Sunday, November 29, 2009

Seven CUs Sue Former Directors and Officers of WesCorp (Updated)

The Las Vegas Review Journal is reporting that 7 credit unions are suing directors and officers of Western Corporate Federal Credit Union, seeking damages for millions of dollars lost when the institution was put in conservatorship.

The lawsuit filed in Los Angeles Superior Court on Tuesday, November 24 alleges that WesCorp changed its investment focus in 2003 by borrowing up to $10 billion in short-term funds and using the proceeds to invest in risky, long-term mortgage backed securities.

By January 2008, WesCorp was essentially insolvent but continued to operate with emergency support from the National Credit Union Administration. In March 2009, WesCorp was placed into conservatorship, wiping out the ownership stake of credit unions that invested in WesCorp.

The lawsuit accuses WesCorp officers and directors of negligence and breach of their fiduciary duties. The plaintiffs are seeking a judgment for damages.

The seven plaintiff credit unions and their stated losses are as follows:

Cascade FCU, with a loss of more than $1.8 million;

Glendale Area Schools FCU, with a loss of more than $1.2 million;

KaiPerm Northwest FCU, with a loss of $51,374;

1st Valley CU, with a loss of $163,395;

Northwest Plus CU, with a loss of $549,327;

Stamford FCU, with a loss of $189,096; and

Tulare County FCU, with a loss of $212,922.

Thursday, November 19, 2009

Updated Numbers on Problem Credit Unions

The National Credit Union Administration released updated data today on the number of troubled credit unions. The data shows that both the number and deposits in troubled credit unions have increased.

There were 337 problem credit unions, credit unions with a CAMEL code 4 and 5, in October. In comparison, there were 271 problem credit unions at the end of 2008.

At the end of October problem credit unions held $39.8 billion in insured shares (deposits) -- or 5.58 percent of the industry total insured shares -- more than double the amount of shares ($16.3 billion) in troubled credit unions at the end of 2008.

The following graph shows the distribution of problem credit unions by asset size.

Additionally, it is highly likely that more credit unions will migrate towards being classified as a problem credit union, as 1,640 credit unions currently have a CAMEL 3 ratings.

Tuesday, November 17, 2009

Investment Product Income from Nonmembers Taxable

Income from investment products, such as stocks, bonds, mutual funds and annuities, sold to nonmembers by a state-chartered credit union is subject to unrelated business income tax (UBIT), a federal court ruled last week.

“The sale of products to persons who are not members of a credit union at all cannot be considered substantially related to Bellco’s tax-exempt purpose,” Judge Christine Arguello wrote in Bellco Credit Union v. United States.

The credit union argued that income earned from nonmember sales was de minimis and thus should not be taxed. The judge wrote that the credit union did not provide any evidence from "case law to suggest income unrelated to its purpose, no matter how minor, can be shielded from UBIT."

So, if income from the sell of investment products is subject to UBIT, this would suggest that other income from nonmembers should be taxable, including income from loan participations to nonmembers, ATM surcharges, and wire transfer and check cashing services.

However, Arguello ruled that investment products made available to members were "substantially related" to Bellco's tax-exempt purposes, and therefore income from those activities is exempt from UBIT. She also deferred ruling on the treatment of Bellco's income from certain insurance products until the trial begins Dec. 7, and she suggested the trial address whether the sale of such products to nonmembers who belong to other credit unions qualifies for a UBIT exemption.

Saturday, November 14, 2009

Ensign FCU Closed

The Las Vegas Journal Review is reporting that Ensign FCU failed.

The article states that EDS Credit Union took over the insolvent Ensign FCU.

"Ensign lost $10 million in the first nine months of this year as its delinquent and charged off loans totaled $13.4 million."

Ensign FCU is the fourth Nevada credit union to fail in the last couple of months.

Thursday, November 12, 2009

Matz Asks FHFA to Force Fannie to Offer Better Settlement

National Credit Union Administration (NCUA) Chairman Debbie Matz on November 9 wrote the Federal Housing Finance Agency (FHFA) encouraging that regulator to get Fannie Mae to offer a more reasonable settlement to credit unions defrauded by CU National Mortgage.

