Director Liability

Should credit union directors be held professionally liable, if their conduct contributed to the failure of a credit union?

I know that this is a sensitive subject. Credit union advocates will say that since directors are volunteers and most directors are not compensated, it would be unfair to hold them personally liable for a credit union's failure.

However, after reviewing a number of the Material Loss Reviews conducted by NCUA's Inspector General, there is a re-occurring theme that the board of directors were negligent in their oversight of the credit union. These reports note that the board of directors failed to exercise adequate oversight of management and/or exposed the failed credit union to excessively risky business models.

Here are some excerpts from recent Material Loss Reviews.

In the case of the failure of Taupa Lithuanian Credit union, the NCUA Inspector General found that "Taupa’s Board of Directors failed in its duties to adequately oversee the activities of management. During the scope period of our review, multiple examinations identified the need for more consistent Board of Directors meetings and adequate minutes. Examiners cited Board deficiencies in examinations effective June 30, 2006; December 31, 2007; March 31, 2009; June 30, 2010; December 31, 2011; and December 31, 2012."

The Material Loss Review (MLR) for Vensure FCU concluded that "Vensure’s management and Board exposed the credit union to excessive amounts of financial risk due to its affiliation with high risk members and a high risk business model. Specifically, Vensure’s management and Board failed to manage the credit union’s risk related to its ACH payment processing activity for a member that processed payments for internet gambling websites."

NCUA's Inspector General cited weak Board of Directors oversight in the failure of G.I.C. FCU. The MLR reported that "[a]lthough the supervisory committee is the entity charged with primary responsibility over the records of the Credit Union, the Board of Directors acts as control over the supervisory committee by providing a forum for receiving the audit report and minutes of the Committee meetings. We believe G.I.C.’s Board failed in these responsibilities as evidenced by the Board’s failure to keep complete and accurate minutes or to obtain Board packets with information sufficient to execute its duties."

The MLR for Chetco FCU found that the "Board of Directors and management exposed the credit union to excessive amounts of credit and liquidity risk due to its failure to set appropriate limits and maintain the appropriate risk management infrastructure to support the growth in the Member Business Loan (MBL) portfolio."

As these MLRs demonstrate, the actions of these directors contributed to the failures of these credit unions.

NCUA has the authority to pursue these credit union directors, as well as officers, if their gross negligence led to the demise of the credit union. However, outside of a lawsuit suing the directors of WesCorp, it is unclear whether NCUA has chosen to exercise this power.

At a minimum, NCUA's Office of the Inspector General should conduct a study, just like the study performed by the Inspector Generals for the federal banking agencies, on enforcement actions and professional liabilities claims against institution-affiliated parties and individuals associated with failed institutions.