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STATEMENT

OF

THE HONORABLE JOANN M. JOHNSON

CHAIRMAN

NATIONAL CREDIT UNION ADMINISTRATION

"Subprime and Predatory Lending: New Regulatory Guidance, Current Market
Conditions, and Effects on Regulated Financial Institutions"

BEFORE THE

Subcommittee on Financial Institutions and Consumer Credit

# U.S. House of Representatives

TUESDAY, MaRCH 27, 2007

**I. Introduction**

NCUA's primary mission is to ensure the safety and soundness of
federally insured credit unions. It performs this important public
function by examining all federal credit unions, participating in the
supervision of federally insured state chartered credit unions in
coordination with state regulators, and insuring credit union members'
accounts. In its statutory role as the administrator for the National
Credit Union Share Insurance Fund, NCUA provides oversight and
supervision to approximately 8,362 federally insured credit unions,
representing 98% of all credit unions and approximately 87 million
members. [^1]

Federally insured credit unions' holdings of mortgage loans represent a
relatively small part of the overall mortgage market. Mortgage lending
in federally insured credit unions is mostly comprised of traditional
fixed rate mortgages where the risk of payment shock or negative
amortization is minimal. However, some federally insured credit unions
offer nontraditional mortgage products and loans to subprime borrowers
as a means of reaching out to disadvantaged and lower income
individuals.[^2] NCUA supports these outreach efforts when they are part
of a planned, controlled, risk based lending program. In guidance issued
to all federally insured credit unions, NCUA supports risk based lending
programs as a tool to reach out to all credit union members, where the
programs are measured and meet supervisory expectations. NCUA has
outlined safe and sound lending practices for federally insured credit
unions offering loans to borrowers who access subprime products in order
to obtain credit through risk based lending programs.

NCUA carefully monitors mortgage performance indicators in federally
insured credit unions to gauge the effectiveness of underwriting and
collection activity. To date, federally insured credit unions have not
experienced an unsound level of mortgage loan delinquency, net
charge-offs, or foreclosures. Through examination, NCUA ensures
federally insured credit unions have adequate collection policies and
procedures in place. To the extent federally insured credit unions face
increasing mortgage defaults, NCUA expects they will follow normal
collection policies and procedures in working with members to return
them to a current payment status where possible.

**II. Mortgage Lending in Federally Insured Credit Unions**

Mortgage loans in federally insured credit unions represent only 9% of
mortgage loans outstanding in all federally insured depository
institutions.[^3] In 2006, the Mortgage Bankers Association estimated
mortgage loan originations in the marketplace of over \$2.51 trillion,
of which federally insured credit unions originated only 2% or \$54
billion.[^4]

Approximately 68% of federally insured credit unions offer mortgage
loans to their members. Those not offering mortgage loans are generally
smaller federally insured credit unions that cannot afford the expertise
or infrastructure required to manage significant mortgage portfolios.
Additionally, smaller federal credit unions have difficulty implementing
a wide range of mortgage products since loans to a single member are
statutorily limited to 10% of a federal credit union's total unimpaired
capital and surplus. [^5] Consequently, as illustrated below, the
majority of federally insured credit union mortgage lending occurs in
larger credit unions.

  ------------------------ ------------------------- --------------------
  **Federally Insured      **Number of Mortgage      **% of Federally
  Credit Unions by Asset   Loans Originated in       Insured Credit Union
  Size**                   2006**                    Mortgage Loan
                                                     Portfolio as of
                                                     12/31/2006**

  Greater than \$1 billion 509,936                   43.02%

  \$500 million-\$1        255,009                   17.75%
  billion                                            

  \$50 million-\$500       560,061                   33.03%
  million                                            

  \$10 million-\$50        100,546                   5.71%
  million                                            

  Less than \$10 million   9,321                     0.49%
  ------------------------ ------------------------- --------------------

[Fixed Rate Mortgages in Federally Insured Credit Unions]{.underline}

Totaling \$149 billion, traditional fixed rate mortgage loans comprise
61% of federally insured credit union mortgage loans outstanding. Fixed
rate mortgage loans accounted for 80% of the increase in mortgage loans
in 2006. Of first-lien mortgage loans, 57% are traditional fixed rate
mortgage loans.[^6] Fixed rate mortgages in federally insured credit
unions grew at a rate of almost 16% in 2006, with most fixed rate growth
in longer term products. This is likely indicative of credit union
members refinancing adjustable rate mortgage loans into fixed rate loans
as interest rates rise.

[Adjustable Rate Mortgages in Federally Insured Credit
Unions]{.underline}

Adjustable rate mortgage loans comprise about 39% of all federally
insured credit union mortgage loans, and accounted for 20% of the
increase in mortgage loans in 2006. While this growth rate is
significant, it is down from a 42% increase over this same time period
in 2005. In all, adjustable rate mortgage loans grew at a rate of 6%, or
less than half the growth of fixed rate mortgage loans in 2006. This
indicates federally insured credit union members are refinancing into
more fixed rate products in a rising interest rate environment. As of
December 31, 2006, adjustable rate first mortgage loans totaled \$68.8
billion or about 28% of all federally insured credit union mortgage
loans outstanding.

