why U.S. Central changed strategies.  It is food for thought, anyway.

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In last week's NCUA board meeting, NCUA approved a regulation that ends four RegFlex exemptions. One of the affected areas involved fixed assets. Currently, RegFlex credit unions are exempt from the 5% limitation on fixed assets. The final rule ends that, and the rule will be effective 30 days after it is published in the Federal Register.  I'm sure that last sentence caused a few jaws to drop.  There's good news, of sorts.  There is a grandfather clause.

Credit unions that have already exceeded the 5% limit on the effective date of this rule will be grandfathered at that limit. If their level of fixed assets subsequently trends downward, then so will the level at which they are grandfathered. Grandfathered credit unions are, however, still eligible to apply for a waiver to increase their fixed asset investments. For example, a credit union grandfathered at 8% whose fixed assets trend downward to 6.5% will have a new grandfathered limit of 6.5%. Further, if that same credit union then wishes to increase its fixed assets to 9%, then it may apply for a waiver to do so. 

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Please join us for our "Year-End Review," a NAFCU member-only conference call on Nov. 18. NAFCU President Fred Becker and the association's senior staff will report on the latest developments in Washington affecting credit unions, as well as the outlook for the economy. NAFCU's Member Call-In is free, but you must register to participate. You can register online or contact our Member Service Center at (800) 344-5580.