NATIONAL CREDIT 

UNION 

ADMINISTRATION

Earlier Actions Are 

Needed to Better 

Address Troubled 

Credit Unions

Report to Congressional Committees

January 2012

GAO-12-247

United States Government Accountability Office

GAO
 United States Government Accountability Office

Highlights of GAO-12-247, a report to 

congressional committees 

January 2012

NATIONAL CREDIT UNION ADMINISTRATION

Earlier Actions Are Needed to Better Address 

Troubled Credit Unions

Why GAO Did This Study

Corporate credit unions (corporates)—

financial institutions that provide 

liquidity and other services to the more 

than 7,400 federally insured credit 

unions—experienced billions in

financial losses since the financial 

crisis began in 2007, contributing to 

failures throughout the credit union 

system and losses to the National 

Credit Union Share Insurance Fund 

(NCUSIF). Since 1998, Congress has 

required the National Credit Union 

Administration (NCUA), the federal 

regulator of the credit union system, to 

take prompt corrective action (PCA) to 

identify and address the financial 

deterioration of federally insured 

natural person credit unions (credit 

unions) and minimize potential losses 

to the NCUSIF. Legislation enacted in

2011 requires GAO to examine 

NCUA’s supervision of the credit union

system and use of PCA. This report 

examines (1) the failures of corporates 

and credit unions since 2008, (2) 

NCUA’s response to the failures, and 

(3) the effectiveness of NCUA’s use of 

PCA. To do this work, GAO analyzed 

agency and industry financial data and

material loss reviews, reviewed 

regulations, and interviewed agency 

officials and trade organizations. 

What GAO Recommends

NCUA should (1) provide its Office 

Inspector General the necessary 

documentation to verify loss estimates 

and (2) consider additional triggers for 

PCA that would require early and 

forceful regulatory action and make 

recommendations to Congress on how 

to modify PCA, as appropriate. NCUA 

agreed with both recommendations. 

What GAO Found

From January 1, 2008, through June 30, 2011, 5 corporates and 85 credit unions 

failed. As of January 1, 2008, the 5 failed corporates were some of the largest—

accounting for 75 percent of all corporate assets—but the 85 failed credit unions

were relatively small—accounting for less than 1 percent of total credit union 

assets. GAO found poor investment and business strategies contributed to the 

corporate failures. Specifically, the failed corporates overconcentrated their 

investments in private-label, mortgage-backed securities (MBS) and invested

substantially more in private-label MBS than corporates that did not fail. GAO 

also found that poor management was the primary reason the 85 credit unions 

failed. In addition, NCUA’s Office of Inspector General has reported that NCUA’s 

examination and enforcement processes did not result in strong and timely 

actions to avert the failure of these institutions

NCUA took multiple actions to stabilize, resolve, and reform the corporate 

system. NCUA used existing funding sources, such as the NCUSIF, and new 

funding sources, including the Temporary Corporate Credit Union Stabilization 

Fund (Stabilization Fund), to stabilize and provide liquidity to the corporates. 

NCUA placed the failing corporates into conservatorship and liquidated certain 

poor performing assets. In order to decrease losses from the corporates’ failures, 

NCUA established a securitization program to provide long-term funding for 

assets formerly held in the portfolios of failed corporates by issuing NCUAguaranteed notes. To address weaknesses highlighted by the crisis, in 2010, 

NCUA issued regulations to prohibit investment in private-label MBS, established

a PCA framework for corporates, and introduced new governance provisions. 

NCUA considered credit unions’ ability to repay borrowings from Treasury and 

included measures to reduce moral hazard, minimize the cost of resolving the 

corporates, and protect taxpayers. While NCUA has estimated the losses to the 

Stabilization Fund, it could not provide adequate documentation to allow NCUA’s 

Office of Inspector General or GAO to verify their completeness and 

reasonableness. Without well-documented cost information, NCUA faces 

questions about its ability to effectively estimate the total costs of the failures and 

determine whether the credit unions will be able to pay for these losses. 

. 

GAO’s analysis of PCA and other NCUA enforcement actions highlights 

opportunities for improvement. For credit unions subject to PCA, GAO found 

those credit unions that did not fail were more likely subject to earlier PCA 

action—that is, before their capital levels deteriorated to the significantly or 

critically undercapitalized levels—than failed credit unions. GAO also found that 

for many of the failed credit unions, other enforcement actions were initiated 

either too late or not at all. GAO has previously noted that the effectiveness of 

PCA for banks is limited because of its reliance on capital, which can lag behind 

other indicators of financial health. GAO examined other potential financial 

indicators for credit unions, including measures of asset quality and liquidity, and 

found a number of indicators that could provide early warning of credit union 

distress. Incorporating such indicators into the PCA framework could improve its 

effectiveness. View GAO-12-247. For more information, 

contact A. Nicole Clowers at (202) 512-8678 

or clowersa@gao.gov. 
Page i GAO-12-247 National Credit Union Administration

Letter 1 

Background 5

Corporate and Credit Union Failures Were Largely the Result of 

Poor Investment Strategies and Weak Management 12

NCUA Has Taken Various Actions to Stabilize and Reform the 

Corporate System 20

NCUA’s Use of PCA and Other Enforcement Actions Illustrate the 

Need to Improve Their Effectiveness 32

Conclusions 42

Recommendations for Executive Action 43

Agency Comments and Our Evaluation 43

Appendix I Status of OIG Recommendations to NCUA, as of October 30, 2011 47

Appendix II Objectives, Scope, and Methodology 54

Appendix III NCUA Temporary Stabilization and Guarantee Programs 58

Appendix IV Summary of NCUA’s 2010 Corporate Rule 64

Appendix V Comments from the National Credit Union Administration 68

Appendix VI GAO Contact and Staff Acknowledgments 73

Tables

Table 1: PCA Categories for Credit Unions, effective February 2000 11

Table 2: Corporate Capital and PCA Standards, as of October 2011 28

Table 3: NCUA’s Implementation of OIG Recommendations, as of 

October 30, 2011 48

Table 4: Corporate Rules through April 2011 Rulemaking 65

Contents
Page ii GAO-12-247 National Credit Union Administration

Figures

Figure 1: Credit Union System, as of December 31, 2007 6

Figure 2: Assets of Corporate Credit Unions, as of December 31, 

2007 12

Figure 3: Percentages of Private-Label MBS Held by U.S. Central 

and Corporates, from 2003 through 2008 14

Figure 4: MBLs as a Percentage of Total Assets, December 31, 2005, 

to September 30, 2010 18

Figure 5: Number of Credit Unions in PCA, January 2006 to June 

2011 33

Figure 6: Capital Levels of All Credit Unions Triggering PCA versus 

Those That Failed, January 1, 2008, to June 30, 2011 35

Figure 7: Timeliness of Other Non-PCA Enforcement Actions on 

Failed Credit Unions 36

Figure 8: Delinquency Rates on MBLs for Failed Credit Unions 

Compared to the Peer Group, December 31, 2005, through 

March 31, 2011 38

Figure 9: Operating Expenses as a Percentage of Average Total 

Assets for Failed Credit Unions Compared to the Peer 

Group, December 31, 2005, through March 31, 2011 39

Figure 10: Return on Assets for Failed Credit Unions Compared to 

the Peer Group, December 31, 2005, through March 31, 

2011 41

Figure 11: Liquid Assets as a Percentage of Total Assets for Failed 

Credit Unions Compared to the Peer Group, December 31, 

2005, through March 31, 2011 42

Figure 12: Overview of CU-SIP 59

Figure 13: Overview of CU-HARP 60

Figure 14: Timeline for the Liquidity Guarantee Program 62

Figure 15: Timeline for the Share Guarantee Program 63
Page iii GAO-12-247 National Credit Union Administration

Abbreviations

BAM Board Action Memorandum 

CAMEL Capital Adequacy, Asset Quality, Management, Earnings 

and Liquidity

CLF Central Liquidity Facility 

CU-HARP Credit Union Homeowners Affordability Relief Program

CU-SIP Credit Union System Investment Program

CUSO Credit Union Service Organization 

DOR document of resolution 

MBS mortgage-backed securities

MBL member business loan

MLR material loss review

NCUA National Credit Union Administration

NCUSIF National Credit Union Share Insurance Fund

NSPM National Supervision Policy Manual

OIG Office of Inspector General

PCA prompt corrective action

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Page 1 GAO-12-247 National Credit Union Administration

United States Government Accountability Office 

Washington, DC 20548

January 4, 2012

The Honorable Tim Johnson

Chairman

The Honorable Richard C. Shelby

Ranking Minority

Committee on Banking, Housing, 

 and Urban Affairs

United States Senate

The Honorable Spencer Bachus

Chairman

The Honorable Barney Frank

Ranking Member

Committee on Financial Services

House of Representatives

The credit union system has undergone a period of financial turmoil since 

the financial crisis that began in 2007, resulting in an estimated $5 billion 

to $10 billion in losses to the 7,400 credit unions and the institutions that 

support them, known as corporate credit unions (corporates).1 Corporates 

are financial institutions whose members are credit unions, not 

individuals, and that provide credit unions with payment services, 

investment opportunities, and other forms of credit, should credit unions 

face liquidity needs. The corporates experienced significant financial 

losses during the financial crisis that in turn contributed to losses to the 

National Credit Union Share Insurance Fund (NCUSIF). NCUSIF covers 

the balance of each member’s account, up to the insurance limit, 

including principal and posted dividends through the date of any failure.2

 

1

Estimates were based on National Credit Union Administration estimated losses to the 

Temporary Corporate Credit Union Stabilization Fund (Stabilization Fund) (June 30, 2011) 

and the National Credit Union Share Insurance Fund (Sept. 30, 2011). NCUA had not 

issued its full financial audit statement for 2010, as of December 19, 2011, to include 

losses from its Stabilization Fund. The NCUA 2010 Financial Statement Audit for 

Temporary Corporate Credit Union Stabilization Fund was released on December 27, 

2011. There were 7,400 credit unions as of June 2010. 

The National Credit Union Administration (NCUA) is responsible for 

2

NCUSIF provides primary deposit insurance for member shares up to $250,000.

 
 

Page 2 GAO-12-247 National Credit Union Administration

administering NCUSIF, as well as for overseeing federally insured credit 

unions, which includes corporates.

To minimize losses to NCUSIF, NCUA is required to take prompt 

corrective action (PCA) to identify and address declining capital in credit 

unions. Specifically, NCUA is required to classify credit unions into one of 

five capital categories, and take mandatory and increasingly severe 

supervisory actions, such as restrictions on asset growth, as a credit 

union’s capital deteriorates. Prior to the 2007-2009 financial crisis, PCA 

for credit unions was largely untested. In particular, after the passage of 

the Credit Union Membership Access Act, which established PCA for 

credit unions, the growth in the economy meant that the financial 

condition of credit unions was generally strong.3

Legislation enacted in January 2011 requires us to examine NCUA’s 

supervision of the credit union system and use of PCA.

However, as the financial 

crisis unfolded, the financial condition of many credit unions declined, 

testing the effectiveness of PCA on a widespread basis.

4 This report 

examines (1) what is known about the causes of any failures among 

corporates and credit unions since 2008; (2) the steps that NCUA has 

taken to resolve these failures and the extent to which its actions were 

designed to protect taxpayers, avoid moral hazard, and minimize the cost 

of corporate resolutions;5

To determine what is known about the causes of failures among 

corporates and credit unions, we obtained and analyzed NCUA 

documents, including the OIG’s Material Loss Reviews (MLR), NCUA 

postmortem reports, regional examiner reports, and Board Action 

and (3) the effectiveness of NCUA’s use of PCA 

and other enforcement actions. This report also contains information on 

NCUA’s implementation of its Office of Inspector General (OIG) 

recommendations in appendix I.

 

3

Pub. L. No. 105-219, 112. Stat. 913 (1998).

4

An act to clarify National Credit Union Administration authority to make Temporary 

Corporate Credit Union Stabilization Fund expenditures without borrowing from the 

Treasury, Pub. L. No. 111-382, § 4(a), 124 Stat. 4134, 4135 (2011).

5

Moral hazard occurs when a party insulated from risk may behave differently than it 

would behave if it were fully exposed to the risk. In the context of NCUA’s actions to 

stabilize the credit union system, moral hazard may occur when market participants 

expect similar emergency actions in future crises, thereby weakening their incentives to 

manage risks properly.
 

Page 3 GAO-12-247 National Credit Union Administration

Memorandums (BAM).6 As of November 30, 2011, OIG had issued MLRs 

on 5 corporates and 11 credit unions, and NCUA had conducted 15 

postmortem reviews on credit unions that failed since 2008. We obtained 

and analyzed NCUA data related to conservatorships and resolution 

actions from January 2008 to June 30, 2011, to determine the number 

and causes of corporate and credit union failures. To corroborate this 

information, we assessed the asset size and investment concentrations 

for all failed and nonfailed corporates using data from SNL Financial—a 

financial institution database. We assessed the reliability of certain data 

from this database, which is obtained from credit union financial reports 

submitted to the credit union regulators (referred to as call reports), and 

found the data to be sufficiently reliable for calculating ratios for our 

analysis.7

To assess the steps that NCUA has taken to stabilize, resolve, and 

reform the credit union system, we analyzed information from BAMs;

MLRs; NCUA’s Corporate System Stabilization and Resolution Plan; 

NCUA’s 2008, 2009, and 2010 annual reports; audited financial 

statements and other cost estimate information; and NCUAcommissioned reports; in addition to testimonies at relevant 

congressional hearings and planning documents.

We further calculated ratios of credit union member business 

lending as a percentage of total loans for the failed credit unions and their 

peers that did not fail. We interviewed officials in NCUA’s OIG, Office of 

Corporate Credit Unions, Office of Capital Markets, and Office of 

Examination and Insurance to gain their perspectives on the causes of 

the corporate and credit union failures.

8

 

6

The Federal Credit Union Act, as amended, requires the OIG to conduct an MLR of an 

insured credit union if the loss to NCUSIF exceeds $25 million and an amount equal to 10 

percent of the total assets of the credit union at the time at which the NCUA Board 

initiated assistance or was appointed liquidating agent. NCUA, as a matter of policy, 

separately prepares postmortems for failed credit unions where the net loss to NCUSIF is 

between $2 million and $25 million. 

We also analyzed 

NCUA’s proposed and final rules to determine actions taken to reform the 

7

A quarterly listing of summarized accounts is collected from all federally insured credit 

unions, referred to as the 5300 Call Report. The corporates submit financial information, 

including Statement of Financial Condition, Income Statement, Liquidity Report, 

Delinquent Loans, Investments, and other financial data on the Corporate 5310 Report, 

referred to as a call report.

8

NCUA commissioned a number of reports to assist them in estimating losses and 

determining options for addressing the failures of the corporates, including reports by 

Kamakura Corporation, PIMCO, and Barclay’s Capital.
 

Page 4 GAO-12-247 National Credit Union Administration

system. We interviewed officials in NCUA’s OIG, Office of Corporate 

Credit Unions, Office of Capital Markets, Office of Examination and 

Insurance, and Office of General Counsel to discuss NCUA’s response to 

corporate and credit union failures, and efforts to stabilize, resolve, and 

reform the system.

To determine the regulatory actions NCUA has taken to address 

deteriorating credit unions, we reviewed NCUA’s regulatory information 

that included Capital Adequacy, Asset Quality, Management, Earnings 

and Liquidity (CAMEL) ratings, enforcement action data, and PCA-related 

actions over a 2-year period prior to each credit union failure.9 To assess 

the outcomes of PCA, we analyzed the instances and dates of CAMEL 

downgrades, enforcement actions taken, and PCA-related actions to 

determine whether and when NCUA examiners took actions for 

distressed credit unions subject to PCA from January 1, 2006, through 

June 30, 2011. We assessed the data reliability of NCUA’s enforcement 

data and found these data to be sufficiently reliable for this analysis. We 

reviewed a variety of indicators of credit unions’ financial condition, such 

as return on assets, operating expenses, and liquid assets as an early 

warning of financial distress. We selected these leading indicators based 

on the OIG’s MLRs, NCUA’s postmortem studies, and our previous work 

on bank regulation related to PCA.10

We conducted this performance audit from May 2011 to December 2011 

in accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

Using these indicators and data from 

SNL Financial, we compared the performance of failed credit unions to 

peer credit unions that did not fail. We found the data to be sufficiently 

reliable for our purposes. We also verified the status of NCUA’s 

implementation of OIG recommendations through a documentation 

review and interviews with NCUA OIG officials and relevant NCUA 

officials. Appendix II contains additional details of our scope and 

methodology.

 

9

NCUA rates credit unions using the CAMEL rating system, which stands for capital 

adequacy, asset quality, management, earnings and liquidity. The ratings are on a scale 

of 1 to 5, with 1 being the best and 5 the worst. 

10GAO, Bank Regulation: Modified Prompt Corrective Action Framework Would Improve 

Effectiveness, GAO-11-612 (Washington D.C.: June 23, 2011). 
 

