More Than 110,000 Members at Summit CU Will Not Receive a Dividend Payment

At Summit Credit Union (Madison, WI), not all member-owners are equal.

The $2.6 billion credit union announced that more than 46,000 members will share in a a declared $1.9 million dividend. However, this means that over 110,000 members of the credit union will not share in the dividend.

The credit union stated "[i]ndividual member cash payouts were based on the financial success of the credit union as well as how much the member saved and borrowed between October 1, 2015, and September 30, 2016."

In other words, this dividend is part of a loyalty or rewards program. Members who do the most business with the credit union will probably see the largest dividend payment.

If this was true dividend declaration, all member-owners would have received a dividend payment, as they each own a share in the credit union..

Evangelical Christian CU Evicts Church over Almost $22 Million in Unpaid Debt

Evangelical Christian Credit Union (Brea, CA) evicted a Georgia megachurch from its 4,000 seat sanctuary before Christmas over nearly $22 million in debt.

The sanctuary of Higher Living Christian Church (McDonough, GA) will be sold in public auction to the highest bidder for cash on January 3, 2017.

The church building includes a multi-purpose sanctuary with removable seating. It could be modified to accommodate trade shows, graduation ceremonies, cultural events, art displays, or a fellowship hall. The facility also boasted eight classrooms, indoor children's play area, administrative offices, and choir rehearsal room.

Evangelical Christian Credit Union is currently under an enforcement order with the the California Department of Business Oversight.

Read the story.

Visions FCU to Double Size of Corporate HQ

Visions Federal Credit Union (Endwell, NY) will more than double the size of its corporate headquarters over the next two years.

The credit union is constructing a new 91,000-square-foot building behind its current 79,000-square-foot building.

The credit union expects to double in size from $3.5 billion in assets to $7 billion in assets by 2025.

The cost of the project is to be determined.

Read the story.

Metsger: Contingent Legal Fee Was the Best Available Option

In a December 20th letter to Rep. Mick Mulvaney (R - SC), National Credit Union Administration (NCUA) Chairman Metsger wrote that "the decision to pursue legal action using a contingency fee arrangement was the best available option" for the agency over the failure of five corporate credit unions that had bought faulty mortgage-backed securities.

The letter was in response to a November 21 letter from Rep. Mulvaney.

NCUA has paid more than $1 billion in legal fees on $4.3 billion in recoveries from legal settlements.

In pursuing its contingent fee arrangement, Chairman Metsger stated that NCUA did not have the in-house resources or expertise to independently pursue its legal strategy.

He also noted that the agency lacked resources to hire law firms on a hourly basis. Therefore, an hourly fee arrangement would have required increased assessments on credit unions, which credit unions would have had difficulty paying.

Metsger contended that a contingency fee arrangement insulated credit unions from most expenses, if the lawsuits failed, and provided significant upside benefit to credit unions, if the agency's legal strategy was successful.

Metsger claimed that the agency could not have brought these complex lawsuits without the contingency fee arrangement.

Metsger pointed out that the recoveries from NCUA's lawsuits "enabled the agency to stop assessing credit unions the cost of the repayment of the Stabilization Fund since 2012."

Metsger also stated that the agency created a website for credit unions to get information regarding the legal settlements.

The letter also addressed the agency's efforts to control expenses and to increase budget transparency.

The letter appears below (click on image to enlarge)

NCUA Fines 24 CUs for Late Filing 2nd Quarter 2016 Call Reports

The National Credit Union Administration (NCUA) announced that 24 credit unions have agreed to pay civil monetary penalties for late filing their 2nd quarter 2016 Call Reports.

In comparison, 14 credit unions consented to civil monetary penalties a year ago.

The total amount of fines paid were $9,364. Individual penalties ranged from $150 to $1,057. The median penalty was $303.

Of the 24 credit unions agreeing to pay penalties for the second quarter of 2016:

• Sixteen had assets of less than $10 million;
• Five had assets between $10 million and $50 million; and
• Three had assets between $50 million and $250 million.

Eight of the late-filing credit unions had been late in a previous quarter.

NCUA informed late filing credit unions that their fines could be reduced if they signed a consent agreement.

Read the press release.

Corporate CUs Are Required to Disclose Executive Pay, Then Why Not All FCUs

It is time for the National Credit Union Administration (NCUA) to require natural person federal credit unions to disclose senior management compensation.

Let's look at the facts, state-chartered credit unions are required to disclose senior management compensation via Form 990s. Also, NCUA requires a corporate credit union to annually prepare and maintain a disclosure of the dollar amount of compensation paid to its most highly compensated employees, including compensation paid to the corporate credit union's chief executive officer (read the regulation).

NCUA's corporate credit union regulation states that a corporate credit union "must distribute the most current disclosure to all its members at least once a year, either in the annual report or in some other manner of the corporate's choosing."

The regulation also states that "[a]ny member may obtain a copy of the most current disclosure, and all disclosures for the previous three years, on request made in person or in writing. The corporate credit union must provide the disclosure(s), at no cost to the member, within five business days of receiving the request."

The rule allows a corporate credit union to provide supplemental information to add context, such as salary surveys.

If NCUA believes that it is appropriate for corporate credit unions to disclose compensation information to its members, then why hasn't NCUA required natural person federal credit unions to do the same thing.

Clearly, requiring such a disclosure would improve accountability and transparency and would promote good corporate governance.

Supreme Court to Hear Important Patent Troll Case

The Supreme Court last week announced that it would hear the case of TC Heartland v. Kraft, which will be closely watched by banks and credit unions due to its implications for financial institutions facing litigation from patent trolls.

The case hinges on whether patent trolls -- entities that hold patents, often of dubious quality, but use them primarily as the basis for threats of litigation -- can bring cases in any federal court district or must bring them only where defendants are incorporated or doing business.

Last year, 40 percent of patent suits were filed in just one of 94 federal judicial districts: the Eastern District of Texas, known for its friendliness to patent trolls.

The appellate court’s decision in TC Heartland upholds a broad understanding of corporate residence -- rejected by the Supreme Court in a different case -- that would allow patent trolls to continue cherry-picking friendly courts for patent cases against faraway defendants, which increases the pressure on defendants to settle cases.

Read more.

Leasing of Excess Space by FCUs Should Be Subject to UBIT

Federal credit unions (FCUs) are leasing their excess space; but the income from such leasing arrangements is not subject to unrelated business income taxes (UBIT).

Recent examples of FCUs announcing plans to lease excess space include:

• Apple Federal Credit Union with $2.1 billion in assets is building a six-story, 150,000 square-foot headquarters building in Fairfax, Virginia. Apple FCU plans to occupy three floors and will lease the remaining office space.
• Pentagon Federal Credit Union has paid $164.1 million for a new 11-story, 307,634 square-foot headquarters building in Tysons, Virginia. The credit union plans to initially occupy about half of the office building. Pentagon FCU will lease about 150,000 square feet to LMI.

This trend should continue as the National Credit Union Administration yesterday finalized a rule eliminating the requirement that FCUs plan for, and eventually achieve, full occupancy of acquired premises. The final rule modifies the definition of “partially occupy” to mean occupation and use, on a full-time basis, of at least 50 percent of a premises by an FCU or by a combination of the FCU and a credit union service organization in which the FCU has a controlling interest.

This would allow an FCU to venture into real estate activities, which are outside the mission and purpose of an FCU's tax exemption.

Therefore, Congress should repeal Section 1768 of the Federal Credit Union Act. This would permit the income from unrelated activities such as the leasing of excess space be subject to UBIT.

Defunct Bronx CU Fined $500K by FinCEN

The Financial Crimes Enforcement Network (FinCEN) today assessed a $500,000 civil money penalty against Bethex Federal Credit Union, Bronx, New York for significant violations of the Bank Secrecy Act's anti-money laundering (AML) regulations.

In December 2015, the National Credit Union Administration liquidated Bethex, determining the credit union was insolvent with no prospects of returning to viability. At the time of its liquidation, the credit union had $12.2 million in assets.

FinCEN’s penalty is a claim against any assets that remain after the completion of Bethex’s liquidation. The penalty will not affect the National Credit Union Share Insurance Fund or any other credit union.

Since 2002, Bethex’s AML program maintained internal controls specific for low to moderate-income clientele within its designated field of membership in New York City.

But in 2011, Bethex began providing services to wholesale money-services businesses (MSBs) that were located outside New York and engaged in high-risk activity. It processed transactions for MSBs in more than 30 countries, including Mexico, Ghana, Bangladesh, China and Pakistan, all of which carried high risks for money laundering.