Chairman Matz noted that approximately two dozen credit unions were scammed by CU National to a tune of more than $125 million in potential losses. CU National sold mortgage loans to Fannie Mae but did not remit sale proceeds back to the originating credit unions. Fannie Mae offered a settlement equal to approximately 15 percent of potential losses in August and subsequently raised the offer to closer to 25 percent, with a 3 percent bonus if at least 18 credit unions agreed to the offer. The NCUA said only two credit unions have agreed to the settlement.

"The outcome seems especially egregious considering Fannie Mae's status as a government-sponsored enterprise, and doubly so in light of the fact that it is currently in conservatorship and receiving billions of dollars of taxpayer assistance," wrote NCUA Chairman Matz to FHFA Acting Director Edward DeMarco.

Talk about the pot calling the kettle black. Federal credit unions have received the equivalence of taxpayer assistance being exempt from paying income taxes for the last 75 years.

Letter below. Click on image to enlarge.

Tuesday, November 10, 2009

Constitution Corporate Joins the Undead

Another corporate credit union has joined the ranks of the living dead.

Constitution Corporate FCU (Wallingford, Conn.) reported that losses had totally depleted all its capital and was now operating with a Prior Undivided Earnings Deficit of $2,442,918 guaranteed by the National Credit Union Share Insurance Fund (NCUSIF).

The corporate credit union reported a loss of $77.4 million through the first nine months of 2009, resulting from OTTI charges of $79.9 million.

Below are the unaudited income and balance sheet statements for the corporate credit unions (click on images to enlarge).

Monday, November 9, 2009

Study: Uniform Tax Exemption Flawed, Creates Perverse Incentives

A study, An Economic Policy Analysis of the Tax Subsidy for Credit Unions, by William Kelly, Jr. through the Prochnow Foundation at the Graduate School of Banking has recommended replacing the current blanket tax exemption for credit unions with more targeted tax credits that focus credit unions on their public mission of serving people of modest means.

William Kelly is a professor of economics and finance at Grinnell College and previously was senior economist for the Credit Union National Association (CUNA) and the director of Center for Credit Union Research at the University of Wisconsin-Madison.

The study estimates that the annual taxpayer subsidy to credit unions is about $2 billion per year. The bulk of that subsidy is skewed towards higher income credit union members. According to the study:
• 61 percent of credit union benefits go to households with incomes over $95,000;
• 29 percent go to households with incomes of $35,000 to $95,000; and
• 10 percent go to households making less than $35,000.

Kelly writes that the reason why the tax subsidy flows to higher income members is due to its flawed design. “The dollar value of a household’s benefit from favorable interest rates is proportional to the size of the loan or deposit account, and these accounts are larger for more affluent households.”

The study points out that “credit unions differ widely in how well they carry out their Congressionally‐mandated mission to serve 'especially people of modest means', having taxpayers provide a uniform subsidy to all credit unions generates a perverse incentive. The subsidy continues in the same way whether a credit union responds well, poorly, or even opposite to achieving the mission that taxpayers subsidize them to do.”

Therefore, the study concludes that taxpayers would benefit from credit unions paying taxes just like other businesses including cooperatives. Instead of a one-size fits all tax exemption, the study recommends the use of tax credits, which would be targeted at the credit union’s mission of serving people of modest means. For credit unions that are meeting their public policy purpose, the tax credit would offset any tax liability.

Thursday, November 5, 2009

Common Bond Is A Donation

Several weeks ago, Bruen Credit Union Blog did a post What Field of Membership?

The post wrote that the common bond for Pentagon FCU is a $20 bill.

For $20 you can join National Military Family Association (NMFA) and immediately become eligible for membership at Pentagon FCU. Pentagon FCU makes it clear that continued membership in the National Military Family Association is not a requirement to remain a member of the Pentagon FCU.

In fact, one of my golfing buddies joined the NMFA in order to get a Pentagon FCU credit card.