Page 5 GAO-12-247 National Credit Union Administration

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

Credit unions are tax-exempt, cooperative financial institutions run by 

member-elected, primarily volunteer boards. To build capital, credit 

unions do not issue stock; they are not-for-profit entities that build capital 

by retained earnings. Their tax-exempt status and cooperative, not-forprofit structure separate credit unions from other depository institutions. 

Like banks and thrifts, credit unions are either federally or state chartered.

Prior to the financial crisis, the credit union system consisted of three 

tiers, as shown in figure 1. As of December 31, 2007, there were 8,101 

credit unions, 27 corporate credit unions, and 1 wholesale corporate 

credit union—U.S. Central Federal Credit Union (U.S. Central). Credit 

unions are owned by individual members (natural persons) who make 

share deposits and are provided with products and services, such as 

lending, investments, and payment processing. Credit unions are subject 

to limits on their membership because members must have a “common 

bond”—for example, working for the same employer or living in the same 

community.11 Corporates are owned by and serve credit unions. 

Corporates provide payment processing services and loans for liquidity 

purposes and serve as repositories for credit unions’ excess liquidity, 

among other things.12

 

11As we reported in 2003, over the years the common bond requirements have become 

less restrictive and credit unions can now form multiple-bond credit unions. Members can 

also retain their credit union membership even after the basis for the original bond has 

ended. For more information, see GAO, Credit Unions: Financial Condition Has Improved, 

but Opportunities Exist to Enhance Oversight and Share Insurance Management, 

In particular, when loan demand is low or deposits 

are high, credit unions generally invest excess liquidity in corporates and 

then withdraw funds when loan demand is high or deposits are low. 

Corporates meet liquidity needs with member deposits and by borrowing 

GAO-04-91 (Washington, D.C.: Oct. 27, 2003).

12Payment processing services include debit and credit card settlements, automated 

clearinghouse items, check processing, and wire transfers.

Background

Credit Union System
 

Page 6 GAO-12-247 National Credit Union Administration

from U.S. Central, capital markets, or the Federal Home Loan Banks.13

Figure 1: Credit Union System, as of December 31, 2007

Corporates primarily owned by U.S. Central, which functioned as a 

corporate for the corporates, provide the same depository and other 

services that corporates provide to credit unions. U.S. Central was the 

agent group representative for the Central Liquidity Facility (CLF), which 

we discuss later in this section. U.S. Central also acted as an aggregator 

of corporate credit union funds, which allowed them better access to the 

markets at better rates.

While the corporate system—including both U.S. Central and the 

corporates—was designed to meet the needs of credit unions, the 

corporates face competition from other corporates and financial 

institutions that can provide needed services. For instance, credit unions 

 

13Federal Home Loan Banks are regional cooperatives owned by members that include 

community banks, credit unions, community development financial institutions, and 

insurance companies. Federal Home Loan Banks make loans to members known as 

“advances.”
 

Page 7 GAO-12-247 National Credit Union Administration

may also obtain loans and payment processing from Federal Reserve 

Banks.14 In addition, credit unions can obtain investment products and 

services from broker-dealers or investment firms rather than corporates. 

Credit union service organizations (CUSO) also compete with corporates 

and offer, among other things, investments and payment processing.

15 As 

we reported in 2004, corporates seek to provide their members with 

higher returns on their deposits and lower costs on products and services 

than can be obtained individually elsewhere.16

Credit unions and corporates are insured by NCUSIF, which provides 

primary deposit insurance for 98 percent of the nation’s credit unions and 

corporates.17 NCUA administers NCUSIF, collects premiums from credit 

unions and corporates to fund NCUSIF, and ensures that all credit unions 

operate in a safe and sound manner. NCUA is required to maintain 

NCUSIF’s equity ratio at a percentage of no less than 1.2 percent and not 

more than 1.5 percent of insured shares.18 In addition, NCUA provides 

oversight of the CLF, which lends to credit unions experiencing unusual 

loss of liquidity.19

 

14The Federal Reserve System’s discount window extends credit to generally sound 

depository institutions, including credit unions, as a short-term source of funds.

Credit unions can borrow directly from the CLF or 

15CUSOs and third-party vendors differ in that CUSOs primarily serve and are owned by 

credit unions or corporates but maintain a separate legal identity from the credit union or 

corporate. NCUA specifies the types of activities a CUSO may undertake but does not 

regulate CUSOs directly. Most credit unions are limited in how much they can loan to or 

invest in CUSOs, generally up to 1 percent of assets. 

16For more information see: GAO, Corporate Credit Unions: Competitive Environment 

May Stress Financial Condition, Posing Challenges for NCUA Oversight, GAO-04-977

(Washington, D.C.: Sept. 10, 2004).

17According to information provided by American Share Insurance, the sole private credit 

union insurer, as of September 30, 2011, there were 145 privately insured credit unions in 

nine states, representing about 2 percent of all credit unions in the country. The 

Emergency Economic Stabilization Act of 2008 temporarily increased the members’ share 

insurance amount with NCUSIF from $100,000 to $250,000 from October 3, 2008, through 

December 31, 2009. The Helping Families Save Their Homes Act of 2009 extended the 

temporary increase through December 31, 2013, and the Dodd-Frank Wall Street Reform 

and Consumer Protection Act made the increase permanent. 

1812 U.S.C. §1782(h)(4).

19Created by Congress in 1978, CLF membership is voluntary for credit unions and 

requires that a member purchase stock in the fund for membership. The CLF obtains its 

funding through credit union capital investments and borrowings from the Federal 

Financing Bank, which provides reduced-cost financing to federal agencies that issue 

government-backed obligations.
 

Page 8 GAO-12-247 National Credit Union Administration

indirectly through a corporate, which acts as an agent for its members. 

U.S. Central was the primary agent for the CLF and was the depository 

for CLF funds until August 2009, when NCUA changed its investment 

strategy for the liquidity facility.

NCUA supervises and issues regulations on operations and services for 

federally chartered credit unions and for both state- and federally 

chartered corporates.20 NCUA has supervisory and regulatory authority 

over both state- and federally chartered corporates because they provide 

services to federally insured credit unions. In addition, NCUA shares 

responsibility for overseeing state-chartered credit unions to help ensure 

they pose no risk to the insurance fund.21

To supervise federally chartered credit unions and corporates, NCUA 

conducts on-site examinations and off-site monitoring of credit union call 

report data and other financial information that credit unions report on a 

regular basis. In 2008, NCUA changed its on-site examination schedule 

for credit unions from a risked-based scheduling program that required 

two examinations every 3 years to a 12-month cycle. For corporates, 

NCUA conducts annual on-site examinations and reviews call report data 

and operational trends. Also, on-site NCUA examiners and capital 

markets specialists may be assigned on a full-time basis at a corporate.22

 

20Part 704 of NCUA’s regulations, together with the relevant provisions of the Federal 

Credit Union Act of 1934, constitute the primary federal regulatory framework for both 

state- and federally chartered corporates. NCUA’s Office of Corporate Credit Unions is 

responsible for supervising corporate credit unions and U.S. Central. NCUA’s regulations 

(C.F.R. 12, Part 700 through 761), together with the relevant provisions of the Federal 

Credit Union Act of 1934, constitute the primary federal regulatory framework for both 

state- and federally chartered credit unions. 

For state-chartered credit unions, NCUA relies on state supervisory 

21State supervisory agencies supervise state-chartered credit unions and issue 

regulations on field of membership and scope of services. 

22NCUA categorizes corporate supervision into three categories (Types I, II, and III) based 

on asset size, investment authorities, complexity of operations, and influence on the 

market or credit union system. For example, a corporate with Type III supervision 

generally has billions of dollars in assets, exercises expanded investment authorities, 

maintains complex and innovative operations, and has a significant impact in the 

marketplace and on the credit union system. NCUA assigns a full-time, on-site examiner 

to corporates with Type III supervision. 

NCUA Supervision and 

Examination of the 

Corporates and Credit 

Unions
 

Page 9 GAO-12-247 National Credit Union Administration

agency examinations, performs off-site monitoring, and conducts joint 

examinations of credit unions with state supervisory agencies.

As part of its on-site examinations, NCUA assesses a credit union’s 

exposure to risk and assigns risk-weighted ratings under the CAMEL 

rating system. The ratings reflect a credit union’s condition in five 

components: capital adequacy, asset quality, management, earnings, and 

liquidity. Each component is rated on a scale of 1 to 5, with 1 being the 

best and 5 the worst. The five component ratings are then used to 

develop a single composite rating, also ranging from 1 to 5. Credit unions 

with composite ratings of 1 or 2 are considered to be in satisfactory 

condition, while credit unions with composite ratings of 3, 4, or 5 exhibit 

varying levels of safety and soundness problems. A similar rating system, 

known as the Corporate Risk Information System, is used to assess the 

corporates.

NCUA has the authority to take an enforcement action against credit 

unions and corporates to correct deficiencies identified during an 

examination or as a result of off-site monitoring. NCUA can issue letters of 

understanding and agreement, which is an agreement between NCUA and 

the credit union or corporate on certain steps the credit union or corporate 

will take to correct deficiencies. They can also issue preliminary warning 

letters, which is an NCUA directive to a credit union or corporate to take 

certain actions to correct deficiencies. Further, NCUA can issue a ceaseand-desist order, which requires a credit union or corporate to take action 

to correct deficiencies. Although not considered an enforcement action, 

NCUA examiners also can issue documents of resolution to record NCUA’s 

direction that a credit union or corporate take certain action to correct a 

deficiency or issue within a specified period.

NCUA also has a number of options for dealing with a credit union or 

corporate that has severe deficiencies or is insolvent. It can place the 

institution into conservatorship—that is, NCUA takes over the credit 

union’s or corporates’ operations. After NCUA assumes control of the 

institution’s operations, it determines whether the credit union or 

corporate can continue operating as a viable entity. To resolve a credit 

union or corporate that is insolvent or no longer viable, NCUA may merge 

it with or without assistance, conduct a purchase and assumption, or 

liquidate its assets. In an assisted merger, a stronger credit union or 

corporate assumes all the assets and liabilities of the failed credit union or 

corporate with NCUA providing financial incentives or an asset guarantee. 

In a purchase and assumption, another credit union or corporate 

purchases specific assets and assumes specific liabilities of the failed 
 

Page 10 GAO-12-247 National Credit Union Administration

corporate or credit union. In liquidation, NCUA sells the assets of a failed 

credit union or corporate.

PCA is a comprehensive framework of mandatory and discretionary 

supervisory actions for credit unions.23 PCA is based on five categories 

and their associated net worth ratios—that is, capital as a percentage of 

assets (see table 1). If a credit union falls below well capitalized (7 

percent net worth), the credit union is required to increase retained 

earnings.24 When NCUA determines the credit union is in the 

undercapitalized, significantly undercapitalized, or critically 

undercapitalized categories, NCUA is required to take additional 

mandatory supervisory actions. In addition to these mandatory 

supervisory actions, NCUA often enforces discretionary supervisory 

actions. Discretionary supervisory actions are applied to credit unions that 

fall into the undercapitalized category or below and include requiring 

NCUA approval for acquisitions or new lines of business, restricting 

dividends paid to members, and dismissing the credit union’s board 

members or senior management. 

 

23Credit unions that have been in operation for less than 10 years and have $10 million or 

less in total assets are governed by an alternate set of PCA provisions, as provided by 

Section 216 of the Federal Credit Union Act. Also see 12 C.F.R. § 702, 301 et seq. 

24An earnings retention requires a credit union that is adequately capitalized or lower to 

increase the dollar amount of its net worth quarterly by at least 0.1 percent of its total 

assets by transferring that amount from undivided earnings to its regular reserve account 

until it is “well capitalized.” 

PCA Framework
 

Page 11 GAO-12-247 National Credit Union Administration

Table 1: PCA Categories for Credit Unions, effective February 2000

Category

Net worth ratio 

(capital as a 

percentage of assets) Mandatory supervisory actions

Well-capitalized 7% or greater None

Adequately capitalized 6 to 6.99 Earnings retention

Undercapitalized 4 to 5.99 • Earnings retention

• Submission of an acceptable 

net worth restoration plan

• Restriction on asset growth

• Restriction on member business 

lending

Significantly 

undercapitalized

2 to 3.99

Critically 

undercapitalized

less than 2 • Earnings retention

• Submission of an acceptable 

net worth restoration plan

• Restriction on asset growth

• Restriction on member business 

lending

• NCUA must place the credit 

union in liquidation, 

conservatorship or take other 

corrective action

Source: GAO analysis of NCUA regulations.

Note: Significantly undercapitalized also includes a credit union with a net worth ratio of less than 5 

percent if that credit union fails to submit an acceptable net worth restoration plan within the allotted 

time or materially fails to implement the net worth restoration plan. 

Before 2010, U.S. Central and other corporate credit unions were not 

subject to PCA but were instead required to maintain total capital at a 

minimum of 4 percent of their moving daily average net assets. Total 

capital for U.S. Central and corporate credit unions was calculated using 

any combination of retained earnings, paid-in capital, or membership 

capital. If total capital fell below this level, NCUA required U.S. Central or 

the corporate to submit a capital restoration plan. If the capital restoration 

plan was inadequate or the corporate failed to complete the plan, NCUA 

could issue a capital directive. A capital directive orders the corporate to 

take a variety of actions including reducing dividends, ending or limiting 

lending of certain loan categories, ending or limiting the purchase of 

investments, and limiting operational expenses in order to achieve 

adequate capitalization within a specified time frame.
 

Page 12 GAO-12-247 National Credit Union Administration

From January 1, 2008, to June 30, 2011, 5 corporates and 85 credit 

unions failed.25

Figure 2: Assets of Corporate Credit Unions, as of December 31, 2007

The five failed corporates—U.S. Central, Western 

Corporate (Wescorp), Members United, Southwest, and Constitution—

were some of the largest institutions within the corporate system, 

although the credit unions that failed were relatively small. Specifically, 

these five failed corporates accounted for 75 percent of all corporate 

assets as of December 31, 2007 (see fig. 2). In contrast, the 85 credit 

unions that eventually failed represented around 1 percent of all credit 

unions and less than 1 percent of total credit union assets, as of 

December 31, 2007.

 

25For the purpose of our analysis, a failed corporate or credit union is defined as a credit 

union that is no longer viable or insolvent and resolved with NCUA assistance. This 

includes NCUA’s assistance with mergers, purchases and assumptions and involuntary 

liquidations. 

Corporate and Credit 

Union Failures Were 

Largely the Result of 

Poor Investment 

Strategies and Weak 

Management
 

Page 13 GAO-12-247 National Credit Union Administration

NCUA’s OIG MLRs of the failed corporates and our analysis of historical 

financial data for the corporate system show that management of both 

U.S. Central and the failed corporate credit unions made poor investment 

decisions. Specifically, U.S. Central and the failed corporates 

overconcentrated their investments in private-label, mortgage-backed 

securities (MBS), investing substantially more in private-label MBS than 

corporate credit unions that did not fail (see fig. 3).26 At the end of 2007, 

the five failed corporates had invested 31 to 74 percent of their assets in 

private-label MBS. In particular, Wescorp and U.S. Central had invested 

74 percent and 49 percent, respectively, of their portfolio in private-label 

MBS. In contrast, 10 of the 23 remaining corporates had also invested in 

private-label MBS but at lower levels—for example, from 1 to 19 

percent.27

 

26Private-label MBS include mortgages such as subprime and Alt-A mortgages (those 

mortgages with borrowers whose risk profiles fall between prime loans and subprime 

loans) that were pooled and then securitized by entities other than the governmentsponsored enterprises. About 75 percent of subprime and Alt-A mortgages originated from 

2001 through 2007 were securitized. Since 2007, the rise in mortgage delinquencies and 

foreclosures has been particularly acute in this segment of the mortgage market. For more 

information, see GAO, Nonprime Mortgages: Analysis of Loan Performance, Factors 

Associated with Defaults, and Data Sources,

These high concentrations of private-label MBS exposed the 

failed corporates to the highs and lows of the real estate market, which 

experienced significant losses.

GAO-10-805 (Washington, D.C.: Aug. 24, 

2010).

27Corporates typically have a high rate of investments as a percentage of assets. For 

example, at the end of 2007, on average corporates had approximately 90 percent of their 

total assets invested. 

Poor Investment and 

Business Strategies 

Contributed to Corporate 

Failures
 

Page 14 GAO-12-247 National Credit Union Administration

Figure 3: Percentages of Private-Label MBS Held by U.S. Central and Corporates, from 2003 through 2008

Furthermore, corporates had significant deposits in U.S. Central, which 

led to indirect exposure to its high concentration of private-label MBS and 

losses when it failed. For example, in 2007, Members United had 

invested more than 40 percent of total assets in U.S. Central, and 

Southwest and Constitution had each invested approximately 30 percent 

of total assets, according to the MLRs.

In addition to poor investment decisions, the business strategies U.S. 