However, Bethex did not update its anti-money laundering programs. As a result, Bethex was unable to adequately monitor, detect, and report suspicious activity or mitigate the associated risks, leaving the credit union particularly vulnerable to money laundering.

The enforcement order found that Bethex was not adequately staffed to handle the volume of MSB transactions.

Bethex failed to timely detect and report suspicious activity to FinCEN and did not file any Suspicious Activity Reports (SARs) from 2008 through 2011. In 2013, as a result of a mandated review of previous transactions, the credit union late-filed 28 SARs. The majority of the suspicious activity involved high-volume, large amount transfers outside of Bethex’s expected customer base by MSBs capable of exploiting Bethex’s AML weaknesses.

Unfortunately, most of those SARs were inadequate and contained short, vague narratives encompassing a broad summary of multiple and unrelated instances of suspicious activity. FinCEN found that these SARs provided little benefit to law enforcement.

Read the FinCEN press release.

Read the enforcement order.

Rep. Duffy Seeks Answers to Impact of NCUSIF Premium on CU Lending and Operations

In a letter to National Credit Union Administration (NCUA) Chairman Rick Metsger, Rep. Sean Duffy (R - WI) requested that the NCUA Board carefully assess the impact of a National Credit Union Share Insurance Fund (NCUSIF) premium assessment on federally-insured credit unions.

NCUA staff had recommended a possible premium assessment of 3 to 6 basis points for the NCUSIF in 2017.

Specifically, Rep. Duffy requested answers to following five questions by December 27.

Has NCUA done any economic modeling on how assessing a premium could impact credit union lending and operations? If so, what were the results?

Considering that the fund is currently near the top of the normal operating range, does your "base" projection in your economic modeling have the NCUSIF falling outside of the normal operating range (and thus requiring a premium) in the next one to three years?

I understand that the equity ratio is affected by factors such as operating expenses. What is NCUA doing to seek operational improvements and increase efficiency? Will NCUA fully exhaust these possible improvements before seeking a premium?

When the Temporary Corporate Credit Union Stabilization Fund expires ... is it possible any refunds of remaining money in the fund go back to credit unions via the NCUSIF? How could that impact the equity ratio of the NCUSIF?

What is your best estimate currently for the amount of funds that credit unions will receive from the Corporate Stabilization Fund once that expires? How does NCUA make the decision to sell securities once the NCUA Guaranteed Notes (NGNs) mature? Is the agency working to maximize this amount for credit unions?

Read the letter.

NCUA Thumbs Its Nose at Federal Courts

The National Credit Union Administration (NCUA) in its final field of membership (FOM) rule has thumbed its nose at the federal courts.

On two separate occasions, federal courts have invalidated NCUA’s attempts to expand the FOM for community credit unions.

Paragraphs 31 and 32 of the American Bankers Association's complaint show that federal courts found that NCUA failed to comply with the Federal Credit Union Act (FCUA) by ensuring that community credit union must serve a single, well-defined local community.

A federal court in Utah in 2004 invalidated a community charter that included six counties with 1.4 million residents — almost two-thirds of Utah's population — and encompassed an area extending from the Nevada border to the Wyoming border of Utah.

Also, a federal court in Pennsylvania struck down NCUA's decision that a six-county area in south-central Pennsylvania constituted a single “well-defined local community.” The judge wrote in 2008 “[t]o a casual observer familiar with central Pennsylvania, it would likely be a remarkable finding that . . . a geographical area of more than 3,000 square miles with a population of over 1.1 million people and encompassing Harrisburg, Hershey, Carlisle, York, Lebanon, Gettysburg, and Shippensburg — constituted a ‘well-defined local community.’”

Nothing has changed in statute; but now, NCUA's final FOM rule will allow a Combined Statistical Area (CSA) with up to 2.5 million population to be treated as a presumptive well-defined local community. (See my earlier post)

For example, this final rule would allow Utah’s Salt Lake City-Ogden-Clearfield CSA to be classified as a presumptive “well-defined local community,” even though six of the eight counties in the CSA were part of previous litigation that found that those six counties do not constitute a single, well-defined local community.

So, how can these eight counties now be a presumptive well-defined local community?

NCUA is thumbing its nose at the federal courts and is unreasonably interpreting the FCUA.

Over Half of the Credit Unions Reported Fewer Members Compared to A Year Earlier

While overall credit union membership continued to grow during the year ending in the third quarter of 2016, more than half of the credit unions in the country lost members over the last twelve months, according to the National Credit Union Administration.

Fifty-one percent of federally insured credit unions had fewer members at the end of the third quarter of 2016 than a year earlier.

The median membership growth rate was a negative 0.1 percent over the previous year.

Twenty-two states had negative median membership growth. This means more than half of the federally-insured credit unions in those 22 states had fewer members compared to a year ago.

At the median, year-over-year membership declined the most in Pennsylvania (-1.6 percent) and Oklahoma (-1.3 percent). Three other states reported negative year-over-year membership growth rate of one percent or more at the median -- North Dakota (-1 percent), Montana (-1.1 percent), and New Jersey (-1.2 percent).

Approximately 75 percent of credit unions with declining membership had assets of less than $50 million.

Tiny Philadelphia CU Under Cease and Desist Order

The National Credit Union Administration has issued a cease and desist order to S M Federal Credit Union of Philadelphia, Pennsylvania.

S M Federal Credit Union officials have consented to the order, which requires the following actions:

• Provide credit union records to the compensated auditor;
• Complete a member account verification and supervisory committee audit;
• Reconcile and maintain accurate financial statements and member share and loan records;
• Calculate and track loan delinquency;
• Actively and effectively collect past due loans;
• Cease granting new loans;
• Ensure the supervisory committee is fully staffed and fulfilling all obligations; and
• Provide the agency with monthly financial statements; and board and committee minutes.

Chartered in 1959, S M Federal Credit Union has assets of $56,005 and serves 115 members, according to the credit union’s most recent Call Report.

Read the press release.
Read the final order.

Short-Handed NCUA Board Will Likely Delay Incentive Pay Rule Until the Next Administration

Bloomberg is reporting that the Dodd-Frank Act incentive compensation rule is unlikely to be completed during the closing days of the Obama presidency due to the National Credit Union Administration (NCUA) Board being short-handed.

The article states that the opposition of NCUA Board member McWatters along with a bureaucratic quirk at the Securities and Exchange Commission (SEC) means the rule will likely be delayed until the next administration.

The Dood-Frank Act required six regulator agencies to engage in a joint rulemaking regarding incentive pay packages.

The article notes that many of these regulators are short-handed. This is particularly the problem at the NCUA, which has "one Democrat and one Republican on what’s normally a three-member board."

According to the article,

"The NCUA’s Republican, J. Mark McWatters, used to work for House Financial Services Committee Chairman Jeb Hensarling, a vocal critic of Dodd-Frank who has warned regulators not to move ahead with any more rules before Trump takes office. Though McWatters reluctantly voted in April to solicit public comments on bonus restrictions, he said at the time that people shouldn’t mistake that for support. NCUA officials have told staff members of other agencies that the credit union regulator won’t take action on the rules before Trump becomes president, said one of the people, who like others asked not to be named because the discussions were private."

Also at the SEC, the agency is down from five members to three. Were the SEC to schedule a final vote and the sole Republican Commissioner did not participate, the agency would lack a quorum to officially approve the new regulation.

Until vacancies at these agencies are filled, a vote to finalize the rule is unlikely to happen.

Read the story.

ABA Sues NCUA over Its Final FOM Rule

The American Bankers Association (ABA) on December 7 filed a lawsuit against the National Credit Union Administration (NCUA) seeking to overturn the agency's final field of membership (FOM) rule that is scheduled to take effect on February 6, 2017.

The Final FOM Rule was published on December 7 in the Federal Register.

According to ABA's complaint, NCUA’s final rule “fails to adhere to the limitations on federal credit unions established by Congress. By exceeding these statutory limitations, the final rule upsets the balance Congress struck between granting federal credit unions tax-favored status and limiting their operations to carefully circumscribed groups or localities that share a common bond.”

ABA stated that the rule disregards Congress' explicit instruction that community credit unions serve only a single, well-defined local community. Instead, it declares that large regions including millions of residents and cutting across multiple states are single "local" communities.

Under the final rule, an FCU can apply to serve entire geographic regions. NCUA has defined Combined Statistical Areas with populations up to 2.5 million residents as a "well-defined local community." So-called “rural districts” can serve up to 1 million people, which would include the entirety of Alaska, North Dakota, South Dakota, Vermont or Wyoming.

ABA alleges that "[n]o reasonable agency could conclude that the vast areas covered by the Final Rule constitute a single "well-defined local community" or "rural district."

