Representative Issa's Letter to NCUA IG

Below is the letter sent by Rep. Issa to NCUA's Inspector General regarding the hiring of two outside law firms by NCUA under a contingency fee arrangement.

NCUA Closed US Central Bridge FCU

The National Credit Union Administration (NCUA) closed U.S. Central Bridge Corporate Federal Credit Union (U.S. Central Bridge).

This means that U.S. Central Bridge redeemed its CLF stock and the agent group is now no longer providing CLF coverage for member natural person credit unions. As a result, credit unions and their corporates no longer have the CLF as a source of backup liquidity, unless they join the CLF directly.

Read the press release.

John Worth's Response Regarding Future Bank Versus CU Assessments

Two months ago, I wrote a blog post regarding NCUA's Chief Economist John Worth's comparison of future FDIC assessments compared to TCCUSF assessments.

I wrote John Worth asking him what assumptions he used. Here is what he wrote:

"All the FDIC information is drawn from the recent Assessments final rule.

o The rates are the low, midpoint, and upper bound of the ranges in Risk Category I (lowest risk) initial base assessment rate. For example for 2013 that would be 5,7,and 9 from Table 3 in the rule. Of course, some CUs might by in higher risk categories, so this understates the actual assessment burden.

o I use the rates in table 3 until 2018 (assuming DIF < 1.15) and rates in Table 4 thereafter. The rule notes the expectation that DIF will reach 1.15 in 2018. o The assessment rates for Risk Category I reflect the goal of having large and complex institutions bear the burden of moving the DIF from 1.15 to 1.35. Thus the large and highly complex institutions assessment rate. So that concern is fully addressed. o Again mirroring the rule – I didn’t make a downward adjustment for TLGP – that might move the DIF to 1.15 somewhat sooner, so could be a small overstatement, but won’t materially impact the results. During the most recent assessment cycle we forecast no NCUSIF assessment for the coming year. Future year forecasts are highly speculative. The key distinction is that the NCUSIF is near its statutory max, while the DIF assessment are required to bring the DIF back to required minimum. Comparing corporate and DIF assessment provides a reasonable basis for comparison. If there are downturns in economic conditions both the DIF and NCUSIF would perform worse than expected, potentially requiring higher assessments in either case. Finally, as you know over the past 20+ years there have only been a handful of NCUSIF assessments and there have been several dividend payments. Dividends will reduce corporate assessments, but are not factored into the projected assessment levels."

NCUA Hired Law Firms Could Experience Huge Payday

The Wall Street Journal (paid subscription) is reporting that law firms hired by the National Credit Union Administration (NCUA) may experience a huge payday.

NCUA last year hired two law firms, Kellogg Huber Hansen Todd Evans & Figel PLLC and Korein Tillery LLC, on contingency arrangement to recover losses incurred by failed corporate credit unions from their purchases of mortgage-backed securities from investment banks prior to the 2008 financial crisis.

"The law firms were hired under what is known as a contingency arrangement, which would give them one-fourth of any judgment or settlement, according to congressional investigators who reviewed the contracts. It could mean a payday of hundreds of millions of dollars for the firms."

President George W. Bush signed an executive order in 2007, titled "Protecting American Taxpayers from Payment of Contingency Fees," prohibiting federal agencies from entering into these arrangements with outside attorneys. The order was left unchanged by President Barack Obama.

However, the agency claims that it doesn't have to follow the executive order "because it is an independent agency acting as a liquidator of failed credit unions."

House Oversight Committee Chairman Darrell Issa (R., Calif.) requested that NCUA's Inspector General investigate whether the executive order applies to the agency.

Representative Issa said the high attorneys' fees hurt customers because it reduces the amount of any funds recovered from the investment banks, which would be used to replenish the Temporary Corporate Credit Union Stabilization Fund, created by Congress in 2009 to pay for the losses of failed corporate credit unions.

Credit Union Journal (paid subscription) is reporting that of the $170 million in out-of-court settlements NCUA has recovered to date from Wall Street banks, "only $127.25 million flowed into the estates of the failed credit unions.”

The Wall Street Journal notes that NCUA acknowledged that the selection process of the law firms was not public.

