Risk Management Letters to Credit Unions
Posted by Anthony DemangoneÂ
Last week, NCUA issued two major pieces of guidance via its Letter to Credit Unions channel. Â You can access both letters via the general link I just gave you.
NCUA Letter to Credit Unions 10-CU-14 and attachment. Â The guidance shares NCUA expectations concerning the management of funding and liquidity risk. Â Â Here's an overview from NCUA regarding what the guidance addresses:Â
The guidance clarifies the process that should be followed to appropriately identify, measure, monitor, and control funding and liquidity risk. For example, the guidance provides five strategies to measure and manage liquidity risk:
  ï· Project cash flows;
  ï· Diversify funding sources;
  ï· Stress test;
  ï· Cushion liquid assets, and;
  ï· Develop a formal contingency funding plan.
NCUA Letter to Credit Unions 10-CU-15. Â The guidance shares NCUA expectations on due diligence that credit unions should undertake when dealing with indirect lending. If your credit union is involved in indirect lending, I'd give this a close read. Â Examiners will be looking for the following red flags:
  ï· A high concentration of indirect loans to total loans or net worth without adequate controls in place;
  ï· Incentive programs tying loan officer bonuses to indirect loan volume;
  ï· Inadequate analysis of overall indirect loan portfolio performance;
  ï· High instances of first payment default, payment deferment, and account re-aging;
  ï· Frequent refinancing of past due interest, repairs, and add-on expenses (GAP Insurance);|
  ï· Insufficient loan documentation; or
  ï· Poor dealer management including reliance on the dealer to obtain credit reports; accepting loan payments from dealers; dealer-created down payments through dealer incentives, inflated or fraudulent trade-in or purchase price; or continuous overdrafts in dealer reserve accounts.
The guidance also addresses what credit unions must consider when working with indirect lending.Â
A word about Letters to Credit Unions. Letters to credit unions are not regulations or laws. But they clearly represent agency expectations. Â Once a letter is issued, you cannot claim ignorance. Â The letter instantly becomes part of the existing body of information that you must read and build into your decision process.