Post Mortem Of Taxi CU’s Likely To Result In Greater MBL Scrutiny

April 3, 2019 at 9:30 am 2 comments

Even if you have never been anywhere near a medallion loan, if your credit union engages in member business lending, expect even more scrutiny of your lending practices. That’s my overarching takeaway after reviewing the report of NCUA’s inspector general analyzing the demise of Melrose CU, LOMTO CU and Bay Ridge FCU which costs the share insurance fund $765.5 million. I’m going to highlight those parts of the report which might have the greatest operational impact on credit unions, particularly those that aggressively offer member business loans.

Get used to hearing more about NCUA’s Enterprise Risk Management. The inspector general recommends that NCUA institute a more formal process to identify and document concentration risk both within credit unions and among groups of credit unions to spot loan “concentrations” that could potentially pose a significant risk to the Share Insurance Fund.

Expect more aggressive examinations even if your credit union is doing just fine. Prior to 2014, all three of these credit unions were well capitalized. According to the inspector general, examiners involved in the supervision of these credit unions felt they had insufficient grounds to take formal enforcement actions against these credit unions for repeatedly failing to comply with Documents Of Resolution because the credit unions enjoyed profitability and strong capital positions. Not true concluded the inspector general who notes that the existing regulatory framework in “no way limits the authority of the NCUA Board or appropriate state official…to take additional supervisory actions to address unsafe or unsound practices or conditions” irrespective of how well capitalized credit union is.

Expect more scrutiny of concentration limits. As I know readers of this blog are well aware, credit union MBL balances are generally capped at the lesser of 1.75 of a credit union’s net worth or 12.25% of the credit union’s total assets. One of the exceptions to this requirement is for credit unions “that have a history of primarily making member business loans” as of September 1998. Ironically this provision was included in the law primarily to accommodate taxi credit unions.

However all credit unions are still subject to 12 CFR 723.8 which limits the aggregate amount of outstanding business loans which can be lent to any one member or group of associated members to 15% of a credit union’s net worth unless they get a waiver. The inspector general’s report is critical of the failure of examiners to take steps against these credit unions for not complying with this prohibition. It complains that credit union management was allowed to disregard examiner findings.

For me, the bottom line is that regulators have concluded there are more lessons to be learned from the demise of these credit unions than simply a failure to recognize the threat posed by Uber and Lyft before it was too late. Like it or not, no matter how responsibly your credit union executes its MBL program, expect examiners to put your program under the microscope if they haven’t done so already.

Entry filed under: Compliance. Tags: , .

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2 Comments Add your own

  • 1. Anonymous  |  April 3, 2019 at 12:23 pm

    The NCUA should be held accountable for allowing these credit unions conduct business in this way. No oversight as it relates to this particular sector until it was too late. How can any financial institution be allowed to have such levels of concentration in one product?

    • 2. Henry Meier  |  April 3, 2019 at 1:00 pm

      Clearly the proverbial “mistakes were made” applies to everyone, including NCUA. But I am always hesitant to place too much blame on the regulators. If we justifiably demand less regulation but then start blaming regulators when something goes wrong we sound an awful lot like the big banks. I’m proud to be part of an industry that cleans up its messes


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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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