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Regulators Tighten Belt| on Credit Unions

WASHINGTON (CN) - The National Credit Union Administration is increasing its oversight to prevent major losses like those suffered during the 2008 financial collapse, a regulator told the Senate Banking Committee on Thursday.

"We are working very diligently to identify problems as soon as possible and keep costs as low as possible," agency Chairwoman Deborah Matz reported to the Senate Banking, Housing and Urban Affairs Committee.

Matz's administration insures 7,500 credit union institutions, which have 90.8 million members and $780 billion in assets. Credit union membership has increased by 5 million since 2006 and shares have grown by $178 billion, or 30 percent. Since 2008, consumer credit unions have increased loans by 15 percent.

In the wake of the 2008 financial crisis, the agency seized five of 27 corporate credit unions and put them into federal conservatorship, thereby protecting thousands of consumer credit unions that rely on the corporate network.

The five seized institutions represented 70 percent of the entire corporate system assets and 98.6 of total investment losses, of which there were an estimated $13.9 to $16.1 billion.

Consumer institutions that poured capital into corporate credit unions absorbed $5.6 billion in losses. The credit unions will pay back an expected $8.3 to $10.5 billion in remaining losses through stabilization fund assessments to occur annually until 2021. So far, credit unions have paid $1.3 billion in assessments.

"This cost will be borne solely by the credit union system," Matz said in written testimony.

She added at the meeting that the stabilization fund has allowed her administration to spread out the costs to credit unions over time.

"We are trying to keep the assessments as low as possible," Matz said.

To prevent future losses, regulators are now examining credit unions each year instead of every 18 months, Matz said.

"We catch problems earlier," she said, "before they become material concerns."

The agency has added more than 100 examiners to its staff since 2009, and it plans to hire 61 more in 2011.

Examiners review all credit union financial data on a quarterly basis, and when they see institutions with a high rate of fixed rate mortgages, sharp increases in delinquencies or other red flags, they take immediate action.

"They won't wait until the next exam; they will immediately address the problem," Matz said. "We are taking these actions to save as many credit unions as possible."

Troublesome institutions can no longer collect repeated administrative sanctions without taking heed of them, the regulator warned.

Starting late last year, a credit union has 90 to 120 days to take action after receiving a sanction, or face more aggressive sanctions.

The agency is also drafting a new regulation on concentration limits for credit unions, Matz said.

When questioned by senators about the growing number of delinquent business loans at consumer credit unions, Matz said small-business lending was a crucial part of the credit union system.

"Business lending done properly is an important tool for credit unions to have at their disposal to serve members," Matz said. The average credit union business loan is $249,000.

More than 2,200, or 30 percent, of all credit unions issue member business loans.

The number of troubled credit unions has increased in the past few years: 212 in 2007, 254 in 2008, 328 in 2009 and 363 at the end of October. The latest figure represents 5 percent of all credit unions and total shares.

Matz acknowledged that the agency could have engaged in better oversight of large corporate credit unions in the lead-up to the financial crisis, but said the agency did an "adequate job" of overseeing consumer credit unions.

Pointing to the housing market collapse, Matz said, "No one could have foreseen the significant drop in the value of real estate."

Still, the industry remains well capitalized, the chairwoman said.

As of September 2010, consumer credit unions had an aggregate net worth of $90.6 billion, the highest amount in credit union history. According to NCUA data, 98 percent of all credit unions were at least adequately capitalized or better, and 94.8 percent were well capitalized.

"Despite the challenging economy, American credit unions remain strong overall," Matz said.

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