Rules vs. Resources: Is Rulemaking A Substitute For Effective Resource Management?

How effectively are existing NCUA information and examiner resources being used?

NCUA’s CUSO rule is a public relations exercise to show a flurry of activity at the Agency. But all of the busy work hides a much larger question: How effectively are existing information and examiner resources being used? All CUSO exposure has been on credit unions’ books for decades, where examiners can easily review it. CUSO losses are minimal compared with the systemic losses credit unions underwent over the past five years. And together, CUSOs’ ongoing revenues and competitive benefits are one of the reasons cooperatives continue to provide exceptional member services.

But the CUSO rule isn’t the only example of an incorrect analysis and response. Sadly, others abound.

The Case of Shiloh of Alexandria FCU

A small yet troubling example is the failure of Shiloh of Alexandria FCU last April. The Agency closed and liquidated the credit union, which reported $2.4 million in assets,624 members, 16.52% net worth, and an ROA of 1.37% (December 30, 2012 call report data)

In November 2013, NCUA filed a lawsuit against the estate of the manager who committed suicide stating, As of September 30, 2013, the Liquidating Agent’s ongoing investigation into Shiloh Credit Union’s losses reveal at least $9.7 million in losses. These are direct losses to the fund and are expected to grow. (NCUA civil complaint filed Nov. 19, 2013, U.S. District Court for the Eastern District of Virginia)

The former manager was part time, the sole employee. In the complaint, NCUA quoted a note left on the manager’s computer, confessing to wrong doing and taking money over several years.

But here’s the critical question: How could a part-time manager with limited credit union experience (compared with professionally trained, full-time and knowledgeable examiners) steal more than four times ($ 10 million) the amount of funds reported on the books and records?

This was not even a cash operation. Rather, the withdrawals were by check, cash, wire payments and ACH debits. Did the examiners look at the bank statements with all the deposits and outflows? Did they reconcile the statements with the general ledger? Did the share account detail foot with the general ledger summary? Was there any attempt to verify any of the accounts, shares or investment information presented?

Fraud can be hard to detect, but this case begs for explanation about NCUA’s contacts with the credit union for the past four years. How many exams were there? Were proper procedures followed? Filing suit for recoveries is certainly needed, but the horse had left the stable long ago. How does NCUA explain its oversight of this institution?

The Inspector General’s Troubling Big Example

Here’s another example of the NCUA’s administrative challenges. As noted in an Inspector General’s report (October 29, 2013 report, #OIG-13-11), a review of NCUA’s process for documenting share insurance fund losses from credit union failures found inconsistencies among various Agency offices in the timing and amount of loss estimates. One instance was the May 2012 purchase and assumption of Telesis Community Credit Union. The Region (presumably based on direct examiner information) estimated the loss at $255 million; NCUA’s E& I office’s estimate was $72.3 million.

In its March 2012 5300 call report filing, the credit union reported a net worth of $3.8 million, which did not include a loan-loss allowance of $20.7 million for a $224 million loan portfolio. Almost all of the credit union’s $50 million investments were short term cash and CDs. The only other significant asset was land and building with a book value of $17 million.

For the Region to have estimated a loss of $255 million, either all of the credit unions assets were virtually worthless, or there was some other factor not apparent from the call report. Certainly an estimate with this magnitude of loss by the Region must have caused a lot of institutional concern and have heavily influenced the Agency’s decision about how to manage the credit union’s problems.

The dilemma is that E&I’s on-the-ground estimate was off by a factor of almost 400%. Why? According to the OIG report, there is a risk that NCUA management might rely on an office’s estimated SIF loss amount that is not the best estimate available at the time in terms of certainty of time and amount.

Unfortunately, the report provides no insight about Telesis and either loss estimate. Even using the lower $72 million estimate, the loss on assets would have to be near $100 million, once the net worth and loan loss accounts are added in. How could this magnitude of loss have occurred if examiners were monitoring the situation closely, as they surely must have done? Was the P&A transaction managed in the most effective way? How is NCUA’s Asset Management and Assistance Center’s (AMAC) role in this situation monitored so projected losses are minimized?

Two Cases: Same Absence of Reasonable Explanation

Rules do not stop or correct problems. They merely establish boundary lines. The bulk of the NCUA’s resources are for supervisory oversight and examinations. While there may be a reasonable explanation for the extraordinary costs to the NCUSIF, these have not been provided for these cases. Without this, one is left with the impression that NCUA’s involvement was ineffectual (Shiloh) or made a difficult situation worse (Telesis). With over $100 million in losses in these two situations, credit unions should expect a public accounting of the Agency’s role.

December 20, 2013

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