Summary of OFIR-League Rep Discussion
March 3, 2009
Corporate Stabilization Issues
As credit unions begin to record the charges related to recapitalizing the share insurance
fund, OFIR examiners will evaluate the financial impact on credit unions similar to any
other one-time occurrence. Charges will be viewed in relation to each credit union’s
financial strength, net worth, risk profile and management strength. If the charges put a
credit union into Prompt Corrective Action (PCA), this will be viewed differently from
the situation where a credit union is already under a PCA plan. As to the timing of taking
the charges, OFIR reiterated the recommendation from NCUA and CUNA to follow the
advice of your accountant or auditor. Like NCUA, OFIR is not opposed to a credit union
taking charges in 2008, but would require an amended 4Q 2008 Call Report.
Corporate Credit Unions
In light of the U.S. Central (USC) situation, the question was asked about OFIR’s
concerns regarding corporate credit unions, their product lines, their governance and the
regulatory oversight. No specific comments were offered as OFIR reported that NCUA’s
Office of Inspector General is conducting an assessment of USC and will issue a
“material loss report.” The OIG report will define the problems and should set the
direction for any resolution.
Despite NCUA’s recent issuance of the Advanced Notice of Proposed Rulemaking
(ANPR) regarding the future of the corporate structure, OFIR suggested that additional
information may be revealed from the OIG report that could impact feedback on specific
questions and issues within the ANPR. Readers should note that the OIG material loss
report is different from the announced PIMCO evaluation, which is nothing more than a
third party’s assessment and valuation of USC’s investment portfolio. OFIR reported that
NASCUS is concerned about the reliability of the conclusion from PIMCO since any
valuation in the current economy will likely be more subjective than objective.
Asset Valuation Issues
OFIR noted it is taking a closer look at the process credit unions use to fairly value its
assets and especially its investments in light of the mark-to-market requirements. More
training is suggested in this area, which is not a simple process especially in today’s
market. Investments in corporate obligations will include a look at the strength of the
issuer and holder, whether it is an individual corporation that issued the security, or a
trust that holds that security, and which oftentimes can mean an additional evaluation of
yet another party behind the trust.
CU Data and Laptop Security
OFIR reported that due to persistent efforts by Commissioner Ross, the state’s
Department of Information Technology (DIT) is finally responding, both within OFIR
and in other state agencies, to concerns raised by credit unions during the 2007 and 2008
Town Hall meetings about encrypting examiner laptops. The laptop hard drives are now
fully encrypted and users are required to use multi-factor authentication. In addition, the
agency is moving toward the use of key cards in addition to multi-factor authentication.
Without the key, the computer will not be able to turn on, at which point, the multi-factor
authentication will be required. OIFR also reported that communications between OFIR
and NCUA is also encrypted.
Operating Fees
NCUA recently announced an increase in operating fees for FCUs which triggered a
related question for OFIR. OFIR’s operating fees are annually calculated in March
following the release of the prior year’s 4Q call report data, which is the basis for the
calculation. Credit unions are then invoiced before July 1. As to any increase, OFIR said
it was premature to say as the calculation had not yet taken place. However, OFIR
reported that it has experienced additional expenses that would need to be taken into
consideration including the expenses related to the addition of 2 new CU examiners, an
increase in staffing for OFIR’s Office of General Counsel (a shared expense), and laptop
security efforts,. While there are additional SCU assets due to recent charter conversions,
these were finalized in 2009 and thus will not be part of the 2009 fee calculation. OFIR
indicated that it attempts to keep fees as low as possible to avoid any unnecessary surplus
that could be pulled for other uses by OFIR or the legislature if they deem it necessary.
Best Practices vs Legal Requirements
The question was raised regarding a common complaint heard during the Town Hall
meetings, which was “converting” best practices into regulatory mandates. OFIR
indicated that it has responded to these complaints by requiring examiners to back up any
compliance mandate with a citation of the law or regulation especially if it is an
exception in the exam report. This will be reinforced with the examiners. In connection
with this issue, the question was raised about any increased scrutiny regarding BSA
compliance. OFIR said not really, but knowing your member and being alert to
suspicious account activity based on the member’s profile especially for business
accounts, has not disappeared. While all the attention is now on the corporate bailout,
bankruptcy cramdown and foreclosure issues, OFIR reinforced support for ongoing BSA
awareness and training by MCUL. It was noted that MCUL had provided a BSA session
in early February (Bank Secrecy Act) and another is set for November 19 (BSA Exam
Hotspots).
Other Issues of Concern
Member Business Loans. OFIR discussed concerns with credit unions getting involved
with commercial development projects as this is currently a major problem with
community banks given the present economy. Make sure the credit union or its CUSO
has the expertise to understand what is involved and the various risks unique to this kind
of lending.
CUSO’s. Here, OFIR was concerned about the unauthorized use of CUSOs for exotic
products/services that do not comply with the Michigan Credit Union Act. Also OFIR
reminded credit unions that once a CUSO is formed whether wholly owned, or owned
with one or more additional credit unions, that it must operate as a legal entity, and not be
viewed as a subdivision of the credit union. The credit union must operate at arm’s length
(contracts as appropriate) with the CUSO, and in fact treat it like any other third party it
is doing business with including use of due diligence practices issued by NCUA.
Loan Growth. One League Rep reported that lending seems to be on the rise in many
Michigan credit unions, especially MBLs and car loans, and OFIR warned that credit
unions should tread carefully as they are seeing situations where riskier loans, rejected by
banks, are migrating to credit unions. OFIR has also seen an increase in future
obligations/commitments (e.g. lines of credit), especially in the member business loan
area that requires additional monitoring to ensure quick resolution of negative trends that
could develop quickly.
Loan Concentrations. As to the question of concentration of loans in individual credit
unions, OFIR said there was no magical percentage at which point examiners would say
for example, you have too many real estate loans. While there are statutory limits as to
individual aggregate loan amounts, any concentration would be evaluated against a credit
union’s loan policy, which should profile how it will lend to its members, and just as
importantly, if an exception to the policy is required, then what is the process for
approval, and is it followed.
Planning. OFIR continues to impress on credit unions the importance of planning,
creating a strategic plan, with both long and short term goals, and just as important, to
connect plan goals with any budget. If there is a disconnect between the plan and the
budget, examiners will look deeper. League Rep Carolyn Miller reported to OFIR that
MCUL offers free planning services to SAS credit unions $35M and below, and
requested OFIR keep this in mind during examinations, and remind credit unions of this
service where needed.
Extending Fixed-Asset Waivers. The question was asked about situations where a credit
union needed to extend a fixed asset waiver. OFIR indicated that waivers are usually
issued for a 3 year period, and they understand that certain situations will arise where the
credit union has not been able to return to the required fixed asset level. In this case, the
credit union should be in communication with its examiner as to progress (or lack of
progress) and when any further waiver is needed, to outline the steps it has taken, any
change in the initial assumptions forming the basis for requesting the initial waiver, and
how the credit union expects to resolve the problem in any extended waiver period. The
important element is to stay in communication with the examiner.
In summary, OFIR noted some common themes today: member service, thoughtful
planning, risk assessment, proper staffing, due diligence, monitoring, controls and regular
communications with your examiner.