Time Magazine: Should CUs Pay Taxes?

In case you missed it, check out a Times Magazine article on Should Credit Unions Have to Pay Income Tax?

The article notes that credit unions were given their tax exempt status because "they were often the sole source of financing for disadvantaged communities whose members had few assets and no way to prove their creditworthiness."

However, the author states "not all credit unions focus intently on bringing banking services to low-income communities" and points out that expanding the credit union business loan cap does nothing to further their public policy purpose.

The author concludes "with so many millions of Americans relying on check-cashing services and payday lenders, shouldn’t Congress be focusing on policies that aid credit unions in helping those folks?"

Hearing Video on Paying Directors

Legislation has been introduced in Tennessee and Washington that would permit state chartered credit unions to pay their directors.

Paying directors is a controversial issue within the credit union industry. Some within the credit union industry argue that credit unions are becoming increasingly complex and need to be able to compensate directors to attract qualified people to serve on the board. However, others argue that a volunteer board sets credit unions apart from banks.

Below is the February 19th video of a hearing in the Tennessee Senate Commerce and Labor Committee (about 31 minutes in length).

The hearing had several witnesses including the former president of Southeast Financial Credit Union, who spoke in favor of the bill. When asked why not become a bank if he wanted to pay his directors, he spoke about the onerous burden that NCUA imposes on credit unions seeking to convert to a bank charter.

CU Tax Exemption -- Indefensible and Outdated

Check out the latest ads calling out credit unions on their outdated and indefensible tax exemption.

View the print ad. Listen to the radio ad.

State Regulator Suppresses Member Insurrection

Iowa's superintendent of credit unions, JoAnn Johnson (the former Chairman of NCUA), has invalidated a board and management shake-up at Family Community Credit Union in Charles City.

At an annual meeting of the Family Community Credit Union, members voted to dismiss the board of directors, to suspend CEO Dawn Swaningson, to reinstate staff members who had quit in protest of their treatment by Swaningson, and to appoint a new board and CEO.

But JoAnn Johnson wrote the members that their actions "were not in compliance with the bylaws of the credit union, or with the Iowa Credit Union Act."

I suspect that this is not the end of the story.

Read the story.

Problem Credit Union Update, Q4 2012

NCUA reported that the number of problem credit unions fell during the fourth quarter and for all of 2012.

A problem credit union is defined as a credit union with a CAMEL 4 or 5 rating.

The number of problem credit unions fell by 40 during 2012 to 369 credit unions and by 13 during the fourth quarter.

There were:

• 4 credit unions with $1 billion or more in assets on the problem CU list, down from 7 a year earlier;
• 3 credit unions with between $500 million and $1 billion in assets, down from 4;
• 25 credit unions with between $100 million and $500 millionin assets, down from 26;
• 131 credit unions with between $10 million and $100 million in assets, down from 156; and
• 206 credit unions with under $10 million in assets, up from 196.

In addition, the assets and shares (deposits) in problem credit unions declined during 2012.

Assets fell from $29.4 billion at the end of 2011 to $19 billion at the end of 2012. In other words, 1.8 percent of the industry's assets were in CAMEL 4 or 5 institutions.

Shares dropped from $26.3 billion to $16.9 billion over the same time period. At the end of 2012, 2.02 percent of all insured shares were in problem credit unions. This was down 80 basis points from the third quarter and 129 basis points from a year ago.

Newspaper Endorses HarborOne's Conversion to Mutual Bank Charter

The Enterprise News has endorsed Brockton-based HarborOne Credit Union's conversion to a mutual cooperative bank.

In its endorsement, the paper writes:

"It will be good for the economy. It would allow for more commercial lending, more branches and more jobs. It would let HarborOne expand its lending far beyond what is now possible. It also will raise millions of dollars in taxes because banks pay taxes, while credit unions don’t." (emphasis added)

Read the paper's editorial endorsing the conversion.

NCUSIF Collateralized Senior Note of $179 Million

The National Credit Union Share Insurance Fund (NCUSIF) at the end of 2012 was holding a collateralized senior note from one federally-insured credit union.

According to footnote 5 of the NCUSIF's audited financial statements,

"[a]s of December 31, 2012, the NCUSIF had an outstanding collateralized senior note due from an insured credit union for $179.3 million. Accrued interest on the notes is due on a monthly basis. Interest on this note has variable terms."

This note first appeared in the financial statements of the NCUSIF in August of 2012.