However, NCUA should not be confused with being a reasonable agency.

The lawsuit was filed in the United States District Court for the District of Columbia.

Read the complaint.
Read the press release.

Consumer Credit at Credit Unions Grew by Almost $5.3 Billion in October

The Federal Reserve reported on December 7 that outstanding consumer credit grew at credit unions by almost $5.3 billion during October to $378.8 billion, as both revolving and non-revolving credit increased.

Revolving credit increased by almost $200 million to $51.1 billion.

Non-revolving credit rose by approximately $4.9 billion to $327.6 billion.

Read the G.19 Report.

Will Examiners Second Guess Unguaranteed Business Loans?

Will the National Credit Union Administration (NCUA) examiners second guess credit union business loans that don't have personal guarantees?

In May 2016, NCUA replaced the explicit requirement of personal guarantees on business loans with an implicit expectation that credit unions should obtain a personal guarantee.

According to its updated Examiner's Guide, "[a] credit union should only waive a requirement for a personal guarantee when the credit union has a rigorous credit risk management program in place and the ability to properly mitigate the additional risk. The reliance on a personal guarantee should not be relinquished solely to meet competitive pressure."

NCUA expects that only financially strong borrowers would be eligible to receive a personal guarantee waiver.

NCUA lists multiple factors that should be used to determine if a borrower is financially strong, including superior debt service coverage, positive income and profit trends, a strong balance sheet with a conservative debt-to-worth ratio, readily salable collateral supporting the loan, and a low loan-to-value ratio for the loan.

In addition, credit unions must set concentration limits in their policies on the maximum amount of business or commercial loans that do not have personal guarantees.

Moreover, NCUA expects a credit union to "monitor a borrower's financial condition by requiring frequent financial reporting and compliance with specific well-defined financial covenants. The borrower’s operation should be monitored by frequent contacts by the credit union with the borrower to evaluate if there have been material changes to the operations."

In closing, the Examiner's Guide states that "[e]xaminers should determine whether a credit union adheres to its policy in granting unguaranteed commercial loans. Examiners should give particular attention to the credit union’s ability to monitor the performance of these loans. Loans without the benefit of a personal guarantee should be reported to the board in the aggregate and clearly monitored for adverse changes in their repayment performance or overall risk."

Unfortunately, too much of the guidance is based upon subjective language, which will give credit union examiners a lot of leeway to second guess business loans without personal guarantees.

Read the section on personal guarantees.

Alliance FCU Changes to State Charter and Private Share Insurance

Alliance Federal Credit Union (Lubbock, TX) switched from a federal charter to a state charter and changed from federal share insurance to private share insurance provided by American Share Insurance.

According to Scott Rose, President and CEO of the $245 million Alliance FCU, one of the main reasons he and his board of directors chose to convert to American Share was the simple fact that the role of the regulator and insurer needs to be differentiated.

Another key factor in the credit union's decision to move to a state charter, and to partner with American Share Insurance, was that they wanted to be regulated by local government officials that better understand the needs of Texas residents.

This is the third Texas-based credit union to join American Share Insurance in the last 18 months.

Read the press release.

CUs Report Double Digit Year-over-Year Loan Growth

The National Credit Union Administration (NCUA) reported strong loan and deposit growth for federally-insured credit unions at the end of the third quarter of 2016.

Total loans outstanding at federally insured credit unions reached $847.1 billion at the end of the third quarter of 2016, an increase of 10.1 percent from one year earlier.

Every major loan category posted year-over-year growth. New auto loans grew the fastest at a rate of 15.8 percent to $112.2 billion. Outstanding net member business loans grew at the second fastest pace by 14 percent to $63.9 billion.

Insured shares and deposits in federally insured credit unions grew, for the first time, to more than $1 trillion.

As a result of loans growing at a faster pace than deposits (shares), this caused the industry's loan-to-share ratio to increase. The loans-to-shares ratio was 78.6 percent, up from 77.8 percent at the end of the second quarter of 2016 and 77.5 percent a year earlier.

Net Income Up 5.7 Percent

Net income at federally-insured credit unions increased by 5.7 percent from one year ago to an annualized net income of $9.7 billion through the first three quarters of 2016.

Gross income at credit unions rose by $4.7 billion to $59.3 billion as of September 2016. Offsetting the increase in gross income was an increase in non-interest expense by $2.55 billion and interest expense by .52 billion. In addition, provisions for loan and lease losses jumped by $1.1 billion to $4.7 billion. Operating expenses as of September 2016 were 65.43 percent of gross income.

The annualized return on average assets ratio for federally insured credit unions stood at 78 basis points on September 30, 2016, down from 80 basis points a year earlier. The median return on average assets was 37 basis points at an annual rate during the first three quarters of 2016, up slightly from 36 basis points a year earlier.

Almost 98 Percent of CUs Are Well-Capitalized

The industry's aggregate net worth ratio was 10.85 percent as of the end of September, the same as the previous quarter. One year earlier, the system’s aggregate net worth ratio was 10.99 percent.

NCUA reported that 97.9 percent of federally insured credit unions were well-capitalized. At the end of the third quarter of 2016, less than 1.0 percent of federally insured credit unions were undercapitalized.

Delinquency Rate Flat, Net Charge-Off Rate Up

Credit union reported holding approximately $6.5 billion in delinquent loans. This was up from almost $6 billion one year earlier. The overall delinquency rate was largely unchanged -- down 1 basis point from one year ago at 77 basis points. Over the last year, the delinquency rates on member business loans and credit card loans jumped by 41 basis points to 1.52 percent and by 7 basis points to 1.04 percent, respectively.

Net charge-offs are up $930 million from a year earlier to $4.4 billion. The net charge-off rate was up 7 basis points from a year ago to 53 basis points.

NCUA also noted that credit unions with at least $500 million in assets continued to outperform smaller credit unions.

Read the press release.
Review Financial Trends Report.

University Federal Credit Union Sponsors University's Rooftop Playfield

University Federal Credit Union (UFCU), Salt Lake City, Utah, has sponsored a playfield at the University of Utah.

The University Federal Credit Union Playfield was made possible through a lead gift from the UFCU.

The playfield is located on the top of a four-level parking structure in the middle of campus.

In addition, the credit union made a generous contribution to the George S. Eccles Student Life Center, which created the UFCU The Core workout center.

The dollar amount of the contributions were not disclosed.

Read the press release.

Is the Washington-Baltimore-Arlington, DC-MD-VA-WV-PA Combined Statistical Area A Well-Defined Local Community?

The National Credit Union Administration (NCUA) Board is proposing to quadruple the population threshold of a presumptive community charter consisting of a statistical area or a portion thereof served by a federal credit union (FCU) to 10 million.

The Board defines a statistical area as being comprised by a Combined Statistical Area or a Core-Based Statistical Area (CBSA). A CBSA is either a Metropolitan or Micropolitan Statistical Area.

For example, if the proposed population threshold of 10 million is approved, this would allow an FCU to serve a statistical area as a well-defined local community (WDLC) with a population that is greater than the population of 41 states and the District of Columbia.

In addition, the proposal would qualify 20 additional Combined Statistical Areas as presumptive WDLCs. This means that all but two Combined Statistical Areas would qualify as presumptive WDLCs.

Under the proposal, the Washington-Baltimore-Arlington, DC-MD-VA-WV-PA Combined Statistical Area would qualify as a presumptive WDLC.

The Washington-Baltimore-Arlington, DC-MD-VA-WV-PA Combined Statistical Area has an estimated population of approximately 9.6 million people. This is below the proposed 10 million population threshold.

The region encompasses one county in southern Pennsylvania, portions of the eastern panhandle of West Virginia, central and southern Maryland including part of the eastern shore, the District of Columbia, and northern Virginia.

It includes six Metropolitan Statistical Areas and two Micropolitan Statistical Areas.

This region has numerous trade areas, multiple taxing authorities, and multiple political jurisdictions.

In my opinion, the Washington-Baltimore-Arlington, DC-MD-VA-WV-PA Combined Statistical Area is hardly a local community; but rather a region.

NCUA Should Not Rubber Stamp Narrative Model for Community Charter

The National Credit Union Administration (NCUA) Board is proposing to resurrect the narrative model to demonstrate that a community that a federal credit union (FCU) wishes to serve is a well-defined, local community (WDLC).

Until 2010, NCUA required that an FCU applying a community charter submit a narrative for NCUA approval demonstrating that the residents of the proposed community had common interests and interaction. The Board abandoned the narrative requirement in favor of an objective model that gave credit unions the choice between two presumptive WDLC models -- a single political jurisdiction or a statistical area.