[Nontraditional Mortgage Lending in Federally Insured Credit
Unions]{.underline}

Nontraditional mortgage products, such as "interest-only" or "payment
option" adjustable rate mortgage loans, are also offered in some
federally insured credit unions and comprise a smaller subset of
adjustable rate mortgage loans. Due to the evolving nature of mortgage
loan products, NCUA has not previously collected specific information
about the various types of adjustable rate mortgage loans beyond
information about their maturities. Given the growth in popularity of
nontraditional mortgage products (often referred to as "exotic,"
"hybrid," or "alternative" mortgage products), NCUA's 5300 Call Report
has now been amended to specifically collect data on certain
nontraditional mortgage loans. Results will become available after the
March 2007 reporting cycle. [^7]

In February, the House Committee on Financial Services sent a letter to
NCUA and other federal regulators expressing concern about underwriting
and consumer disclosure for certain Hybrid Adjustable Rate Mortgages
(Hybrid ARMs), including "2-28" and "3-27" adjustable rate mortgages.
These loans often have certain features that can present added risks to
borrowers and financial institutions if not underwritten properly. NCUA
shares the Committee's concern about riskier Hybrid ARMs having features
that may be detrimental to consumers, and more particularly, to subprime
borrowers.[^8]

Current data indicates federally insured credit unions are not heavily
involved in Hybrid ARM mortgage lending. As of December 31, 2006, all of
the Hybrid ARM products in federally insured credit unions comprised
less than 17% of federally insured credit union mortgage loans
outstanding. The pool of loans, in which "2-28" and "3-27" ARMs are
reported on NCUA's 5300 Call Report, also contains other more
traditional short term Hybrid ARMs, such as "3-1" and "5-1" ARMs. "3-1"
and "5-1" ARMs may have less frequent interest rate adjustments and
better terms since they are more typically marketed to prime borrowers
than are "2-28s" or "3-27s." Federally insured credit unions have
offered "3-1" and "5-1" ARMs for many years, whereas "2-28" and "3-27"
ARMs have only more recently gained popularity in the mortgage market.
For these reasons, it is unlikely that riskier Hybrid ARMs such as
"2-28s" and "3-27s," comprise a material portion of all Hybrid ARMs held
by federally insured credit unions.

There are several reasons why these riskier Hybrid ARMs are not
prevalent in federally insured credit unions. As earlier addressed, many
federally insured credit unions are smaller institutions that lack the
sophistication or resources to underwrite these types of loans. Second,
and very importantly, the Federal Credit Union Act prohibits prepayment
penalties and establishes a statutory limit for interest rates not to
exceed 18%. [^9] Because of these statutory provisions, the regulatory
environment for federal credit unions is not conducive to some of the
features that make the cost of underwriting these loans more tenable to
other types of institutions. For example, some institutions effectively
lock subprime borrowers into upward payment adjustments and higher
interest rates by charging prepayment penalties if the borrower wishes
to refinance the loan.

[Mortgage Loan Performance In Federally Insured Credit
Unions]{.underline}

Demand for mortgage loans in federally insured credit unions remains
high. Mortgage loans led all loan types in growth in 2006, increasing
\$25.61 billion (71% of all new loan growth) to a new high of 49% of
total loans. NCUA continues to closely watch performance indicators in
the mortgage lending area through data collection and the examination
and supervision process.

NCUA's most current call report data indicates mortgage loan
delinquencies greater than 30 days increased in 2006, moving upwards
from 0.79% to 0.99%. Mortgage loan delinquencies over 60 days were at
only 0.34% of total mortgage loans. While mortgage loan delinquencies in
federally insured credit unions have increased overall over the last
five years, the level of delinquency has remained sound and relatively
consistent, as demonstrated in the following table:

+------------------------------+-------+-------+------+------+------+
| **Mortgage Loan Delinquency  |       |       |      |      |      |
| and Net Charge-Offs**        |       |       |      |      |      |
|                              |       |       |      |      |      |
| **In Federally Insured       |       |       |      |      |      |
| Credit Unions**              |       |       |      |      |      |
+------------------------------+-------+-------+------+------+------+
| **Year Ending:**             | **2   | **2   | **20 | **20 | **20 |
|                              | 002** | 003** | 04** | 05** | 06** |
+------------------------------+-------+-------+------+------+------+
| **Delinquency \>30 days**    | 0.91% | 0.83% | 0    | 0    | 0    |
|                              |       |       | .77% | .79% | .99% |
+------------------------------+-------+-------+------+------+------+
| **Delinquency \>60 days**    | 0.30% | 0.28% | 0    | 0    | 0    |
|                              |       |       | .25% | .27% | .34% |
+------------------------------+-------+-------+------+------+------+
| **Net Charge-Offs/Average    | 0.02% | 0.02% | 0    | 0    | 0    |
| Mortgage Loans**             |       |       | .02% | .02% | .03% |
+------------------------------+-------+-------+------+------+------+

As also shown in the table above, while mortgage loan charge-offs
increased in 2006, the ratio of net mortgage loan charge-offs to average
mortgage loans totaled only 0.03%. Federally insured credit union
mortgage loans in foreclosure have increased over the last three
quarters from \$136 million to \$165 million, or by approximately 20%.
Still, mortgage loans in foreclosure represented only 0.07% of total
mortgage loans outstanding at year-end. While these trends merit
continued observation, the above mentioned mortgage loan performance
ratios are not alarming.

**III. NCUA's Ongoing Efforts to Promote Sound Risk Based Lending**

Subprime lending and nontraditional mortgage programs provide access to
credit for some members that would not be available in traditional
lending programs. In that regard, NCUA fully supports sound loan
programs designed to reach out to disadvantaged or subprime credit union
members for the mutual benefit of all involved.

