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Melrose's imminent failure may have dragged down NCUA's crisis-fund payouts

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Melrose's imminent failure may have dragged down NCUA's crisis-fund payouts

The National Credit Union Administration last week announced its largest-ever liquidation of a retail credit union. That looming action may have played a role in the amount of money the regulator rebated to credit unions in July, experts said.

The NCUA on Aug. 31 liquidated $1.1 billion-in-assets Melrose CU after determining the Briarwood, N.Y.-based credit union was insolvent and unlikely to recover. In February 2017, the New York State Department of Financial Services placed Melrose CU into conservatorship and named the NCUA as conservator.

Melrose CU's members and shares, as well as some loans and other assets, were assumed by Hauppauge, N.Y.-based Teachers FCU, which serves 300,541 members and has almost $6.1 billion in assets. Securing a credit union to take that action lessened whatever loss the share insurance fund will have to absorb, former NCUA Chairman Michael Fryzel said in an interview. The NCUA has not yet announced what that loss will be.

Fryzel said the loans that the NCUA retained are likely ones Teachers believed it would have difficulty collecting. The NCUA's asset management division will continue to review and work those loans in an effort to collect as much as possible before they are written off. The share insurance fund will likely be able to absorb the loss without any additional assessment to credit unions, Fryzel said.

While Melrose is the largest liquidation of a retail, or "natural person," credit union, the industry has had to absorb much larger failures by corporate credit unions, which provide funds to other credit unions. The faltering of corporate credit unions during the financial crisis led the NCUA to establish a temporary stabilization fund, for which credit union premiums helped cover the bill. Credit unions across the country received a rebate for what they chipped in, but Melrose's failure may have affected what the NCUA paid out.

The NCUA returned $735.7 million from its share insurance fund to more than 5,700 eligible credit unions in July. Fryzel said the NCUA board likely retained in the share insurance fund what it believes was enough to cover any loss from the Melrose failure.

"My guess, and it's only a guess, is that the NCUA took these potential loses into account a while ago and they were considered as it decided what rebates, et cetera, were given to credit unions," William Mellin, president and CEO of the New York Credit Union Association, said in an interview.

Melrose had a heavy concentration of taxi medallion loans and was working to diversify its portfolio. Mellin said he assumes that the agency's decision to retain some loans was part of the negations that took place as it looked for a merger partner. "It's not the first time the agency retained loans," Mellin said.

Credit union consultant and former NCUA Chairman Dennis Dollar said in an interview that it is difficult to find another credit union large enough to take on all the troubled loans and potential losses of an institution the size of Melrose. In that case, the share insurance fund often has to cover some or most of the potential losses in the portfolio in order to facilitate another credit union being able to take the members.

"It is part of being in the deposit insurance business for the NCUA, and not always an easy part," Dollar said.

Melrose is the fifth federally insured credit union liquidation in 2018, following Chicago-based St. Elizabeth’s CU; Wayne, N.J.-based First Jersey CU; Louisville, Ky.-based Louisville Metro Police Officers CU; and Detroit-based Greater Christ Baptist CU. Additionally, Chicago-based Beverly Bus Garage FCU and Warren, Mich.-based Ukrainian Future CU were placed into conservatorship. Ukrainian Future later merged into Chicago-based Selfreliance Ukrainian American FCU.