The Board is now proposing to allow an FCU to submit a narrative to demonstrate that the community it proposes to serve qualifies as a WDLC based upon common interests and interaction among the area’s residents.

NCUA noted that its pre-2010 experience with community charter applications has identified 13 criteria that were most useful and compelling to demonstrate common interests and interaction.

The thirteen criteria are:

• Presence of a Central Economic Hub;
• Community-wide Quasi-Government Agency Services;
• Governmental Designations with Community;
• Shared Public Services and Facilities;
• Hospitals and Major Medical Facility Services;
• College and University Enrollment;
• Multi-Jurisdictional Mutual Aid Agreements;
• Organizations’ and Clubs’ Membership and Services;
• Newspaper Subscriptions;
• Attendance at Entertainment and Sporting Events;
• Local Television and Radio Audiences;
• Community-wide Shopping Patterns; and
• Geographic Isolation.

According to the proposed rule, “[a]n area need not meet all of the narrative criteria to qualify as a local community; rather, the totality of circumstances within the criteria a credit union elects to address must indicate a sufficient presence of common interests and interaction among the area’s residents.”

However, NCUA has an obligation to examine not only those factors that support the presence of common interests and interaction in the proposed community; but also, those factors that do not support the presence of common interests and interaction. To exclude factors that would rule against the presence of common interests and interaction would bias the agency’s analysis. As a federal judge opined: “NCUA must critically analyze the facts provided in the application to ensure that incomplete and erroneous information does not lead to an improper conclusion.”

In conclusion, NCUA should not “rubber stamp” information provided by an FCU showing interaction and common interests of residents. To augment its analysis, the NCUA Board should seek comment from the public on whether the proposed community is a WDLC.

Read the proposed rule.

First African Baptist FCU Closed, American Heritage FCU Assumes Members and Deposits

The National Credit Union Administration liquidated First African Baptist Church Federal Credit Union of Sharon Hill, Pennsylvania.

American Heritage Federal Credit Union of Philadelphia immediately assumed First African Baptist’s members and deposits.

NCUA made the decision to liquidate First African Baptist Church Federal Credit Union after determining the credit union was insolvent with no prospect of restoring viable operations.

This low-income designated credit union was seriously undercapitalized with a net worth ratio of 2.09 percent as of September 30.

At the time of its liquidation and subsequent purchase and assumption by American Heritage Federal Credit Union, First African Baptist Church Federal Credit Union had assets of $76,188 and served 261 members, according to its most recent Call Report.

First African Baptist Church Federal Credit Union is the eleventh federally insured credit union liquidation of 2016 and the seventh credit union in Pennsylvania to be liquidated this year..

Read the press release.

IBM Southeast Employee Credit Union to Acquire Florida Bank

Another small bank is being acquired by a large credit union.

It is being reported that IBM Southeast Employee Credit Union (Delray Beach, FL) has filed an application to acquire Boynton Beach-based Mackinac Savings Bank.

IBM Southeast Employee Credit Union has $947 million in assets and 16 branches, according to its most recent call report.

In comparison, Mackinac Savings Bank reported 3 branches and $109.5 million in assets as of September 30.

The deal still requires regulatory approval and the transaction price was not disclosed.

Read the story.

Bankruptcy Filing Affidavit Claims the Price of NYC Taxi Medallions As Low As $250,000

A recent Chapter 11 bankruptcy filing of a taxi medallion owner placed the value for New York City (NYC) taxi medallions as low as $250,000.

Evgeny Freidman on November 14 filed for bankruptcy protection regarding three New York City taxi medallions.

According to the affidavit, the entry of Uber and Lyft into the New York market has caused taxi revenues to fall by 45 percentt,

As a result, "Medallion owners ... can no longer demand the $2,000 or $2,500 per month rent per Medallion lease." The going lease rate is now about $1,500 per month.

This decline in revenues has caused taxi medallion values to plummet precipitously.

According to the affidavit,

The current value of the Medallions is based on sales, and is difficult to determine, but without question it has fallen precipitously since the February 2014 TLC auction prices. Based on some recent auction results, the value is perhaps as low as $250,000 each, but certainly, in my opinion, no more than $500,000 each.

If the price of taxi medallions is $250,000, this could signify large potential losses to the National Credit Union Share Insurance Fund from undercapitalized taxi medallion lending credit unions.

Read the court filing.

Rep. Mulvaney Troubled by $1 Billion in Legal Fees Paid by NCUA

Representative Mick Mulvaney (R - SC) wrote National Credit Union Administration (NCUA) Chairman Metsger on November 21 that he was troubled by the $1 billion in legal fees paid by the agency on $4.3 billion in recoveries associated with lawsuits over the sale of faulty mortgage-backed securities to five failed corporate credit unions.

Rep. Mulvaney wrote that "[m]ore prudent action in this matter may have saved the credit union industry millions of dollars."

Rep. Mulvaney has requested answers from the agency to three questions within 30 days:

• Why did the agency pursue these cases under contingency fee arrangements?
• What was the original analysis of why this was the better approach?
• Has there been a post-settlement analysis to see if this was actually the best approach financially given the outcomes?

I will be very interested in the agency's response.

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

Regional and Community Banks Top CUs in Customer Satisfaction

The American Customer Satisfaction Index (ACSI) reported that regional and community banks topped credit unions in customer satisfaction.

Regional and community banks had a combined score of 83, up 3.8 percent from a year ago. When super-regional banks and money center banks are included the industry's combined score was 80 -- up 5.3 percent from a year ago.

In comparison, credit unions edge up 1.2 percent to 82, slightly below the industry’s long-term average.

The report noted that strong membership growth at credit unions was putting a strain on the customer experience at credit unions.

Areas experiencing deterioration at credit unions were call centers, variety of financial services, and convenience.

The score for call centers fell 2 percent to 83.

In addition, members reported a slight drop in the availability of a variety of financial services, which fell from a score of 84 to 83.

Also, credit union members' assessment of the number and location of branches fell 3 percent to 68. The report further noted that credit union members wanted greater access to ATMs, as this benchmark fell 7 percent from a year ago to 67.

The report further noted that there was no change in customer experience in six areas, including courtesy and helpfulness of staff, satisfaction with website, and the speed in which transactions were completed.

Read the press release.

Summit CU Seeks to Build New 130,000 Square Foot Headquarters Building

Summit Credit Union is negotiating with Cottage Grove Planning Commission and other agencies to build its new corporate headquarters in Cottage Grove, Wisconsin.

The proposed 130,000 square foot building would be on 11 acres and would house 250 employees.

The preliminary plan includes underground parking for 90 vehicles and surface parking for another 400.

If the building is approved, it will be designed in 2017, built in 2018 and opened no later than 2020.

Read the story.

Meritrust CU Signs Letter of Intent to Buy 10-Story Building

Meritrust Credit Union has signed a letter of intent to purchase the Cargill Protein building in downtown Wichita.

Meritrust expects to move roughly 150 administrative and support positions to the 10-story, 110,000-square-foot building.

The credit union stated that it has grown rapidly in recent years and its administrative office has become too small to support its staff.

Details on the offer for the building have not been disclosed.

Read the story.

Mountain America CU Breaks Ground on 11-Story, 327,000 Square Foot Corporate HQ Building

Mountain America Credit Union (West Jordan, UT) announced the ground breaking of its new corporate headquarters in Sandy, Utah.

The building will span 11 stories and 327,000 square feet and can accommodate up to 1,700 employees.

An adjacent parking structure will include 1,800 parking stalls and will be shared by Mountain America and Hale Centre Theatre. Employees will enjoy features including a fitness center, outdoor amenities, access to a one-acre park/outdoor amphitheater maintained by Sandy City.

The cost of the corporate headquarter's project was not disclosed.

Mountain America Credit Union has more than $5.9 billion in assets.

Read the story.

The Number of Problem CUs Fell During Q3 2016; 2017 NCUSIF Premiums Estimated Between 3 and 6 Basis Points

The National Credit Union Administration (NCUA) reported today that the number of problem credit unions fell during the third quarter; but shares (deposits) and assets at problem credit unions edged higher during the quarter.

At the end of the third quarter, there were 201 problem credit unions. In comparison, there were 209 problem credit unions at the end of the second quarter of 2016 and 233 credit unions at the end of the third quarter of 2015.

A problem credit union has a composite CAMEL rating of 4 or 5.

During the third quarter both total shares (deposits) and assets in problem credit unions rose. Shares in problem credit unions increased from $8.4 billion as of June 30, 2016 to $8.6 billion as of September 30. Over the same time period, assets in problem credit unions rose from $9.5 billion to $9.7 billion. A year earlier, problem credit unions held $7.6 billion in shares and $8.5 billion in assets.

