Compliance Blog

Written by Steve Van Beek

Last week, NCUA published a Material Loss Review for Clearstar Financial Credit Union in Reno, Nevada.  NCUA's Office of Inspector General (OIG) is required to conduct a Material Loss Review (MLR) for any credit union failure that will cost the National Credit Union Share Insurance Fund (NCUSIF) more than $10 million dollars.  Clearstar was placed into liquidation by the Nevada Department of Business and Industry, Financial Institutions Division on September 29, 2009, naming NCUA the liquidating agent.   

Here is part of the Executive Summary from the MLR:

"We concluded Clearstar failed because its Board and management did not implement proper risk management policies and procedures related to credit and concentration risk. Specifically, management originated and funded a significant amount of loans that were both poorly underwritten and to many borrowers that had poor credit histories. Because of this, over time, the Credit Union‟s loan portfolio increased in credit risk.

Additionally, the Credit Union used modified borrower classification matrixes that allowed them to approve loans to borrowers that were of a much higher credit risk than industry standards would expect. Also, in late 2008, management began extending an inordinate number of delinquent loans when it became obvious borrowers did not have the ability to meet their obligations. This was done to stem the flow of collection issues the Credit Union was facing; despite very little evidence borrowers would have the ability to meet their obligations when the extension period expired.

Finally, the Credit Union focused a significantly large portion of its loan portfolio on new and used vehicle loans originated both internally by Credit Union personnel, as well as externally through an indirect loan program. Clearstar‟s indirect loan program originated loans from new and used auto and recreational vehicle (RV) dealerships.2 This program coupled with liberal underwriting policies enabled the Credit Union to generate a high volume of new loans. As more of these loans were originated, Clearstar‟s default rate increased as well. When coupled with the economic recession that began in 2008, the Credit Union‟s failure was largely unavoidable."

Two of the issues that contributed to Clearstar's failure have been highlighted by NCUA in recent Letters to Credit Unions:

• Concentration Risk - 10-CU-03: Letter & Enclosure
• Indirect Lending and Appropriate Due Diligence - 10-CU-15: Letter

Additionally, I wrote an article for the July/August 2010 issue of The Federal Credit Union magazine on MLRs and the learning opportunity for senior management and CU Boards.