An Unguarded Backdoor to CU Membership?

To circumvent field of membership restrictions, more and more credit unions are making use of associations.

You make a donation to or join an association and this makes you eligible for credit union membership.

While some credit unions will simply list the various associations among all membership groups and state if you are a member you can join, other credit unions are overtly steering individuals who would otherwise not qualify for membership to an association.

For example, NuVision FCU writes on its website:

"If you do not qualify based on the above criteria, no problem! You can become a member of the American Consumer Council (Council) as a path to NuVision membership.

Thanks to a cooperative agreement between NuVision and the Council, members can join NuVision as well as having access to materials that will aid in improving their financial planning efforts.

We can sign you up for membership in the Council, at no initial cost to you, at the same time you become a NuVision member."

NuVision further writes that you don't have to renew your membership in the Council to retain your membership in the credit union because of its "once a member, always a member" policy.

It seems to me that if a credit union tells individuals that you don't have to renew, then the credit union is making a mockery of this associational membership.

Below is a table (click to enlarge) of 37 credit unions with at least $1 billion in assets that are using membership in associations to allow people to qualify for credit union services.

For some of these credit unions, it appears that the ends justify the means. Their goal is to grow membership and they don't care how.

What is worse is that credit union regulators seem to be partners in this duplicitous behavior on the part of credit unions.

NCUA does not appear to be enforcing its own field of membership manual were it says that "[i]ndividuals ... who only make donations to the association are not eligible to join the credit union."

In closing, a U.S. Federal Court wrote in Texas Bankers Association v. NCUA and Communicators FCU that Congress never intended for the association language "to be the unguarded backdoor to credit union membership."

Credit Unions May Expel Members

The Federal Credit Union Act permits federal credit unions to adopt a policy to expel members for nonparticipation in the affairs of credit unions. Usually, members are expelled from credit unions because they caused a loss to the credit union.

You’re probably thinking what’s the big deal.

To expel a member, credit unions have to hold special meetings, where two-thirds of the members present must vote for the expulsion. The special meeting is usually announced in a newsletter or on the credit union's website.

For example, Towers FCU on its website announced that a special meeting will be held immediately after its annual meeting May 24.

Some credit unions actually publish the members' names to be expelled.

For example, an online May/June 2010 newsletter of $2.6 billion Visions FCU (NY) contained a list of members that had caused a loss of $250 or more to the credit union, since January 1, 1994. These members were going to be expelled in special meeting on June 16. (see images below)

Anybody can view the list whether you belong to the credit union or not.

Consumers need to know this is one of the downsides associated with joining a credit union. If you cause a loss to the credit union, the credit union may publicly shame you.

So before joining a credit union, you should ask to see the credit union by-laws on whether the credit union has a policy about expulsion and whether the credit union publishes the names of people to be expelled.

NCUA's Efforts to Preserve Liquidity in Corporate CU System Worked

In general, I've been an outspoken critic of NCUA and its policies; but today, I would like to point out a policy that worked.

The Inspector General Report on the failure of Members United shows that NCUA's policies to stop the liquidity drain in the corporate credit union system worked and these policies partially reversed the outflow of funds.

"The Temporary Corporate Credit Union Liquidity Guarantee Program stabilized Members United's remaining unsecured borrowing sources. The Temporary Corporate Credit Union Share Guarantee Program restored some confidence in Members United when comparing the 42 percent decline in member shares between March and December 2008, with the 24 percent increase in 2009 and the 3 percent increase though July 2010."

Voluntary Prepaid Assessments Should Be Transferable

I have a suggestion that I believe would improve NCUA's proposed voluntary prepaid assessment program for the Temporary Corporate Credit Union Stabilization Fund -- allow federally-insured credit unions to transfer the prepaid assessments among themselves.

This prepaid assessment is just like any asset and credit unions should be able to buy or sell prepaid assessments if there is an economic reason to do so.

Additionally, allowing credit unions to transfer their prepaid assessments among themselves would be a useful liquidity management tool for some credit unions, particularly if there is significant variation between what they prepaid and what they will be actually assessed.

If credit unions are looking for precedent, they only need to look at what FDIC did in 2009. The FDIC allowed for the transferability of bank's prepaid assessments.

Voluntary Prepayment Program Proposed

NCUA has floated a proposal that would permit credit unions to voluntarily prepay future assessments to the Temporary Corporate Credit Union Stabilization Fund (Fund). While NCUA does not have the legal authority to mandate prepaid assessments, it does have authority to collect assessments in advance on a voluntary basis.