A Justice Department spokeswoman commented for the Wall Street Journal article that the Justice Department was "unaware of any other federal agency that has outside firms on contingency fee contracts."

NuVision Abandons Underserved Community

NuVision's tagline is "Enjoy Life, Bank Easier." For the residents of an underserved East Los Angeles community, this just became a tad more difficult.

NuVision Federal Credit Union announced its intention to close its East Los Angeles branch on Mednick Avenue as of October 31.

The article points out that more than a quarter of the households in this community have incomes at or beneath the poverty level.

NuVision concluded that the branch, which opened 5-1/2 years ago, “is not performing at the expected level for a branch of its size and that has been open for this length of time.” In other words, it was not turning a profit.

The article also noted that the credit union just opened a branch in Costa Mesa. According to geocoding software on the FFIEC's website, the median family income of the census tract of the new branch is 114 percent of the core based statistical area's median family income.

Credit unions talk about putting people before profits, this action does not seem to be the case for this credit union.

Read the article.

Gesa CU Pays $1 Million for Naming Rights to Carousel

Gesa Credit Union provided a gift of $1 million to a group that has proposed building a carousel in Kennewick, Washington. In return, the credit union received the naming rights to the carousel for twelve years.

The carousel will be called "The Carousel of Dreams presented by Gesa Credit Union."

While this donation will enhance the stature of the credit union CEO in the local community, I'm not sure this gift is in the best interest of the members of the credit union, especially since the credit union has only paid $3.6 million in dividends (interest) to its members on their savings through the first six mionths of 2012.

After all, the donation of a credit union’s members’ money to an outside party is a highly sensitive issue.

Read the story.

Navy FCU and Nonbank SIFIs

Is Navy Federal Credit Union a nonbank systemically important financial institution (SIFI)?

Dodd-Frank Act requires designated nonbank SIFIs to be supervised by the Board of Governors and subject to prudential standards.

Title I of the Dodd-Frank Act defines a “nonbank financial company” as a domestic or foreign company that is “predominantly engaged in financial activities,” other than bank holding companies and certain other types of firms.

The Financial Stability Oversight Council analyzes three factors -- size, interconnectedness, and substitutability -- when making the determination to designate a nonbank financial company as a SIFI and to subject the entity to Federal Reserve supervision.

I think we can all agree that Navy is predominately engaged in financial activities. Thus, it is a nonbank financial company.

Navy FCU has consolidated assets of $51.6 billion, as of September 2012. This is in excess of $50 billion size threshold used to determine whether a nonbank financial company is a SIFI.

Navy FCU is also systemically important to the National Credit Union Share Insurance Fund (NCUSIF) and the credit union industry. As of July 2012, the NCUSIF had approximately $10.95 billion in equity. This means that Navy FCU is almost 4.5 times larger than the NCUSIF. The failure of Navy FCU could swamp the resources of the NCUSIF and would likely cause federally-insured credit unions to expense their one percent NCUSIF capitalization deposit, as this asset becomes impaired. This impairment charge would cause credit unions to contract lending and other services.

As NCUA Chairman Fryzel testified in 2009 regarding the creation of the Temporary Corporate Credit Union Stabilization Fund to handle the failure of several corporate credit unions, "the current structure of the NCUSIF requires that credit unions take all these insurance expense charges at once, which would result in a contraction of credit union lending and other services...such a large, sudden impact on credit unions’ financial statements could further destabilize consumer confidence."

The same applies to Navy FCU. As Henry Meier, Associate General Counsel for the Credit Union Association of New York, recently wrote on his blog, New York's State of Mind, "the biggest credit unions pose the greatest risk to the most credit unions." So, the failure of Navy FCU would most likely have a destabilizing impact on the $1 trillion credit union industry.

Navy FCU is an important source of credit to civilian Department of Defense employees and enlisted personnel in our Armed Forces. The failure of Navy FCU could potentially affect the availability of credit to this community in the short run. although in the long-run I believe other competitors would fill the void.

Furthermore, the National Credit Union Administration is not designated as a primary financial regulatory agency by Title I of the Dodd-Frank Act. In determining whether a nonbank finacial company should be regulated by the Federal Reserve, the Financial Stability Oversight Council will look at the degree to which the company is already regulated by 1 or more primary financial regulatory agencies.

