CUs Have Received Significant Support from the U.S. Treasury

In describing the difference between banks and credit unions, Public Service Credit Union on its website wrote "[i]n the entire history of U.S. credit unions, taxpayer funds have never been used to bail out a credit union."

However, is this statement correct?

The evidence would suggest that credit unions have received significant assistance from the U.S. Treasury and thus the American taxpayer in recent years, although credit unions are exempt from paying corporate income taxes.

According to the National Credit Union Administration, the Central Liquidity Facility borrowed more than $18 billion from the U.S. Treasury in 2009 to stabilize two failed corporate credit unions -- U.S. Central and Western Corporate Federal Credit Unions.

In addition, the Temporary Corporate Credit Union Stabilization Fund has borrowed more than $11 billion from the U.S. Treasury to handle the resolution cost of failed corporate credit unions. Over $5 billion of the borrowings from the U.S. Treasury is still outstanding.

FOIA Appeal Denied

The National Credit Union Administration (NCUA) denied a Freedom of Information Act (FOIA) Appeal for all communications (for example, letters, e-mails, faxes, telephone logs) associated with the following individuals -- Carlos Rodriguez, Robert (Bob) Marinace, Paul Davis, and Paul Popescu -- regarding Technology Credit Union’s conversion to a mutual savings bank charter. These individuals were actively opposed to Technology's conversion.

However, NCUA cited exemptions 5, 7(C), and 8 of the FOIA to support its withholding this information. The agency does not confirm or deny the existence of this material.

In denying the FOIA Appeal, NCUA, for example, stated that there is "no public interest in the release of the requested material." NCUA wrote that there was no allegation of wrongdoing with regard to any official actions taken by the agency.

Furthermore, the agency stated that given the narrow scope of the FOIA, a partial redaction would not protect the personal privacy interests of these individuals.

In addition, the agency stated that Exemption 8 allows it to withhold information "contained in or related to examinations, operating or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions." The agency notes that the "receipt and disposition of communications ... falls within the scope of exemption 8."

It seems to me that the agency has taken an overly broad interpretation of the FOIA exemptions to suppress the disclosure of information that might be embarrassing to the agency, if made public.

This failure to disclose its communications with these individuals who actively opposed Technology's conversion adds further credibility to suspicions that this agency is inherently biased against credit unions exercising their rights to charter choice.

Read the January 15, 2013 denial letter (click on images to enlarge).

Credit Union Use of Discount Window Loans, Q4 2010

In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Federal Reserve makes available with a two year lag detailed transaction level information regarding the use of discount window loans.

Below is information on credit union borrowings from the discount window in the fourth quarter of 2010 (click on image to enlarge).

All credit unions that accessed the discount window did so through the Primary Credit program, which is only available to depository institutions in sound overall condition to meet short-term, backup funding needs.

Twenty-four credit unions borrowed from the Federal Reserve discount window during the fourth quarter of 2010. Workers Credit Union of Fitchburg, Massachusetts was the most active credit union borrower from the discount window.

Illinois CU Fined for Violating MBL Rules

Gas and Electric Credit Union of Rock Island was fined by the Illinois Department of Financial and Professional Regulation Division for Financial Institutions for violating the state's member business loan regulations.

The state regulator found that the credit union had improperly granted two business loans to a member of the credit union, in an aggregate amount of $120,125, without having a member business loan policy or experienced member business lending personnel as required by the state's rules.

The credit union was hit with a Document of Resolution requiring the credit union to divest the two business loans.

A special examination found that the credit union had failed to divest the loans as required by the remedial order and the credit union was assessed a fine of $5,000 for each violation.

Read the order.

Chetco's Failure to Cost $76.5 Million

According to information obtained from a Freedom of Information Act request, the estimated loss to the National Credit Union Share Insurance Fund from the failure of Chetco FCU is $76.5 million.

Read NCUA's response to the FOIA.

Three CU Bills Introduced in Oregon

Three bills have been introduced in Oregon that would subject state chartered credit unions to the state's corporate excise tax, additional reporting standards, and an affirmative obligation to meet the credit needs of members.

House Bill (H.B.) 2486 would impose a corporate excise tax on large state-chartered credit unions and any interstate credit unions, which hold public deposits exceeding $250,000 or have commercial loans that collectively exceed 10 percent of a credit union's assets. The legislation would not apply to credit unions with loan assets of $50 million or less. If enacted, the bill would apply to tax years beginning on or after January 1, 2013. Read the bill.

H. B. 2484 requires credit unions to file with the director of the Department of Consumer and Business Services periodic reports that: summarize the number and amount of member business loans and certain other loans; describe the services credit unions provide to people with low and moderate incomes; and list total amount of deposits credit unions hold at their main office and at locations where they accept deposits. Read the bill.