Central and the other four failed corporates’ pursued contributed to their 

failure. Specifically, their management implemented business strategies 

to attract and retain credit union members by offering lower rates on 

services and higher returns on investments. According to the MLRs, U.S. 

Central shifted towards an aggressive growth strategy to maintain and 

increase its market share of corporates. This strategy led its management 

to increase its holdings of high-yielding investments, including privatelabel MBS. From 2006 to 2007, U.S. Central’s assets grew by 22 percent 
 

Page 15 GAO-12-247 National Credit Union Administration

as members invested their liquid funds in return for competitive rates. The 

other failed corporates implemented similar business strategies.

The financial crisis exposed the problems in the corporates’ investment 

and business strategies, leading to a severe liquidity crisis within the 

credit union system. Specifically, the downturn severely diminished the 

value and market for private-label MBS and depositors lost confidence in 

the corporate system because of the institutions’ substantial investment in 

these securities. The decline in value of these investments resulted in 

corporates borrowing significant amounts of short-term funds from outside 

of the credit union system to meet liquidity needs as credit unions 

reduced their deposits. However, these options became limited when 

credit rating agencies and lenders lost confidence in individual corporates 

and some lines of credit were suspended. For example, from 2007 to 

2009, credit rating agencies downgraded U.S. Central’s long- and shortterm credit ratings, and in 2009, the Federal Reserve Bank of Kansas City 

downgraded its borrowing ability.28 Eventually, the deterioration of the 

underlying credit quality of the private-label MBS led to the corporates’ 

insolvencies. 

According to our analysis of NCUA’s and its OIG’s data, the 85 credit 

union failures were primarily the result of poor management.29

Operational risk includes the risk of loss due to inadequate or failed 

internal controls, due diligence, and oversight. We found that 

management’s failure to control operational risk contributed to 76 of the 

85 failures. For example, Norlarco Credit Union’s management had weak 

Management of failed credit unions exposed their institutions to increased 

operational, credit, liquidity, and concentration risks, which it then failed to 

properly monitor or mitigate. The following describes these risks and 

provides examples of how exposure to these risks led to the failure of a 

number of credit unions.

 

28U.S. Central had a line of credit with the Federal Reserve Bank of Kansas prior to the 

financial crisis.

29To conduct this analysis we reviewed NCUA regional examiner reports for all of the 

failed credit unions and postmortem reports, which were conducted on 15 of the 85 failed 

credit unions. In addition, we reviewed the NCUA OIG’s MLRs for 10 of the 85 failed credit 

unions and information in the OIG’s Semiannual Report to the Congress for April 1, 2010, 

to September 30, 2010, and October 1, 2010, to March 31, 2011. 

Poor Management Was the 

Primary Reason That 85 

Credit Unions Failed
 

Page 16 GAO-12-247 National Credit Union Administration

oversight policies and controls for an out of state construction lending 

program and failed to perform due diligence before entering into a 

relationship with a third party responsible for managing it. Norlarco’s 

management allowed the third party to have complete control in making 

and overseeing all of the credit union’s residential construction loans, 

leading to a decline in borrower credit quality and underreported 

delinquencies. Potential losses from its residential construction loan 

program led to Norlarco’s insolvency.

Management’s failure to control operational risk can also create the 

potential for fraud. We analyzed NCUA’s and its OIG’s data and found 

that fraud or alleged fraud at credit unions contributed to 29 of 85 of credit 

union failures. According to NCUA, credit unions with inadequate internal 

controls are susceptible to fraud. In addition, NCUA’s internal 

assessments of fraud showed that their examiners often had cited 

inactive boards or Supervisory Committees, limited number of staff, and 

poor record keeping before the fraud was discovered at the failed credit 

unions. For example, the OIG reported that Certified Federal Credit 

Union’s internal controls were severely lacking, enabling the chief 

executive officer to report erroneous financial results to the credit union’s 

board and in quarterly call reports. According to the MLR, before the fraud 

was identified, the credit union’s board was weak and unresponsive to 

repeated reports of inaccurate accounting records and weak internal 

controls from NCUA examiners and external auditors. The credit union 

was involuntarily liquidated in 2010. NCUA OIG officials told us that some 

other indicators of potential fraud are high ratios of investments to assets 

and a low number of loan delinquencies.

Credit risk is the possibility that a borrower will not repay a loan or will 

default. We found that management’s failure to control for credit risk 

contributed to 58 of the 85 credit union failures. For example, Clearstar 

Financial Credit Union management originated and funded a significant 

number of loans that were poorly underwritten—that is, they were made 

to borrowers with poor credit histories. Management then compounded 

these mistakes by extending delinquent loans and poor collection 

practices, contributing to the credit union’s eventual failure. 

Moreover, management at some failed credit unions did not consistently 

monitor the credit risk associated with member business loans (MBL). 

With some limitations, credit unions can lend to their members for 
 

Page 17 GAO-12-247 National Credit Union Administration

business purposes.30 However, these loans can be risky for credit unions. 

For example, NCUA reported in recent congressional testimony that due 

to the lack of credit union expertise and challenging macroeconomic 

conditions, over half of the losses sustained by the NCUSIF were related 

to MBLs for a two year period in the late 1980s.31 Our analysis of NCUA’s 

and its OIG’s data indicated that MBLs contributed to 13 of the 85 credit 

union failures. According to our analysis of historical financial data, failed 

credit unions had more MBLs as a percentage of assets than peer credit 

unions that did not fail or the credit union industry (see fig. 4).32

 

30Most credit unions are restricted from lending more than 12.25 percent of assets as 

MBLs. Recently there have been congressional proposals to raise the cap to 27.5 percent. 

The majority of MBLs, $31.4 billion, or 84 percent, are secured by real estate. Agriculturalrelated MBLs have steadily grown to $1.4 billion, representing approximately 4 percent of 

total MBLs. More than one-third of all MBLs ($14 billion) are held by credit unions in three 

states. California credit unions account for the largest percentage of total MBLs (20 

percent, or $7.5 billion), followed by New York credit unions (11 percent, or $4.2 billion), 

then Wisconsin credit unions (6 percent, or $2.3 billion). 

In 

addition, more than 40 percent of failed credit unions participated in 

member business lending. Comparatively, NCUA had testified that only 

30 percent of all credit unions participated in member business lending, 

as of March 31, 2011.

31See NCUA, Statement of the Honorable Debbie Matz, Chairman National Credit Union 

Administration “Credit Unions: Member Business Lending” Before the Senate Committee 

on Banking, Housing, and Urban Affairs (June 16, 2011). 

32We reviewed financial filings from the fourth quarter of 2005 through the third quarter of 

2010 for three groups: (1) the 85 credit unions that failed from January 2008 to June 2011; 

(2) a group of 340 peer credit unions—the four closest credit unions in terms of assets 

within the state as each failed credit union; and (3) the broader industry to include all 

credit unions that reported for each quarter within the period.
 

Page 18 GAO-12-247 National Credit Union Administration

Figure 4: MBLs as a Percentage of Total Assets, December 31, 2005, to September 30, 2010

Liquidity risk is the risk that the credit union may not be able to meet 

expenses or cover member withdrawals because of illiquid assets. We 

found that liquidity risk contributed to 31 of the 85 credit union failures. 

For example, the management of Ensign Federal Credit Union relied on a 

$12 million deposit to fund credit union operations. However, when the 

deposit was withdrawn in 2009, the credit union lacked other funding 

sources to meet normal member demands and operational expenses, 

contributing to the credit union’s failure.

Concentration risk is excessive exposure to certain markets, industries, or 

groups. While some level of concentration may not be avoidable, it is the 

responsibility of management to put in place appropriate controls, 

policies, and systems to monitor the associated risks. We found that 

concentration risk contributed to 27 of the 85 credit union failures. For 

example, High Desert Federal Credit Union’s management began 

expanding its real estate construction lending in 2003, and by 2006, its 

loan portfolio had more than doubled from $73 million to $154 million. In 

2006, construction lending accounted for more than 60 percent of the 
 

Page 19 GAO-12-247 National Credit Union Administration

credit union’s loan portfolio. When the housing market collapsed, its 

concentration in the real estate construction loans led to its insolvency.

In addition to the management weaknesses in corporates and credit 

unions, NCUA’s examination and enforcement processes did not result in 

strong and timely actions to avert the failure of these institutions. The OIG 

found that stronger and timelier action on the part of NCUA could have 

reduced losses from the failures from U.S. Central and the four other 

failed corporates. NCUA examiners had observed the substantial 

concentration of private-label MBS for U.S Central and three of the four 

other corporates that failed prior to 2008, but did not take timely action to 

address these concentrations. For example, NCUA examiners observed 

Wescorp’s growing concentration in private-label MBS beginning in 2003; 

but they did not limit or take action to address this issue until 2008. 

Similarly, the OIG’s material loss review of Southwest Corporate cites that 

NCUA’s March 2008 exam concluded, “current and allowable MBS 

exposures are significant given the unprecedented market dislocation... 

Southwest’s exposure is clearly excessive.” However, the MLR did not 

indicate that NCUA issued a document of resolution or enforcement 

action to address Southwest’s high concentration. In the case of 

Constitution Corporate, the MLR noted that NCUA took enforcement 

action to address concentration limits prior to failure.

Similar to its findings for corporate failures, the OIG found weaknesses in 

NCUA’s examination and enforcement processes for 10 of the 11 failed 

credit unions for which it conducted MLRs. In particular, the OIG stated 

that “if examiners acted more aggressively in their supervision actions, 

the looming safety and soundness concerns that were present early-on in 

nearly every failed institution, could have been identified sooner and the 

eventual losses to the NCUSIF could have been stopped or mitigated.” 

The OIG made a number of recommendations to address the problems 

that the financial crisis exposed.33

 

33The OIG conducted individual MLRs on U.S. Central and the four failed corporates and 

based on these reviews made six recommendations to NCUA. See

For example, to better ensure that 

corporate credit unions set prudent concentration limits, the OIG 

recommended that NCUA provide corporate credit unions with more 

definitive guidance on limiting investment portfolio concentrations. Based 

www.ncua.gov, 

accessed January 3, 2012.

OIG Identified Weaknesses 

in NCUA’s Examination 

Processes for Corporates 

and Credit Unions
 

Page 20 GAO-12-247 National Credit Union Administration

on the credit union failures, the OIG recommended that NCUA take steps 

to strengthen their examinations process by, among other things, 

improving the review of call reports and third-party relationships, as well 

as following up credit union actions in response to documents of 

resolution and the quality control review process for examinations. 

Appendix I contains more information on the status of NCUA’s 

implementation of OIG’s recommendations.

NCUA took actions to stabilize, resolve, and reform the corporate system 

and to minimize the costs of its intervention. NCUA based these actions 

on four guiding principles:

• to avoid any interruption of services provided by corporate credit 

unions to credit unions;

• to prevent a run on corporate shares by maintaining confidence in the 

overall credit union system;

• to facilitate a corporate resolution process in line with sound public 

policy that is at the least possible cost to the credit unions over the 

long term, while avoiding moral hazard; and

• to reform the credit union system through new corporate rules with a 

revised corporate and regulatory structure.

NCUA established a number of measures to ensure that corporates had 

access to liquidity. To resolve the failed corporates, NCUA placed five 

corporates—U.S. Central, Wescorp, Members United, Southwest, and 

Constitution—into conservatorship and isolated their nonperforming 

assets. To reform the system, NCUA enacted new rules to address the 

causes of the failures, assessed credit unions for corporate losses, 

forecasted the impact of future assessments through scenario tests, and 

took measures to reduce moral hazard. Through these actions, NCUA 

attempted to resolve the corporates’ losses at the least possible cost. 

However, we could not verify all NCUA’s estimated losses of the 

corporates’ and credit union failures.

NCUA Has Taken 

Various Actions to 

Stabilize and Reform 

the Corporate System
 

Page 21 GAO-12-247 National Credit Union Administration

To provide liquidity, NCUA used two existing funds—NCUSIF and CLF—

and based on legislative changes, created a temporary fund—the 

Temporary Corporate Credit Union Stabilization Fund (Stabilization 

Fund). NCUA also created four new programs—the Credit Union System 

Investment Program (CU-SIP), the Credit Union Homeowners’ 

Affordability Relief Program (CU-HARP), the Temporary Corporate Credit 

Union Liquidity Guarantee Program (Liquidity Guarantee Program), and 

the Temporary Corporate Credit Union Share Guarantee Program (Share 

Guarantee Program). See appendix III for more information about these 

programs.

NCUA used NCUSIF to provide liquidity to the corporate system. As 

stated earlier, U.S. Central had experienced substantial losses, impairing 

its ability to provide liquidity to the credit union system. In December 

2008, NCUA provided for a NCUSIF loan to U.S. Central to cover an endof-year liquidity shortfall. The loan was outstanding for 3 days and then 

fully repaid. In January 2009, NCUA placed a $1 billion capital note in 

U.S. Central.34

NCUA also borrowed from the CLF, one of its primary liquidity facilities for 

the credit union system. Prior to the 2007-2009 financial crisis, the 

obligation limit on the CLF’s borrowing authority with Treasury was $1.5 

billion. At NCUA’s request, Congress removed the appropriation limit in 

2008 allowing CLF to borrow up to its full legal borrowing authority.

NCUSIF subsequently wrote off this note when it 

determined the credit losses on the private label MBS (held by U.S. 

Central) impaired the full value of the note.

35

Under the formula in the Federal Credit Union Act, CLF could borrow up 

to $41 billion at that time. In March 2009, CLF borrowed $10 billion from 

the Federal Financing Bank and lent it to NCUSIF.36

 

34A capital note is a short-term debt issuance that is usually not collateralized. 

Because the CLF is 

35To avoid compromising its borrowing authority with Treasury, NCUA changed the CLF’s 

investment strategy in mid-2009. Specifically, before 2009, the CLF’s funds from 

subscribed capital stock and retained earnings placed in a deposit account with U.S. 

Central, the CLF agent. However, given U.S. Central’s insolvency, NCUA moved its funds 

out of U.S. Central and invested them with Treasury in 2009, to avoid an adverse 

accounting treatment for the fund—thereby reducing the fund’s member equity and 

ultimately limiting its borrowing authority with Treasury. 

36As discussed earlier, the Federal Financing Bank is administered by Treasury and 

provides reduced-cost financing to federal agencies that issue government-backed 

obligations.

NCUA Used Existing and 

Temporary Funding 

Sources to Stabilize the 

Corporate System
 

Page 22 GAO-12-247 National Credit Union Administration

restricted from lending directly to corporates, NCUA then used funds from 

NCUSIF to lend $5 billion to U.S. Central and $5 billion to Wescorp. By 

October 2010, U.S. Central and Wescorp had repaid their loans to 

NCUSIF using funds raised primarily from the sale of more than $10 

billion in unencumbered marketable securities that sold near their par 

value in August and September 2010.37

In addition, NCUA used a temporary fund created by Congress in 2009 to 

help increase liquidity in the system. In May 2009, Congress passed the 

Helping Families Save Their Homes Act, which, among other things, 

created a temporary fund to absorb losses from corporates.

NCUA subsequently repaid its 

$10 billion CLF loan with proceeds from asset sales.

38 In particular, 

the act created the Stabilization Fund, which replaced NCUSIF as the 

primary source to absorb the corporates’ losses. The act also amended the 

Federal Credit Union Act to give NCUA the authority to levy assessments 

over the life of the Stabilization Fund to repay the corporates’ losses 

instead of repaying them in a lump sum.39 In addition, it increased NCUA’s 

borrowing authority with Treasury up to $6 billion through a revolving loan 

fund to be shared between the Stabilization Fund and NCUSIF.40

To increase liquidity for the corporates, NCUA also established four 

programs,

• CU-SIP and CU-HARP. In early 2009, NCUA established these 

programs to provide a temporary source of stable funding to the 

corporates. Due to the restriction preventing the CLF from lending 

directly to the corporates, NCUA designed both programs so that the 

CLF would lend to the credit unions, which then purchased notes 

issued by corporates.41

 

37Once NCUA was prepared to liquidate the corporates, it began the process of 

unwinding—that is, closing out—derivatives contracts and other arrangements that 

encumbered these securities, freeing them up to be sold.

The corporates were then required to use the 

38Amending the Federal Credit Union Act, 12 U.S.C. §§ 1751-1795k. 

39The assessment period was initially a 7-year period and was changed after the 

Stabilization Fund was extended to 2021. 

40As mentioned earlier, the act also extended the temporary increase in members’ share 

insurance amount with NCUSIF from $100,000 to $250,000 to increase confidence in the 

credit union system and prevent a run on member shares.

41The corporates used CU-SIP/CU-HARP funds to repay outstanding collateralized debt 

to protect their interests in the collateral. 
 

Page 23 GAO-12-247 National Credit Union Administration

funds to pay down their external debt, freeing up assets that had been 

posted as collateral against the debt. In exchange for participating in 

the programs, the corporates were required to pay CLF borrowing 

costs to credit unions and an additional fee to the credit unions as an 

incentive for them to participate in the programs. CLF lending to credit 

unions totaled approximately $8.2 billion under CU-SIP and about 

$164 million under CU-HARP. All borrowings for both programs were 

repaid in 2010.