What is motivating NCUA to propose this voluntary program is the large upfront cash outlays associated with corporate credit union resolutions. NCUA is projecting that the Fund's cash outlays will total $8.44 billion through October 2012. NCUA is estimating that $5.5 billion of the cash outlays would be met through borrowings from Treasury. This still leaves a shortfall of $2.94 billion.

Under the terms and conditions of the proposed voluntary program, the minimum prepayment by a credit union would be $10,000 and the maximum voluntary contribution would be 36 basis points of insured deposits as of March 31, 2011. According to NCUA's analysis, roughly 6,023 credit unions would be eligible to participate in the program. Credit unions with less than $2.8 million in assets would not be able to participate because the maximum voluntary prepayment would be below the $10,000 minimum threshold.

This voluntary prepaid assessment would be a non-interest earning asset; but will receive a low-risk weighting for risk-based capital purposes. [Note: FDIC assigned a risk weighting of zero for prepaid assessments by FDIC-insured banks.]

Additionally, NCUA would need at least $300 million in aggregate prepaid assessments before the agency will go forward with the program. If all eligible credit unions participate, NCUA projects that it will raise about $2.8 billion in prepaid assessments.

The voluntary prepaid assessments would apply to assessments beginning in 2013, not to assessments in 2011 and 2012. NCUA would deduct the excess amount from Stabilization Fund assessments in subsequent years until the balance of the credit union‘s advance account is reduced to zero. If a credit union has any leftover prepaid assessments when the life of the Fund ends in June 2021, the balance will be returned to the credit union at that time.

Credit unions that participate in the program will record assessment expenses annually as they are made by the NCUA Board.

Read the proposal.

Problem Credit Unions: Numbers Up; Assets and Shares Down in April

NCUA reported that the number of problem credit unions increased by 8 in April to 374 credit unions – tying the second most during this current credit cycle. In October 2010, there were 378 problem credit unions. A problem credit union is defined as having a CAMEL code of 4 or 5.

Credit unions with less than $100 million in assets accounted for the increase in the number of problem credit unions.

However, assets and shares (deposits) in problem credit union fell in April. According to NCUA, assets and shares in problem credit unions fell by $400 million in April to $41.6 billion and $36.9 billion, respectively. NCUA reported that 4.87 percent of all insured shares and 4.55 percent of industry assets were in problem credit unions.

Hmong American FCU Liquidated

The National Credit Union Administration (NCUA) liquidated Hmong American Federal Credit Union of St. Paul, Minnesota. NCUA made the decision to close Hmong American Federal Credit Union and discontinue its operation after determining the credit union is insolvent and has no prospects for restoring viable operations.

The credit union was placed into conservatorship on May 4 by NCUA.

As of March 2011, the credit union's financial report showed that it was very well capitalized with net worth ratio of almost 16 percent and a delinquent loan ratio of .45 percent.

Read press release.

Charter Choice Strips Members of Their Equity Is A Red Herring

The Wisconsin Legislature’s Joint Finance Committee voted last week to include language in the state budget bill that would make it easier for a credit union to switch to a mutual savings bank charter, if certain requirements are met.

The Wisconsin Credit Union League reacted by stating that the legislative language would strip credit union members of their equity in the cooperative financial institutions they own.

Excuse me, what ownership equity is being stripped?

Is there an account at Wisconsin credit unions that provides detailed information about the amount of equity that each credit union member owns in his or her credit union?

Can Wisconsin credit union members redeem their equity when they leave the credit union?

Can they sell their equity interest in the credit union to others?

The answer is no to all of these questions.

The only way members are going to see this equity they own in a credit union is if the credit union voluntarily liquidates and is solvent.

However, this is a rare event.

According to NCUA, there were ten voluntary liquidations of credit unions between the beginning of 2007 and the end of 2009.

The Wisconsin Credit Union League is trying to scare credit union members into believing that they will lose their equity interest if a credit union becomes a mutual savings bank.

But this is not the case. Switching to a mutual savings bank will not deprive credit union members of their equity interest.

This argument that members will lose their equity they own in a credit union is a red herring.

I'm Not a FAN of $10 Donation to Join A Credit Union

A Washington, D.C. area credit union is using an association to circumvent its field of membership limitations.

