Although credit union loan delinquencies and charge-offs stabilized in 2011, NCUA exams will remain focused on loan quality in 2012, according to NCUA Chairman Debbie Matz.
That’s because the agency expects continued pressure on loan portfolios due to high unemployment and low real estate values. “In the coming year, credit unions can expect weak loan demand combined with continued low interest rates, to present earnings and asset/ liability management challenges,” she writes in The NCUA Report.
Matz says the agency will remain focused on due diligence and risk management, and examiners will pay particular attention to:
1. Concentration risk. Credit unions with a large portion of their portfolio in a particular type of loan, especially real estate loans, are exposed to concentrated credit, liquidity, and interest rate risks.
Credit unions should have sound portfolio limits in place to address concentration risk and to manage within those limits.
2. Long-term, fixed-rate loans. Credit unions with elevated levels of long-term, fixed-rate real estate loans made at historically low interest rates are exposed to significant interest rate risk in the event of a rising-rate environment.
Matz says examiners will focus on credit unions’ ability to develop models and manage interest-rate risk.
3. Yield focus. Credit unions may be tempted to take on more credit, liquidity, or interest-rate risk in search of higher yields. But this can expose credit unions to potentially significant losses, Matz says.
“Examiners will be closely examining the planning and analysis conducted by credit unions offering new loan products or increasing their loan portfolio risks to generate additional yield,” she says.
4. Third-party loans. Credit unions that purchase or participate in loans from other lenders (including other credit unions) must conduct effective due diligence, employ sound underwriting standards, and implement proper controls to monitor these activities.
Credit unions must comply with new loan participation protection provisions once NCUA finalizes a rule later this year.
5. Loan modifications. Matz says NCUA is revising troubled debt restructuring policies to give credit unions additional flexibility to assist troubled borrowers, as long as credit unions have appropriate policies and controls in place.