• Liquidity Guarantee Program and Share Guarantee Program. NCUA 

created these two temporary guarantee programs in late 2008 and 

early 2009 to help stabilize confidence and dissuade withdrawals by 

credit unions, in an attempt to avoid a run on the corporates. These 

programs provided temporary guarantees on certain new unsecured 

debt obligations issued by eligible corporates and credit union shares 

held in corporates in excess of $250,000. Initially, NCUA provided the 

coverage to all the corporates for a limited time but later provided 

extensions to continue guaranteeing coverage to corporates that did 

not opt out of the program. Based on NCUA’s 2009 financial 

statements, no guarantee payments were required for either program. 

However, as of December 19, 2011, the audited financial statements 

for calendar year 2010 of the Stabilization Fund were not completed 

and available.

NCUA took a variety of steps to resolve the failed corporates and 

maintain corporate payment processing services for credit unions. First, in 

April 2009, NCUA enacted a temporary waiver to allow corporates not 

meeting their minimum capital requirements to continue to provide 

services to credit unions. In particular, the waiver allowed corporates to 

use their capital levels of record on their November 2008 call reports in 

order to continue providing the necessary core operational services to 

credit unions. In addition, it granted the Office of Corporate Credit Unions 

discretionary authority to modify or restrict the use of this capital waiver 

for certain corporates based on safety and soundness considerations. 

Without the waiver, corporates that failed to meet the minimum capital 

requirements would have had to cease or significantly curtail operations, 

including payment system services and lending and borrowing activities. 

As a result, the credit union system would have faced substantial 

interruptions in its daily operations, potentially leading to a loss of 

confidence in other parts of the financial system.

NCUA Took Steps to 

Resolve Corporate 

Failures and Maintain 

Ongoing Payment System 

Functions
 

Page 24 GAO-12-247 National Credit Union Administration

Second, NCUA ultimately placed the five failing corporates into 

conservatorship.42 According to NCUA, it placed the corporates into 

conservatorships to reduce systemic exposure, exert greater direct 

control, improve the transparency of financial information, minimize cost, 

maintain confidence, and continue payment system processing. When 

placing the five corporates into conservatorship, NCUA replaced the 

corporates’ existing boards, the chief executive officers, and in some 

cases, the management teams and took over operations to resolve the 

corporates in an orderly manner. As a part of the conservatorships, 

NCUA set up bridge institutions for the wholesale corporate—U.S. 

Central—and the three other corporates.43 Through these bridge 

institutions, NCUA managed the corporates’ illiquid assets and 

maintained payment services to the member credit unions.44 The member 

credit unions must provide sufficient capital to acquire the operations of 

these bridge institutions from NCUA.45

Third, NCUA established a securitization program to provide long-term 

funding for the legacy assets formerly held in the securities portfolios of 

certain corporate credit unions by issuing NCUA-guaranteed notes. 

NCUA’s analysis showed that MBS were trading at market prices 

considerably below the intrinsic value that would eventually be received 

by long-term investors.46

 

42In March 2009, NCUA placed U.S. Central and Wescorp into conservatorship. In 

September 2010, NCUA placed Constitution, Members United, and Southwest into 

conservatorships. 

NCUA used a method similar to the “good bank43Bridge institutions are temporary institutions chartered by NCUA for the purpose of 

continuing services to member credit unions during a transition period. These institutions 

remain under NCUA authority while member credit unions determine their long-term 

service options, perform appropriate due diligence, and implement the necessary 

operational changes. 

44After conservatorship, NCUA merged Constitution Corporate into Member’s United 

Bridge. Therefore, NCUA created four bridge institutions for the conserved corporates. 

45As of October 30, 2011, two of the four bridge institutions—Members United Bridge and 

Southwest Bridge—had been acquired by newly chartered institutions. Former members 

of Members United Bridge are now served by Alloya Corporate and members of 

Southwest Bridge by Catalyst Corporate. 

46Prior to obtaining long-term funding, NCUA considered funding the corporate credit 

unions’ bad assets with borrowings from Treasury. However, NCUA determined that it was 

more beneficial to have collateral up front by securitizing the assets and avoid reducing its 

borrowing authority with Treasury if needed later. 
 

Page 25 GAO-12-247 National Credit Union Administration

bad bank” model that the Federal Deposit Insurance Corporation has 

sometimes adopted with insolvent banks to remove illiquid or “bad” assets 

from the failed corporates. In particular, NCUA transferred the corporates’ 

assets into Asset Management Estates, also known as liquidation 

estates.47

NCUA issued $28 billion (at the point of securitization) in these NCUAguaranteed notes, while the face value of the original MBS assets was 

approximately $50 billion.

Using these estates, NCUA held and isolated the corporates’ 

illiquid assets (i.e., MBS) from the bridge institutions and issued the 

NCUA-guaranteed notes.

48

Finally, as of November 2011, NCUA has initiated lawsuits against parties 

it believes are liable for the corporates’ MBS-related losses. These 

lawsuits allege violations of federal and state securities laws and 

misrepresentations in the sale of hundreds of securities, according to 

NCUA.

NCUA structured each of the guaranteed 

notes so that its value would approximate the value of the principal and 

interest cash flows on the underlying legacy assets. NCUA officials said 

that by structuring the notes in this manner, NCUA minimized its 

exposure in the event that the underlying cash flow was less than the 

notes’ value. According to NCUA’s term sheet, cash flows from the 

underlying securities will be used to make principal and interest payments 

to holders of the notes, and NCUA guarantees timely payments. NCUA 

issued 13 separate notes, with the final sales occurring in June 2011 and 

maturing between 2017 and 2021. Any necessary guarantee payments 

are to be made from the Stabilization Fund, which also expires in 2021.

49

 

47NCUA established these estates through its Asset Management Assistance Center, 

which has the authority to oversee the funding and disposal of bad assets.

48NCUA relied on external consultants—in addition to its own analysis—to estimate its 

losses from the failed corporate credit unions.

49If successful, any proceeds would be returned to the Stabilization Fund.
 

Page 26 GAO-12-247 National Credit Union Administration

NCUA issued a new rule for corporates to address the key causes of the 

failures.50

• Essentially eliminate the wholesale corporate or third tier of the credit 

union system. The new corporate rule that NCUA issued on October 

20, 2010, eliminated both the definition of and the requirements 

applicable to a wholesale corporate or the third tier of the credit union 

system.

Among other things, the rule (1) eliminates the definition and 

separate treatment of the wholesale corporate or third tier of the credit 

union system, (2) prohibits corporates from investing in certain securities 

and set sector concentration limits, (3) creates a new system of capital 

standards and PCA for corporates, and (4) introduces new corporate 

governance requirements. Some parts of the new rule addresses the 

recommendations of NCUA’s OIG. NCUA issued the rule on October 20, 

2010, and it will be implemented over a number of years. For additional 

information on the rule, see appendix IV.

51

• Prohibit corporates from certain investments and set sector 

concentration limits. NCUA amended the corporate rule to prohibit 

certain investments, such as private-label MBS, and set certain sector 

concentration limits.

NCUA essentially eliminated the wholesale corporate, in 

part, to mitigate inefficiency and systemic risk in the credit union 

system. The failure of U.S. Central, the credit union system’s only 

wholesale corporate, highlights some of the risks. Specifically, its 

failure contributed to the failure of three corporates, instability in the 

other corporates, and substantial losses to the Stabilization Fund.

52

 

50NCUA published a proposed rule in December 2009 with the public comment period 

ending March 2010. 

In addition to prohibiting private-label MBS, the 

rule prohibits corporate investments in collateralized-debt obligations, 

net interest-margin securities, and subordinated securities. Previously, 

corporates were allowed to set their own sector concentration limits, 

which enabled them to continually increase their limits or set 

excessive limits. The new rule sets maximum sector concentration 

limits for corporate investments and addresses OIG recommendations 

that NCUA provide corporates with more definitive guidance on 

51The rule was effective January 18, 2011, except for specified provisions.

52The new investment, credit risk and asset-liability management provisions generally took 

effect 90 days after publication of the final rule (i.e., Jan. 18, 2011). A corporate holding 

investments that violate the new prohibitions must submit an investment action plan to 

NCUA under 12 C.F.R. § 704.10. 

NCUA Enacted Rules to 

Address the Causes of 

Corporate Failures
 

Page 27 GAO-12-247 National Credit Union Administration

limiting investment portfolio concentrations. Corporates are limited to 

investing less than 1,000 percent of capital or 50 percent of total 

assets in specific investments, including agency MBS, corporate debt 

obligations, municipal securities, and government-guaranteed student 

loan asset-backed securities.53

• Create a new system of capital standards and PCA for corporates. 

NCUA’s new corporate rule also established a revised set of capital 

standards for corporates and PCA framework. The new capital 

standards replace the existing 4 percent mandatory minimum capital 

requirement with three minimum capital ratios, including two riskbased capital ratios and a leverage ratio (see table 2).

Furthermore, corporates are restricted 

from investing more than 500 percent of capital or 25 percent of total 

assets in other asset-backed security sectors, including auto loans 

and leases, private-label student loans, credit card loans, or any 

sector not explicitly noted in the rules. NCUA has taken additional 

steps to mitigate the associated risk by limiting the weighted-average 

life of the portfolio to approximately 2 years. NCUA also tightened the 

limits on securities purchased from a single obligor from 50 percent of 

capital to 25 percent.

54 The riskbased capital and interim leverage ratios became enforceable on 

October 20, 2011, and all corporates were required to meet these 

capital standards.55

 

53Agency MBS are government-guaranteed MBS, which differ from private-label MBS 

because they are originated or securitized by a government-sponsored enterprise or 

government agency. The concentration limit on real-estate MBS is set at no more than 

300 percent of capital or 15 percent of assets for commercial MBS. 

Starting in October 2011, corporates are also 

subject to PCA if their capital falls below the adequately capitalized 

level for any of the three capital ratios. As discussed earlier, a 

corporate becomes subject to more severe supervisory actions and 

restrictions on its activities if its capital continues to fall.

54See the preamble to the final rule, at 75 Fed. Reg. 64789-64792 and 64794-64802, for 

background on the new capital standards. The new capital standards initially took partial 

effect 1 year after publication of the rule (i.e., Oct. 20, 2011) and are then phased in during 

the next 10 years.

55The leverage ratio evolves over time, reducing the amount of contributed capital that 

qualifies for inclusion in the leverage ratio. The amount of retained earnings included in 

the leverage ratio becomes effective in 2013 and is fully phased in by 2020.
 

Page 28 GAO-12-247 National Credit Union Administration

Table 2: Corporate Capital and PCA Standards, as of October 2011

Categories

Total risk based 

capital ratio

Tier-one risk based 

capital ratio

Leverage 

ratio

Well Capitalized 10% 6% 5% 

Adequately capitalized 8 4 4 

Undercapitalized Less than 8 Less than 4 Less than 4 

Significantly 

undercapitalized

Less than 6 Less than 3 Less than 3 

Critically undercapitalized Less than 4 Less than 2 Less than 2 

Source: GAO analysis of NCUA regulations.

Note: In addition to meeting required capital standards a corporate must not be subject to any written 

agreement, order, capital directive, or PCA directive issued by NCUA to meet a specific capital level 

for any capital measure. 

• Introduce new corporate governance requirements. NCUA has 

instituted a new corporate governance rule. To ensure that corporate 

board members have adequate knowledge and experience to oversee 

sophisticated corporate investment and operation strategies, they 

must hold an executive management position, such as chief executive 

offer, chief financial officer, or chief operating officer of a credit 

union.56 Corporate board members are also prohibited from serving 

on more than one corporate credit union board. According to NCUA, 

this restriction will help ensure that board members’ loyalty is 

undivided and that they are not distracted by competing demands 

from another corporate. Effective October 21, 2013, the majority of a 

corporate’s board members must be representatives from member 

credit unions. The purpose of this rule is to limit another corporate 

from serving other corporates rather than serving their member credit 

unions. In addition, the governance rules require disclosure of 

executive compensation and prohibit “golden parachutes”—lucrative 

benefits given to executives who are departing their jobs.

 

56The positions of manager and treasurer at smaller credit unions are considered 

equivalent of chief executive officer or chief financial officer.
 

Page 29 GAO-12-247 National Credit Union Administration

NCUA’s audited financial statements for NCUSIF reported an allowance 

for loss of $777.6 million at December 31, 2010. This allowance for loss 

represents the difference between funds expended to close failed retail 

credit unions and the amounts NCUA estimates it will recover from the 

disposition of the failed retail credit unions’ assets. Also, these financial 

statements reported additional estimated losses of about $1.23 billion as 

of December 31, 2010, associated with troubled credit unions considered 

likely to fail.

With respect to the Stabilization Fund, the 2010 audited financial 

statements were not yet final, as of December 19, 2011.

57 NCUA officials 

cited ongoing challenges in resolving and valuing failed corporate assets 

as contributing to the delays in finalizing the Stabilization Fund financial 

statements. We requested documentation adequate to support NCUA’s 

estimates of losses from corporate failures, but NCUA was not able to 

provide the documentation we required. The NCUA OIG was provided 

with the same information that we obtained and told us that they were

unable to verify NCUA’s loss estimates. Absent this documentation, it is 

not possible to determine the full extent of losses resulting from corporate 

credit union failures. Moreover, without well-documented cost information, 

NCUA faces questions about its ability to effectively estimate the total 

costs of the failures and determine whether the credit unions will be able 

to pay for these losses.

Credit unions are responsible for repaying NCUSIF and the Stabilization 

Fund, and NCUA has begun to assess credit unions for those losses. 

NCUA borrowed taxpayer funds from Treasury to fund NCUSIF and the 

Stabilization Fund to provide liquidity to the corporate system and it plans 

to repay the debt to Treasury with interest by 2021. Since 2009, NCUA 

has assessed credit unions a total of about $5 billion (about $1.7 billion 

for NCUSIF and $3.3 billion for the Stabilization Fund).

NCUA officials told us that they had analyzed the credit unions’ ability to 

repay by determining the impact that varying assessment levels would 

have on the net worth ratios of both individual credit unions and the credit 

union system. NCUA considers factors such as the number of credit 

 

57The NCUA 2010 Financial Statement Audit for Temporary Corporate Credit Union 

Stabilization Fund was released on December 27, 2011, after we completed our audit and 

therefore was not available for inclusion in this report. 

NCUA’s Total Loss 

Estimates Related to 

Credit Union Failures 

Were Unavailable

Credit Unions Are 

Responsible for Repaying 

Loans, but Risks Remain
 

Page 30 GAO-12-247 National Credit Union Administration

unions that would fall below 2 percent capital or be subject to PCA’s net 

worth restoration plan. In 2011, NCUA levied a $2 billion assessment for 

the Stabilization Fund. According to NCUA officials, NCUA determined 

that the credit union system had enough surplus capital to pay the 

assessment because of its strong return on assets of 0.86 percent for first 

three quarters of the year. NCUA determined that the assessment would 

result in around 811 credit unions having a negative return on assets. 

NCUA officials also noted that in a typical year about 10 to 20 percent of 

credit unions have had a negative return on assets. According to NCUA 

officials, the primary driver for the $2 billion Stabilization Fund 

assessment in 2011 was interest and principal on maturing medium-term 

notes that the corporates issued and that were to be repaid by the 

Stabilization Fund. NCUA officials told us that if they had found that the 

credit unions could not afford the Stabilization Fund assessment, they 

would have considered other options, such as issuing additional NCUAguaranteed notes or unsecured debt.

Although NCUA officials have stated that the credit union system will bear 

the ultimate costs of corporate and credit union failures, risks to the 

taxpayers remain. However, many of the reforms are ongoing and NCUA 

continues to resolve the failure of U.S. Central and Wescorp, as will be 

discussed. Moreover, the ultimate effectiveness of NCUA’s actions and 

associated costs remain unknown. As a result, whether the credit union 

system will be able to bear the full costs of the losses or how quickly 

NCUA will repay Treasury is unknown. Should the credit union system be 

unable to repay Treasury through NCUA assessments, taxpayers would 

have to absorb the losses.