While I don't know if the Financial Stability Oversigt Council will make the determination that Navy FCU is a nonbank SIFI subject to Federal Reserve supervision, I believe there is enough evidence to support such a finding.

Number of Problem CUs Fell During Q3

The number of problem credit unions, as well as shares (deposits) and assets in problem credit unions fell during the third quarter. A problem credit union is defined as having a CAMEL code of 4 and 5.

Problem credit unions decreased by 17, for a total of 382 as of Sept. 30. Assets and shares were $26.3 billion and $23.5 billion, respectively.

The number of problem credit unions with $500 million or more in assets was unchanged between the end of the second quarter and the end of the third quarter.

There were 7 credit unions with more than $1 billion in assets on the problem list. These 7 credit unions have $11.3 billion in shares.

There were another 4 credit unions with between $500 million and $1 billion in assets on the problem list.

During the quarter, there were 10 fewer problem credit unions with between $100 million and $500 million in assets. As of the end of September, there were 30 credit unions in this cohort.

As a percentage, CAMEL code 4 and 5 credit unions represented 2.8 percent of total insured shares and 2.5 percent of total industry assets.

Year-to-date, there have been 16 credit union failures -- the same number that failed in all of 2011. Seven were assisted mergers, and nine were involuntary liquidations, of which six were assisted purchase and assumptions.

FCUs Are Subject to New York's Mortgage Recording Tax

The Court of Appeals for the State of New York ruled that Hudson Valley FCU is subject to the mortgage recording tax.

Hudson Valley asserted that it was not required to pay the mortgage recording tax (MRT) on mortgage obligations issued to members because (1) the Federal Credit Union Act (FCUA) exempts federal credit unions and their property from state taxation and (2) as instrumentalities of the United States, federal credit unions are immune from state taxation under the Supremacy Clause.

However, the Court wrote "if federal credit union mortgages were intended to be excluded from state MRTs, such immunity would have been plainly stated in the FCUA. Instead, although the FCUA contains an extensive list of exemptions relevant to federal credit unions, it makes no mention of mortgages or loans of any kind."

The Court disagreed with Hudson Valley that the mortgage recording tax "is tantamount to an illegal direct tax on the credit unions themselves."

The Court also concluded that the credit union's assertion that the mortgage recording tax would thwart the efforts of credit unions to serve people of modest means and would have serious financial ramifications for federal credit unions to be unfounded.

The Court opined "contrary to its assertions, there appears little danger that the MRT will drive federal credit unions out of business."

The Court further rejected the federal instrumentality argument.

Read the Decision

Lynn Municipal Employees CU Cited for Unsafe and Unsound Practices

The National Credit Union Administration (NCUA) has entered into a Letter of Understanding and Agreement (LUA) with the Lynn Municipal Employees Credit Union of Lynn, Massachusetts and the Massachusetts Division of Banks.

The LUA requires the credit union to take steps to correct unsafe and unsound practices, including:

• Failure to comply with the requirements of previous enforcement actions.
• Operating without adequate supervision and direction by the credit union’s board of directors over senior management.
• Failure to maintain accurate books and records.
• Failure to establish appropriate internal controls.
• Engaging in unsafe and unsound underwriting standards and practices.

For example, the LUA states that that the credit union will make the following improvements to its loan underwriting process. It will ensure:

(i) credit reports reviewed during the underwriting process contain credit scores;
(ii) loan documentation includes discussion of why members with adverse credit are granted loans;
(iii) debt-to-income ratios are calculated correctly and include all debts from the member’s credit report and loan application; and
(iv) loan notes are completed accurately and ensure proper procedures are in place in the event that loan notes are changed.

Lynn Municipal CU has 398 members and almost $2.2 million in assets.

Read the press release.

Read the enforcement order.

Wirz: NCUA Charter Conversion Rules An Exercise in Government Abuse

Earlier this week, I wrote that NCUA's conversion rules needed to be re-examined.

Adding fuel to the fire is Henry Wirz's scathing commentary on NCUA's role regarding credit union conversions in the October 15th edition of Credit Union Journal (paid subscription).