Alternative loan products, known as "credit builder," "subprime,"
"people helping people," and "micro" loans all represent market-driven,
practical attempts at providing consumer alternatives. Importantly,
federally insured credit unions have utilized subprime lending as a
vehicle to reach out to disadvantaged members, providing access to
credit to a subset of borrowers who might not otherwise qualify. NCUA
has previously issued guidance supporting subprime lending when part of
a safe and sound risk based lending program.[^10]

[NCUA Guidance]{.underline}

Through several issuances of guidance, NCUA has outlined risk based
lending concepts. Although mortgage lending is not specifically
addressed in these issuances, these concepts are still applicable. NCUA
periodically issues guidance to federally insured credit unions through
Letters to Credit Unions. Examiners routinely discuss the guidance set
forth in these letters with credit union management and evaluate their
responses through the examination and supervision function.

Recognizing the emergence of risk based lending efforts in the credit
union industry, in 1995, NCUA issued Letter to Credit Unions 174 to all
federally insured credit unions discussing the potential advantages and
disadvantages to federally insured credit unions of risk based lending
programs, or programs where subprime credit could be offered. Risk based
lending involves setting a tiered pricing structure that assigns loan
rates based upon an individual\'s credit risk. A tiered pricing
structure enables federally insured credit unions to make more loans to
disadvantaged, lower income, or credit-challenged individuals. Through a
carefully planned risk-based lending program, federally insured credit
unions can make loans to somewhat higher-risk borrowers, as well as
better serve their lower-risk members.

Letter to Credit Unions 174 stated that "\[c\]redit unions should engage
in risk-based lending, not as a means of re-pricing existing balance
sheets, but as a tool to reach out to the underserved\..." and also
noted that "\[s\]afety and soundness should remain of paramount
importance\...." Attached to Letter to Credit Unions 174 was an
informational whitepaper discussing safety and soundness considerations
and stressing the importance of consumer compliance issues related to
risk based lending. Specifically, the whitepaper discussed the necessity
of planning, policies, procedures, portfolio limitations and monitoring,
and effective pricing. Additionally, the whitepaper reminded federally
insured credit unions of their obligations under the Equal Credit
Opportunity Act, Fair Housing Act, and the Fair Credit Reporting Act.
Finally, the whitepaper outlined the examination procedures NCUA would
use to review these programs.

In 1999, NCUA issued Letter to Credit Unions 99-CU-05 to all federally
insured credit unions restating that soundly managed risk based lending
programs were a way to reach out to all members. In Letter to Credit
Unions 99-CU-05, NCUA noted that those receiving the largest benefit
from risk based lending programs would be individuals attempting to
repair or establish credit, but reiterated the need for sound planning,
underwriting, monitoring, and control. Additionally, Letter to Credit
Unions 99-CU-05 noted that a federally insured credit union's capital
adequacy would be evaluated considering the volume and type of risk
based lending pursued and the adequacy of the credit union's risk
management program. Lastly, Letter to Credit Unions 99-CU-05 provided
federally insured credit unions with more information about NCUA's
expectations for risk based lending program planning, loan policies, and
procedures.

In 2004, NCUA issued Letter to Credit Unions 04-CU-13 to all federally
insured credit unions discussing NCUA's supervisory expectations for
controls over several types of specialized lending, including subprime
lending.

Subprime lending involves higher levels of risk and requires greater
skill to successfully implement. Properly managed, however, it can be a
viable and safe component of a federally insured credit union's balance
sheet. A well-managed subprime program enables federally insured credit
unions to serve disadvantaged members. Sound underwriting practices,
effective control and monitoring systems and sufficient capital levels
are key components to a well-managed program. All of these aspects are
more fully elaborated in NCUA's guidance on this topic.

Letter to Credit Unions 04-CU-13 outlined NCUA's underwriting
expectations for federally insured credit unions engaged in subprime
lending, noting the need to focus on borrowers' ability to repay loans
as structured. A questionnaire on Subprime Lending Controls was also
introduced to federally insured credit unions as an attachment to Letter
to Credit Unions 04-CU-13. This questionnaire is currently used as part
of the evaluation of risk based lending and subprime lending programs in
federally insured credit unions with loan portfolios containing
significant amounts of subprime loans.

In 2005, NCUA specifically addressed emerging risks in mortgage lending
and concerns about alternative or exotic mortgage products in the
overall mortgage market when a Supervisory Alert was issued to its
examiners. The alert focused on the evolution of products in the
mortgage market, the unusual volume of originations of variable rate
mortgage products in a low interest rate environment, and the market
trend toward liberalization of underwriting standards. The alert
outlined potential issues with "interest-only," "payment-option," and
"hybrid" adjustable rate mortgages with illustrations of payment shock
for each of the products discussed.

The above referenced Supervisory Alert was then issued to federally
insured credit unions in October 2005 with Letter to Credit Unions
05-CU-15 which also addressed the use of alternative or exotic mortgage
products to afford housing in areas of high housing value appreciation.
Additionally, Letter to Credit Unions 05-CU-15 notified federally
insured credit unions that "NCUA field staff will be monitoring these
trends and will evaluate not only interest rate risk related to mortgage
lending but also the increased credit risk associated with these newer
mortgage products and more liberal underwriting standards."

