By Ray Birch
ALEXANDRIA, Va.–When it comes to credit risk, credit unions were offered insights from NCUA on areas at which examiners will be looking, forbearance extension reporting, plans that need to be developed, and even the neighborhoods in which CUs might want to hand out their business cards.
Those issues and others were addressed during a webinar hosted Wednesday by the agency.
Victoria Bennett, senior credit specialist in NCUA’s Office of Examination and Insurance, emphasized the agency wants to know what credit unions will be actively doing regarding the institution’s credit risk.
“We want to see your documentation on it. Who, what, when, where, why and how,” said Bennett. “Document what you have going on. We are going to want to know how strong your capital and earnings are. If you are dealing with high credit risk, your capital and earnings is what’s going to carry you through.”
In addition, Bennett said the agency will be monitoring any credit unions getting into what it believes to be high-risk endeavors.
“If it sounds too good to be true, it probably is,” she said. “We are concerned we could have credit unions who might be suffering and then they are looking to get fast income. The new programs that you get into, if they are higher risk, they need to be well documented. I'm not telling you not to get into new programs, but you do need to document when you are doing that.”
CARES Act Provisions
Turning to ways credit unions are reporting CARES Act forbearance extensions, Bennett said she assumes all credit unions are reporting those extensions to “some degree or another.” She added she has seen some high numbers.
“I hope no one is at this level, having 60% of your portfolio with CARES Act modifications, but you never know,” Bennett said.
Bennett encouraged credit unions to re-score the modifications to wherever the credit unions sees the risk.
“That is something that your examiners are going to be looking at,” Bennett said. “We recognize you are entitled to keep them at the prior CARES Act levels. Consider how you are recording. If you are not going to re-score them, at the very least let the board know how much you have got in CARES Act modifications. You can also spread this out a little bit and provide the number of CARES Act modifications that have matured and have gone back.
“So you have a separate column showing the ones that were affected, and you can also include delinquencies,” continued Bennett. “We expect that you are reporting COVID modification delinquencies to your board, but it could be added into some kind of a graph, if you choose. It is just a suggestion.”
Other Steps to Take
Bennet outlined several other steps credit unions should consider.
“Understand, these suggestions are from my days as a problem case officer,” explained Bennett. “These are not required. My biggest suggestion to you is if you believe that you might have a problem, develop a plan. What are you going to do in the event that you get into a bad situation in recovery? The big concern is when a bad situation is getting worse. It is human nature to hope that things will improve, and I certainly have seen this on more than one occasion. But then tomorrow never comes and the issue keeps getting bigger.”
Bennett stressed that by having a plan the credit union will be in better shape to deal with problems if they arise.
“For example, the plan could state that when delinquencies reach a certain amount, you will have an outside company take over the short-term delinquencies,” she said. “And if your losses reach a certain (higher) level you will start doing this, this, and this. Maybe you will reduce expenses to protect capital.”
What a prudent plan of action does is allow the credit union to assemble sound processes at a time when management is not stressing over the situation, which can then be effectively employed if needed.
“Hopefully this will avoid you getting into the situation of hoping, hoping, hoping, and then it gets worse and you can’t get out of it,” she said. “I hope none of you get into that situation, but a plan is a good way to protect yourself.”
Importance of Communication Stressed
Bennett also emphasized that communication to and among staff is a critical piece of risk management.
“Communication is essential. Staff readiness is important,” said Bennett, referring to employees knowing what they need to do in the event serious problems begin arising in the portfolio. “If your staff needs to know additional formation in order to be ready…if delinquencies start to go up, your readiness level is important. Talk to your examiners, if you need us. Generally, we will help you if we can. Please, if you are running into trouble, let us know.”
Bennett cautioned now is not the time for any credit union to have outdated lending policies.
“Are your policies up to date? I would assume everybody's workout policy is up to date, whether it is the TDR or not. But also other policies,” she said. “Foreclosure and repossession policies for commercial and consumer loans. And if you take nothing else away from this webinar, with regard to foreclosure and policies, know that real estate agents are not property managers. I had that happen so often in 2008 and 2009, when credit unions had a bunch of foreclosed properties. Many thought that the real estate agents are property managers. They are not. If you have multiple foreclosed properties, have someone assigned to make sure the properties are well maintained.
“You have to consider potential squatters, theft—such as theft of copper pipes and fixtures—and all kinds of things that can disappear,” she continued. “And there is maintenance. Weeds—some credit unions were fined for not keeping up their foreclosed on homes’ yards. You also need insurance on vacant properties.”
Finally, Bennett stressed getting the phone numbers of nearby neighbors who can help in a pinch.
“Going out and handing out your business cards (in a foreclosed home’s neighborhood) is not a bad idea,” Bennett said.