According to NCUA, 0.86 percent of total insured shares and 0.8 percent of industry assets were in problem credit unions at the end of the second quarter.

Ninety percent of problem credit unions have less than $100 million in assets and approximately 1 percent have assets in excess of $500 million.

In addition, National Credit Union Share Insurance Fund (NCUSIF) reported an increase in reserves from $178.9 million at the end of August to $182.6 million as of September 30.

A presentation by the NCUA staff to the NCUA Board estimated that 2017 NCUSIF premiums would likely range between 3 basis points to 6 basis points, as the projected NCUSIF equity ratio next year will be between 1.24 percent to 1.27 percent -- below the Normal Operating Level of 1.30 percent of insured deposits. Staff stated that these estimates are for budgetary planning purposes of credit unions. Staff further stated that credit unions should not accrue for this expense until future action by the NCUA Board to actually charge a premium in 2017.

According to staff analysis, a premium of 3 basis points would cause an additional 110 credit unions to report negative net income after the premium. If the premium is 6 basis points, an additional 219 credit unions would report a loss after the premium.

Guardian CU Buys Two Bank Branches and Deposits

Guardian Credit Union (Montgomery, AL) announced that it has reached an agreement with SouthCrest Financial Group to purchase its two Alabama offices and all related deposits and assets.

The two branches are located in Chilton County.

Guardian will pay a 5 percent deposit premium on the total deposits transferred, which are expected to be about $45 million, and purchase more than $6 million worth of loans.

The sale is subject to regulatory approval and is expected to close in early 2017.

Read the story.

Logix FCU Breaks Ground on New $100 Million Corporate Campus

Logix Federal Credit Union (Burbank, CA) broke ground on its new corporate headquarters to Santa Clarita, California.

The estimated total cost of the project is at roughly $100 million. This includes the price of the land, the building, the technical equipment, furnishings and landscaping.

The company will start out with a 170,000-square-foot building and will have the capability of adding another 85,000 square feet over time.

The $4.8 billion credit union expects to move to it new corporate campus in the third quarter of 2018.

Read the story.

Survey Shows Drop in Compliance and Risk Management Concerns

Despite a persistently stringent regulatory environment, banks and credit unions are becoming more confident in their compliance and risk management programs, according to the Regulatory and Risk Management study by Wolters Kluwer.

Overall, levels of concern among the 846 respondents collectively declined for the first time in the survey’s four-year history. A majority of the respondents -- 59 percent -- said that their compliance department now plays a collaborative role in major business decisions within their organization, and 39 percent are using an integrated or strategic risk management program.

While confidence is growing, respondents still noted several key obstacles to implementing an effective compliance program, including inadequate staffing (33 percent), manual processes (26 percent) and too many priorities (21 percent). Preparing for the new Home Mortgage Disclosure Act rules was also a central point of concern, with most respondents worried about being able to accurately capture the data required by the rule and training bank employees.

On the risk management side, 70 percent of respondents fingered cybersecurity as the top risk their institutions will face over the next year, up from 66 percent in the 2015 survey.

Read the press release.

Read the survey.

NCUA: No CUs Fined for Mortgage-Related Violations Between January 2012 and April 2016

Last week the Government Accountability Office (GAO) released a report reviewing the collection and use of funds from financial institutions for mortgage-related violations.

According to the GAO, "National Credit Union Administration (NCUA) ... had not assessed any penalties against financial institutions for mortgage-related violations from January 2012 through April 2016."

While NCUA did not assess any monetary penalties against credit unions for mortgage-related violations, this should not be interpreted to mean that credit unions had not had mortgage-related violations. Instead, NCUA may have addressed mortgage-related violations via the supervisory process.

Read the report.

Evansville Teachers FCU Buys Regional Mortgage Company

CU Today is reporting that Evansville Teachers FCU (Evansville, IN) plans to purchase First Liberty Financial Mortgage, a regional mortgage company headquartered in Owensboro, KY.

With the acquisition, First Liberty Financial Mortgage will become a division of Evansville Teachers FCU.

The $1.3 billion credit union expects this acquisition to double its monthly mortgage production.

The deal is expected to become effective November 15 and will expand the credit union’s mortgage lending presence to 12 new markets in the states of Kentucky, Tennessee, Alabama, and Mississippi.

Read the story.

Population Limit for Rural District Increases to 1 Million People

The National Credit Union Administration (NCUA) Board on October 27th quadrupled the population limit for a Rural District.

The final rule increased the population limit for a so-called “Rural District” to 1 million people from 250,000. At the same time, NCUA dropped the alternate population limit of 3 percent of the population of the state in which the majority of the Rural District's residents would be located.

But as I pointed out previously, the final rule will allow an FCU to arbitrarily cobble together densely populated urban areas with sparsely populated counties. In fact, NCUA’s Rural District definition could define a region as rural, despite having more than half of the population living in urban areas.

Also, while NCUA states that a state does not meet the requirement of being a well-defined local community, the Rural District population expansion provides a backdoor for an FCU to have a state-wide field of membership.

Potentially, the states of Alaska, North Dakota, South Dakota, Vermont and Wyoming in their entirety could be designated as rural districts.

However, more than half of the residents in the states of Alaska, North Dakota, South Dakota, and Wyoming live in urban areas.

If this occurs, this would represent an abuse of the agency’s discretion.

Read the final rule.

NCUA Appointed Conservator of Valley State CU

The Director of the Michigan Department of Insurance and Financial Services appointed the National Credit Union Administration conservator of Valley State Credit Union, of Saginaw, Michigan.

The Michigan Department of Insurance and Financial Services placed Valley State Credit Union into conservatorship on August 17, 2016 because of unsafe and unsound practices at the credit union.

The credit union reported that 15.76 percent of its loans were 60 days past due. In addition, the credit union had a loss of almost $458 thousand through the first 3 quarters of 2016.

Valley State Credit Union is a federally insured, state-chartered credit union with 2,925 members and assets of $22.3 million, according to the credit union’s most recent Call Report.

Read NCUA press release.

Westerra CU Receives Naming Rights to Infinity Park's Sports Plaza

Westerra Credit Union (Denver, CO) has entered into a three-year sponsorship with Infinity Park, home of the Glendale Raptors Rugby Football Club.

The sponsorship gives Westerra Credit Union the naming rights to the stadium’s sports plaza, which will be called Westerra Credit Union Sports Plaza.

In addition to the Westerra Sports Plaza, Westerra Credit Union’s logo will be displayed on the men’s jerseys for the 2017 and 2018 seasons. The $1.4 billion credit union also receives signage throughout the stadium and the opportunity to have an on-site presence at all Infinity Park events.

The price of the sponsorship deal was not disclosed.

Read more.

Credit Union Sued after Sharing Woman's Credit Report with High School Class

A South Dakota woman is suing Consumer's Federal Credit Union (Gregory, SD) after copies of her credit report were shared with a class of 26 high school students.

The plaintiff, Terri McFayden, alleges that the credit union CEO, Sara Zimbelman, shared a partially redacted copy of the plaintiff's credit report with a class of 26 high school students and made derogatory remarks about her credit history.

The lawsuit claims that McFayden's name, address, partial Social Security number and a "substantial amount of credit information" was still visible on the report.

The plaintiff also claims that the entire community now knows about her financial problems and she is experiencing emotional distress.

McFayden is suing for violations of the Fair Credit Reporting Act and intentional infliction of emotional distress. She also seeks punitive damages.

Read the story.

Consumer Credit at CUs Grew in September by $3.9 Billion

The Federal Reserve reported that outstanding consumer credit at credit unions grew by approximately $3.9 billion for September 2016 to $373.5 billion.

Revolving credit at credit unions edged higher by almost $100 million to $50.9 billion in September.

Nonrevolving credit increased by nearly $3.9 billion during the month of September to $322.7 billion.

Read the G.19 Report.

Losses Surge on Higher Provisioning for Bad Taxi Medallion Loans at Progressive CU

Taxi medallion lender Progressive Credit Union (New York, NY) reported a loss of almost $52.4 million through the first three quarter of 2016 on higher provisioning charges.

For the third quarter, the loss was $32.98 million.

Provisions for loan and lease losses were $60.3 million at the end of the third quarter, up from $25.1 million as of June 2016.

The credit union's net worth fell from $233 million as of June 2016 to $200 million as of September 2016. Progressive's net worth ratio dropped from 36.71 percent to 33.95 percent over the same time period.

Delinquent loans increased by 45.2 percent during the quarter to approximately $70.6 million at the end of the third quarter. As a result, 11.62 percent of all loans were 60 days or more past due. In addition, delinquent loans were 35.29 percent of net worth.