In 2006, NCUA issued Nontraditional Mortgage Guidance and began work on
Proposed Subprime Lending Guidance, both in tandem with other
regulators. While nontraditional and subprime mortgage lending are not
major components of federally insured credit union mortgage portfolios,
NCUA is concerned that predatory and unsound lending in other areas of
the marketplace may increase consumers' monthly debt burdens
significantly, resulting in a "ripple effect" that would not only impact
credit union members but also federally insured credit union asset
quality. If credit union members begin to experience difficulty making
payments on homes they have financed elsewhere, loan accounts at their
federally insured credit unions will also be impacted. NCUA continues to
work with other regulators to finalize proposed consumer illustrations
that outline ways to clearly disclose the risks of Nontraditional
Mortgage products.

The Interagency Nontraditional Mortgage Guidance was drafted to address
loan products with the risks of both payment shock and/or negative
amortization. Since fully amortizing loans do not pose a risk of
negative amortization, they were not initially included in the guidance.
More recently, NCUA participated with the other FFIEC agencies in
proposing interagency guidance on Subprime Mortgage Lending bridging the
gap between these loan types, and other fully amortizing Hybrid ARMs
such as "2-28" and "3-27" adjustable rate mortgages. It would ensure the
issue of payment shock is addressed through appropriate underwriting in
these loans, which are most commonly offered to subprime borrowers. The
proposed guidance also requests comments regarding whether applying a
more stringent underwriting standard to other ARMs would stifle the
market or reduce the availability of credit. NCUA will continue to work
with the other FFIEC agencies to address this issue through Interagency
Guidance and internal implementation.

[Consumer Protection for Credit Union Mortgage Applicants]{.underline}

Credit unions must comply with the same mortgage specific federal
regulations as other federally insured institutions, including: Truth in
Lending (Regulation Z), the Real Estate Settlement Procedures Act
(RESPA), the Home Owner's Equity Protection Act (HOEPA), the Flood
Disaster Preparedness Act (FDPA), the Fair Housing Act (FHA), and the
Home Mortgage Disclosure Act (HMDA).[^11] NCUA's examiners review
compliance with applicable laws and regulations in the normal course of
the examination and supervision process.

As the enforcement authority for HMDA in credit unions, NCUA is
responsible for the oversight of HMDA data collection.[^12] For the 2005
reporting period, approximately 2,300 institutions overseen by NCUA for
the purpose of HMDA reporting submitted loan/application register data.
The respondents included federally insured credit unions, non-federally
insured credit unions, and credit union service organizations. Combined,
the NCUA respondents submitted data for 813,783 loan applications.

Based on the HMDA data collected, credit unions appear to be actively
meeting the need for mortgage products among credit union applicants for
mortgage credit. Reporting credit unions approved an overwhelming
majority of the applications processed during the 2005 reporting period.
Approximately 69% of all applications resulted in a loan origination.
Moreover, the reporting credit unions denied fewer than 13% of all
applications. Of the total applications processed, 11.90% resulted in a
denial of credit and 1.06% resulted in a denial of a request for
pre-approval of credit.

Credit unions are also serving underserved areas with mortgage products.
When credit unions complete the loan/application registers, they
identify the location of the properties under consideration by census
tract. The HMDA data compares the income levels of the census tracts of
the properties under consideration to the income levels of the larger
metropolitan statistical areas (MSA) that encompass the properties. NCUA
uses a similar methodology when determining, for the purposes of
chartering policy, if an area qualifies as underserved. An area with a
median family income level at or below 80% of the median family income
for the larger metropolitan statistical area is underserved.

Census tract income information was available for approximately 90% of
the mortgage loan applications reported. For underserved areas, 66% of
mortgage loan applications the credit unions processed resulted in
originations, with fewer than 18% of the mortgage loan applications that
included property in underserved areas denied. The approval rate in
areas for mortgage loans in non-underserved census tracks was 75%, with
only approximately 10% denied.

During 2005, reporting credit unions originated over 72,000 mortgages,
with 13.5% of those originations occurring in underserved areas. The
median family income reported by the applicants who received mortgages
in underserved areas was \$55,000. [^13] In contrast, the median family
income for applicants who received mortgages in areas that did not
qualify as underserved was much higher at \$72,000.

**IV. NCUA and Federally Insured Credit Union Outreach**

The NCUA and the credit union industry have historically devoted
resources to addressing the homeownership needs of disadvantaged
communities. Federally insured credit unions assist members in making
the transition to homeownership by providing affordable loans and
financial homebuyer education. NCUA has implemented several programs to
encourage federally insured credit unions to expand homeownership
opportunities and provide financial education to members.

A 2005 study by the Annie E. Casey Foundation indicated that the single
most important step that could be taken to strengthen home ownership
opportunities and retention among very low-income families is to expand
and improve the delivery of financial literacy education and
homeownership education and counseling. [^14] In addition, the study
states that the sharp growth of subprime lending in recent years appears
to have increased the need for homeownership education while
simultaneously making it more difficult for homeownership education
groups to reach clients.

NCUA is a member of the Financial Literacy and Education Commission (the
Commission), a federal entity established under the Financial Literacy
and Education Improvement Act, enacted by Title V of the Fair and
Accurate Credit Transactions Act of 2003, to improve financial literacy
and education of persons in the United States.

The principal duties of the Commission include: (1) encouraging
government and private sector efforts to promote financial literacy; (2)
coordinating financial education efforts of the federal government,
including the identification and promotion of best practices; (3) the
development of a national strategy to promote financial literacy and
education among all American consumers; (4) the establishment of a
website to serve as a clearinghouse and provide a coordinated point of
entry for information about federal financial literacy and education
programs, grants, and other information; and (5) the establishment of a
toll-free hotline available to members of the public seeking information
about issues pertaining to financial literacy and education.

