The National Credit Union Administration (NCUA) Board authorized the creation of a Loss Share Pilot Program as a potential option for resolving large, complex problem credit unions at the lowest cost to the National Credit Union Share Insurance Fund (NCUSIF).

This tool is intended to facilitate resolution of large credit unions that are no longer viable as free-standing institutions. Taking a page from the Federal Deposit Insurance Corporation (FDIC), which has used loss share agreements extensively in conjunction with failed bank purchase and assumption agreements, NCUA anticipates that losses will be reduced and loans will retain more value when remaining with an operating financial institution.

Under the FDIC program, the acquiring financial institutions purchase and service pools of loans and FDIC reimburses the acquiring financial institution a percentage of any loan losses.

NCUA says loss share agreements could potentially defer NCUSIF losses or even reduce losses if loan value increases. FDIC experience has also shown that loss sharing can add clarity about risk in an acquiring institution’s loan portfolio.

As part of its pilot NCUA will evaluate the cost benefits of overseeing loss share agreements that have 8 to 10 year time horizons.

At the conclusion of the pilot, expected to be in mid-2011, the NCUA Board will decide whether to make the loss share program permanent. Development of the pilot will commence immediately.