The most likely candidate is Evangelical Christian Credit Union of Brea, California.

As of December 2012, Evangelical Christian reported $179,254,167 of outstanding term borrowings from corporate credit unions. This is exactly equal to the amount of the note receivable minus the $70 million in capital notes provided to Texans Credit Union and AEA Federal Credit Union by the NCUSIF.

I suspect that this collateralized senior note had to deal with the 2012 liquidation of a corporate credit union.

Tiny Detroit-based CU Liquidated

The Michigan Office of Financial and Insurance Regulation (OFIR) today liquidated Amez United Credit Union of Detroit, Mich., and appointed the National Credit Union Administration (NCUA) as liquidating agent.

An OFIR examination found that AUCU was operating in an unsafe and unsound manner and insolvent. OFIR examiners found significant exposure to credit risk and the institution lacked appropriate capital reserves.

At the end of 2012, the credit union reported that 15.72 percent of its loans were 60 days or more past due. However, its regulatory filings noted that the credit union was well capitalized with a net worth ratio of 15.86 percent.

Originally chartered in 1961, Amez United Credit Union served registered members of the churches in the Detroit district of the Michigan Conference of the African Methodist Episcopal Zion Church. Amez United Credit Union had 158 members and assets of approximately $168,865, according to its most recent Call Report.

Amez United Credit Union is the second federally insured credit union liquidation in 2013 and the first Michigan credit union to be closed, since United Catholic Credit Union in August 2012.

Read OFIR press release.

Read NCUA's press release.

Convicted Swindler Sues CU for Failure to Perform Biz Loan Due Diligence

Convicted swindler Michael Vorce has filed a federal lawsuit against Lake Michigan Credit Union alleging that the lack of oversight by the credit union allowed him to obtain millions in business loans for non-existent boats.

According to Vorce, Lake Michigan Credit Union extended loans based on fake serial numbers that were never verified, resulting in loans for millions of dollars for boats that did not exist. By March 2007, Vorce had obtained fraudulent loans worth $4.7 million.

Vorce claims he filed the lawsuit on the behalf on the members of Lake Michigan Credit Union.

You can't make this up.

Read the story.

MBL and Supplemental Capital Legislation Introduced

Reps. Ed Royce (R-Calif.) and Carolyn McCarthy (D-N.Y.) yesterday re-introduced an ABA-opposed bill (H.R. 688) that would raise the member business-lending cap for certain credit unions from 12.25 percent to 27.5 percent of total assets.

The legislation would raise the cap for well-capitalized credit unions that have member business loans outstanding at the end of each of the four consecutive quarters immediately preceding their application date; can demonstrate at least five years experience soundly underwriting and servicing such loans; and have the requisite policies and experience in managing them. Credit unions also would have to satisfy other standards that the National Credit Union Administration Board determines are needed to maintain their safety and soundness.

Also, Reps. Peter King (R-N.Y.) and Brad Sherman (D-Calif.) yesterday re-introduced a bill (H.R. 719) that would permit the National Credit Union Administration to allow qualified credit unions to accept supplemental capital. The legislation would require such capital to be uninsured and subordinate to other claims against a credit union. The measure also would authorize the NCUA to set maturity limits on it.

$80 Billion Credit Contraction Due to Investment Losses in Corporate CUs

A recently published working paper by the Federal Reserve found that the $7 billion in corporate credit union losses passed onto natural person credit unions may have resulted in an $80 billion contraction in loans from natural person credit unions (NPCUs).

The paper looks at the impact of the collapse in the asset backed securities (ABA) market in 2007 - 2009 on NPCUs through their capital investments in corporate credit unions and uncovered a strong contagion effect.

Although NPCUs held very little in ABS paper, they were indirectly exposed to this market through their relationship with corporate credit unions that invested heavily in the ABS market. As losses on ABS paper on the books of the corporate credit unions mounted, this impaired the capital investments of NPCUs. This depletion in natural person credit unions' capital investments in their corporate credit unions was associated with a significant contraction in lending over the subsequent four quarters.

The paper also found that as corporate credit unions became insolvent, there was an incentive for NPCUs to hoard cash. This is not surprising, given that corporate credit unions were a source of liquidity for NPCUs.

In addition, the paper found that nearly all of the contraction in credit occurred at those NPCUs that entered the crisis with relatively less capital after controlling for pre-existing liquidity as well as size.

