GFA Completes Acquisition of Stock Savings Bank

GFA Credit Union, based in Gardner, Mass., has completed the acquisition of Monadnock Community Bank in Peterborough, New Hampshire.

This is the first credit union acquisition of a stock bank in the United States.

Read the story.

Chetco Closed by NCUA

The National Credit Union Administration (NCUA) announced the liquidation of Chetco Federal Credit Union (Chetco) effective December 31. Business loans played a significant role in the credit union's liquidation.

Rogue Federal Credit Union (Rogue) of Medford, Oregon will purchase and assume Chetco’s five Oregon branches and memberships and Coast Central Credit Union (Coast Central) of Eureka, California will purchase and assume the Crescent City branch and California memberships.

NCUA placed Chetco into conservatorship on September 23, 2011 and made the decision to liquidate Chetco and discontinue its operations after determining the credit union was insolvent with no prospect for restoring viable operations on its own.

Chetco had a net worth ratio of minus 7.31 percent as of September 30, 2012. The credit union reported 23.81 percent of its loans were 60 days or more delinquent. Over half ($33 million) of the $60.2 million in delinquent loans were member business loans.

At the time of liquidation, Chetco served 24,926 members and had approximately $259 million in deposits.

Chetco is the fourteenth federally insured credit union liquidation in 2012. NCUA did not disclose the cost of Chetco's failure to the NCUSIF.

Read the press release.

CU Volunteer Junkets

While credit unions talk about how their board members are volunteers, many of these volunteers are handsomely rewarded with perks, such as trips to conferences in exotic locations.

For example, CUNA is offering its Volunteer Institute in Punta Cana, Dominican Republic at the Paradisus Palma Real Golf and Spa Resort. The Institute will run from May 19 through 22, 2013.

If a credit union volunteer cannot attend CUNA's Volunteer Institute, there are plenty of other junkets available.

Volunteers can get their credit unions to pay for an all inclusive junket on The Panama Canal Credit Union Educational Cruise Conference (February 15 - 25, 2013). The educational cruise will stop in the Bahamas, Aruba, Curacao, Panama, and Costa Rica. The cost of the cruise begins at a price of more than $3,000 and does not include airfare.

Another possibility for credit union volunteers is to explore the Galapagos Islands with CU EduCruises. This educational excursion will take place during June of next year at a tidy price of over $7,000 per one volunteer per cabin. If the volunteer brings a guest, the price per cabin jumps to over $12,000.

CU EduCruises also offers a cruise to the Canary Islands.

Barred from Corporate CUs; But Not Retail CUs

I was reviewing NCUA's administrative orders associated with the personnel at the two costliest credit union failures -- Western Corporate FCU and U.S. Central FCU.

The orders with one exception had the same language barring the individual from:

• becoming an employee, holding any office in, or otherwise participating in any manner in the conduct of the affairs of any federally-insured corporate credit unions;
• consulting or advising any federally-insured corporate credit unions on any matters involving or related to investment securities, investment policy, or invesment strategy; or
• selling any investment securities ... to any federally insured corporate credit unions.

However, these prohibition orders with one execption did not bar these individuals from becoming an employee or participating in the affairs of a natural person or retail credit union.

If these individuals are not qualified to work for or to participate in the affairs of federally-insured corporate credit unions, then how are these individuals qualified to participate in the affairs of or work for a natural person credit union?

And I am not the only person asking this question.

I was carbon copied along with The Wall Street Journal and The Washington Post on a letter to the NCUA Board that raised the same question.

Law Will Protect Banks and Credit Unions from Frivolous Lawsuits

President Obama signed into law on December 20 a bill (HR 4367) that would protect banks and credit unions from frivolous lawsuits by repealing an outdated, duplicative requirement that a placard must be attached to ATMs stating that a fee may be charged.

If the placard was not attached to an ATM, a consumer may recover statutory damages of between $100 and $1,000 for each transaction. Successful class-action plaintiffs could recover up to $500,000. As a result, a cottage industry developed where some people were removing placards, photographing ATMs without them and filing lawsuits.