Moral hazard occurs when a party insulated from risk may behave 

differently than it would behave if it were fully exposed to the risk. In the 

context of NCUA’s actions to stabilize the credit union system, moral 

hazard occurs when market participants expect similar emergency 

actions in future crises, thereby weakening their incentives to manage 

risks properly. Furthermore, certain emergency assistance can also 

create the perception that some institutions are too big to fail. In general, 

mitigating moral hazard requires taking steps to ensure that any 

government assistance includes terms that make such assistance an 

undesirable last resort, except in the direst circumstances, and specifying 

when the government assistance will end. For example, we previously 

reported that during the 2007-2009 financial crisis, the federal 

government attached terms to the financial assistance it provided to 

financial institutions such as (1) limiting executive compensation, 

NCUA Took Measures to 

Reduce Moral Hazard in 

Designing the Assistance 

and Reforms
 

Page 31 GAO-12-247 National Credit Union Administration

(2) requiring dividends be paid to providers of assistance, and 

(3) acquiring an ownership interest—all of which were designed to 

mitigate moral hazard to the extent possible.58

NCUA designed actions to mitigate moral hazard at various stages of its 

effort to resolve and reform the corporate credit union system, but the 

effectiveness of these actions remains to be seen. Examples of the 

actions designed to mitigate moral hazard include terminating the 

corporates’ management teams and eliminating their boards, issuing 

letters of understanding and agreement as a condition to entering the 

Share Guarantee Program, requiring a guarantee fee under the Liquidity

Guarantee Program, requiring credit unions to repay the losses to 

NCUSIF and the Stabilization Fund, filing lawsuits against responsible 

parties, and requiring credit unions to disclose executive compensation. 

In addition, NCUA enhanced market discipline by requiring corporates to 

obtain capital from their member credit unions to remain in operation. 

That is, member credit unions decided whether to capitalize new 

corporates. As of October 30, 2011, the two of the four bridge 

corporates—Wescorp Bridge and U.S. Central Bridge—had either not 

succeeded in obtaining sufficient member capital (Wescorp) or had not 

attempted to do so because of a lack of anticipated demand (U.S. 

Central). They are both being wound down by NCUA.

 

58GAO, Ongoing Challenges and Guiding Principles Related to Government Assistance 

For Private Sector Companies, GAO-10-719 (Washington, D.C.: Aug. 3, 2010).
 

Page 32 GAO-12-247 National Credit Union Administration

Credit unions that triggered PCA had mixed results. Our analysis of credit 

unions that underwent PCA indicates corrective measures that were 

triggered earlier were generally associated with more favorable 

outcomes. We observed successful outcomes associated with PCA, but 

also noted inconsistencies in the presence and timeliness of PCA and 

other enforcement actions. Furthermore, in most cases, other 

discretionary enforcement actions to address deteriorating conditions 

either were not taken or taken only in the final days prior to failure. Other 

financial indicators could serve to provide an early warning of 

deteriorating conditions at credit unions.59

The number of credit unions in PCA significantly increased as the 

financial crisis unfolded (see fig. 5).60

 

59Regulators face a challenging trade-off between false positives (in this context, taking an 

action based on an incorrect prediction of credit union distress) and false negatives (in this 

context, failing to take an action based on an incorrect prediction of credit union health) in 

establishing a threshold or thresholds for capital or other indicators that might trigger 

intervention in a potentially troubled credit union. Striking the right balance between these 

two errors depends on the relative costs of each error, and other considerations.

From January 1, 2006, through 

June 30, 2011, 560 credit unions triggered PCA. Specifically, of the 560 

credit unions that entered PCA from January 1, 2006, through June 30, 

2011, the vast majority (452) triggered PCA from January 2008 through 

June 2011. 

60For our analyses, we refer to credit unions “in PCA” as those that were included in 

NCUA’s PCA monitoring reports, requiring a proactive regulatory response. The PCA 

monitoring reports focus on those credit unions that NCUA classifies as undercapitalized, 

significantly undercapitalized, or critically undercapitalized. These credit unions are 

required to develop a net worth restoration plan when the credit union has a net worth 

ratio of less than 6 percent or has not met risked-based net worth requirements. Similarly, 

we refer to credit unions entering or “triggering PCA” as those that have been initially 

identified as undercapitalized, significantly undercapitalized, or critically undercapitalized 

(utilizing the original net worth ratio classification and date in the PCA monitoring reports) 

that require a proactive regulatory response. These reports do not include other credit 

unions that have earnings retention requirements under PCA (e.g., those with a net worth 

ratio between 6 and less than 7 percent).

NCUA’s Use of PCA 

and Other 

Enforcement Actions 

Illustrate the Need to 

Improve Their 

Effectiveness

Use of PCA and Other 

Enforcement Actions 

Highlight the Need to 

Address Deteriorating 

Credit Unions Earlier
 

Page 33 GAO-12-247 National Credit Union Administration

Figure 5: Number of Credit Unions in PCA, January 2006 to June 2011

Most credit unions that triggered PCA have not failed. Specifically, 69 of 

85 credit unions that failed from January 2008 through June 2011 had 

previously triggered PCA. To examine these trends in more depth, we 

tracked a group of 275 credit unions that were subject to PCA from 

January 1, 2008, through June 30, 2009.61

From January 1, 2006, through June 30, 2011, most credit unions had 

capital at the undercapitalized level when PCA was triggered.

As of June 30, 2011, 40 

percent of these 275 credit unions had merged with stronger credit 

unions, 39 percent remained in business, 19 percent failed, and 2 percent 

voluntarily liquidated. Of the credit unions still in business, 70 improved 

their net worth ratios in order to exit PCA; 37 remain in PCA.

62

 

61For the group of 275 credit unions, we observed outcomes of PCA for a minimum of 2 

years subsequent to the date the credit union triggered PCA.

The 

timeliness of NCUA’s application of PCA improved during the period. 

Specifically, for credit unions triggering PCA from January 2006 to

December 2007, approximately 43 percent had initial capital levels that 

62Undercapitalized refers to a net worth ratio of less than 6 but at least 4 percent.
 

Page 34 GAO-12-247 National Credit Union Administration

were significantly or critically undercapitalized. In contrast, for credit 

unions triggering PCA from January 2008 through June 2011, 

approximately 77 percent were classified as undercapitalized or greater, 

while less than a quarter (23 percent) entered at a significantly or critically 

undercapitalized level.

While our analysis revealed some favorable outcomes, we observed 

inconsistencies related to the presence and timeliness of PCA’s 

implementation. For instance, PCA was not triggered for 16 of the 85 

credit unions that failed from January 1, 2008, to June 30, 2011. The 

remaining 69 credit unions triggered PCA prior to failure, but did so at 

lower capital levels than the credit unions that triggered PCA as a whole 

during the same period (see fig. 6). Consequently, PCA had limited 

opportunity to address deteriorating conditions in credit unions that 

eventually failed, particularly when capital deteriorated quickly. In most 

cases, PCA was not initiated until less than 180 days prior to failure.
 

Page 35 GAO-12-247 National Credit Union Administration

Figure 6: Capital Levels of All Credit Unions Triggering PCA versus Those That Failed, January 1, 2008, to June 30, 2011

Notes: Credit unions entering PCA also include newly chartered credit unions that are placed in PCA 

by regulators as a matter of practice. NWR means net worth ratio. The breakout of initial capital levels 

is shown for all 69 credit unions that entered PCA and subsequently failed from January 2008 through 

June 2011, including 7 credit unions that triggered PCA prior to 2008. A breakout of initial capital 

levels among 62 credit unions that triggered PCA from 2008 on was similar, with 45 percent triggering 

PCA at the undercapitalized level and 55 percent triggering PCA at the significantly or critically 

undercapitalized level. 

Similar to the implementation of PCA measures, our analysis showed 

inconsistencies in the presence and timeliness of other discretionary 

enforcement actions for the credit unions that failed. The CAMEL 

composite ratings generally highlighted the deterioration of credit unions 

prior to failure. Specifically, our analysis showed:

• 50 of 85 failed credit unions received a CAMEL 3 composite rating 

prior to failure, with a median of 641 days prior to failure;

• 63 of 85 failed credit unions received a CAMEL 4 composite rating 

prior to failure, with a median of 365 days prior to failure; and
 

Page 36 GAO-12-247 National Credit Union Administration

• 48 of 85 failed credit unions received a CAMEL 5 composite rating 

prior to failure, with a median of 96 days prior to failure.

Despite the deteriorating condition of these credit unions, in many cases, 

NCUA either did not take any non-PCA formal or informal enforcement 

action or took action only in the final days prior to failure (see fig. 7). For 

instance, for 42 of the 85 failed credit unions (49.4 percent) NCUA did not 

take any formal or informal enforcement action (non-PCA) on credit 

unions within 2 years prior to their failure. In some cases, when action 

was taken, it was not timely. For example, 12 of the 85 failed credit 

unions (14.1 percent) did not have an initial formal or informal non-PCA 

enforcement action until 180 days or less before failure. In the remaining 

31 cases (36.5 percent), action was taken more than 180 days prior to the 

failure of the credit union. As discussed earlier, similar concerns about the 

presence and timeliness of enforcement actions were also frequently 

cited in MLRs and other reports issued by NCUA’s OIG.

Figure 7: Timeliness of Other Non-PCA Enforcement Actions on Failed Credit Unions

Note: Figures are based on a 2 year look back period. 
 

Page 37 GAO-12-247 National Credit Union Administration

These results are also consistent with our recent work to assess the 

performance of PCA and other enforcement actions for banks.63 In 

particular, we found that the presence and timeliness of enforcement 

actions (non-PCA) to address deteriorating banks were inconsistent. 

Furthermore, we noted that the effectiveness of PCA, as currently 

constructed, is limited because of its reliance on capital, which can lag 

behind other indicators of financial health. That is, problems with a bank’s 

assets, earnings, or management typically manifest before these 

problems affect capital levels. Consequently, once an institution falls 

below PCA’s capital standards, it may not be able to recover regardless 

of the regulatory action imposed.

Multiple indicators of financial health highlight differences in asset quality, 

earnings, management, and liquidity between the failed and other credit 

unions well before failure, and may be helpful in detecting future distress. 

In considering other indicators for detecting early distress in credit unions, 

we reviewed data from regulatory filings from the fourth quarter of 2005 

through the first quarter of 2011 for (1) the 85 credit unions that failed 

from January 2008 through June 2011 and (2) a group of 340 peer credit 

unions—the four closest credit unions in terms of total assets within the 

state as each failed credit union.64 To compare the performance of these 

groups, we analyzed a range of indicators from the CAMEL rating that 

demonstrate asset quality, management, earnings, and liquidity. For 

assessing asset quality, we also looked at credit unions’ risk exposure 

and credit performance.65

 

63

Some indicators we analyzed showed 

differences between the failed credit unions and their peers, but were not 

necessarily strong indicators. Furthermore, using some of these 

indicators as early warning signs of distress could present different 

advantages and disadvantages—all of which would need to be 

considered. 

GAO-11-612. 

64While a total of 340 peer credit unions reported their financial condition in regulatory 

filings during the entire period, the number of failed credit unions reporting declined over 

this period because credit unions stopped reporting after they failed. We also compared 

these groups against the industry—all credit unions that reported their financial condition 

in a regulatory filing for each quarter within the period.

65The indicators we chose for this review were based partially on the ability to obtain 

publicly available data across all credit unions.

Other Financial Indicators 

Could Help Identify 

Troubled Credit Unions 

Earlier than Capital
 

Page 38 GAO-12-247 National Credit Union Administration

Asset quality. We analyzed a number of indicators of asset quality. 

Specifically, we analyzed indirect loans as a percentage of total assets; 

payment-option, adjustable rate mortgages, and interest-only mortgage 

loans as a percentage of total assets; participation loans as a percentage 

of total assets; and MBLs as percentage of total assets. While these 

measures contribute to an understanding of the quality of assets credit 

unions may have in their portfolios, one measure we looked at—

delinquency rates on MBLs—may be predictive of declining asset quality 

and deteriorating portfolio performance, and hence future failure.

Delinquency rates on MBLs demonstrate that the credit performance of 

these loans for failed credit unions was significantly worse than the peers. 

Figure 8: Delinquency Rates on MBLs for Failed Credit Unions Compared to the Peer Group, December 31, 2005, through 

March 31, 2011

Management. Operating expenses as a percentage of average total 

assets indicates how efficiently a credit union manages its business. 

Operating expenses can also be correlated with credit quality, as 

delinquent loans require more servicing. All other things equal, credit 

unions that have lower operating expense ratios are more profitable and 

able to retain more earnings than those with higher operating expense 

ratios. The failed credit unions had operating expenses nearly 
 

Page 39 GAO-12-247 National Credit Union Administration

1 percentage point higher than peer group at the fourth quarter of 2005, 

well before the financial crisis and the bulk of credit union failures. This 

difference continued to increase over time, peaking in the third quarter of 

2008 but remained around 3 percentage points higher at the end of the 

period (see fig. 9).

Figure 9: Operating Expenses as a Percentage of Average Total Assets for Failed Credit Unions Compared to the Peer Group, 

December 31, 2005, through March 31, 2011

Earnings. Net income as a percentage of assets indicates the profitability 

of institutions. Specifically, we examined two measures—costs of funds 

and return on assets—as indicators of earnings.66

 

66The cost of funds measures the average interest rate that credit unions need to pay its 

creditors to fund its liabilities and indicates profitability. 

For most of the period 

of our analysis, the credit unions that eventually failed paid a higher 
 

Page 40 GAO-12-247 National Credit Union Administration

average cost of funds compared with the peer group.67

Return on assets is a commonly used measure of credit union financial 

performance and measures the net income or profit that a credit union 

generates as a percentage of its total assets.

However, because 

the differences were slight, it did not appear to be a strong leading 

indicator and return on assets appeared to be a stronger leading 

indicator.

68

 

67Specifically over the time period, the failed credit unions averaged a cost of funds of 

1.66 percent, which was19 basis points more than its peer group. The higher cost of funds 

impacted the failed credit unions’ profitability and limited their accumulation of capital as 

compared to the peer group and industry. These percentage differences appeared small, 

but these differences may reflect differing levels of risk taking by individual credit unions.

Prior to the 2007-2009 

financial crisis, the return on assets for the failed credit unions was similar 

to the peer group. However, as the financial crisis escalated through late 

2007 and throughout 2008, the credit unions that eventually failed saw 

their performance deteriorate significantly, with the return on assets falling 

as low as negative 20 percent in the third quarter of 2008. During the 

same time period, the return on assets for the peer group had significantly 

smaller declines, and improved to levels near zero in 2008 through the 

first quarter of 2011 (see fig. 10).

68Quarterly numbers are annualized by multiplying the return by four.
 

Page 41 GAO-12-247 National Credit Union Administration

Figure 10: Return on Assets for Failed Credit Unions Compared to the Peer Group, December 31, 2005, through March 31, 2011

Liquidity. Liquid assets as a percentage of total assets are a measure of 

credit unions’ liquidity—that is, the ability to make payment on its shortterm obligations.69

 

69Liquidity is calculated as the sum of cash on hand, cash on deposit, cash equivalents, 

marketable securities, demand deposits and other assets that are readily convertible to 

cash. 

This indicator showed that the failed credit unions 

consistently had fewer liquid assets compared to the peer group from 

December 31, 2005, through March 31, 2011. While the differences 

fluctuated throughout this time frame, the failed credit unions had at least 

5 percentage points fewer liquid assets than the peer group, with the 

divergence growing to 14.3 percentage points compared to the peer 

group (see fig. 11).
 

Page 42 GAO-12-247 National Credit Union Administration

Figure 11: Liquid Assets as a Percentage of Total Assets for Failed Credit Unions Compared to the Peer Group, December 31, 

2005, through March 31, 2011

NCUA has taken steps to stabilize, resolve, and reform the corporate

system. Many of the reforms are ongoing and NCUA continues to resolve 

the failures of U.S. Central and Wescorp. As a result, the ultimate 

effectiveness of NCUA’s actions and associated costs remain unknown. 

Moreover, while the 2010 financial statements for NCUSIF are final—and 

record a loss—the 2010 financial statements for the Stabilization Fund 

were only recently released at the end of December 2011. Prior to the 

release of these statements, NCUA had estimated losses for the 

Stabilization Fund, but NCUA did not provide adequate documentation to 

allow us to verify the reasonableness and completeness of these 

estimates. Without well documented cost information, NCUA faces 

questions about its ability to effectively estimate the total costs of the 

failures and determine whether the credit unions will be able to pay for 

these losses.

Before the recent financial crisis, PCA was largely untested because the 

financial condition of the credit unions had been generally strong since 

PCA was enacted. With the failure of the 85 credit unions, the PCA 

Conclusions
 

Page 43 GAO-12-247 National Credit Union Administration

framework showed some weaknesses when addressing deteriorating 

credit unions. The main weakness of the PCA framework, as currently 

constructed in statute, stems primarily from tying mandatory corrective 

actions to only capital-based indicators. As previously reported, capitalbased indicators have weaknesses, notably that they can lag behind 

other indicators of financial distress. Other alternative financial indicators 

exist or could be developed to help identify early warning signs of 

distress, which our analysis shows is a key to successful outcomes. Tying 

regulatory actions to additional financial indicators could mitigate these 

weaknesses and increase the consistency with which distressed credit 

unions would be treated. By considering which additional financial 

indicators would most reliably serve as an early warning sign of credit 

union distress—including any potential tradeoffs—and proposing the 

appropriate changes to Congress, NCUA could take the first steps in 

improving the effectiveness of PCA.