H.B. 2485 provides that credit unions have an ongoing affirmative obligation to meet the credit needs of all communities in which a credit union has a physical presence. The bill would require the director of the Department of Consumer and Business Services to adopt rules to specifically govern that obligation and to create certain minimum standards for measurement. The director must consider federal regulations that implement federal Community Reinvestment Act in adopting rules. The bill also would require the director to periodically evaluate whether each credit union meets its obligation. Read the bill.

Not a Single Applicant Was Previously A Member

In a recent CUES Skybox column, Jim Devine had an interesting observation about whether businesses that were applying for credit from a credit union were members of the credit union before applying for the credit.

Jim Devine wrote:

"Part of my job is to do portfolio reviews. I looked at 40 loans at one credit union and found that not a single applicant was previously a member."

I suspect that this is not an isolated case.

This should be a concern for exisitng credit union members.

Business loans tend to be larger and riskier. This means the net worth of the credit union could be put at risk from a borroweer who has no real connection with the credit union.

Moreover, if a business or any other borrower is not a member of the credit union before applying for credit, how is the credit union any different from other financial institutions?

When Congress in 1951 revoked the tax exemption for mutual thrifts, it found that “investing members are becoming simply depositors, while borrowing members find dealing with a savings and loan association only technically different from dealing with other mortgage lending institutions in which the lending group is distinct from the borrowing group.”

4 Credit Unions Repay TARP Funds

Four credit unions have repaid in full their investments from the Treasury Department's Community Development Capital Initiative.

The four credit unions are:

• Atlantic City FCU, Lander (WY);
• Gateway Community FCU, Missoula (MT);
• Brewery Credit Union, Milwaukee (WI); and
• Greater Kinston Credit Union, Kinston (NC).

New Appraisal Requirements for Higher-Risk Mortgages

A Dodd-Frank Act-mandated joint final rule will establish new appraisal requirements for “higher-risk mortgage loans.” Mortgage loans secured by a consumer’s home with interest rates above a certain threshold are considered higher-risk under Dodd-Frank.

The rule will require creditors making such loans to use a licensed or certified appraiser to prepare a written report based on a physical inspection of the property’s interior. It also will mandate that creditors disclose information about the appraisal’s purpose and provide consumers with a free copy of the appraisal report.

Creditors also will have to obtain an additional appraisal at no cost to the consumer for a home-purchase higher-risk mortgage loan if the seller acquired the property for a lower price during the previous six months. The requirement is intended to address fraudulent property-flipping by seeking to ensure that the value of the property used as loan collateral legitimately increased.

The rule, which will go into effect on Jan. 18, 2014, is being issued by the Federal Deposit Insurance Corporation, Consumer Financial Protection Bureau, Office of the Comptroller of the Currency, Federal Reserve, National Credit Union Administration and Federal Housing Finance Agency.

Read FDIC Staff memo on the rule.

Read the final rule.

NCUA Sets Low Bar for Fair Lending Exams

The National Credit Union Administration (NCUA) appears to set the bar pretty low when it comes to examining credit unions for fair lending compliance.

According to NCUA's 2013 Annual Performance Plan, the agency estimated that it completed 11 fair lending exams in 2012. Its target for 2013/2014 is 18 completed fair lending exams annually.

I hope the agency does not think 18 completed fair lending exams annually constitutes a stretch goal. This would mean that 99 percent of federal credit unions will not be examined for fair lending compliance over the next two years.

In fact, Department of Justice reports that between 2001 and 2011 NCUA never made a single fair lending referral. This absence of any referrals is probably due to NCUA's "See No Evil, Hear No Evil, Speak No Evil" approach to examining credit unions for consumer compliance.

This is not an isolated case of NCUA's abysmally track record with regard to examining credit unions for compliance with consumer regulations. For example, in July 2012, the Government Accountability Office found that NCUA examined 0.02 percent of federal credit unions for Servicemembers Civil Relief Act (SCRA) compliance.

Asset Size Threshold for Small CU Designation Raised

The National Credit Union Administration (NCUA) Board (the Board) has redefined a “small entity” as a credit union with $50 million or less in assets. Initially, the Board proposed raising the asset size threshold to $30 million.

Previously, NCUA has defined a small credit union as having $10 million or less in assets.

The increase in the asset size threshold will result in an additional 2,270 credit unions being designated as a small entity. In total, almost 4,670 are now designated as small credit unions.

In addition, the final rule increases to $50 million the asset threshold used to define a “complex” credit union for determining whether risk-based net worth requirements apply and exempts all federally insured credit unions (FICUs) with assets of $50 million or less from the agency’s interest rate risk rule requirements.

Currently only credit unions with $10 million or less in assets are exempted from interest rate risk and risk-based net worth regulatory requirements.

The Board estimates that the change in the asset size threshold means that approximately 358 FICUs with at least six percent net worth are no longer required to comply with a risk-based net worth requirement and 992 FICUs are exempted from the interest rate risk requirement.

