ALEXANDRIA, Va. (5/20/09)—Sounding hauntingly familiar, the National Credit Union Administration’s (NCUA’s) Office of Inspector General (OIG) found blame for the failure of Norlarco CU could be placed squarely on the shoulders of credit union management, and that state and federal regulators could have acted more definitively. Norlarco, of Fort Collins, Colo., was placed into conservatorship by state regulators in May 2007 after a number of its construction loans issued in Lee County, Fla., became delinquent. In July, the NCUA took control of the credit union and removed its board of directors. And in 2008, Public Service CU, Denver, successfully bid to purchase the assets and assume the shares of Norlarco. The OIG’s assessment of what went wrong at Norlarco was very similar to the finding in its study to determine reasons behind the 2007 failure of Huron River Area CU of Ann Arbor, Mich. Regarding credit union management, both reviews found that credit risk and strategic risk were major factors in the credit union failures and that, in both cases, management did not adequately manage and monitor the credit risk within its loan programs. Regarding the new report on Norlarco, the OIC said specifically that management:
* Failed to conduct a due diligence review of its relationship with its third party vendor, First American Funding, LLC1 (First American); * Failed to adequately oversee the Residential Commercial Lending (RCL) program; * Created a concentration risk by committing to fund $30 million per month in construction loans; * Failed to develop an adequate asset-liability management (ALM) policy; and * Failed to develop adequate policies and a strategic plan to guide the credit union and the RCL program.
“In addition, we determined Norlarco management took undue advantage of its field of membership to grow the RCL program,” the OIG said in its executive summary. The report also faulted regulators, state and federal. The OIG determined that examiners “did not adequately evaluate the safety and soundness of Norlarco's loan participation program.” That lapse, the study said, resulted in a missed opportunity to slow the RCL programs growth, which might have mitigated the loss to the National Credit Union Share Insurance Fund. Even so, the OIG made no formal recommendations to NCUA in the report. It noted, instead, that Norlarco clearly failed to follow NCUA guidance available at the time; and further noted that NCUA has added to that guidance since. The NCUA had no comment on the report.