However, the placard requirement is unnecessary because ATM operators are required to disclose fees on ATM screens and consumers have the right to decline the transaction without being charged.

NCUA Sues Former Texans CU CEO Addison

The National Credit Union Administration (NCUA) today filed suit in Federal District Court in Dallas against David Addison, former CEO of Texans Credit Union (TCU), alleging Addison breached his fiduciary duty to members and was “grossly negligent” in his management of the credit union, which is now in conservatorship.

Read the press release.

Read the complaint.

2000 Credit Unions Reported a Loss During Q3

According to data from NCUA, 2,000 federally insured credit unions (or 29 percent of the industry) reported a loss during the third quarter of 2012.

A vast majority of the credit unions reporting losses during the third quarter were smaller institutions. The following information shows the number of credit unions posting a loss by asset size group.

• 989 credit unions with less than $10 million in assets;
• 703 credit unions with between $10 million and $50 million in assets;
• 162 credit unions with between $50 million and $100 million in assets;
• 134 credit unions with between $100 million and $500 million in assets;
• 8 credit unions with between $500 million and $1 billion in assets; and
• 4 credit unions with more than $1 billion in assets.

Six credit unions reported third quarter losses in excess of $1 million. Carolina Trust FCU (Myrtle Beach, SC) reported the largest third quarter loss at $3.9 million.

The other credit unions with more than $1 million in losses during the third quarter were:

• Empower CU (West Allis, WI), loss of almost $3.2 million;
• Liberty Bay (Baintree, MA), loss of $2.4 million;
• Southeast Financial Credit Union (Franklin, TN), loss of $1.9 million;
• Alabama One (Tuscaloosa, AL), loss of $1.3 million; and
• P E F FCU (Highland Heights, OH), loss of $1.1 million.

A Tale of Two Regulators

If you want to observe a difference between FDIC and NCUA, you only need to look at how the two agencies handled the pending expiration of Transaction Account Guarantee program, which is set to expire on December 31, 2012.

FDIC notified banks on November 5 about the pending expiration of the program. Banks were to give adequate advance warning to noninterest bearing transaction account depositors about the pending change in insurance coverage. FDIC also provided model language which could be shared with these depositors.(read the letter)

On the other hand, NCUA waited until the third week of December to send a letter to federally-insured credit unions about the expiration of the Transaction Account Guarantee program. NCUA wrote that credit unions should communicate to thier membership about the potential changes in insurance coverage occurring on January 1, 2013. This hardly strikes me as providing credit union members with adequate advance warning, especially if credit unions start having this conversation with their members between now and the December 31 (hopefully credit unions had already communicated this change in insurance coverage before receiving NCUA's letter). (read the letter)

CUs Gain Market Share in Seattle Area

A Seattle Times noted that Seattle-area credit unions have made substantial market share gains.

28 percent of Seattle-area households bank primarily with a credit union now, up from 21.5 percent in 2008, according to market data firm Scarborough Research. That is a 30 percent jump in credit union banking, the ninth largest increase out of 96 metro areas around the nation. About half of all households banking with a credit union in the Seattle-Bellevue-Everett area are with BECU.

Read the article.

NCUA Closes Olean Tile Employees FCU

The National Credit Union Administration (NCUA) liquidated Olean Tile Employees Federal Credit Union of Olean, N.Y.

NCUA made the decision to liquidate Olean Tile Employees Federal Credit Union and discontinue operations after determining the credit union was insolvent and had no prospect for restoring viable operations.

Its September 2012 financial information stated that the credit union was well capitalized and did not have asset quality issues.

Olean Tile Employees Federal Credit Union served 550 members and had assets of approximately $778,139.

Olean Tile Employees Federal Credit Union is the thirteenth federally insured credit union liquidation in 2012 and the second credit union headquartered in New York to fail this year. The other credit union was Eastern New York Federal Credit Union.

Read the press release.

Bank and CU Trade Groups Call for Congress to Pass Bill Helping Underwater Homeowners

ABA, CUNA and seven other trade groups urged House and Senate leaders to extend a bill -- the Mortgage Forgiveness Debt Relief Act -- slated to expire at year’s end that would help underwater homeowners. The measure is included in the Family and Business Tax Cut Certainty Act of 2012, a bipartisan tax-cut extension bill that the Senate Finance Committee approved in August.