Northwest Federal Credit Union of Herndon, Virginia states on its website: "If you find you are not eligible to join NWFCU via the relationships defined above, we can approve your membership with enrollment in the Financial Awareness Network (FAN), an organization dedicated to promoting and supporting financial education."

Financial Awareness Network membership is open to anyone ages 13 and older. To join, you need to pay a one time $10 membership fee. This immediately qualifies you for credit union membership.

FAN was established on March 3, 2010 with the stated goal of promoting and supporting financial education, which is laudable.

But when I looked into FAN, I found that three of the six directors are either employees of Northwest Federal Credit Union or employed by the credit union's foundation, NWFCU Foundation. The three directors are Barbara d'Andrade (Outreach Manager for Northwest FCU), Phyllis Ziakas (VP of HR & OD at Northwest FCU), and Linda Rogus (Executive Director of NWFCU Foundation).

Additionally, events conducted by FAN were in conjunction with the NWFCU Foundation.

This leads me to believe that this association is an extension of the credit union and is meant to easily qualify the public for membership.

The reality is for a $10 donation, you can belong to Northwest FCU. The credit union's common bond is anyone living in the United States, which makes a mockery of the concept of common bond.

The Internal Revenue Service should revoke Northwest FCU's tax exemption, as Northwest FCU is a credit union in name only.

CUs with the Most Delinquent Business Loans in 2010

The following table (click to enlarge) provides a ranking of the credit unions with the largest dollar volume of delinquent member business loans.

At the end of 2010, America First reported the largest dollar volume of delinquent (60 days or more past due) member business loans at $122 million. Approximately 31 percent of its member business loans were delinquent and of those delinquent member business loans almost two-thirds were over 12 months past due.

Other credit unions with sizeable amount of delinquent member business loans (over $30 million) include Evangelical Christian Credit Union, Desert Schools FCU, Kinecta, Texans CU, Space Coast CU, and Telesis Community CU.

IG Releases Material Loss Report on Members United

NCUA's Office of the Inspector General (IG) released its material loss report on the failure of Members United Corporate FCU. NCUA has estimated that as of February 28, 2011 the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) had recorded a loss of $400.1 million for Members United.

The IG report found that management and the Board provided inadequate oversight, which resulted in Members United purchasing significant holdings of private-label mortgage-backed securities (MBS), many of which were later downgraded to subprime and Alt-A. Specifically, Members United management:

1. Did not establish timely investment concentration limits;

2. Relied too heavily on ratings assigned to the securities by Ratings Agencies to monitor the amount of credit risk in the investment portfolio;

3. Relied on monoline insurers to provide credit enhancement to a portion of the non-agency mortgage-backed securities in the portfolio;

4. Did not properly identify and monitor credit risk exposure in the underlying mortgage loan collateral; and

5. Relied on the corporate credit union structure to provide financial strength and liquidity. Members United did not adequately evaluate the risk of investing with and having its only line of credit with U.S. Central.

As a result of the dislocation in the credit market, the actions of management and the credit union's Board had serious consequences for the Members United. The corporate credit union experienced a deterioration in the market value of its MBS portfolio. The decline in the market value of its investments limited its ability to sell securities hampering its ability to meet the liquidity needs of member credit unions. Public confidence in Members United debt eroded due to ratings downgrades, which impeded its ability to issue debt to meet its liquidity needs.

The IG report also notes that NCUA failed to adequately assess or timely identify key risks related to Members United's investment portfolio.

The first time that NCUA examiners commented on Members United exposure to subprime and Alt-A MBS was in August 2007. At that time, Members United held almost $4.9 billion in MBS, of which 67 percent was subprime or Alt-A. However, examiners did not raise supervisory concerns or issue a document of resolution.

In May 2008, NCUA examiners expressed concerns regarding the corporate credit union's significant concentration in mortgage-backed securities and issued a document of resolution about the appropriateness of the existing concentration limits.

The IG report states that NCUA also placed too much reliance on credit ratings and failed to recognize the lack of diversification in Members United's investment portfolio.

Read the IG Report.

NCUA Presses Case for CUSO Exam Authority

NCUA may be a day late and a dollar short in pressing for the authority to regulate credit union service organizations (CUSOs).

Speaking at the National Association of Credit Union Service Organizations annual convention in Las Vegas, NCUA Board member Gigi Hyland argued that NCUA needed the statutory authority to examine credit union service organizations (CUSOs).

Ms. Hyland asserted that if NCUA had this authority it could have stemmed the losses associated with lending and operational troubles arising from credit unions relationships with their CUSOs.

