Weak underwriting standards and high risk concentration, combined with inadequate regulatory supervision, led to the failure of Cal State 9 Credit Union, a Concord, Calif.-based institution that entered federal conservatorship in late 2007.
According to a newly released ‘material loss review’ conducted by the National Credit Union Administration's (NCUA) Office of Inspector General (OIG), management at Cal State 9, which began its liquidation process in 2008, funded an ‘excessive amount’ of indirect home equity lines of credit (HELOCs) that were ‘rife with risky loan elements.’ State and federal examiners were concerned about how large a share the subprime, indirect HELOCs consumed of the credit union's total assets, but failed to address timely the rate and level of growth of Cal State 9's HELOC portfolio, the OIG says.
"In addition, we determined examiners did not adequately monitor the credit union's liquidity position. As a result, we believe examiners missed opportunities to slow or stop the growth of the indirect HELOC program, which would have likely mitigated the loss to the [National Credit Union Share Insurance Fund]," the report states.
In July 2008, Cal State 9's estimated loss to the insurance fund was about $206 million. The final cost will not be known until all the credit union's assets are sold, the OIG adds. The NCUA board entered a purchase and assumption agreement with Patelco Credit Union on Cal State 9's assets and liabilities in May 2008.