In addition to serving as a member of the Commission, NCUA Chairman
Johnson has served as Chairman of its MyMoney.gov website subcommittee
since October 2006.  The MyMoney.gov web site was created to provide
public access to financial education tools and resources, which will
empower Americans to save, invest and manage money wisely to meet
personal goals.  In this role, the Chairman coordinates the efforts of
twenty federal agencies to improve financial education across the
nation. 

The Access Across America initiative, announced in February 2002,
incorporated the Agency's activities for federally insured credit unions
expanding services into underserved areas. The program has been designed
to partner with federal government agencies and other organizations to
identify and facilitate the use of resources available for federally
insured credit unions to assist in their efforts to serve individuals in
underserved areas.

As an adjunct to the Access Across America initiative, the Partnering
and Leadership Successes (PALS) program was introduced in 2003 to
provide best practices in serving members and marketing to potential
members in underserved areas and communities.  The agency coordinated
widely attended workshops where a mix of federally insured credit unions
presented programs focused on serving those in the lower economic
strata.  These programs included partnering opportunities with the
Neighborhood Reinvestment Corporation, Latino outreach, and
micro-business lending opportunities with the Small Business
Administration. NeighborWorks^®^ America is a national nonprofit
organization created by Congress to provide financial support, technical
assistance, and training for community-based revitalization efforts.
There are 22 credit unions participating on NeighborWorks^®^ Boards and
Committees.[^15] NCUA has incorporated the most successful aspects of
PALs into the Access Across America programs and plans to continue to
offer these valuable efforts in the future.

NCUA's Office of Small Credit Union Initiatives (OSCUI) conducts
regional and national training workshops on a variety of topics to help
small and low income designated credit unions (LICUs) succeed.[^16] For
example, in 2006, OSCUI held 20 national workshops covering subjects
such as establishing financial literacy programs. Approximately 1,900
federally insured credit union representatives from 1,060 federally
insured credit unions attended these workshops. NCUA plans to host
another twenty workshops for 2007. Marketing to potential members and
developing products designed for low- to moderate-income members will be
discussed at this year's workshops.

In addition to the training, NCUA administers the Community Development
Revolving Loan Fund (CDRLF) program. The CDRLF is funded through
Congressional appropriations and provides financial assistance for
federally insured credit unions serving predominantly low-income
members. This financial assistance may be in the form of loans or
technical assistance grants (TAGs). TAG initiatives are broadly
structured so that LICUs may create outreach programs that meet their
communities' needs. Although NCUA's grant initiatives do not
specifically address foreclosure prevention, several approved TAG
initiatives have been for the purpose of wealth building and financial
education, which includes lessons about saving and being prepared for
unexpected expenses, managing credit, budgeting, and purchasing a home.

Financial education and member outreach programs directly or indirectly
prepare credit union members and the community for long-term
homeownership, while avoiding foreclosure. NCUA has approved TAGs for
federally insured credit unions that focus on this preparation. For
example, Syracuse Cooperative Federal Credit Union, recipient of a TAG,
offers financial education workshops in two languages addressing
homeownership, qualifying for a mortgage, and building credit. The
credit union also uses financial advisors who help members avoid
foreclosure by providing housing counseling and access to mortgage
lenders, realtors, or legal advisors. Another TAG recipient, Shiloh of
Alexandria (VA) Federal Credit Union, provides a financial counseling
program that addresses debt consolidation and credit awareness. The
objective of the program is to provide affordable homeownership options
to lower income individuals by providing down-payment and closing cost
assistance and below-market interest rates on loans. These important
initiatives, as well as loans to offset low-cost mortgage loans for the
underserved, continue to receive support from the CDRLF.

Another way federally insured credit unions make mortgage products
accessible and affordable to low-income consumers is to partner with
government entities that provide assistance. Some federally insured
credit unions that are certified by the U.S. Department of the
Treasury's Community Development Financial Institutions (CDFI) Fund are
recipients of awards.[^17] These awards assist in defraying the costs of
serving disadvantaged communities. The following are examples of the
work performed by CDFI credit unions:

-   The People's Community Partnership Federal Credit Union, located in
    Oakland, California, is a CDFI and an NCUA low-income designated
    credit union (LICU)[^18]. CDFI assisted the credit union by
    providing funds to support classes on budgeting, banking, credit,
    and home buying to their predominantly minority membership. NCUA
    also provided a grant to the credit union to provide free tax return
    service for some low-income members.

-   Latino Community Credit Union (LCCU) is a CDFI and LICU located in
    Durham, North Carolina. Its mission is to "improve the financial
    condition of the Hispanic community through the delivery of
    affordable financial services and financial education programs
    specifically targeted to underserved Hispanic immigrants in North
    Carolina."[^19] The CDFI Fund has awarded \$2 million to cover a
    portion of the cost to support a new branch, enhance delivery of
    services, and to implement a home mortgage lending program for new
    Latino immigrants, who make up over 85 percent of LCCU\'s
    membership.

-   Self-Help Credit Union is a CDFI and LICU located in Durham, North
    Carolina. Its mission is directed toward "creating ownership and
    economic opportunity for minorities, women, rural residents, and
    low-wealth families." The credit union offers a variety of
    residential mortgage products and specializes in serving customers
    who cannot obtain conventional financing due to credit or other
    problems, and individuals who have traditionally been underserved,
    including female-headed, minority, and low-income households, rural
    families, and first-time buyers[^20]. The credit union's bilingual
    financial education workshops include a home buying topic. Self-Help
    was awarded two grants from the CDFI Fund to help defray the costs
    of offering homeownership loans and other loan products in its
    service area.