Credit Union Times quoted Ms. Hyland regarding losses at Texans CU arising from its business lending CUSO as saying: "We could see things were going wrong but we had to go through the side door and through the maze to get there. By the time we got there, it was too late."

Unfortunately, I'm afraid that NCUA is seeking to close the barn door after the horses have already left the barn.

The Government Accountability Office recommended in 2003 that the agency seek the same legislative authority as the other banking regulators to examine third party vendors.

In 2004, NCUA Chairman Johnson requested that Congress grant the agency the authority to examine third-party vendors and even provided draft legislative language; but Congress never acted on this request.

The agency should have never approved allowing CUSOs to originate business loans in 2003 when it knew it did not have the authority to directly examine business lending CUSOs.

It is very troubling that NCUA during the last decade expanded the range of activities that could be offered by CUSOs, especially given the fact that the agency could not examine these entities.

Domino Effect of the Proposed Debit Card Rule

Check out a new TV ad warning about the consequences of the Federal Reserve’s proposed debit card rule.

“If Congress doesn’t act now, community banks and credit unions will be squeezed, and consumers may have to pay more for their debit cards,” the ad’s spokesperson says.

Fed's Debit Proposal Will Adversely Impact Smaller Credit Unions

NCUA released a letter from NCUA Chairman Debbie Matz to Federal Reserve Chairman Ben Bernanke on the impact of the Fed's proposed debit interchange rule on credit unions.

Based on data collected in March and analysis on the direct cost and income from debit card transactions for credit unions of different sizes, NCUA requested the Federal Reserve modify the proposed rule to provide meaningful exemptions for small card issuers related to network exclusivity and merchant routing.

The proposed Federal Reserve rule would cap debit intechange fees to 12 cents per transaction for institutions with $10 billion or more in assets. NCUA contends that the prohibitions on network exclusivity and merchant routing would significantly disadvantage smaller institutions.

NCUA reviewed data from 296 credit unions. NCUA found that the direct cost per debit transaction does not fall below the 12 cents proposed by the rule until a credit union reached $100 million to $500 million in assets size. The median direct cost per transaction was 31 cents, 21 cents, and 19 cents for credit unions under $10 million in assets, between $10 million and $50 million, and between $50 million and $100 million in assets, respectively.

Additionally, more than one-third of the credit unions currently report losing money on debit interchange programs before the Fed's rule becomes effective. This would likely increase if the 12 cent cap goes into effect.

The Credit Union National Association stated that it believed the cost estimates for large credit unions' debit transactions were "incredibly understated" by NCUA.

Read the letter.

Two Credit Unions Placed into Conservatorship

NCUA`announced that Hmong American Federal Credit Union of St. Paul, Minnesota, and Valued Members Federal Credit Union of Jackson, Mississippi, were placed into conservatorship.

Hmong American Federal Credit Union currently has 716 members and assets of $2.7 million. Its financial data does not provide an explanation as to why the credit union was conserved. Hmong American reported a small profit at the end of the first quarter of 2011. It had a net worth ratio of almost 16 percent and delinquency rate of 0.45 percent.

On the other hand, Valued Members Federal Credit Union saw a sharp decline in its financial performance. During the last two quarters, the $9 million credit union reported a loss of almost $1.45 million. As a result of the losses, Valued Members FCU became critically undercapitalized with a net worth ratio of 0.17 percent. The credit union reported that 6.43 percent of its loans were 60 days or more past due and net charge-off rate was 6.45 percent at the end of the first quarter of 2011.

Read Hmong press release.

Read Valued Members FCU press release.

Once a Member, Always a Member: Not Necessarily?

The Washington Department of Financial Institutions' Division of Credit Unions issued an interpretative letter to Washington State Employees Credit Union on whether a former credit union member can be re-instated as a member under the "once a member, always a member" principle, although the person no longer meets the field of membership requirements.

The interpretative letter states that "the principle does not provide re-instatement for an individual after he terminated his membership with the credit union and no longer meets the field of membership requirements."

However, the letter does point out that if the account closing was solely a mistake of the credit union, the credit union can re-instate a former member as long as the credit union had once a member, always a member policy in place at the time the accounts were closed. The credit union will need to document the nature of the mistake.

This interpretative letter is consistent with a legal opinion letter issued by NCUA in 1991.

Read the Washington DFI letter.

Read NCUA's 1991 letter.