Early delinquencies (30 to 59 days past due) were $14.2 million as of September 30, 2016.

Progressive reported net charge-offs of $10.8 million as of September 2016, up from $4.3 million from the previous quarter.

Troubled Debt Restructured (TDR) loans were $123.4 million at the end of the third quarter. TDR loans were 20.32 percent of loans and 61.7 percent of net worth.

Allowances for loan and lease losses (ALLL) were $91.1 million as of September 2016, up from $62.3 million as of June 2016. The credit union's coverage ratio (ALLL divided by delinquent loans) was 129.11 percent. However, its coverage ratio is overstated as $38.1 million was allocated to cover TDR loans.

The credit union is reporting a buffer of net worth and ALLL of $291.1 million, which is able to absorb expected and unexpected losses.

SIU CU Adds 13 Counties to Its Field of Membership

SIU Credit Union (Carbondale, IL) has received approval from the Illinois Department of Financial and Professional Regulation to add 13 counties to its field of membership.

SIU Credit Union can now offer credit union membership to individuals that live or work in Alexander, Clinton, Edwards, Gallatin, Hamilton, Hardin, Monroe, Pope, Pulaski, Wabash, Washington, Wayne, or White counties, according to a news release from the credit union.

Read the story.

New Convention Center to Be Named for American 1 Credit Union

A new convention center being built at the Jackson County (Michigan) Fairgrounds will be named for American 1 Credit Union.

The $300 million credit union contributed $4 million for the construction of the $6 million convention center.

The new building will feature a large expo space that can be sectioned off for smaller events. Additional rooms will be able accommodate conferences with multiple sessions. The facility will also include a full kitchen for catering services.

The new convention center will compliment the existing American 1 Event Center at the Fairgrounds.

The $4 million contribution to the convention center is approximately equal to total dividend payments to members for the years of 2013, 2014, and 2015, as reported by the credit union's Call Report.

Read more.

Taxi Medallion Lender LOMTO Is Undercapitalized

According to Call Report data, LOMTO Federal Credit Union (Woodside, NY) is now undercapitalized.

The credit union reported net worth of $20.5 million. Its net worth ratio was 8.40 percent as of September 2016. However, its minimum risk based net worth requirement was 10.04 percent.

The credit union reported a loss of almost $11.75 million through the first three quarters of 2016. The credit union reported $9.9 million in loan loss provisions during the first nine months of 2016.

The credit union reported an increase in delinquent loans during 2016. At the end of 2015, delinquent loans were $6.4 million. By the end of the third quarter, delinquent loans were $30.4 million.

This means that as of September 2016, the delinquent loan rate was 13.43 percent. This is up from 2.65 percent at the end of 2015.

Also, delinquent loans were 148.38 percent of the credit union's net worth.

The credit union further reported that approximately $33.8 million in Troubled Debt Restructured (TDR) loans, of which $14.8 million is in non-accrual status. TDR loans were 14.91 percent of loans and 164.72 percent of net worth, respectively.

LOMTO recorded $3.4 million in charge-offs through the first 3 quarters of 2016. The net charge-off rate was 1.94 percent.

LOMTO reported that $25.75 million in allowances for loan and lease losses. The credit union's coverage ratio was 84.64 percent at the end of the third quarter. However, the coverage ratio is overstated as $15 million was allocated to cover TDR loans.

In aggregate, LOMTO has a buffer of net worth plus allowances for loan and lease losses of $46.25 million to absorb expected and unexpected losses.

On other interesting fact is that uninsured deposits at LOMTO have fallen by 47 percent over the last year to $11.4 million.

Net Charge-Offs of Taxi Medallion Loans at Melrose CU Surge in the Q3

According to Call Report data, net charge-offs at Melrose Credit Union (Briarwood, NY) were almost $191 million, as of September 2016. This is up from $22.7 million at the end of the second quarter, as the credit union wrote down defaulted taxi medallion loans.

Delinquent loans fell by approximately $14 million during the third quarter to $421.4 million. As of September 2016, 24.12 percent of its loans were 60 days or more past due. Delinquent loans as a percent of net worth were 290.45 percent.

The credit union's allowance loan and lease loss (ALLL) accounts plummeted from $270.5 million in the second quarter to $102.2 million in the third quarter.

The combination of higher net charge-offs and the failure to increase provisions for loan and lease losses between June 2016 and September 2016 contributed to the decline in the ALLL line item.

The decline in allowance for loan and lease losses resulted in the coverage ratio (ALLL divided by Delinquent Loans) dropping to 24.24 percent from 62.14 percent during the quarter.

This would indicate that Melrose is seriously under-reserved and will need to increase provisions to rebuild its allowance for loan and lease losses accounts. The anticipated increase in future provisions for loan and lease losses will negatively impact earnings and the credit union's net worth.

Melrose also reported that Troubled Debt Restructured (TDR) loans fell during the quarter from $358.8 million to $242.9 million. The vast majority of TDR loans ($235 million) were in non-accrual status. As of September 2016, TDR loans represented 13.90 percent of loans and 167.39 percent of net worth.

The credit union reported that it was undercapitalized as of September 2016. The credit union had a net worth ratio of 7.52 percent; but needed a risk based net worth requirement of 9.14 percent.

The credit union has a combined buffer of net worth plus ALLL to absorb expected and unexpected losses of almost $247.3 million.

Tomorrow I will report on LOMTO Federal Credit Union.

Nomura Agrees to Settlement of More Than $3 Million over the Sale of Faulty Securities

Nomura Asset Acceptance Corporation and Nomura Home Equity Loan, Inc. have jointly agreed to pay more than $3 million to settle claims by the National Credit Union Administration (NCUA) alleging the sale of faulty residential mortgage-backed securities to two corporate credit unions.

With this settlement, NCUA will dismiss pending suits against both firms. Neither firm admits fault as part of the settlement agreement.

NCUA still has litigation pending against other financial institutions, including Credit Suisse and UBS Securities, alleging they sold faulty residential mortgage-backed securities to corporate credit unions. NCUA also has pending litigation against various residential mortgage-backed securities trustees and LIBOR banks related to corporate credit union losses.

Read the press release.

Metsger: NCUA Has Not Engaged in Broad De-Risking

The National Credit Union Administration (NCUA) Chairman Metsger wrote Senator Flake (R-AZ) and Representative Luetkemeyer (R-MO) on October 31 that the agency "has not engaged in broad de-risking initiatives or activities with an individual institution or broadly through the credit union system."

Metsger stated that NCUA did not participate in the Justice Department's Operation Choke Point.

Metsger assured them that the agency is dedicated to ensuring public access to financial services.

Rather than cutting off entire categories of customers to banking services, the agency encourages credit unions to take a risk-based approach in assessing individual customer relationships.

Moreover, NCUA sent a memorandum to all field staff in August 2014 stating that it is the agency's policy that the decision to open, close, or decline an account or relationship is generally made by the credit union without NCUA's involvement.

Metsger concludes that NCUA does not dictate to credit unions, which businesses credit unions can serve, as long as the businesses are legal and within the credit union's field of membership.

Failed Auction on Foreclosed Medallions of First Jersey CU

ValueSquared, a short seller, reported in Seeking Alpha about last week's failed public auction for 3 foreclosed New York City yellow cab medallions.

These 3 medallions were collateral for defaulted loans possessed by First Jersey Credit Union. None of the 3 medallions was sold.

For the 2 unrestricted medallions, 2 people were willing to bid $400,000 to $410,000. It is reported that First Jersey Credit Union had $700,000 to 800,000 in outstanding balance on each defaulted loan.

In rejecting the bids, First Jersey Credit Union thought that the taxi medallions were worth more. The credit union believed it can lease out the medallions and would be better off than selling now at discounted prices.

However, do you believe New York City taxi medallions will go higher or lower in value?

Read the commentary.

Legal Redlining of Minority, Low-Income and Underserved Communities

The National Credit Union Administration (NCUA) on October 27 repealed the "core area" requirement when a federal credit union (FCU) applies for a community charter consisting of a portion of a Core Based Statistical Area (CBSA). This could result in the redlining of low-income or minority communities by community chartered credit unions.

When the NCUA Board implemented the core area requirement, it noted the primary purpose of this requirement was to acknowledge the "core area" of a Core Based Statistical Area as the typical focal point for common interests and interaction among residents. An additional purpose was to extend FCU services to low-income persons and underserved areas, both typically located in the "core area" of a Core Based Statistical Area.

However, the NCUA Board reversed its position by stating correctly that the Federal Credit Union Act does not require a community charter based upon a CBSA to serve a "core area."