Using HMDA data, the research concluded that this contraction in credit availability was disproportionately aimed at that those applicants seeking the most leveraged mortgages.

Read the paper.

Controlled Experiment on Taxation (New Title)

In an op ed in The Gazette, Pat Jury, the head of the Iowa Credit Union League, wrote that "[i]ncreasing taxes on credit unions increases taxes on Iowa Credit Union members. Credit unions would have to pass along the increased expense to their members in the form of higher fees, higher loan rates and lower savings dividends."

However, Jury's opinion is not shared by some within the credit union industry.

Ed Speed, the former CEO of Texas Dow Employees Credit Union (TDECU), wrote the following in an August 10, 2011 guest opinion appearing in Credit Union Times.

"The only impact taxation would have on TDECU is that we will double in size every seven years instead of every five years. So what?

The NCUA special assessments prove my point. Last year and for the next nine years, credit unions are paying special NCUA assessments, assessments that have just about the same impact as a 35% tax on credit union net income.

The assessments we paid - and will pay for the next decade - did not drive us to change loan and deposit rates and fees last year, nor will they in the future.

Paying a 35% tax on income would have the same impact on how we price: none, nada, zip."

So, the corporate assessment provides a controlled experiment to simulate the impact of taxation on the pricing of credit union services.

Did your credit union change loan or deposit rates and fees because of the corporate credit union assessment?

NCUA Responds to Rep. Issa's Request on Hiring of Outside Counsel

In a twelve-page letter, NCUA's Inspector General (IG) responded on February 6 to Rep. Issa's inquiry about hiring outside counsel on a contingency fee arrangement to handle certain financial security-related litigation. See my blog post of October 31, 2012 to read Rep. Issa's letter.

Rep. Issa requested that the IG look at whether the contingency fee arrangements were the best possible alternative. In a heavily redacted analysis, the IG concluded that the amount paid to outside counsel as of October 31, 2012 appears to be reasonable and not unnecessarily high.

With regard to Issa's question as to whether Executive Order (E.O.) 13433 applied to NCUA, the IG concluded that NCUA did not violate E.O. 13433 by entering into a contingency fee arrangement when hiring outside counsel. The IG wrote that the E.O. "does not prohibit NCUA from entering into contingency fee arrangements when it is serving in the capacity as Conservator or as Liquidating Agent." The IG stated that NCUA is stepping into the shoes of the credit union and "is no longer functioning as a government agency."

The IG letter also noted that in hiring the two law firms the agency complied substantively with the "Procedures for Hiring Outside Counsel," although it did not adhere completely to the its procedures. The letter notes that NCUA only interviewed two law firms, when the agency should have contacted three before engaging representation. The IG further concluded that political affiliation had no bearing on the law firms hired.

Read the letter.

Chutzpah

Credit Union Journal is reporting that Robert Nealon, the former CEO of failed Constitution Corporate FCU, asked the U.S. Court of Appeals for the District of Columbia to overturn the NCUA Board’s decision denying him back pay and benefits after the agency seized Constitution Corporate in September 2010. The failure of Constitution Corporate is estimated to cost $200 million to resolve.

Read the story in Credit Union Journal (subscription required).

Interview with HarborOne's CEO on Conversion

The Enterprise recently interviewed James Blake, president and chief executive officer of Brockton-based HarborOne Credit Union, on the credit union's attempt to switch its charter to a bank.

Read the interview.

NCP Community Development FCU Seized by NCUA

The National Credit Union Administration (NCUA) placed NCP Community Development Federal Credit Union of Norfolk, Va. into conservatorship.

NCP Community Development Federal Credit Union is a low-income credit union with $2 million in assets.

According to NCUA, the credit union reported a loss of $381,739 for 2012. Its return on assets was minus 19.79 percent for 2012.

As a result, over the last year the credit union's net worth ratio went from 13.72 percent as of December 2011 to 3.83 percent at the end of 2012. This means the credit union was significantly undercapitalized at the end of 2012.

Read the press release.

It's None of Your Business!

That was the response of the Oregon credit union regulator to a 1994 interim final rule issued by NCUA on credit union conversions to non-credit union status.

The regulator was incensed by NCUA's arrogance and pointed out that if the members democratically voted to change charters, so be it.

I think there are credit union managers and regulators that today share that same sentiment with Oregon's CU regulator and would love to tell NCUA to mind its own business.

Read the letter below.