Henry Wirz, the CEO of SAFE CU in North Highlands, CA, wrote that NCUA's rules governing the charter conversion process are "an exercise in government control." He denounces NCUA for "government overreach and abuse of authority."

Wirz derides NCUA for making "it possible for vigilante justice to rule" the conversion process.

Wirz states that NCUA has made a mockery of the credit union principle of democratic governance.

NCUA's Role in Conversion Process Needs Scrutiny

On December 13, 2005, Representative Jeb Hensarling (R -TX) requested that the Government Accountability Office (GAO) investigate how the National Credit Union Association (NCUA) addresses the conversion of federally insured credit unions to mutual savings banks.

Representative Hensarling requested this review after two Texas credit unions requested redress from a federal court in order to complete their conversions.

For those individuals not familiar with the issue, NCUA had invalidated the conversion votes of the two Texas credit unions over how a single two-sided sheet of paper was folded as part of the mailing to the credit unions' memberships.

Representative Hensarling in his letter posed 3 issues that he wanted the GAO to examine:

• Whether the NCUA’s actions conform with, or exceed, the powers granted by the 1998 Credit Union Membership Authorization Act (CUMAA) which grants the NCUA the authority to oversee the methods and procedures of a conversion vote.

• Whether the NCUA’s rules and guidelines for conducting a conversion are “no more or less restrictive than that applicable to charter conversion by other financial institutions,” as required by law.

• Whether the behavior of the NCUA in overseeing conversions acts as an undue hindrance on the ability of credit unions to convert.

Regrettably, the GAO did not act on his request.

Over the last 7 years, NCUA obstructionism has only become worse, making it very difficult, if not impossible, for a credit union to exercise its right to change charters.

It seems the time is right to examine NCUA's tyrannical role in the conversion process.

Small Credit Unions and Complexity

The NCUA Board is proposing to raise the asset threshold for a small credit union from less than $10 million in assets to less than $30 million in assets. It is also proposing to exclude small credit unions from NCUA’s definition of a complex credit union.

According to the Board, raising the asset threshold from $10 million to $30 million would mean an additional 1,603 federally-insured credit unions (FICUs) would be defined as a small credit union and bring the total number of FICUs covered by the definition to 4,041 or 58 percent of all FICUs.

In addition, 230 out of the 1,603 FICUs would no longer be defined as complex. This means that these 230 FICUs would no longer be subject NCUA's risk-based net worth requirement.

However, there are 409 banks with less than $30 million in assets and they are subject to risk-based capital requirements.

While small credit unions do not pose an undue risk to the National Credit Union Share Insurance Fund (NCUSIF), I believe most people would agree that complex credit unions are engaged in riskier activities than non-complex credit unions. These complex institutions should be expected to hold more capital to offset the risk they pose to the NCUSIF.

Credit Unions Face A Regulatory Tax Because of Their Tax Exemption

Last week, I spoke at the Credit Union Water Cooler Symposium in Nashville, Tennessee.

Below is a video segment from the Conference where I told the audience that the preservation of the credit union tax exemption has imposed a regulatory tax on credit unions. This regulatory tax appears in the form of business lending and capital restrictions.

I know that some within the credit union industry would like to have their cake and eat it too. But that is unlikely to happen.

Material Loss Review on O.U.R. FCU

NCUA's Inspector General released a Material Loss Review on the failure of O.U.R. Federal Credit Union, a low-income credit union in Eugene, Oregon.

According to NCUA, the failure of O.U.R. FCU will result in an estimated loss to the National Credit Union Share Insurance Fund (NCUSIF) of $3.7 million. While the loss did not exceed the $25 million threshold, the Inspector General Office concluded that the circumstances surrounding the loss to the NCUSIF were unusual enough to warrant a review.

The IG report found that several factors contributed to the failure of O.U.R. FCU:

• Suspcious activity;
• Ineffective board oversight;
• Weak controls; and
• Inaccurate accounting.

The IG report was also critical of NCUA examiners noting that the agency missed the opportunity to prevent or reduce the loss to the NCUSIF, including incomplete examinations and ineffective resolution of issues raised during examiniations.

