Largest CU Failure in California Tied to B&C Lending

A new regulatory report says the collapse of Cal State 9 Credit Union of Concord, Calif., was caused by the lender's ill-fated foray into subprime residential lending, which eventually comprised more than 92% of its loans. "Specifically, management committed an exorbitant percentage of the credit union's assets in an indirect 'Home Equity Line of Credit' program without adequate controls in place to oversee and manage the risks in the program's operations," according to a "material loss review" conducted by the National Credit Union Administration's Office of Inspector General. Virtually all of the indirect HELOCs were of the subprime variety that included loans with stated income, high loan-to-value ratios, and negative amortization second liens, most of which were made to borrowers with low credit scores. More troubling, according to the report, was that the risky loan program even jeopardized at least three nearby credit unions and one bank with the sale of $190 million in non-recourse loan participations to those four institutions. The report on the collapse of the $440 million asset Cal State 9-the biggest credit union failure ever in California-comes as the Senate Subcommittee on Permanent Investigations is planning additional hearings on the collapse of Washington Mutual, the biggest depository failure ever which was also caused by subprime lending. Like Washington Mutual, Cal State 9, failed in 2008. Its demise will cost the NCUA insurance fund $206 million, making it the costliest credit union failure to date.