In justifying the abolition of the "core area" requirement, NCUA stated it "has in place a supervisory process to assess management’s efforts to offer service to the entire community an FCU seeks to serve. NCUA holds credit union management accountable for the results of an annual evaluation that encompasses a community FCU’s implementation of its business and marketing plans, extending for three years after the credit union either is chartered, converts or expands."

But this supervisory argument is a red herring.

The final rule allows an FCU to now draw its boundaries so as to restrict service to low-income, minority, and underserved communities. The agency's supervisory process will not address this issue; because the "core area" is not part of the credit union's community charter.

When this field of membership rule goes into effect, community charters should be examined to see if FCUs exclude core areas.

If FCUs exclude core areas from their community charters, this should raise questions about preserving the credit union tax exemption.

Read the final rule.

Puerto Rico's Cooperative Credit Unions' Financial Outlook Is Dire

Addressing a federal oversight board overseeing Puerto Rico’s financial restructuring, Governor Alejandro Garcia Padilla stated that Puerto Rico’s cooperative credit unions face huge financial losses and could collapse.

The island's 116 Coops have suffered large losses in their investment portfolios from the default on Government Development Bank and General Obligation bonds and could suffer larger losses under a broader debt restructuring plan.

The Governor warned that a broader debt restructuring could: cause one-third of all Puerto Ricans to suffer losses on their deposits; reduce lending and economic growth on the island; and cause the collapse of the island's state-insured credit unions as depositors flee to FDIC-insured institutions.

The Governor noted that the cost of protecting credit union depositors, as well as the cooperative credit union system, was estimated at $1.2 billion.

Note: These 116 cooperative credit unions are not insured by the National Credit Union Share Insurance Fund.

Below is the slide from the Governor's presentation.

Deseret First CU Breaks Ground on New HQ Building

Deseret First Credit Union broke ground on the construction of its new corporate office building in West Valley City, Utah.

The 60,000 square-foot, three-story facility will house management, administrative, member service, lending, IT, and other functions of the credit union.

Construction on the facility is expected to be completed in fall 2017.

The cost of the project was not disclosed.

Read the story.

New Mexico CU Mega-Merger Announced

Sandia Laboratory Federal Credit Union and Kirtland Federal Credit Union have announced that they are seeking a merger of the two institutions.

Kirtland is a $760 million credit union. Sandia Laboratory FCU is a $2.3 billion credit union.

If approved, the combined institution will have over $3 billion in assets.

The merger has to be approved by Kirtland's members and the National Credit Union Administration.

Read more.

NCUA Board Proposes to Quadruple the Population Size Limit for a Community Charter to 10 Million

The National Credit Union Administration (NCUA) Board on October 27 proposed to increase the population size of a presumptive community charter for a federal credit union (FCU) to 10 million.

The proposed rule would quadruple the population limit from 2.5 million to 10 million for a well-defined local community (WDLC) consisting of a statistical area or a portion thereof.

The proposal stated that "the Board anticipates that many areas that would qualify as a WDLC will experience population growth over time. The Board therefore believes that its policy should anticipate and accommodate inevitable growth ... in order to maximize the potential membership base available to community credit unions."

In justifying the higher population limit, the proposal stated that the 10 million population limit conforms to the population of the most populous single political jurisdiction approved by the Board (Los Angeles County).

In addition, the Board believes the 10 million population proposal would narrow an inherent imbalance between FCUs and state-chartered credit unions. According to NCUA, there are at least nine states that permit their credit unions to serve a state-wide field of membership.

Furthermore, the proposal would allow an FCU to submit a narrative, supported by appropriate documentation, to demonstrate that the community it wishes to serve qualifies as a WDLC. The appendix to the propose rule identifies thirteen criteria that the agency has historically found "the most useful and compelling ... to demonstrate common interests or interaction among residents of a proposed community."

The proposal will have a 30 day comment period.

Read the proposal.

WSJ: NCUA Provides CUs with Greater Flexibility to Add Members

The Wall Street Journal is reporting that the National Credit Union Administration (NCUA) today finalized a rule that would provide federal credit unions with more flexibility to expand their memberships.

The rule, which could draw a lawsuit from the banking industry, makes more than a dozen changes to the regulator’s policies to broaden the way that credit unions can define their “field of membership,” allowing them to serve larger geographic areas and employee groups.

The rule will become effective 60 days after being published in the Federal Register.

I will have more to say after thoroughly reading the rule.

Read the Wall Street Journal (subscription required).

UDAAP and the Freezing of Delinquent Members Electronic Access to Accounts

The Consumer Financial Protection Bureau (CFPB) accused Navy Federal Credit Union of engaging in "Unfair, Deceptive or Abusive Acts or Practices" (UDAAP) by freezing members electronic access to their accounts after they became delinquent.

Some within the credit union industry have stated that the CFPB's action is usurping a "long standing legal interpretation is that an FCU may limit services to a member who has caused a loss" so long as the member retains the right to vote at the annual meeting and maintain a share draft account.

However, I believe these concerns are overblown. The enforcement order is specific to Navy, not to the industry. Navy can no longer impose electronic account restrictions on members, who become delinquent or overdraw their accounts; beause its practices were unfair and not abusive.

Credit unions can still freeze electronic access to accounts; but need to ensure their practices are fair.

Critics of the CFPB have accused the agency of regulation through enforcement action. I agree with that observation; but it is not going to change any time soon. Therefore, it is important to read the enforcement order and do your due diligence, especially if you are a credit union with at least $10 billion in assets.

Here are some examples of unfair practices from the order.

• Navy froze members access to the accounts without providing adequate notice to the members.
• The electronic account restrictions prevented members from adding travel alerts through mobile platforms.
• The electronic account restrictions disabled the member's ATM and debit cards as well as all ATM functions.
• Navy did not make exceptions for accounts containing protected federal benefits, such as Social Security income or veterans’benefits.

Furthermore, the order found that injuries to members were not reasonably avoidable because policies and practices regarding electronic access and service restrictions were not adequately disclosed at the time the account was opened. This means that credit unions need to look at their account opening process to ensure that members have adequate disclosures.

NCUSIF Estimated Losses of $5.4 Million Between April 1, 2016 and September 30, 2016

The National Credit Union Administration Office of the Inspector General (OIG) reported that losses to the National Credit Union Share Insurance Fund (NCUSIF) between April 1, 2016 and September 30, 2016 were approximately $5.4 million.

In its Semi-Annual Report to Congress, the OIG provided estimates of NCUSIF losses and grounds for closing arising from the liquidation of one credit unions and emergency merger of another credit union.

Also, the OIG had contracted with Moss Adams LLP to conduct a Material Loss Review (MLR) regarding the failures of six federally insured credit union located in Bensalem and Chester, Pennsylvania. All six credit unions outsourced the management, recordkeeping, data processing, and maintenance of financial records to a third party provider, which allegedly caused each institution to fail. The MLR will: (1) determine the cause(s) of the credit unions’ failure and the resulting estimated $3.2 million loss to the Share Insurance Fund; (2) assess NCUA’s supervision of the credit unions; and (3) provide appropriate recommendations and suggestions to prevent future losses.

30 CUs Consent to Fines for Late Filing Call Report in Q1 2016

The number of credit unions consenting to civil money penalties for late filing their Call Reports in the first quarter of 2016 doubled from a year ago.

In the first quarter of 2015, 15 credit unions consented to penalties. Thirty federally insured credit unions consented to civil monetary penalties for filing late Call Reports in the first quarter of 2016.

The 30 credit unions consented to total penalties of $20,036.

Individual penalties ranged from $151 to $6,734. The median penalty was $274.

The assessment of penalties primarily rests on three factors: the credit union’s asset size, its recent Call Report filing history and the length of the filing delay.

Of the 30 credit unions agreeing to pay penalties for the first quarter of 2016:

• Twenty had assets of less than $10 million;
• Nine had assets between $10 million and $50 million; and
• One had assets greater than $250 million.

Five of the late-filing credit unions had been late in a previous quarter.

Read the press release.

List of CUs consenting to civil money penalties.

What Does SBNY's Earnings Report Tell Us About CU's Chicago Taxi Medallion Valuations?

Signature Bank threw in the towel on its Chicago taxi medallion portfolio and made the decision to reserve for or write down each Chicago taxi medallion loans to $60,000.

Here are some highlights from the press release on taxi medallion loans in Chicago.

During the third quarter, Signature Bank had $61.7 million in provisioning expenses for its Chicago taxi medallion portfolio.

According to the press release, $95.1 million of the charge-offs in the 2016 third quarter were for the Chicago taxi medallion portfolio. The remaining Chicago taxi medallion portfolio balance is $58.4 million with an associated allowance for loan losses of $12.6 million for a net exposure of $45.8 million.

