Compliance Blog

May 10, 2010

Another Material Loss Review

Posted by Anthony Demangone

Last week, NCUA's Office of Inspector General issued its latest Material Loss Review.  The latest MLR reviewed the reasons behind the failure of Eastern Financial Florida Credit Union.  The document is 36 pages long, and it breaks down the various weaknesses which lead to the credit unions demise.  Here are some observations made by the Office of Inspector General.
  • The credit union's board and management whiffed on risk management, especially with its investments.
  • Its growth strategy was unsustainable.
  • Management allowed numerous regulatory violations in relation to member business loans. 
  • State and federal (NCUA) examiners missed or miscalculated the investment risk.   
NCUA summed up the reasons behind the failure thusly (and yes, I just used thusly in a sentence):
Eastern Financial’s failure can be attributed to inadequate management and Board of Directors (Board) oversight that exposed the credit union to excessive amounts of risk due to investments in complex private-placement Collateralized Debt Obligations (CDOs), weak business loan underwriting and credit administration, poor earnings resulting from an aggressive growth strategy, and an inadequate strategic plan.
This is the latest example of how NCUA is pointing to weak management by a credit union's board of directors and management.  If you've been keeping score, there have been a number of these reviews.  Taken in concert with recent LUAs, NCUA's message is clear: credit union boards and management must adequately manage whatever they are doing.  The more complicated the process, the higher the level of internal controls and management that will be needed.

With that in mind, it may be a good time to review the NCUA Examiner's Guide chapter on Management.  That would be Chapter 7.Â