In addition to a partnership with government entities, credit unions
partner with other entities to offer Individual Development Accounts
(IDAs). IDAs are savings accounts designed to assist low-income people
on their path toward asset ownership through matched savings and
financial education. Credit unions partner with local organizations to
provide IDA programs with different goals.

Examples include:

-   Alternatives Federal Credit Union (Alternatives) is a CDFI and LICU
    located in New York, New York. Its mission is "to build wealth and
    create economic opportunity for underserved people and communities."
    Alternatives began offering IDAs in 1998. It partners with local
    organizations (Challenge Industries, Tompkins Community Action and
    Department of Social Services) to provide IDA programs, each with
    different goals, savings matches and eligibility requirements. The
    CDFI Fund awarded funds to support its affordable housing loan
    activities. In addition to the partnerships mentioned, the credit
    union has a partnership with Ithaca Neighborhood Housing
    Services.[^21]

-   Fort Campbell Federal Credit Union located in Clarksville,
    Tennessee, created the Home Front Mortgage Program to help active
    duty military personnel stationed at Fort Campbell buy houses in
    Tennessee or Kentucky by eliminating down payments. First-time home
    buyers attend free homeownership counseling provided by BALANCE, a
    financial education and counseling service. The counseling can be
    done at any time as long as it is completed by the time the loan
    closes.

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-   O.U.R. Federal Credit Union is a CDFI and LICU located in Eugene,
    Oregon. The credit union targets its mortgage products and services
    to low-income micro entrepreneurs, Latino residents, and other Lane
    County, OR residents. The CDFI Fund awarded multi-year financial
    assistance that covered a portion of the cost of outreach to the
    Hispanic residents, a financial education program, affordable loan
    programs and development of a new mortgage loan program. United Way
    also assists the credit union in serving low-income persons. The
    credit union is a HUD-approved housing counseling agency.

-   Community Trust Credit Union is a CDFI and LICU located in Modesto,
    California. Its products and services are directed toward "people
    who are traditionally underserved by mainstream financial
    institutions."[^22] The credit union partners with many community
    based organizations that include the California State University,
    United Way, Hispanic American Society, and Council for the Spanish
    Speaking, to extend financial services to the underserved. The CDFI
    Fund has awarded the credit union with funds to open a new branch in
    a "neighboring community with very high levels of poverty and
    unemployment, in order to provide affordable financial services to
    currently un-banked individuals"; acquire technology and equipment
    to serve the community; and improve the delivery of its services.

Non-CDFI, non-LICU, federally insured credit unions also work to provide
education and easier access to homeownership for their members.
Following are a few examples of how large credit unions work with other
entities or utilize their resources to aid with member education and
initial down-payments:

-   Reliant Federal Credit Union partnered with the State of New York
    Mortgage Agency (SONYMA) to offer affordable mortgage loans to
    first-time home buyers. The SONYMA Partnership Program offers low
    down payment requirements, flexible underwriting requirements,
    interest rate lock-in periods that are longer than conventional
    lock-in periods, and closing cost assistance. As part of this
    program, the member is required to complete a financial education
    course through a SONYMA approved source.

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-   Hiway Federal Credit Union, located in St. Paul, Minnesota, provides
    their members not only with affordable housing, but with sustainable
    housing by offering loans members can afford under Fannie Mae's
    (FNMA) "My Community Program." The credit union has also partnered
    with Lutheran Social Services (LSS) which has offices throughout the
    state to provide instruction on credit scoring and how the members
    can improve their credit scores. If a member's mortgage application
    is denied due to poor credit, the member receives two free
    counseling sessions with LSS. Members that complete the LSS program
    may be approved for a mortgage loan.

-   Royal Credit Union, located in Eau Claire, Wisconsin, was recognized
    by the Wisconsin Housing and Economic Development Authority (WHEDA)
    and is in the top ten in the state for WHEDA loans. In 2006, Royal
    assisted 166 families participating with WHEDA. The credit union
    also uses other programs to help their members with home ownership
    including programs from Federal Home Loan Mortgage Corporation (Home
    Possible Program) and Veterans Administration programs. The credit
    union also conducts various home buyer seminars throughout the year
    to teach members about the steps necessary for home ownership.

-   Goldenwest Federal Credit Union, located in Ogden, Utah, is a major
    participant in the Utah Housing Finance Agency's first time home
    buyer mortgage program. Under the program, first time home buyers,
    single parents, and members who have not owned a home in three years
    are eligible to participate. The credit union also participates in
    an "Own in Ogden" program that provides a down payment of up to
    \$6,000 for homes located in low-income areas and in the "Good
    Neighbor Next Door Program" which allows firefighters, policemen and
    school teachers to buy a U.S. Department of Housing and Urban
    Development foreclosure at 50 percent of value. In 2006, the credit
    union originated over 67 loans totaling \$7.1 million in the
    programs.

-   Navy Federal Credit Union, located in Merrifield, Virginia, focuses
    on\
    ensuring that their military members are provided financial
    services\
    throughout the world.  On their website, they have a step-by-step
    process\
    to assist members with determining how much they can afford to
    borrow.  In addition, there is a short video on the website
    explaining the home buying process.  The credit union also provides
    free mortgage counseling and a variety of mortgage loan products to
    suit the individual needs of its\
    members, whether they are first-time or experienced home buyers.
    Additionally, they maintain the servicing of their members
    throughout the\
    lifetime of the loan.  This allows Navy Federal to help its members
    as they encounter special circumstances.