NCUA’s regulations permit associational common bonds and some credit unions, such as Digital FCU, have been using associational groups as a strategy to effectively circumvent field of membership limitations.

It’s legal, but is it right?

Now some credit unions or credit union trade associations appear to be organizing associational groups for the primary purpose of allowing people to join the credit union.

For example, United Services of America FCU in San Diego allows people to join the credit union by becoming a member of Prime Meridian Association. For information on Prime Meridian people are advised to contact the credit union.

The creation of Prime Meridian Association fulfills a vision articulated by Mary Cunningham, the CEO of United Services of America FCU.

She wrote several years ago: “I believe that every red-blooded person living in America deserves the right to join a credit union, regardless of where they live or who their employer is or what language they speak…I believe the common bond is formed when a person walks into a credit union and lays down their $5 to join a credit union along with all the other members using it.”

GTE FCU has set up CU Savers, a non-profit educational club the credit union sponsors. By joining CU Savers, a person is eligible for membership in GTE FCU.

The formation of an association for the purpose of allowing people to join the credit union is an abuse of the credit union charter and a blatant manipulation of the system.

Tuesday, November 3, 2009

Excerpts from GAO Study on ASI

With the recent failure of Cumorah CU, I’ve received requests to look into the operations of American Share Insurance (ASI) – a private insurer of credit union shares.

Unfortunately, it is hard to find information about the current financial condition of ASI, but I believe the following information from a 2003 Government Accountability Office study regarding how ASI is funded and its risk management practices might provide some insights (discussion begins on page 66 of the report).

ASI is chartered in Ohio as a credit union share guaranty corporation. ASI started insuring credit union shares in 1974 and it provides both primary share insurance and excess share insurance.

The funding structure of ASI‘s primary share insurance coverage is similar to the National Credit Union Share Insurance Fund (NCUSIF). Each member credit union, as a condition of insurability, is required to place a non-interest bearing, refundable capitalization deposit with ASI. This deposit is at-risk.

However, unlike the NCUSIF capitalization deposit, ASI’s capitalization deposit takes into consideration the risk of the credit union. Currently, the deposit requirement ranges from 1.0 percent to 1.3 percent of a credit union‘s total shares and is tied to the financial condition of the credit union. The NCUSIF capitalization deposit is a flat 1 percent of insured shares.

Additionally, according to GAO, ASI has the contractual ability to reassess all member credit unions up to 3 percent of their total assets to raise additional funds to cover catastrophic loss and Ohio statute authorizes that the Superintendent of the Division of Financial Institutions can order ASI to reassess its insured credit unions up to the full amount of their capital.

ASI reviews the financial statements of member credit unions no less than quarterly and conducts on-site examinations of privately insured credit unions at least once every 3 years. GAO reported that for large credit unions ASI increased its monitoring by conducting semiannual, on-site examinations, as well as monthly and quarterly off-site monitoring, which included a review of the credit unions’ most recent audits (monthly) and financial information (quarterly).

Furthermore, ASI’s termination policy enables it to manage risk. ASI may terminate a credit union’s insurance with 30 days notice to the credit union and its regulator, if the credit union fails to comply with ASI requirements to remedy any unsafe or unsound conditions or remedy an audit qualification in a timely manner.

ASI is dually regulated by the Ohio Division of Financial Institutions and the Ohio Department of Insurance. “The Ohio Division of Financial Institutions conducts annual assessments of ASI, which evaluate ASI’s underwriting and monitoring procedures, financial soundness, and compliance with Ohio laws. Under Ohio law, its Department of Insurance also is required to examine ASI at least once every 5 years,” according to GAO.

Ohio law requires ASI to provide copies of written communication with regulatory significance to Ohio regulators, obtain the opinion of an actuary attesting to the adequacy of loss reserves, and apply annually for a license to do business in Ohio.

In addition, ASI is subject to state oversight and regulation in those states where ASI insures credit unions.

But GAO did caution that ASI could find it difficult to cover catastrophic losses under extreme economic conditions because it does not have the backing of any governmental agency and lacks reinsurance for its primary share insurance program.

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