The Mortgage Forgiveness Debt Relief Act “prevents underwater homeowners from being taxed if their lender reduces principal or they sell their home through a short sale,” the trade groups explained in a letter. “If Congress fails to act, the possibility of receiving a tax bill would make it more difficult and expensive for these struggling homeowners to accept short sales and many loan modification offers.”

“We urge you to ensure renewal of the [the Mortgage Forgiveness Debt Relief Act] before the end of this year in order to help as many underwater homeowners as possible,” they said.

Read the letter.

G.I.C. FCU Liquidated

The National Credit Union Administration (NCUA) liquidated G.I.C. Federal Credit Union of Euclid, Ohio.

NCUA made the decision to liquidate G.I.C. Federal Credit Union and discontinue operations after determining the credit union was insolvent and had no prospect for restoring viable operations.

This credit union failure is very suspicious as NCUA's September 2012 Financial Performance Report indicated that the credit union was very well capitalized with a net worth ratio of 14.40 percent and was profitable with a return on assets of 0.83 percent.

G.I.C. Federal Credit Union served 3,476 members and had assets of approximately $15.5 million.

G.I.C. Federal Credit Union is the twelfth federally insured credit union liquidation in 2012.

Read the press release.

Undercapitalized Credit Unions, September 2012

As of September 30, 2012, there were 104 credit unions that were undercapitalized. This was down from 120 credit unions as of June 2012 and 165 credit unions, as of September 30, 2011.

Six credit unions were critically undercapitalized and another 14 credit unions were significantly undercapitalized, including two credit unions that received Section 208 net worth assistance from NCUA.

NCUA announced in October the merger of two critically undercapitalized credit unions -- El Barrio and NorthCounty Cooperative.

Several credit unions were classified as undercapitalized, although they met the minimum net worth leverage ratio of 6 percent to be adequately capitalized. This is most likely due to them being classified as complex credit unions and they are not meeting their risk-based net worth requirement.

NCUA's Denial of FOIA

On October 1, I filed a Freedom of Information Act (FOIA) request with NCUA regarding all communications the agency had with certain individuals that opposed Technology Credit Union's conversion to a mutual savings bank charter.

Almost two months later, NCUA denied my request. NCUA stated that the disclosure of these communications "would constitute an unwarranted invasion of personal privacy."

Below is NCUA's November 29 letter (click on the letter to enlarge).

Customer Satisfaction at CUs Fell in 2012

Customer satisfaction with credit unions fell in 2012, according to the American Customer Satisfaction Index (ACSI).

Credit union satisfaction fell 5.7 points to an ACSI score of 82.

ACSI commented that "a change toward more fees and higher minimum balance requirements could be worrisome given the industry’s weaker customer service this year. For credit unions, maintaining high customer satisfaction will demand more resources, along with judicious competitive monitoring of fees and costs."

Despite the decline in customer satisfaction, the survey noted that customer service score at credit unions is still the highest for the financial services industry.

Read the report.

Tax Foundation Says Taxing CUs Among the Least Harmful Revenue Raising Options

Taxing credit unions is among the least harmful revenue raising options, according to The Tax Foundation.

According to the December 5 Fiscal Fact, "[i]f lawmakers decide that new revenues must be part of any long-term effort to solve the budget crisis, they must choose the least harmful way of raising new revenues or else they risk compounding the crisis by slowing economic growth."

The Tax Foundation wrote:

"As a second-best option to asset sales, require Government Sponsored Enterprises (GSEs) and federally-owned businesses to pay federal income taxes. TVA, for example, has operating revenues of $11 billion and $47 billion in assets. It should pay federal income taxes. The tax benefit to credit unions has been estimated at $2 billion to $3 billion per year."

Elsewhere in the report the Tax Foundation stated:

"#4 Tax certain non-taxed business activities: There are a number of non-taxed businesses or industries that compete directly with private businesses but have the advantage of not paying federal income taxes. These include: credit unions; rural electric coops; nonprofit hospitals; and certain types of insurance firms. These businesses should be taxed as any for-profit enterprise."