-   Police and Fire Federal Credit Union, located in Philadelphia,
    Pennsylvania, offers a "lender-assist" mortgage which is designed
    for members with a minimal or no down-payment. This mortgage product
    provides members assistance of one percent of the loan amount to be
    applied toward closing costs. Additionally, the credit union has
    partnered with the Consumer Credit Counseling Service of Delaware
    Valley to provide members with access to free confidential credit
    counseling and debt management planning.

-   Redstone Federal Credit Union, located in Huntsville, Alabama,
    offers first time home buyers the opportunity to obtain a grant from
    the Federal Home Loan Bank of Atlanta for down payment and closing
    assistance. The credit union offers real estate loans with a
    loan-to-value ratio of up to 100 percent utilizing programs
    sponsored by FNMA and USDA. Redstone FCU participates in the North
    Alabama Individual Development Account Program sponsored by Family
    Services and Department of Health and Human Services for low income
    families that are not immediately ready for homeownership, including
    many with past credit problems or first time homebuyers. This
    program allows families to save for a down payment with matching
    funds up to \$6,000. The credit union provides financial counseling
    services for all homeownership loans.

-   ESL Federal Credit Union, located in Rochester, New York, offers a
    "No-Down Mortgage Loan" and a "Low-Down Mortgage Loan" which
    finances up to 97 percent of the purchase price and a "Neighborhood
    Solution" loan with no down payment or low-down payment options.
    Additionally, the credit union offers a "No Closing Cost Mortgage"
    program which allows financing up to 95 percent on fixed or
    adjustable rate loans.

    **V. Consequences of Subprime Mortgage Market Dislocation for
    Federally Insured Credit Unions**

    While certain segments of the broader mortgage market have
    experienced record levels of mortgage foreclosures, federally
    insured credit union foreclosure rates remain relatively low. As of
    December 31, 2006, the national 30 day mortgage delinquency rate on
    1-to-4 family residential properties was 4.95% of all outstanding
    mortgage loans and 1.19% of outstanding mortgages were in the
    foreclosure process.[^23] Conversely, federally insured credit union
    mortgage delinquencies over 30 days totaled only 0.99% of all
    federally insured credit union mortgages and only 0.07% of
    outstanding federally insured credit union mortgages were in the
    foreclosure process.

    Federally insured credit union mortgages are performing well in
    relation to the broader mortgage market, but NCUA is concerned about
    the "ripple effect" of the dislocation to the subprime mortgage
    market on federally insured credit unions and credit union members.
    As the number of consumers experiencing difficulty with housing
    payments increases, federally insured credit unions may be adversely
    impacted by rising delinquencies in both second mortgage loans and
    other consumer credit delinquencies.

    At the end of 2006, asset quality in federally insured credit unions
    was at the best year-end level in six years. Overall delinquency
    improved from a high of 0.82% in 2001 to 0.68% of loans, while the
    net charge-off to average loans ratio improved from a high of 0.56%
    in 2003 to 0.45%. Meanwhile, federally insured credit unions' net
    worth to assets ratio grew to 11.54%, its highest level in six
    years. With federally insured credit unions exhibiting strong and
    improving asset quality, sound levels of net worth, and relatively
    limited involvement with subprime mortgages, NCUA is cautiously
    optimistic about federally insured credit unions' positioning with
    regard to the current subprime mortgage market dislocation.

    **VI. Conclusion**

Federally insured credit unions originate and retain a relatively small
amount of nontraditional or subprime mortgages. Federally insured credit
union mortgage lending makes up only a small part of the overall
mortgage market, and is predominantly comprised of more traditional
fixed rate mortgages. Some federally insured credit unions offer
nontraditional mortgage products or risk based lending programs as a
means of reaching underserved members who otherwise would not qualify
for loans. NCUA has outlined safe and sound lending practices for these
types of loan programs and carefully monitors mortgage lending
performance indicators in individual federally insured credit unions and
the industry. Current federally insured credit union mortgage
performance is indicative of sound underwriting and appropriate
collection efforts in federally insured credit unions. To date, NCUA has
not noted an unsound level of mortgage loan delinquency, net
charge-offs, or foreclosures in federally insured credit unions. Through
its examination process, NCUA ensures federally insured credit unions
have collection policies and procedures in place to deal with any
increase in foreclosures and work with members to return them to a
current status where possible.

NCUA continues to support the recent Interagency Guidance on
Nontraditional Mortgage Products, and views it as a key step in
addressing the general weakening of underwriting standards in the
overall mortgage market. While, in NCUA's assessment, nontraditional
mortgage products are not prevalent in federally insured credit unions,
the guidance sets forth best practices and information valuable to
credit unions that may offer these products. NCUA also recognizes the
possibility that federally insured credit unions and their members could
also be negatively affected by nontraditional mortgage loans granted
outside of federally insured credit unions in the broader mortgage
market. To that end, NCUA has an interest in ensuring these loans are
prudently underwritten and clearly understood by borrowers wherever they
are offered.

NCUA also supports the recently proposed Interagency Guidance on
Subprime Mortgage Lending. While subprime lending in federally insured
credit unions is normally part of a broader risk based lending program,
the underwriting standards proposed by the guidance are prudent and
consistent with the message NCUA has been conveying to federally insured
credit unions for years. Loans to subprime borrowers must be
underwritten prudently and should not be granted to the borrower's
detriment. It is critical that subprime mortgage borrowers be given
timely information to ensure they understand the risks involved with the
products they select. NCUA will work with the other agencies to finalize
this important guidance as soon as possible.

