ALEXANDRIA, Va. – NCUA reported this morning that last year’s failure of Eastern New York FCU was mostly caused by poor member business lending, which the $57 million credit union conducted through several layers of CUSOs, subsidiaries through which credit unions typically conduct non-traditional business.

The CEO of the credit union, in Napanoch, N.Y., was given too much authority from the Board and he “undertook business ventures that would prove to be catastrophic,” wrote NCUA’s Inspector General in a Material Loss Review issued this morning. The credit union, which was chartered in 1961 to serve employees at the Eastern New York Correctional Facility in Napanoch, was liquidated by NCUA in October 2011 and its remnants assigned to USAlliance FCU in Rye, N.Y. NCUA projects the losses on the failure to be around $4 million.

The latest report comes as the credit union lobby for expanded MBL powers is coming to a head in Congress, with some 500 credit union executives and allies visiting Capitol Hill today to push for higher credit union limits on MBLs. Eastern New York FCU joins a growing list of credit union failures over the past few years traced to their member business lending practices.

The new report also comes as the credit union industry has fought NCUA to a standstill over the agency’s bid for more power to examine and regulate CUSOs.

The new report cites three main reasons for the Eastern New York FCU failure: poor MBLs; a complicated layer of CUSOs; and NCUA examiner shortcomings.

For example, the credit union owned three CUSOs, each of which held ownership stakes in sub-CUSOs, and at least one sub-CUSO which held an ownership stake in a sub-sub-CUSO. The CUSOs were mostly funded by non-cash investments, such as interests in a patent, license subscriptions and goodwill. Several of the CUSOs were set up to generate income, although most of the CUSOs had few customers. “ENY FCU developed a complex, multi-layered network of CUSOs in which funds were loaned between CUSO’s with little or no documentation supporting collateral positions,” found the IG.

“The considerable income ENY FCU made in those years masked the fact that the credit union was actually unprofitable due to unsound infrastructure and contractual relationships implemented under the former CEO,” said the report. “During each examination occurring between 2007 and 2009, examiners identified that profitability was dependent on income generated from the CUSOs.”

In addition, the NCUA examiner, concluded the IG, had limited experience and received insufficient supervisory oversight.

The credit union’s MBL activity grew from less than $1 million in 2008 to $3.5 million in 2009. Of this amount, 17 loans totaling $3.1 million or 88% of the total dollar value originated to family members of member business loan customers. ENY FCU’s CEO and its chairman of the board approved all loans, even though neither had any experience making business loans. The MBL portfolio, concluded the IG, was characterized by “poor underwriting, almost no credit analysis, mostly secured by worthless inventory or assets.” In addition, there was no collateral valuation or inventory.

 

 

Subscribe Now

Authoritative analysis and perspective for every segment of the credit union industry

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.