The report notes that the credit union was under a net worth restoration plan since March 2010. In addition, the credit union was issued a Letter of Understanding and Agreement (LUA) in August 2010, which specifically listed concerns and expectations related to record keeping, the debit card program, interest rate risk, and capital levels. Neither regulatory action was made public by NCUA.

Read the IG Report.

FCUs that Recently Opted In to Low Income Designation

On August 7, NCUA notified 1,003 federal credit unions that they were eligible for a low-income designation. The agency gave these credit unions 30 days to opt-in to this designation.

A low-income credit union is not subject to the member business loan cap of 12.25 percent of assets and can issue secondary capital instruments.

NCUA in September stated that 553 federal credit unions had opted in to the designation; but extended the deadline for another 30 days.

ABA filed a Freedom of Information Act request with NCUA to obtain a list of the credit unions that had opted in.

Below is a link to a spreadsheet that contains the name and other information about the credit unions making this low-income selection as of early October.

NCUA reported that 615 credit unions had made the decision to become low-income designated credit unions.

Twelve credit unions had assets in excess of $1 billion with Michigan State University FCU being the largest credit union opting for low-income designation.

Pennsylvania had the most credit unions to opt-in to this designation with 69, followed by Texas with 50 and New York with 42. A total of 41 states, plus Puerto Rico and Washington D.C., had at least one credit union opt-in to the low-income designation.

One hundred seventy-seven credit unions that opted in to the low-income designation reported holding some member business loans on their books. Three of the credit unions were already grandfathered from the business loan cap.

To review the list, click here.

Vermont CUs Can Use the Term Bank in Ads

On October 5, the Vermont Department of Financial Regulation ruled that a state chartered credit union can use the terms “bank” or “banking” or derivative terms or phrases in advertisements. However, a state chartered credit union is required to disclose that it is a credit union. The disclosure that a state chartered credit union is a credit union will be clear and conspicuous so that reasonable consumers can read, see or hear and understand the information.

To read the order, click here.

Fiscal Watchdog: CU Tax Exemption Worth $2 Billion Annually

Eliminating credit unions’ federal income tax exemption would generate $2 billion a year in revenue and reduce the U.S. corporate tax rate by 0.2 percent, according to a policy paper and related corporate tax reform calculator released by the Committee for a Responsible Federal Budget, a bipartisan policy group focused on federal budget and fiscal issues.

The paper reviewed several reforms that could lower the U.S. corporate tax rate, which is the highest in the developed world.

“Within the tax corporate tax code, there are a number of narrowly focused provisions which benefit only one or a few industries. Though some of these tax expenditures may have important justifications, they can also lead to an unequal playing field where the government is picking winners and losers,” the paper said.

“Examples include various tax preferences for extractive industries like oil and gas, the exemption of credit union income, the low-income housing credit which subsidizes housing construction, and the Blue Cross/Blue Shield deduction.”

Read the report.

Conserved CU Merged without NCUSIF Assistance

Conserved Trinity Credit Union of Trinidad, Colorado was merged into Power Credit Union of Pueblo, Colorado.

The Colorado Division of Financial Services placed Trinity Credit Union into conservatorship July 27 and appointed NCUA as conservator.

NCUA announced that the merger did not receive any assistance from the National Credit Union Share Insurance Fund.

Read the press release.

CUs that Borrowed From Fed During Q3 2010

Credit unions were not active borrowers from the Federal Reserve's Discount Window during the third quarter of 2010, as economic and financial conditions improved.

According to data released by the Federal Reserve, only 9 credit unions borrowed from the Discount Window during the third quarter of 2010 and only one credit union, Northwest Community Credit Union, borrowed from the Federal Reserve more than once during the quarter.

The credit unions that borrowed from the Federal Reserve's Discount Window were:

• ACHIEVA CU, CLEARWATER, FL
• CRESCENT CU, BROCKTON, MA
• ELEVATIONS CU, BOULDER, CO
• ESL FCU, ROCHESTER, NY
• NORTHWEST CMNTY CU, SPRINGFIELD, OR
• REDSTONE FCU, HUNTSVILLE, AL
• ST ANNES CU OF FALL RIVER, FALL RIVER, MA
• TALERIS CU INC, CLEVELAND, OH
• VISIONS FCU, ENDWELL, NY