Given that the 2010 financial statements for the Stabilization Fund were 

not available for our review and NCUA was unable to provide us 

adequate documentation for their estimates as well as the identified 

shortcomings of current PCA framework, we recommend that NCUA take 

the following two actions.

1. To better ensure that NCUA determines accurate losses incurred from 

January 1, 2008, to June 30, 2011, we recommend that the Chairman 

of NCUA provide its OIG the necessary supporting documentation to 

enable the OIG to verify the total losses incurred as soon as 

practicable.

2. To improve the effectiveness of the PCA framework, we recommend 

that the Chairman of NCUA consider additional triggers that would 

require early and forceful regulatory actions, including the indicators 

identified in this report. In considering these actions, the Chairman 

should make recommendations to Congress on how to modify PCA 

for credit unions, and if appropriate, for corporates.

We provided a draft of this report to NCUA and its OIG for their review 

and comment. NCUA provided written comments that are reprinted in 

appendix V and technical comments that we have incorporated as 

appropriate.

Recommendations for 

Executive Action

Agency Comments 

and Our Evaluation
 

Page 44 GAO-12-247 National Credit Union Administration

In its written comments, NCUA agreed with our two recommendations. 

Notably, NCUA stated that it had taken action to implement one of the 

recommendations by providing OIG with documentation of loss estimates 

for the Stabilization Fund as of December 31, 2010. It expects to provide 

additional documentation of loss estimates as of June 30, 2011, in 

January 2012. In its letter, NCUA also stated that the December 31, 2010, 

audited financial statements for the Stabilization Fund would be issued in 

the near future and described reasons for the delay in finalizing this audit. 

These reasons included the scope and magnitude of the corporate 

failures and the actions that NCUA had undertaken to resolve the 

corporate failures and strengthen its financial reporting systems. While 

NCUA acknowledged that some of the loss estimates were not finalized 

at the time of our audit, including the 2010 financial statements, it noted 

that the results from the valuation experts were complete and available. 

Our report recognizes the challenges that NCUA has faced in finalizing its 

financial statements and describes the actions that it has taken to 

stabilize, resolve, and reform the credit union system. However, as we 

reported, NCUA was unable to provide us with the documentation that we

required to verify the reasonableness and completeness of the loss 

estimates for the Stabilization Fund. Subsequently, the NCUA 2010 

Financial Statement Audit for Temporary Corporate Credit Union 

Stabilization Fund was released on December 27, 2011. Although NCUA 

has said that its analysis shows that the credit union system has the 

capacity to pay for the loss estimates, we continue to believe that without 

well-documented cost information, NCUA faces questions about its ability 

to effectively estimate the total costs of the failures and determine 

whether the credit unions will be able to pay for these losses. Taking the 

steps to address our recommendation will help NCUA address these 

questions.

In its written comments, NCUA also described its commitment to

continued research and analysis to improve the effectiveness of PCA. In 

particular, NCUA cited its membership on the Federal Financial 

Institutions Examination Council and the Financial Stability Oversight 

Council. NCUA also noted that it was following developments related to 

the federal banking agencies’ consideration of enhancements to PCA 

triggers, a step that we recommended in our report Banking Regulation: 

Modified Prompt Corrective Action Framework Would Improve 

Effectiveness.

70

 

70GAO-11-612. 

NCUA agreed with the recommendation to consider other 
 

Page 45 GAO-12-247 National Credit Union Administration

triggers for PCA but noted that some of the potential financial indicators 

that we identified could have drawbacks. We also acknowledged in the 

report that multiple indicators of financial health could be used as early 

warning indicators and that the extent to which the financial indicators we 

identified could serve as strong early warning indicators might vary.

Furthermore, using some of these indicators as early warning signs of 

distress could present different advantages and disadvantages—all of 

which would need to be considered. Nevertheless, we continue to believe 

that considering a range of potential indicators, including those identified 

in the report, is a necessary and important step in improving the 

effectiveness of PCA. 

NCUA’s letter also noted a potential “misconception” in the report and 

said that it recognized the need for timelier use of formal enforcement 

action, as evidenced in its response to OIG findings and 

recommendations. However, NCUA stated that nearly all failed credit 

unions received an enforceable regulatory action prior to failure, either 

through PCA or non-PCA authorities. In some cases, the failures 

occurred so abruptly that NCUA did not have a long lead time to take 

action. NCUA also stated that it had a strong record of employing PCA 

actions when credit unions tripped PCA triggers, as PCA actions are 

often more expedient forms of enforceable regulatory action. As 

discussed in the report, successful outcomes were associated with PCA 

in some cases. However, we also found inconsistencies in the presence 

and timeliness of PCA and other enforcement actions. Furthermore, we 

also found that other discretionary enforcement actions to address 

deteriorating conditions either were not taken or were taken only in the 

final days before the failure. Finally, the letter concluded that credit 

unions performed well during the recent financial crisis and that NCUA 

had successfully mitigated the failures that did occur. Our report 

describes the scope and magnitude of failures among corporates and 

credit unions and also notes that the 85 credit unions represented less 

than 1 percent of credit union assets as of 2008. Finally, we also 

described actions NCUA had taken to stabilize the credit union system, 

but we note that NCUA’s examination and enforcement processes did 

not result in strong and timely actions to avert the failure of these 

institutions.
 

Page 46 GAO-12-247 National Credit Union Administration

We are sending copies of this report to NCUA, the Treasury, and the 

Financial Stability Oversight Council, and other interested parties. The 

report is also available at no charge on the GAO website at 

http://www.gao.gov. 

If you or your staffs have any questions about this report, please contact 

A. Nicole Clowers at (202) 512-8678 or clowersa@gao.gov. Contact 

points for our Office of Congressional Relations and Public Affairs may be 

found on the last page of this report. GAO staff that made major 

contributions to this report are listed in appendix V. 

A. Nicole Clowers

Director

Financial Markets

and Community Investment
Appendix I: Status of OIG Recommendations 

to NCUA, as of October 30, 2011 

Page 47 GAO-12-247 National Credit Union Administration

During the period of November 2008 to October 2011, the National Credit 

Union Administration’s (NCUA) Office of Inspector General (OIG) made 

25 recommendations to NCUA to improve both corporate and credit union 

supervision, operations and financial reporting.1 Six of the 25 

recommendations were for corporates and 19 were for credit unions. 

NCUA has fully implemented 6 of the 25 recommendations relating to 

improving the corporate structure, corporate governance, examination 

processes, and call report data, as well as providing guidance on 

concentration risk. In addition, they have partially implemented another 10

recommendations—2 of these relate to corporate risk management and 

corporate examiner training. The other 8 partially implemented 

recommendations are related to improving the credit union examination 

process and financial monitoring of credit unions on areas such as fast 

growing and new business programs, third-party relationships, 

concentration risk, and ensuring credit union’s take appropriate action to 

respond to documents of resolution (DOR).2

 

1

These recommendations are from seven MLRs, OIG Capping Report on Material Loss 

Reviews (OIG-10-20) and Review of NCUA’s Document of Resolution Follow-up Process

(OIG-11-11). The seven MLRs include Material Loss Review of Huron River Credit Union

(OIG-08-10), Material Loss Review of U.S. Central Federal Credit Union (OIG-10-17), 

Material Loss Review of Western Corporate Federal Credit Union (OIG-10-19), Material 

Loss Review of Members United Corporate Federal Credit Union (OIG-11-01), Material 

Loss Review of Certified Federal Credit Union (OIG-11-08), Material Loss Review of 

Constitution Corporate Federal Credit Union (OIG-11-09), and Material Loss Review of 

Southwest Corporate Federal Credit Union (OIG-11-10). It is OIG policy to follow-up with 

the agency on recommendations six months after they were issued. Four of these reports 

(OIG-11-08, OIG-11-09, OIG-11-10, and OIG-11-11) were issued within 6 months of 

October 30, 2011. Therefore, unless the agency had taken immediate action these 

recommendations would not be closed by the OIG at the time of this report. 

Finally, NCUA has not yet 

implemented another 9 recommendations—6 of these recommendations 

are related to improving examination processes for credit unions with 

more than $100 million in assets, internal controls and documenting call 

report analysis. The remaining 3 recommendations that were not 

implemented relate to improving follow-up procedures for DORs. 

Furthermore, OIG officials have told us that 13 of the 19 partially or not 

implemented recommendations will likely be fulfilled with the issuance of 

the revised National Supervision Policy Manual (NSPM) in 2012. OIG 

2

DORs are used by NCUA examiners to outline plans and agreements reached with credit 

union officials to reduce identified areas of unacceptable risk. DORs identify persons 

responsible and time frames for correction and may contain one or more action items. 

DOR action items include the corrective action credit union management needs to perform 

and address the examiner’s concerns related to a specific risk area and risk factor.

Appendix I: Status of OIG Recommendations 

to NCUA, as of October 30, 2011
Appendix I: Status of OIG Recommendations 

to NCUA, as of October 30, 2011 

Page 48 GAO-12-247 National Credit Union Administration

officials have reviewed the draft revised NSPM and determined that it 

addresses their recommendations. Table 3 provides a summary of these 

recommendations and their status based on our evaluation of the 

information that NCUA and its OIG provided.

Table 3: NCUA’s Implementation of OIG Recommendations, as of October 30, 2011

Issue Recommendation Status Comments

Three-tier corporate 

structure 

NCUA evaluate the current three-tier 

corporate structure and impose 

comprehensive changes to corporate 

regulations and guidance, as warranted, to 

strengthen individual corporates and the 

corporate system as a whole.

Implemented On September 24, 2010, the NCUA Board 

issued a final rule establishing a new 

comprehensive framework for corporate safety 

and soundness. The OIG closed the 

recommendation based on this action.

Corporate guidance 

on concentration 

limits

Provide corporates with more definitive 

guidance on limiting investment portfolio 

concentrations by security type (i.e., agencybacked versus nonagency-backed 

securities); sector type (e.g., residential real 

estate versus nonresidential real estate);

geography (e.g., less concentration in a 

single state); by supporting collateral (e.g., 

sub-prime; Alt-A; prime; adjustable rate 

mortgages with payment option, interestonly, and negative amortization features; 

etc.); and by issuer, originator, and servicer.

Implemented On September 24, 2010, the NCUA board 

issued amendments to NCUA Rules and 

Regulations Part 704 that requires specific 

concentration limits by investment type and 

sector, including mortgage-backed securities 

(MBS). In addition, the final rule prohibits 

investments in private-label MBS and 

subordinated securities. The OIG closed the 

recommendation based on this action.

Corporate 

governance

Institute requirements for corporate board 

membership to eliminate conflicts of interest. 

Specifically, the NCUA should determine 

whether it is appropriate for retail corporate 

board members to sit on the boards of the 

top-tier corporate credit unions.

Implemented The revised Corporate Rule requires a majority 

of a corporate board members be 

representatives of credit unions and limits a 

person serving on multiple corporate boards. 

The OIG closed the recommendation based on 

this action.

Corporate examiner 

training and 

guidance

Revise examiner guidance on evaluating 

aggressive growth strategies when such 

strategies appear to include increased credit 

risk for the corporate. Guidance should 

include the evaluation of growth strategies to 

determine their effect on the capital 

adequacy and overall safety and soundness 

of the corporate. 

Implemented According to NCUA officials, the new rule to 

eliminate the lower retained earnings reserve 

requirements of corporates will assist with 

managing growth as higher capital requirements

have to be maintained. Consequently, the OIG 

closed the recommendation based on this 

action.
Appendix I: Status of OIG Recommendations 

to NCUA, as of October 30, 2011 

Page 49 GAO-12-247 National Credit Union Administration

Issue Recommendation Status Comments

Provide NCUA examiners training to identify 

higher risk assets, especially if those assets 

are higher yielding products that involve a 

higher level of sophistication and several 

counterparties. Additionally, outside of 

previously raised recommendations for 

sector limit concentrations and 

diversification, NCUA should consider offsite monitoring enhancements of Call Report 

data to identify rapidly increasing holdings of 

certain types of assets and ensure that 

examiners and credit union management 

fully understand the risks posed by the 

products. NCUA should require credit unions 

to perform stress testing or scenario 

analysis to evaluate potential losses in the 

event of market dislocations or adjustments 

to other economic conditions.

Partially 

implemented

According to OIG officials, NCUA partially 

implemented this recommendation through the 

new corporate rules. However, the second part 

of this recommendation to enhance off-site 

monitoring and to require corporates to perform 

stress testing or scenario analysis has not yet 

been implemented. 

Corporate risk 

management

Determine the best use of available 

resources to independently assess risk 

within corporates and other

significant/complex institutions. 

Partially 

implemented 

According to the OIG, NCUA has indicated that 

there is an active working group identifying 

elevated risk posed by large, complex 

institutions and developing appropriate 

strategies to supervise those institutions. The 

OIG considers this an open recommendation.

Credit Union 

examination 

processes

NCUA management issue a Supervisory 

Letter to all federal and state examiners to 

alert them of the need to (1) analyze and 

understand financial ratios and trends 

individually and as a group and (2) 

thoroughly analyze pertinent qualitative data 

in order to adequately assess the safety and 

soundness of credit union operations.

Implemented NCUA has issued guidance to credit unions and 

examiners on (1) the changing credit union 

business model, (2) mortgage and real estate 

market risks, and (3) risk focused supervision 

and monitoring. The OIG closed the 

recommendation based on this action.

Expand examiner procedures to require 

examiners ensure amounts reported on the 

general ledger for all material accounts such 

as loans, member deposits, cash, and 

investments, reconcile to subsidiary ledgers 

and to the Call Report. Examiner procedures 

should also include reviewing bank and 

other key account reconciliations for 

unusual, large, or stale-dated reconciling 

items, as well as the underlying support.

Partially 

implemented

Effective January 1, 2011, NCUA required 

examiners to review and test bank 

reconciliations. However, the OIG suggests that 

NCUA should also require examiners to review 

and test other key balance sheet accounts and 

reconcile the balances to the credit union’s call 

report. In addition, NCUA has revised the 

NSPM to require examiners that identify 

untimely or inaccurate bank reconcilements or 

other material out of balance accounts and 

require corrective action within 180 days. NCUA 

expects to implement the NSPM in 2012.

Require examiners to document their 

consideration of external audit findings and 

recommendations in the Risk Assessment. 

Examiners should ensure examination 

procedures directly address the audit 

findings and examiners work papers 

adequately document the review.

Not 

implemented 

NCUA has revised the draft NSPM to require 

examiners to assess transaction risk as high if 

significant or ongoing recordkeeping errors are 

identified. Additionally, the NSPM will require 

examiners to document review of the 

Supervisory Committee audit work papers and 

follow-up on material concerns. NCUA expects 

to implement the NSPM in 2012.
Appendix I: Status of OIG Recommendations 

to NCUA, as of October 30, 2011 

Page 50 GAO-12-247 National Credit Union Administration

Issue Recommendation Status Comments

Assigning Capital 

Adequacy, Asset 

Quality, 

Management, 

Earnings and 

Liquidity (CAMEL) 

ratings

Caution examiners that assigning CAMEL 

composite ratings of 1 or 2 to credit unions 

that implement new business strategies 

needs to be supported with compelling, 

verified mitigating factors. Such mitigating 

factors should consider things such as the 

institution’s corporate governance, risk 

management controls, allowance for loan 

and lease losses methodologies, 

concentration limits, funding sources, 

underwriting standards, capital levels, and 

whether the mitigating factors are likely to be 

sustainable in the long-term. 

Partially 

implemented

According to the OIG, NCUA has issued several 

letters to credit unions beginning in August 2008 

on evaluating risk. According to NCUA officials, 

letters to credit unions are guidance for both 

credit unions and examiners. In addition, NCUA 

is in the process of revising the NSPM to 

address the evaluation of risk related to new 

business strategies. According to NCUA, it will 

implement the revised NSPM in 2012. The OIG 

considers this an open recommendation.

Issue guidance regarding the evaluation of 

management with an emphasis on 

management integrity. The guidance should 

emphasize the various factors that should 

be considered when assessing the 

management component of the CAMEL 

rating system. The guidance should address 

the principles of the Risk Focused Exam 

program that need to differ when addressing 

management integrity issues versus issues 

of competence.

Not 

implemented

NCUA plans to evaluate this recommendation 

and if necessary issue additional guidance 

addressing how examinations should differ 

when addressing management integrity versus 

competency issues.

Require a documented secondary review of 

the final CAMEL ratings by the Supervisory 

Examiner for all credit unions with more than 

$100 million in assets prior to issuance to 

credit union management. 

Not 

implemented

According to the OIG, NCUA is in the process of 

revising the NSPM to require senior examiner 

reviews of any credit union with assets 

exceeding $250 million. NCUA expects to 

implement the revised NSPM in 2012. The OIG 

considers this an open recommendation.

Monitoring credit 

union call reports 

Issue a national instruction placing more 

emphasis on quarterly monitoring of Call 

Reports including developing offsite 

monitoring triggers and specific procedures 

to more easily “red flag” areas to be 

investigated as well as provide a specific 

time allocation. 