The Board recognizes that excluding more credit unions from some safety and soundness regulations will increase risk; but believes that the incremental increase in risk is acceptable.

CFPB Ability-to-Repay Rule

The Consumer Financial Protection Bureau (CFPB) will later today issue its final ability-to-repay rule -- along with its “qualified mortgage” standard and related safe harbor provisions.

However, earlier this morning, the CFPB issued a press release with a fact sheet and summary of the final rule that show the “qualified mortgage” -- or QM -- definition under the regulation will be broad enough to encompass almost all current types of mortgages.

Loans that are not considered qualified mortgages under the rule are those with negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years. So-called “no-doc” loans also cannot be QMs.

“Finally, a loan generally cannot be a qualified mortgage if the [consumer’s] points and fees … exceed 3 percent of the total loan amount, although certain ‘bona fide discount points’ are excluded for prime loans,” the CFPB summary said.

The summary explained that qualified mortgages generally will be provided to people with debt-to-income ratios less than or equal to 43 percent.

For a temporary, transitional period, however, loans that don’t have a 43 percent debt-to-income ratio but meet government affordability or other standards -- such as those that are eligible for purchase by Fannie Mae or Freddie Mac -- will be considered QMs.

The final rule also implements a special Dodd-Frank Act provision that treats certain balloon-payment loans as qualified mortgages if they are originated and held in portfolio by small banks in predominantly rural or underserved areas.

While the summary didn’t provide the details the final rule will, it noted that safe harbor legal protections would be given to lower-priced qualified mortgages, which are typically made to borrowers who pose fewer risks.

A different legal standard -- a rebuttable presumption -- would apply to higher-priced qualified mortgages, which are typically for consumers with an insufficient or weak credit history. “If the loan goes south, the consumer can rebut the presumption that the creditor properly took into account their ability to repay the loan,” the bureau said.

The ability-to-repay final rule will take effect in January 2014.

Read the ability-to-repay rule summary.

Read the ability-to-repay fact sheet.

$72 Million

That is the estimated loss to the National Credit Union Share Insurance Fund as of November 2012 from the failure of Telesis Community Credit Union in Chatsworth, California.

Tiny Wisconsin CU Closed

The Wisconsin Office of Credit Unions liquidated New Covenant Missionary Baptist Church Credit Union (New Covenant) of Milwaukee, Wisconsin and appointed the National Credit Union Administration (NCUA) as liquidating agent.

The Wisconsin Office of Credit Unions made the decision to liquidate New Covenant after determining the credit union was in an unsafe and unsound condition to transact its business and had no prospect of restoring viable operations.

The credit union had a net worth ratio of -0.49 percent, as of September 2012. Almost 20 percent of the credit union's loans were 60 days or more past due.

New Covenant served 294 members and had assets of approximately $585,000.

New Covenant Missionary Baptist Church Credit Union is the first federally insured credit union liquidation in 2013.

Read the press release.

Conserved Credit Union Receiving Section 208 Assistance Makes Charitable Contributions

The Credit Union Times is reporting that AEA Federal Credit Union of Yuma, Arizona is looking to make a $10,000 charitable contribution to one of three community organizations.

Normally, this story would not be newsworthy, except the credit union is under NCUA conservatorship and is the recipient of $20 million in Section 208 Net Worth assistance. If it was not for this net worth assistance from the NCUSIF, the credit union would be insolvent. Even with the net worth assistance, the credit union is significantly undercapitalized, according to its September 2012 call report.

NCUA Sues J.P. Morgan

The National Credit Union Administration has filed suit in Federal District Court in Kansas against J.P. Morgan Securities as successor-in-interest to Washington Mutual Bank, alleging violations of federal and state securities laws in the sale of $2.2 billion in mortgage-backed securities to three failed corporate credit unions -- U.S. Central, Western Corporate and Southwest Corporate federal credit unions.

The complaint alleges the firms made numerous misrepresentations and omissions of material facts in the Offering Documents of the securities sold to the failed corporate credit unions. The complaint states underwriting guidelines in the Offering Documents were “systematically abandoned,” and the misrepresentations caused the credit unions to believe the risk of loss was minimal.

Read the press release.

Community Banks and Credit Unions Are Feeling the Impact of Durbin

A legislative provision meant to protect debit card revenues for small banks and credit unions does not appear to be working as well as lawmakers had expected.

Read the Washington Post article.

Another Congress, No Action on CU Business Lending Bill

The 112th Congress has left town without taken any action on the credit union business lending bill.

This is the fifth consecutive Congress, where the credit union lobby has sought expanded business lending authority for credit unions and came up empty.

I suspect that legislation to expand the business lending authority for credit unions will be re-introduced, when the 113th Congress convenes.

But I don't know why credit unions should believe that the outcome will be any different this time around. As Albert Einstein once said, "[t]he definition of insanity is doing the same thing over and over again and expecting different results."