**Attachments**

I. NCUA Letter to Credit Unions 174

II\. NCUA Letter to Credit Unions 99-CU-05

III\. NCUA Letter to Credit Unions 04-CU-13

with attached Subprime Questionnaire

IV\. NCUA Letter to Credit Unions 05-CU-15

with attached 10-06 Supervisory Alert

V. NCUA Letter to Credit Unions 06-CU-16

[^1]: ^1^ Approximately 174 state chartered credit unions are privately
    insured and are not subject to NCUA oversight.

[^2]: NCUA defines subprime borrowers as those who have weak credit
    histories (e.g., delinquent payments, charge-offs, judgments,
    bankruptcies), or reduced payment capacity (e.g., high debt ratios
    or low credit scores). The same definition was used by the other
    federal financial institution regulatory agencies in 2001 guidance
    entitled *Interagency Guidance on Subprime Lending: Expanded
    Guidance for Subprime Lending Programs.*

[^3]: NCUA data and *FDIC- Statistics on Depository Institutions Report,
    1-4 Family Residential Net Loans and Leases for all depository
    insured institutions as of 12/31/2006.* 31 Dec. 2006. Federal
    Deposit Insurance Corporation. \< http://www2.fdic.gov/SDI/SOB\>.

[^4]: NCUA Data and *MBA Mortgage Finance Forecast.* 12 Feb. 2007.
    Mortgage Bankers Association.
    \<[http://www.mbaa.org/files/Bulletin/InternalResource/48425_MortgageFinance
    MarketForecast-February2007.pdf](http://www.mbaa.org/files/Bulletin/InternalResource/48425_MortgageFinance MarketForecast-February2007.pdf)\>.

[^5]: 12 C.F.R. 701.21(c)(5). Unimpaired capital and surplus equals
    shares plus post-closing, undivided earnings.

[^6]: First-lien mortgage loans are loans in which credit unions hold
    first lien position on the collateral securing the mortgage.

[^7]: NCUA's 5300 Call Report is the data collection tool used to
    collect required financial statement reports from federally insured
    credit unions on a quarterly basis.

[^8]: NCUA alerted its examiners and the credit union industry to the
    increasing risks in mortgage lending in 2005 with a supervisory
    alert and letter to credit unions. In 2006, NCUA provided
    nontraditional mortgage information to its specialized lending
    subject matter examiners in regional conferences during training
    sessions.

[^9]: 12 U.S.C. §§1757(5)(A)(vi) and 1757(5)(A)(vii)

[^10]: Risk based lending is a means by which a credit union may be able
    to more effectively meet the credit needs of all its members. It
    involves setting a tiered pricing structure that assigns loan rates
    based upon an individual's credit risk. The precepts of risk based
    lending are more fully discussed in NCUA Letters to Credit Unions
    174, *Risk Based Loans* and 99-CU-05, *Risk Based Lending.*

[^11]: These laws also apply to privately insured credit unions.

[^12]: NCUA is responsible for HMDA data collection for federally
    insured and privately insured credit unions.

[^13]: Median family income reflects the income level at which half of
    all families earn more, and half earn less. The American Community
    Survey defines a family as \"a householder and one or more people
    living in the same household who are related by birth, marriage, or
    adoption.\" See *American Community Survey.* U.S. Census Bureau.
    \<http://factfinder.census.gov /home/saff/main. html?\_lang=en\>.

[^14]: "Strengthening the Ladder for Sustainable Homeownership,"
    prepared by the National Housing Conference for the Annie E. Casey
    Foundation, February 2005, page 18. The Foundation was established
    in 1948. The Foundation's stated mission is to foster public
    policies, human service reforms, and community supports that more
    effectively meet the needs of today's vulnerable children and
    families.

[^15]: "Credit Union Partnerships With NeighborWorks Organizations:
    Proven Models for Success" booklet released jointly by NCUA and the
    National Reinvestment Corporation in 2002.

[^16]: CDFI award profiles and financial assistance amounts are as of
    March 8, 2007.

[^17]: The CDFI Fund provides financial and technical assistance awards
    in order to promote access to capital and local economic growth in
    urban and rural low-income communities across the nation. A CDFI is
    "a specialized financial institution that works in market niches
    that are underserved by traditional financial institutions" and
    include regulated institutions such as community development banks
    and credit unions, and non-regulated institutions such as loan and
    venture capital funds.

[^18]: A LICU has a membership consisting of 50 percent or more
    low-income members.

[^19]: Credit union mission and product description from Latino
    Community Credit Union. 8 Mar.
    2007.\<http://cooperativalatina.org\>.

[^20]: Credit union mission and product description from Self-Help
    Credit Union. 8 Mar. 2007. \<http://www.self-help.org\>.

[^21]: "Credit Union Partnerships With NeighborWorks Organizations:
    Proven Models for Success" booklet released jointly by NCUA and
    Neighborhood Reinvestment Corporation in 2002.

[^22]: Credt union mission and product description from Community Trust
    Credit Union. 8 Mar. 2007. \<http://www.myctcu.com\>.

[^23]: According to the Mortgage Banker's Association's (MBA) *National
    Delinquency Survey* issued 3/13/07 with data as of 12/31/2006. The
    MBA's *National Delinquency Survey* is based on a sample of over 43
    million mortgage loans serviced by mortgage companies, commercial
    banks, thrifts, and credit unions. Typically, federally insured
    depository institutions have lower delinquency rates than the
    overall national 30 day delinquency average.