Partially 

implemented

NCUA is in the process of revising the NSPM to 

require that examiners document their quarterly 

review of call reports, financial performance and 

national risk reports. NCUA expects to 

implement the NSPM in 2012. In addition, 

NCUA has taken steps to enhance quarterly 

regional risk reports, issued guidance on the 

identification and mitigation of risk, provided 

instruction to examiners, and revised the 

minimum examination scope. The OIG 

considers this an open recommendation.
Appendix I: Status of OIG Recommendations 

to NCUA, as of October 30, 2011 

Page 51 GAO-12-247 National Credit Union Administration

Issue Recommendation Status Comments

Require examiners to document and retain 

the specific procedures and analysis 

performed during their quarterly review of 

the 5300 Call Reports. This analysis should 

then be forwarded to the Supervisory 

Examiner for review. 

Not 

implemented

According to NCUA, it has responded to this 

recommendation by enhancing quarterly 

regional risk reports to detect excessive growth 

of various loan and investment products. In 

addition, NCUA is in the process of revising the 

NSPM to require examiners to document the 

quarterly Call Report and Financial 

Performance Report reviews and developing an 

automated system for examiners, senior 

examiners, and regional office staff to document 

and review quarterly risk trends. The OIG 

considers this an open recommendation.

Credit union 

concentration risk

Require a breakout of unfunded 

commitments by loan type on the 5300 Call 

Report to facilitate analysis and to better 

track loan concentrations. 

Implemented NCUA has added data fields to the credit union 

Call Report to capture more detail regarding 

unfunded commitments by loan type. The OIG 

closed the recommendation based on this 

action.

Determine whether to propose or change 

regulatory guidance to establish limits or 

other controls for concentrations that pose 

an unacceptable safety and soundness risk 

and determine an appropriate range of 

examiner response to high-risk 

concentrations. 

Partially 

implemented

NCUA has taken steps to implement this 

recommendation, including providing instruction 

on risk identification and problem resolution and 

issuing guidance on addressing concentration 

risk. In addition, NCUA is in the process of 

revising the prompt corrective action (PCA) 

regulations so that the calculation of minimum 

net worth level will place additional emphasis on 

credit concentrations on a credit union balance 

sheet. According to the OIG, the 

recommendation will be closed after NCUA 

revises this regulation. 

Develop a more specific process, such as 

trigger reports or standards, so examiners 

can better identify, analyze, and monitor 

loan concentrations during exams, as well 

as between exams. 

Partially 

implemented

NCUA has taken steps to implement this 

recommendation, including enhanced quarterly 

regional risk reports to identify excessive growth 

in loan and investment products, updated 

national risk reports to identify concentration 

risk, and issued guidance to credit unions and 

examiners on concentration risk. In addition, 

NCUA is in the process of updating examination 

software to provide triggers to guide examiner’s 

review of concentration risk. The OIG considers 

this an open recommendation.
Appendix I: Status of OIG Recommendations 

to NCUA, as of October 30, 2011 

Page 52 GAO-12-247 National Credit Union Administration

Issue Recommendation Status Comments

New program or 

service and thirdparty due diligence 

at credit unions

Re-emphasize examination guidance for 

third-party relationships, with particular 

attention to the assessment of the risk the 

relationship may pose to the credit union’s 

safety and soundness. 

Partially 

implemented

NCUA has taken steps to implement this 

recommendation, including issuing guidance to 

credit unions and examiners and instruction to 

examiners on assessing the third-party 

relationships. In addition, NCUA has updated 

credit union service organizations (CUSO) 

regulations and required that all credit union 

examinations review third-party vendor 

relationships. NCUA is in the process of 

pursuing the enforcement authority over 

CUSOs, enhance supervision and examination 

of CUSOs, and improve the reporting of CUSO 

data to NCUA. The OIG considers this an open 

recommendation.

Develop examination guidance for due 

diligence over new or fast growing programs 

and areas of emphasis, with particular 

attention to the risk the new program or new 

area may pose to the credit union’s safety 

and soundness. 

Partially 

implemented

According to the OIG, NCUA has taken steps to 

implement this recommendation, including 

issuing guidance to credit unions and 

examiners, instruction to examiners on 

identifying risk on new business lines and thirdparty due diligence. In addition, NCUA has 

updated the national risk reports to identify 

growth trends and new products or services, 

developed regional programs for onsite exams 

at high-risk credit unions, and required that all 

credit union examinations review third-party 

vendor relationships. However, NCUA is in the 

process of revising the NSPM to address the 

evaluation of risk related to new business 

strategies and expects to implement it in 2012. 

The OIG considers this an open 

recommendation.

Credit union 

examination quality 

control

Review the current requirements and levels 

that trigger a Quality Control Review and 

expand the process as necessary. Provide 

national guidelines for the Quality Control 

Review process so that all regions are 

consistent in their reviews.

Not 

implemented

According to the OIG, NCUA is in the process of 

revising the requirements that trigger an 

examination quality control review. This revision 

also required that senior examiners document 

their review of all examination reports. These 

revisions will be in the NSPM, which NCUA 

expects to implement in 2012. The OIG 

considers this an open recommendation.

Require Supervisory Examiners to provide a 

written response to the results of Quality 

Control Review on any recommendations 

made by the Quality Control Review

Not 

implemented

According to the OIG, NCUA is in the process of 

revising the NSPM to require Supervisory 

Examiners to provide a written response when 

material issues are noted for an exam report. 

NCUA expects to implement the NSPM in 2012. 

The OIG considers this an open 

recommendation.
Appendix I: Status of OIG Recommendations 

to NCUA, as of October 30, 2011 

Page 53 GAO-12-247 National Credit Union Administration

Issue Recommendation Status Comments

Document of 

resolution follow-up 

process

Determine whether credit unions with repeat 

DORs have taken appropriate corrective 

action. In the event that corrective action 

has not been taken, examiners should be 

instructed to elevate the supervisory 

response, including the taking of 

enforcement action when necessary.

Partially 

implemented

According to the OIG, NCUA has issued 

guidance to credit unions and examiners and 

provided instruction on the administrative 

remedies available and timely resolution of 

problems. In addition, NCUA has enhanced onsite supervision requirements for troubled credit 

unions in one region. NCUA is in the process of 

revising the NSPM, which it expects to 

implement in 2012, to require the review of 

repeat DORs and other unresolved issues as 

part of the exam quality control review process. 

The OIG considers this an open 

recommendation.

Develop a standardized DOR monitoring 

process requiring the Office of Examination 

and Insurance and the regional offices to 

generate and analyze DOR database 

reports on a regularly defined basis 

including, but not limited to the DOR Aging 

Months of Unresolved Report.

Not 

implemented

According to NCUA, the Office of Examinations 

and Insurance and Office of the Chief 

Information Officer will work together to improve 

the DOR reports thereby strengthening the 

regions ongoing monitoring and reporting of 

DOR items. In addition, additional guidance will 

be incorporated into the NSPM to be 

implemented in 2012 and training on the proper 

use of the DOR during NCUA’s 2012 National 

Conference. The OIG considers this an open 

recommendation.

Require written responses from credit union 

management, regardless of the composite 

CAMEL rating, for all DOR items not 

resolved within the established timeframes.

Not 

implemented

According to the OIG, NCUA has revised the 

draft NSPM and plans to require written 

responses for all DORs within a prescribed 

timeframe, regardless of the credit union’s 

composite CAMEL rating. NCUA expects to 

implement the NSPM in 2012. The OIG 

considers this an open recommendation.

Ensure regional staff takes stronger 

supervisory actions when a credit union fails 

to correct DOR items.

Not 

implemented

According to the OIG, NCUA has revised the 

draft NSPM to require more stringent 

administrative actions when credit unions do not 

resolve DORs in the agreed time frame. NCUA 

expects to implement the NSPM in 2012. The 

OIG considers this an open recommendation.

Source: GAO analysis of NCUA and OIG data.
Appendix II: Objectives, Scope, and 

Methodology

Page 54 GAO-12-247 National Credit Union Administration

Legislation enacted in January 2011 requires us to examine NCUA’s 

supervision of the credit union system and the use of PCA. This report 

examines (1) what is known about the causes of failures among 

corporates and credit unions since 2008; (2) the steps that NCUA has 

taken to resolve these failures and the extent to which its actions were 

designed to protect taxpayers, avoid moral hazard, and minimize the cost 

of corporate resolutions; and (3) NCUA’s use of PCA and other 

enforcement actions. In addition, we reviewed NCUA’s implementation of 

its OIG recommendations. (See app. I.) 

To identify the causes of failures among corporates and credit unions, we 

obtained and analyzed NCUA documents, including Material Loss 

Reviews (MLR), postmortem reports, Board Action Memorandums (BAM), 

and other relevant documents. To corroborate this information, we also 

assessed the asset size and investment concentrations for all failed and 

nonfailed corporates by conducting analyses of data from SNL 

Financial—a financial institution database—on corporates’ investment 

portfolios from January 2003 to September 2010.1

 

1

We used SNL Financial to analyze the levels of private-label MBS held by corporates. 

This included both private-label MBS and secondary mortgage and home equity loan 

asset-backed securities. 

We obtained and 

analyzed NCUA data related to conservatorships and resolution actions 

taken from January 2008 to June 2011 to determine the number and 

causes of corporates’ and credit union failures. We further assessed 

credit union member business loan participation as a percentage of total 

loans for both failed and their peer credit unions that did not fail from 

December 2005 to January 2011. To identify credit union failures related 

to fraud, we reviewed data, analyzed reports and documents by NCUA 

and its OIG on each of the failed credit unions from January 2008 to June 

2011. To determine loss data from the corporates’ and credit union 

failures, we reviewed NCUA’s 2008, 2009, and 2010 annual reports;

MLRs; BAMs; and NCUA data on losses to National Credit Union Share 

Insurance Fund (NCUSIF) and the Temporary Corporate Credit Union 

Stabilization Fund (Stabilization Fund). We interviewed NCUA’s OIG, 

Office of Corporate Credit Unions, Office of Capital Markets, Chief 

Financial Officer, and Office of Examination and Insurance to obtain their 

perspectives on the causes of the corporates’ and credit union failures. 

We further met with credit union industry associations to obtain their 

views on NCUA’s efforts to reform the corporate credit union system. We 

Appendix II: Objectives, Scope, and 

Methodology 

Analysis of Causes of 

Failures among Corporates 

and Credit Unions
Appendix II: Objectives, Scope, and 

Methodology

Page 55 GAO-12-247 National Credit Union Administration

assessed the reliability of the SNL and NCUA data used for this analysis 

and determined that these data were sufficiently reliable for our purposes.

To assess the steps that NCUA has taken to stabilize, resolve, and 

reform the corporate and credit union system, we reviewed NCUA 

documents and data including BAMs; MLRs; NCUA annual reports from 

2008, 2009, and 2010; audited financial statements; NCUA’s Corporate 

Stabilization and Resolution Plan; and NCUA-commissioned reports; in 

addition to testimonies at relevant congressional hearings and planning 

documents.2

 To determine actions taken to reform the corporate system, 

we reviewed NCUA’s proposed and final rules and interviewed NCUA’s 

General Counsel to discuss the potential impact of these rules and their 

effective dates. To determine NCUA’s assessments for credit unions’ and 

their ability to repay, we reviewed BAMs, NCUA’s scenario analyses for 

its credit union assessments and loss estimates, and interviewed NCUA 

officials. We requested detailed information on NCUA’s loss estimates for 

NCUSIF and Stabilization Fund; NCUA provided some information but it 

was not sufficient for us to determine the reasonableness and 

completeness of these estimates. To determine the steps that NCUA took 

to reduce moral hazard, we compared the actions taken to stabilize, 

resolve and reform the credit union system to principles cited in our past 

work on providing federal financial assistance.3

To assess the outcomes of PCA, we reviewed the outcomes of credit 

unions as a whole that were subject to PCA from January 1, 2006, 

through June 30, 2011. Additionally, we tracked a group of credit unions 

that were subject to PCA from January 1, 2008, through June 30, 2009, 

during the 2007-2009 financial crisis to identify those credit unions that (1) 

failed, (2) survived and remained in PCA, and (3) survived and exited 

PCA. To determine the actions that NCUA took to address deteriorating 

 

2

NCUA commissioned a number of reports to assist them in estimating losses and 

determining options for addressing the failures of the corporates, including reports by 

Kamakura Corporation, PIMCO, and Barclay’s Capital. In addition, while we reviewed 

NCUA’s 2010 annual report, losses for the Stabilization Fund were not included, the 

NCUA 2010 Financial Statement Audit for Temporary Corporate Credit Union Stabilization 

Fund was not released until December 27, 2011, after we had completed our audit.

3

GAO-10-719. 

Analysis of Actions Taken 

by NCUA to Stabilize the 

Credit Union System

Analysis of PCA 

Outcomes, Ratings 

Downgrades, Enforcement 

Actions and Other 

Indicators
Appendix II: Objectives, Scope, and 

Methodology

Page 56 GAO-12-247 National Credit Union Administration

credit unions, we reviewed regulatory information that included CAMEL 

ratings, enforcement action data, and PCA-related activities over a 2 year 

period prior to each credit union failure from January 1, 2008, through 

June 30, 2011. Specifically, we analyzed the instances and dates of 

CAMEL downgrades, enforcement actions taken, and PCA-related 

actions to determine whether and when actions were taken.4

To assess the utility of various financial indicators in detecting credit unions’ 

distress, we reviewed the OIG’s MLRs, NCUA’s postmortem studies, and 

our previous work on PCA.

 

5 We compared failed credit unions to peer 

credit unions that did not fail to assess their performance on numerous 

financial indicators, such as return on assets, operating expenses and 

liquid assets as an early warning of financial distress. We also compared 

the failed credit unions and their peers to credit union industry averages 

across the same period. In considering other indicators for detecting early 

distress in credit unions, we reviewed data from regulatory filings from the 

fourth quarter of 2005 through the first quarter of 2011 for three groups: (1) 

the 85 credit unions that failed from January 2008 to June 2011; (2) a 

group of 340 peer credit unions—the four closest credit unions in terms of 

total assets within the state as each failed credit union; and (3) all credit 

unions that reported their financial condition in a regulatory filing for each 

quarter within the period.6 To compare the performance of these three 

groups, we chose a range of indicators from the CAMEL rating that 

demonstrates asset quality (A), management (M), earnings (E), and 

liquidity (L). For assessing asset quality, we also looked at credit unions’ 

risk exposure and credit performance.7

 

4

NCUA rates credit unions using the CAMEL system, which stands for capital adequacy, 

asset quality, management, earnings, and liquidity. The ratings are on a scale of 1 to 5, 

with 1 being the best and 5 the worst.

To perform this work, we relied on 

data from SNL Financial.

5

GAO-11-612. 

6

While a total of 340 peer credit unions reported their financial condition in regulatory 

filings during the entire period, the number of failed credit unions reporting declined over 

this period because credit unions stopped reporting after they failed.

7

The indicators we chose for this review were based partially on the ability to obtain 

publicly available data across all credit unions. Regulators could request other information 

that would be useful for selecting additional financial indicators, such as the charge-off 

data for certain asset classes.
Appendix II: Objectives, Scope, and 

Methodology

Page 57 GAO-12-247 National Credit Union Administration

We assessed the reliability of the SNL Financial database and NCUA’s 

enforcement data used in our analyses, and found these data to be 

sufficiently reliable for our purposes.

To determine the status of NCUA’s implementation of OIG 

recommendations, we reviewed the OIG’s corporate and credit union 

MLRs and their recommendation tracking documents and interviewed 

NCUA and NCUA’s OIG officials.

We conducted this performance audit from May 2011 to December 2011

in accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

Analysis of NCUA’s Actions 

to Address OIG 

Recommendations
Appendix III: NCUA Temporary Stabilization 

and Guarantee Programs

Page 58 GAO-12-247 National Credit Union Administration

To help stabilize the credit union system, NCUA created four new 

programs to provide liquidity to corporates. NCUA initiated two of these

new programs, the Credit Union System Investment Program (CU-SIP) 

and the Credit Union Homeowners’ Affordability Relief Program (CUHARP) in early 2009. Due to the restriction preventing the Central 

Liquidity Facility (CLF) from lending directly to the corporate credit unions, 

NCUA designed both programs, CU-SIP and CU-HARP, so that the CLF 

would lend to the credit unions, which agreed that they in turn would 

invest in NCUA-guaranteed notes issued by corporates. Starting in 

January 2009, corporates were required to use the invested funds to pay 

down their external secured debt. Money from the corporates’ debt 

issuances were used to free up collateral and to pay back loans made by 

the credit unions. In exchange for participating in the programs, the 

corporates were required to pay CLF borrowing costs to credit unions and 

an additional fee to the credit unions as an incentive for them to 

participate in the programs. CLF lending to credit unions totaled 

approximately $8.2 billion under CU-SIP and about $164 million under 

CU-HARP. All borrowings for both programs were repaid in 2010.

