Concentration Risk

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CU officials and management have a fiduciary responsibility to identify, measure, monitor, and control concentration risk.  Concentration risk must be managed in conjunction with credit, interest rate and liquidity risks; as a negative event in any category may have significant consequences on the other areas, as well as strategic and reputation risks.

Concentration risk has increased in importance during the recent economic recession.  Poor risk management of residential and commercial mortgage loan concentrations, in particular, is having an adverse effect on credit unions nationwide; resulting in significant loan losses, earnings deterioration, capital depletion, and increased credit union failures.

The board of directors should establish a policy addressing its philosophy on concentration risk, limits commensurate with net worth levels, and the rationale as to how the limits fit into the credit union’s overall strategic plan.  Take a global perspective when developing the policy, including identifying outside forces (such as economic or housing price uncertainty) which will affect the ability to manage concentration risk.

The parameters set by the board should be specific to each portfolio and should include limits on loan types, share types, third party relationship exposure, etc.  The risk limits should correlate to the overall growth objectives, financial targets, and net worth plan.  The risk limits set forth in the concentration risk policy should be closely linked to those codified in related policies, including, but not limited to, real estate loan, member business loan, loan participation, asset/liability management (ALM), investment and liquidity policies.  Any Concentration exceeding 100 percent of net worth must be monitored carefully, and the board of directors should document an adequate rationale for undertaking that level of risk. More

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SAFE Act registration

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The NCUA expects the initial period for federal registration of residential mortgage loan originators under the SAFE Act to begin around Jan. 31 and end around July 29.

The SAFE Act, or Secure and Fair Enforcement for Mortgage Licensing Act of 2008
– requires all mortgage loan originators to register on the Nationwide Mortgage Licensing System and Registry. The registry website is up now and provides information about the registration process, including what credit unions can do prior to the registration period to facilitate the process.

More Regulation Forthcoming

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The recent Frank-Dodd bill signed into law contains 35 different rule-making provisions applicable to credit unions. In NY State Governor Patterson signed legislation last December amendments relating to foreclosure actions on home mortgage loans. The Credit Card Act, Reg Z, the Safe Act etc etc. The result is higher costs of doing business all around without adding value to our existing member relationship.

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