ABA: It’s Time to End $2 Billion Annual CU Tax Subsidy

Now is the time to eliminate the $2 billion annual credit-union tax subsidy, ABA said yesterday in a question-and-answer-formatted email message to all House and Senate members.

ABA questioned why tax-paying households are still subsidizing the $1 trillion credit union industry, given the current challenges in managing the federal debt.

The credit-union tax exemption “costs the U.S. Treasury about $2 billion each year in forgone tax revenues, while hard working Americans foot the bill,” ABA said. “This bill will continuously grow as credit unions become larger.”

The association explained that there are 195 large credit unions with more than $1 billion in assets. “That’s larger than 90 percent of banks,” ABA said. “Banks, like households, pay taxes. It’s time for credit unions to do so as well.”

Troubled CU Mergers in 2012

There were 73 troubled credit union mergers in 2012.

A troubled credit union merger occurs if the following three reasons are cited by NCUA when approving the merger: Poor Management, Poor Financial Condition, and Loss/Declining Field of Membership.

The median size of a troubled credit union acquired in 2012 was approximately $5.4 million. The average asset size was almost $24.4 million.

Montgomery County Teachers FCU was the largest troubled credit union to be acquired in 2012 with $393 million in assets.

Letter to NCUA on Common Bond Expansion

ABA wrote National Credit Union Administration (NCUA) Chairman Debbie Matz regarding the potential problematic expansion of Thrivent FCU's field of membership.

Members of Thrivent Financial for Lutherans are part of Thrivent FCU's field of membership. Thrivent Financial for Lutherans is voting to expand its common bond from Lutherans to Christians. The voting will take place between March 1 and April 30.

NCUA has an affirmative obligation to limit this type of expansion and to ensure a genuine affiliation among credit union members.

Read the letter below (click on image to enlarge).

Below is NCUA's response. The agency stated that Thrivent FCU has not notified the agency that the credit union's sponsor is in the process of amending its common bond. In the event of a change in the sponsor's bylaws, Thrivent FCU will need to submit this information to NCUA to see whether it still complies with the associational common bond.

Three Strikes, You're Out, Maybe?

The Director of the Division of Financial Institutions for the Illinois Department of Financial & Professional Regulation suspended the operations of Bagumbayan Credit Union of Chicago for the third time in 2012 because the credit union was operating in an unsafe and unsound manner.

The first suspension order was issued on July 26, 2012. The second order issued on September 21, 2012. The third order was issued on November 21, 2012.

This means the operations of the credit union have been effectively suspended for six months.

In baseball, the batter is out after three strikes.

How many strikes is the Illinois regulator going to give this credit union before liquidating or involuntarily merging the credit union?

Corporate CU Merger Receives NCUA Assistance

The merger of Corporate One Federal Credit Union and Southeast Corporate Federal Credit Union was facilitated by special assistance provided by NCUA.

According to Corporate One's Unaudited Q4 2012 Financial Statement (footnote 9),

"[i]n order to accomplish the merger of a $1.5 billion institution into Corporate One, the NCUA provided certain assistance up to $15 million. The assistance was in the form of cash and a conditional indemnification to cover losses on certain assets acquired by Corporate One. In NCUA Rules and Regulations Part 704.2, intangible assets in excess of one half percent of MDANA must be deducted from a corporate's adjusted core capital. For eight years, the NCUA is allowing Corporate One to add back such adjustment to adjusted core capital for any excess intangibles related to core deposits."

Supervisory Focus for 2013

NCUA issued a letter to federally-insured credit unions regarding its supervisory focus for 2013.

In the letter, NCUA wrote that examiners will evaluate credit union’s capacity to manage risk in the following two areas -- operational risk and balance sheet management.

According to the letter, "[o]perational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events." The two areas that it will focus on are technology and internal controls.

With regard to balance sheet management, NCUA examiners will focus on three areas -- interest rate and liquidity risk, concentration risk, and less established products. In the case of less established products, NCUA examiners are going to verify whether credit unions have "the appropriate expertise and risk-mitigation controls over such products with which credit unions have historically had limited experience."

In addition , NCUA stated that it plans to issue a supervisory letter this year to address the process and expectations for member business loan rule waiver requests, in particular waivers for personal guarantees and blanket waivers versus individual loan waivers.

NCUA will also provide guidance for alternative standards replacing credit ratings when assessing the creditworthiness of securities.

Credit unions should expect additional information related to troubled debt restructurings.

Read the letter.