• CU-SIP. Credit unions received a 25-basis-point spread over the cost 

of borrowing from the CLF for investing in 1-year CU-SIP note issued 

by participating corporate credit unions. Lending from the CLF for the 

CU-SIP started in January 2009 and ended in March 2009, totaling 

approximately $8.2 billion. All borrowings were repaid by the credit 

unions to the CLF by the respective months in 2010 (see fig. 12).

Appendix III: NCUA Temporary Stabilization 

and Guarantee Programs
Appendix III: NCUA Temporary Stabilization 

and Guarantee Programs

Page 59 GAO-12-247 National Credit Union Administration

Figure 12: Overview of CU-SIP 

• CU-HARP. This 2-year program was designed to assist struggling 

homeowners by temporarily facilitating modifications to their monthly 

mortgage payments.1

 

1

A 1-year program with an optional 1-year extension, subject to the credit worthiness of 

participating credit unions. This program is similar to the Department of the Treasury’s 

Home Affordable Modification Program, which provided assistance to homeowners 

through a cost-sharing arrangement with mortgage holders and investors to reduce 

monthly mortgage payment amounts of those at risk of foreclosure to affordable levels. 

Credit unions invested in CU-HARP Notes from 

participating corporates. These notes had 1-year maturities and the 

option to extend the date of maturity for an additional year. The 

extension of the program’s 1-year maturity depended on the credit 

union’s continued good standing and available CLF funding. The CLF 

lent approximately $164 million to credit unions under the CU-HARP. 
Appendix III: NCUA Temporary Stabilization 

and Guarantee Programs

Page 60 GAO-12-247 National Credit Union Administration

All remaining notes under the program matured in December 2010 

and the credit unions repaid all borrowings. The corporates paid a 

bonus to the credit unions, which was tied to a 50 percent reduction 

relief in mortgage payments to homeowners. According to NCUA,CUHARP was not very successful as the program’s design for credit 

unions to earn the bonus was complex and the time frame in which to 

apply was limited (see fig. 13).

Figure 13: Overview of CU-HARP

NCUA created two temporary guarantee programs in late 2008 and early 

2009 called the Temporary Corporate Credit Union Liquidity Guarantee 

Program (Liquidity Guarantee Program) and Temporary Corporate Credit 

Union Share Guarantee Program (Share Guarantee Program) to help 

stabilize confidence and dissuade withdrawals by credit unions, in an 

attempt to avoid a run on the corporates by member credit unions. These 

programs provided temporary guarantees on unsecured offerings by 
Appendix III: NCUA Temporary Stabilization 

and Guarantee Programs

Page 61 GAO-12-247 National Credit Union Administration

corporates and shares of credit unions held by corporates in excess of 

$250,000.2

• Liquidity Guarantee Program. NCUA guaranteed the timely payment of 

principal and interest of all corporates’ unsecured debt.

NCUA originally included all corporates under both guarantee 

programs for a limited time after signing a letter of understanding and 

agreement limiting activities and compensation. It later extended the 

programs to corporates chose not to opt out of the programs.

3

 

2

Unsecured debt is debt that is not collateralized. That is it has no supporting collateral or 

other guarantee securing the debt offering.

The program’s 

debt issuance deadline was September 2011, with debt maturing no 

later than June 2017. However, the program was later revised so that 

any unsecured debt issued after June 2010 would mature no later than 

September 2012. NCUA stated that this revision was necessary to 

focus on short-term liquidity needs and bring the program’s deadline in 

line with its other stabilization efforts (see fig. 14).

3

This program is similar to the Federal Deposit Insurance Corporation’s Temporary

Liquidity Guarantee Program, which temporarily guaranteed newly-issued senior 

unsecured debt of insured depository institutions and most U.S. holding companies. 
Appendix III: NCUA Temporary Stabilization 

and Guarantee Programs

Page 62 GAO-12-247 National Credit Union Administration

Figure 14: Timeline for the Liquidity Guarantee Program

• Share Guarantee Program. This program largely mirrors the Liquidity 

Guarantee Program. That is, NCUA guaranteed credit union shares in 

excess of $250,000 through February 2009, with the option of 

continuing participation in the program through December 2010. NCUA 

revised the program in May 2009 to extend the program’s deadline to 

December 2012 and shortened the length of the program’s coverage to 

shares with maturities of 2 years or less (see fig. 15).
Appendix III: NCUA Temporary Stabilization 

and Guarantee Programs

Page 63 GAO-12-247 National Credit Union Administration

Figure 15: Timeline for the Share Guarantee Program

In mid-2009, NCUA transferred obligations from both the Liquidity 

Guarantee and Share Guarantee programs to the Stabilization Fund to 

limit NCUSIF’s losses stemming from any future corporate losses.4

 

4

The Liquidity Guarantee Program and the Share Guarantee Program provided guarantee 

coverage in the event that a corporate participating in either program would not be able to 

fulfill any of its payment obligations. This guarantee coverage has been transferred from 

NCUSIF to the Stabilization Fund. 

According to NCUA officials, NCUSIF was obligated to provide for any 

guarantee payments that might arise from either the Liquidity Guarantee 

Program or the Share Guarantee Program. Based on NCUA’s 2009 

financial statements, no guarantee payments were required for either 

program; however, as of December 19, 2011, audited 2010 financial 

statements for the Stabilization Fund were not available.
Appendix IV: Summary of NCUA’s 2010 

Corporate Rule

Page 64 GAO-12-247 National Credit Union Administration

On September 24, 2010, the NCUA Board adopted comprehensive new 

rules to govern corporates.1 Following its initial publication the final rule, 

the corporate rules underwent several technical corrections and five 

additions to the corporate rule were published on April 29, 2011.2

This table provides an overview of the corporate rule as initially published 

in October 2010 and later amended in April 2011. It summarizes the 

major provisions at a general level and gives references to where more 

detailed explanations can be found in the preambles of the October 2010 

and April 2011 final rulemakings. The preambles describe in considerable 

detail the rationales for the provisions, section-by-section analyses of 

each provision, what NCUA initially proposed, the comments it received 

and its response to them, and how the final provisions differ from those 

originally proposed.

The 

corporate rule affect several parts of title 12 of the Code of Federal 

Regulations but is codified primarily in 12 C.F.R. Part 704.

 

1

The corporate rule was published in the Federal Register as a final rulemaking on 

October 20, 2010, 75 Fed. Reg. 64786.

2

See 75 Fed. Reg. 71526 (Nov. 24, 2010) (interim final rule with request for comments); 

76 Fed. Reg. 16235 (Mar. 23, 2011) (final rule adopting the same technical corrections as 

the interim rule). NCUA proposed additional technical corrections and clarifications of the 

Corporate Rule in a proposed rulemaking published on September 6, 2011, 76 Fed. Reg. 

54991. 

Appendix IV: Summary of NCUA’s 2010 

Corporate Rule
Appendix IV: Summary of NCUA’s 2010 

Corporate Rule

Page 65 GAO-12-247 National Credit Union Administration

Table 4: NCUA Corporate Rule through April 2011 Rulemaking

Issue Corporate rule Implementation status 

Capital standards and prompt corrective action

Capital standards A new set of capital standards for corporates was established, 

based generally on the Basel I capital requirements.

a

The new standards are:

b

• Leverage ratio and tier-one RBC ratio: 4% or greater; and

• Total RBC ratio: 8% or greater.

The new standards replace the existing 4 percent mandatory 

minimum capital requirement.

The final rule was published on 

October 20, 2010. The new capital 

standards initially take partial effect 

one year after publication of the Rule 

(i.e., October 20, 2011) and are then 

phased in over 10 years

Prompt corrective action

c 

The rulemaking establishes a prompt corrective action (PCA) 

regime for corporates.

The corporate PCA system assigns corporates to one of five 

capital categories ranging from “well capitalized” to “critically 

undercapitalized.” A corporate becomes subject to more severe 

supervisory actions and restrictions on its activities the lower it 

falls on the scale of capital categories.

d

Prior to this, corporates were exempt from PCA. 

The final rule was published on

October 20, 2010, and effective as of 

October 20, 2011.

Investments, credit risk, and asset-liability management

Credit management

e

Corporates are required to review all national recognized 

statistical rating organization (NRSRO) ratings. 

f The final rule was published on 

October 20, 2010, and effective as of 

January 18, 2011.

Corporates are prohibited from investing in collateralized debt 

obligations, net interest margin securities, private-label MBS, or 

a security subordinated to any other securities in the issuance.

A corporate holding investments that violate the new 

prohibitions once they took effect must submit an investment 

action plan to NCUA under 12 C.F.R. §704.10. 

The final rule was published on 

October 20, 2010, and effective as of 

January 18, 2011.

Corporate single obligor limits have been tightened to 25 

percent of capital, except for several exemptions. 

The final rule was published on 

October 20, 2010, and effective as of 

January 18, 2011.

Asset and liability 

management

Imposes sector concentration limits on corporate investments. g The final rule was published on 

October 20, 2010, and effective as of 

January 18, 2011.

Corporate governanceh

Board representationi All corporate board members are required to hold a chief 

executive officer, chief financial officer, or chief operating officer 

or treasurer/manager position at their member credit union or 

another member entity. 

The final rule was published on 

October 20, 2010, and effective as of 

February 18, 2011.

Individuals are prohibited from serving on the board of more 

than one corporate.

The final rule was published on 

October 20, 2010, and effective as of 

January 18, 2011.

A majority of a corporate board’s members are required to be 

representatives of credit unions. 

The final rule was published on 

October 20, 2010, and will be effective 

as of October 21, 2013. 
Appendix IV: Summary of NCUA’s 2010 

Corporate Rule

Page 66 GAO-12-247 National Credit Union Administration

Issue Corporate rule Implementation status 

Board and executive 

compensation

Annual disclosure of amounts paid by corporates to its most 

highly compensated employees. j The final rule was published on 

October 20, 2010, and effective as of 

January 18, 2011.

“Golden parachutes,” are prohibited as defined as payments 

made to an “institution affiliated party” that are contingent on 

termination of that person’s employment and received when the 

corporate making payment is troubled, undercapitalized, or 

insolvent.

The final rule was published on 

October 20, 2010, and effective as of 

January 18, 2011.

k 

Corporates are prohibited from paying or reimbursing an 

institution affiliated party’s legal or related expenses incurred in 

proceedings instituted by NCUA or a state regulator when that 

party is ultimately found liable.

The final rule was published on 

October 20, 2010, and effective as of 

January 18, 2011.

Certain highly paid corporate executives are required to 

disclose compensation they receive from a corporate CUSO.l The final rule was published as of April 29, 2011, and effective as of May 31, 

2011.

 

Corporate board votes The names of board members attending meetings are required 

to be recorded in the minutes along with the names of board 

members who voted “no” or abstained on any votes that were 

taken.m

The final rule was published on April 

29, 2011, and effective as of May 31, 

2011.

 

Corporate credit union service organizations (CUSOs)

CUSO issues Corporate CUSO activities are restricted to activities 

preapproved by NCUA.n

Once granted, approval for an activity can only be withdrawn 

through a rulemaking.

The new rule grants approval for 

brokerage services and investment advisory services, and 

provides that NCUA may approve additional categories of 

activities and publish such approval on the agency website.

The final rule was published on 

October 20, 2010, and effective as of 

January 18, 2011. However, CUSOs 

were given until April 18, 2011, to 

come into compliance with the activity 

restrictions. 

Corporates are required to divest from a CUSO that engages in 

unapproved activities. 

The final rule was published and 

effective as of October 20, 2010, but, 

subject to certain conditions, corporate 

credit unions have until October 20, 

2011, to divest from a noncomplying 

CUSO.o

The new rule also requires CUSOs to permit their corporates as 

well as NCUA access to their books, records, personnel, 

equipment, and facilities.

The final rule was published on April 

29, 2011, and effective as of May 31, 

2011. 

Corporate operations

Liquidityp Corporates are restricted from borrowing the lower of 10 times 

its capital or 50 percent of its capital and shares (excluding 

shares representing member reverse repurchase agreements). 

The final rule was published on 

October 20, 2010, and effective as of 

January 18, 2011.q

 

Corporate’s secured borrowing is restricted to 30 days and for 

liquidity purposes. Securitized borrowing for nonliquidity 

purposes is limited to well-capitalized corporates and cannot 

exceed an amount equal to the corporate’s excess capital.

The final rule was published on 

October 20, 2010, and effective as of 

January 18, 2011.
Appendix IV: Summary of NCUA’s 2010 

Corporate Rule

Page 67 GAO-12-247 National Credit Union Administration

Issue Corporate rule Implementation status 

Auditing and reporting 

requirements

Corporates are required to implement certain audit, reporting, 

and audit committee practices derived from the Federal Deposit 

Insurance Act, the Sarbanes-Oxley Act, and Federal Deposit 

Insurance Corporation regulations.

The final rule was published on April 

29, 2011, and effective dates as of 

January 1, 2012, for some of these 

requirements but others are delayed 

until 2013 and 2014.

r

Enterprise risk 

management

s

Corporates are required to establish risk management policies 

and enterprise-wide risk management committees that included 

at least one independent risk management expert.

The final rule was published on April 

29, 2011, and effective April 29, 2013. t

Fees This rule authorizes corporates to charge their members 

reasonable one-time or periodic membership fees.

The rule was published on April 29, 

2011, and effective May 31, 2011. u

Source: GAO summary of NCUA’s corporate rule.

a

12 C.F.R. §704.3. 

b

Basel I is a set of international banking regulations put forth by the Basel Committee on Bank 

Supervision, which set out the minimum capital requirements of financial institutions with the goal of 

minimizing credit risk. Basel 1 requires banks to maintain a minimum amount (8 percent) of capital 

based on a percent of risk-weighted assets. 

c

See the preamble to the final rule, at 75 Fed. Reg. 64789-64792 and 64794-64802, for background 

on the new capital standards. 

d

12 C.F.R. §704.4. The Corporate Rule also establishes procedures to govern corporate PCA-related 

determinations, codified at 12 C.F.R. §747.3001 through 3006. See the preamble at 75 Fed. Reg. 

64792 and 64802-804 for background on the PCA provisions. In addition, the PCA system for 

corporates is similar in many (but not all) respects to the PCA system applicable to federally regulated 

and insured banking institutions as well as the PCA system applicable to natural person credit unions 

under section 207 of the Credit Union Act, 12 U.S.C. §1790d. 

e

75 Fed. Reg. 64792 

f

12 C.F.R. §704.6. 

g

12 C.F.R. §704.8. 

h

For background, see 75 Fed. Reg. at 64793-94, 64811-17. 

i

12 C.F.R. §704.14. 

j

Amends 12 C.F.R. §704.19. 

k

Amends 12 C.F.R. §704.20. 

l

The preamble to the final rule, 76 Fed. Reg. at 23862, gives background on this provision. This rule 

amends 12 C.F.R. §§704.11 and 704.19. 

mSee 76 Fed. Reg. at 23862-63 for background. Amended 12 C.F.R. §704.13. 

n

Amends 12 C.F.R. §704.11. 

o

For background on the CUSO provisions, see 75 Fed. Reg. 64794, 647811-13. 

p

Amended 12 C.F.R. §704.9. 

q

For background, see 75 Fed. Reg. at 64793, 647810-11. 

r

Amended 12 C.F.R. §704.15. 

s

For background, see 76 Fed. Reg. at 23863-64. 

t

Added a new section to the Corporate Rule, 12 C.F.R. §704.21. 

u

For background, see 76 Fed. Reg. at 23865-66. The rulemaking added a new section, 12 C.F.R. 

§704.22. 
Appendix V: Comments from the National 

Credit Union Administration

Page 68 GAO-12-247 National Credit Union Administration

Appendix V: Comments from the National 

Credit Union Administration
Appendix V: Comments from the National 

Credit Union Administration

Page 69 GAO-12-247 National Credit Union Administration
Appendix V: Comments from the National 

Credit Union Administration

Page 70 GAO-12-247 National Credit Union Administration
Appendix V: Comments from the National 

Credit Union Administration

Page 71 GAO-12-247 National Credit Union Administration
Appendix V: Comments from the National 

Credit Union Administration

Page 72 GAO-12-247 National Credit Union Administration
Appendix VI: GAO Contact and Staff 

Acknowledgments

Page 73 GAO-12-247 National Credit Union Administration

A. Nicole Clowers, (202) 512-8678 or clowersa@gao.gov

In addition to the contacts named above, Debra R. Johnson, Assistant 

Director; Emily R. Chalmers; Gary P. Chupka; Nima Patel Edwards; 

Debra Hoffman; Barry A. Kirby; Colleen A. Moffatt; Timothy C. Mooney; 

Robert A. Rieke; and Gregory J. Ziombra made significant contributions 

to this report. Other contributors included Pamela R. Davidson, Michael 

E. Hoffman, Grant M. Mallie, Jessica M. Sandler, and Henry Wray.

Appendix VI: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments

(250609)
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