As of September 30, 2016, non-accrual loans were $162.8 million of which $140.1 million were taxi medallion loans.

This would suggest that credit unions with Chicago taxi medallion loans will need to recognize losses in their Chicago taxi medallion portfolio.

Read the press release.

Senator Flake and Rep. Luetkemeyer Write NCUA about De-risking

October 19, 2016

The Honorable Rick Metsger
Chairman
National Credit Union Administration
1775 Duke Street
Alexandria, Virginia 22314

Dear Chairman Metsger:

We write regarding the trending practice of “de-risking” and to request information on what action the National Credit Union Administration (NCUA) has taken to address impacts associated with this trend.

As you are no doubt aware, financial institutions have generally noted concerns about enforcement and supervisory risk when terminating certain accounts. In other words, they have likely concluded that they cannot earn a sufficient financial return on these accounts to offset the risk of punitive enforcement action by regulators or prosecutors. Significant uncertainty resulting from a perceived lack of standardization in applying laws related to de-risking compounds the costs in this cost-benefit analysis for credit unions.

To date, the NCUA has neglected to issue any supervisory guidance on the practice and its position remains unclear. However, credit unions in our states have made it clear that the de-risking trend is very real and may result from actions taken by NCUA’s regulatory and supervisory staff to influence a credit union’s decision to exit a line of business or to terminate a customer relationship.

We recognize the critical importance of financial regulatory efforts to combat money laundering and terrorism, as well as the responsibility of credit unions to conduct their due diligence in assessing the nature and risk associated with all customer accounts. However, the implementation of federal anti-money laundering efforts must be pursued with an eye toward unnecessary and unintended impacts to law abiding citizens and businesses. It is important to recognize that the loss of financial access can actually subvert anti-money laundering efforts by driving certain financial activities into untraceable banking alternatives.

Accordingly, we request that you clarify the NCUA position on de-risking and examine your agency’s execution of anti-money laundering regulations and other sanctions laws compliance. Specifically, we are requesting information on whether or not the NCUA has encouraged credit unions to de-risk due to a customer’s specific location or line of business. In addition, please describe the methodologies employed by NCUA to ensure the standardization of examinations of compliance with anti-money laundering laws.

We appreciate your prompt attention to this matter and request a response from you by November 1, 2016.

Sincerely,

Blaine Luetkemeyer
U.S. House of Representatives

Jeff Flake
United States Senate

Bad Deal?

Yesterday, I reported that National Credit Union Administration (NCUA) paid more than $1 billion in contingent legal fees to two law firms regarding lawsuits over the sale of toxic mortgage securities that contributed to the failure of five corporate credit unions during the financial crisis.

These contingent legal fees were approximately 23.2 percent of the total recoveries from the settlement of the lawsuits.

However, Reuters is reporting that legal fees paid by NCUA is more than double the amount paid by the Federal Housing Finance Agency (FHFA).

FHFA paid $406.7 million to law firms that pursued similar set of lawsuits over the sale of toxic mortgage securities. These legal fees were approximately 2 percent of the $18.7 billion FHFA had obtained through settlements and judgments.

Why didn't NCUA negotiate a better deal?

Congress should investigate NCUA's sweetheart deal with these two law firms.

Judge Questions Validity of CU's Arbitration Clause

The PennRecord is reporting that a federal judge is allowing discovery to proceed in a putative class action litigation between FedChoice Federal Credit Union (Lanham, MD) and any members who may have been affected by an arbitration clause in the institution’s Service Agreement.

To be able use FedChoice's inter-bank service, the plaintiff had to agree to accept the Service Agreement. It was either "all or nothing."

However, Judge J. William Ditter Jr. of the U.S. District Court for the Eastern District of Pennsylvania said October 12 the Service Agreement presented by FedChoice contained an arbitration clause of “questionable validity."

The judge noted that the arbitration clause was buried on page 10 of 12 pages of online legalese.

The plaintiff, Sheila Horton, filed a class action lawsuit challenging the fees charged for overdraft protection by FedChoice. FedChoice claims that the parties in the dispute are governed by a broad, written, enforceable arbitration agreement.

Read more.

Corporate CU Lawsuit Legal Contingency Fees Tops $1 Billion

The National Credit Union Administration (NCUA) today disclosed that it has so far paid legal contingency fees to two law firms of $1,003,029,479.

As of Oct. 11, 2016, the NCUA Board has recovered more than $4.3 billion from its lawsuits filed over the failure of five corporate credit unions.

These legal contingency fees represent 23.2 percent of total recoveries from the lawsuits.

Read the press release.

GAO Regulation D Study Looks at Impact on Bank and CU Practices

The Government Accountability Office (GAO) study released on October 18 examines the impact of Regulation D on bank and credit union practices.

Section 19 of the Federal Reserve Act requires depository institutions to maintain reserves against a portion of their transaction accounts solely for the implementation of monetary policy. Regulation D implements section 19, and it also requires institutions to limit certain kinds of transfers and withdrawals from savings deposits to not more than six per month or statement cycle if they wish to avoid having to maintain reserves against these accounts.

Reserve requirements are an implicit tax on banks and credit unions. However, the authority for the Federal Reserve to pay interest on reserves has reduced some of the costs associated with reserve requirements.

GAO found that 12,135 depository institutions were subject to Regulation D’s requirements, as of June 2015. Fifty-two percent were credit unions, while 48 percent were banks.

Eighty-six percent of banks were required to satisfy reserve requirements in contrast to 23 percent of credit unions. Sixty-five percent of banks had net transaction account balances reservable at the 3 percent ratio and 20 percent of banks were reservable at the 10 percent ratio. Of the 23 percent of credit unions that were required to satisfy reserve requirements, the majority (79 percent) had net transaction deposits reservable at the 3 percent ratio.

As part of its study on Regulation D, GAO surveyed 892 depository institutions with a response rate of 71 percent. Below are some of the findings from the report.

GAO found banks were more likely than credit unions to enforce the transaction limit to implement Regulation D’s requirements, with an estimate of 89 percent versus an estimate of 59 percent.

GAO estimated that 63 percent of banks charged fees after the sixth transaction on savings accounts compared to 55 percent of credit unions. For money market accounts, GAO found that 90 percent of banks charged fees after sixth transaction compared with an estimate of 63 percent of credit unions.

Banks tended to report lower fees for savings accounts, with an estimated median of about $2 for banks and an estimated median of about $4 for credit unions. The median fee for money market accounts was about $5 for both banks and credit unions.

GAO found that more credit unions than banks (an estimated 54 percent versus an estimated 6 percent for savings accounts and an estimated 55 percent versus an estimated 4 percent for money market accounts) prohibited the seventh transaction when the six transaction limit was reached.

GAO also noted that banks were more likely to employ retail sweeps program to reduce the amount of reservable net transaction accounts than credit unions. Fifteen percent of banks and 2 percent of credit unions employed retail sweeps program to reduce transaction account reserves.

In addition, the study surveyed banks and credit unions about the biggest challenges associated with monitoring and enforcing the transaction limit with the top challenge getting customers to read Regulation D disclosures.

There is more information in the report. Click on the link below to see more of the results from the survey.

Read the study.

Members Choice Credit Union Builds New HQ

Members Choice Credit Union (Houston, TX) will move to a new 80,000-square-foot, four-story building by October 2017, according to the Houston Business Journal.

Construction began in August on the new building.

The company plans to occupy up to three floors of the building and lease out the remaining space to tenants.

The price tag of the project was not disclosed.

Read the story.

Was NCUA AWOL on Navy's Improper Debt Collection Practices?

It appears that the National Credit Union Administration (NCUA) was "absent without leave" (AWOL) with respect to Navy Federal Credit Union's improper debt collection practices.

Only the Consumer Financial Protection Bureau (CFPB) issued an enforcement order about Navy's collection practices and required Navy to make restitution to members harmed by its collection practices.

However, NCUA, which is the primary safety and soundness regulator of Navy, did not take any action against Navy Federal Credit Union at this time.

In comparison, the Office of the Comptroller of the Currency issued an enforcement order against Wells Fargo over its sales practices in coordination with the CFPB.

Why didn't NCUA coordinate enforcement actions with CFPB?

Does NCUA believe that improper debt collection practices and the freezing of members electronic access to their accounts are a safety and soundness concern?

I suspect that this improper debt collection practice at Navy is not an isolated event. There are probably other credit unions that are engaged in questionable debt collection practices.

It seems to me that NCUA should make examining the debt collection practices of credit unions an important part of any consumer compliance exam.

NCUA's silence on this issue is deafening.