The report also notes that if Congress looks to broaden the tax base, it should look to eliminate industry subsidies, targeted tax preferences, and refundable credits first, including the special exemption for credit unions.

Tax Foundation briefing paper.

Travel Expenses for NCUA Board Members

Bravo to Credit Union Journal for examining the travel-related expenses of the NCUA Board members.

According to data obtained from a Freedom of Information Act request, Credit Union Journal found that in the four years up to August of 2012, Board member Fryzel spent $109,182.99 on travel; Chairman Matz, $81,523.12; and Board member Hyland, $71,551.35.

During 2011 and 2012, Fryzel spent $67,845.58, Matz $50,302.22, and Hyland $27,196.43.

The story points out that Fryzel lives in Chicago and flies to NCUA Board meetings, while Matz lives in the Washington, D.C. area, as did Hyland during her board tenure.

For example, Credit Union Journal compared the lodging expenses for the three NCUA Board members attending CUNA's Government Affairs Conferences in Washington, D.C. for 2011 and 2012. In 2011, Fryzel spent $1,657.95 for three night's lodging. Matz spent $1,116.39 for three nights. Hyland spent $647.13 for two nights. In 2012, Fryzel spent $2,720.54 for four night's lodging, Matz spent $1,022.40 for three nights, and Hyland $373.27 for one night.

What is noticeable is the discrepancy between Fryzel and the other two board members nightly lodging expense.

The article also points out that any expenses within a NCUA staff's official duty station are not permissible unless granted a waiver. Matz justified the waiver by telling Credit Union Journal that "I was speaking at the GAC and attending several meetings early in the morning and in the evening during the week, and due to heavy and often unpredictable D.C. morning traffic, and the fact it was important that I make the meetings on time, I stayed in a hotel."

While I agree that the D.C. morning commute can be very difficult, I still don't think that this explanation is sufficient justification for either Matz or Hyland to incur any lodging expenses for attending CUNA's Government Affairs Conferences.

Read the story (paid subscription).

Impact of 2013 Assessments on CU Net Worth and Profitability

During the November NCUA Board meeting, the agency announced that premium assessments for 2013 could range from 8 basis points to 16 basis points.

An assessment of 8 basis points is expected to lower the net worth ratio for credit unions by 3 basis points and credit union return on assets by 7 basis points. NCUA anticipates that this assessment would cause 300 credit unions to report a loss.

However, an assessment of 16 basis points would reduce the net worth ratio by 9 basis points and lower the return on assets by 13 basis points. NCUA expects 604 credit unions would report a loss based upon this assessment.

Another Credit Union-Bank Transaction

Self-Help FCU has entered into a definitive agreement to buy the deposits and the current banking operations of Second Federal Savings and Loan from Lake Forest-based Wintrust Financial.

Wintrust’s subsidiary, Hinsdale Bank, had acquired the deposits and branches of failed Second Federal from the Federal Deposit Insurance Corporation (FDIC) in July. As of September, Second Federal was estimated to have about $161 million in deposits. In addition, Self-Help will acquire Second Federal’s three branches.

Self-Help FCU along with Chicago-based Resurrection Project had bought Second Federal’s loans, most of which were mortgages with Hispanic borrowers in Chicago, from the FDIC.

Terms of the transaction were not being disclosed. The transaction is subject to approval by banking regulators; but is expected to close in the first quarter of 2013

This is the fourth transaction this year where a credit union has bought a bank.

Don't Be Fooled: Credit Unions Charge Fees

The Street has an interesting article on credit union members being vulnerable to fees -- a fact rarely shared or acknowledged. The story noted that some credit unions may have benefitted more than their new members from Bank Transfer Day movement.

Read the post.

Border Lodge Credit Union Closed

Stephen W. Kimbell, Commissioner of the Vermont Department of Financial Regulation, announced that he has taken possession of the Border Lodge Credit Union in Derby Line, Vermont, and closed it.

The Commissioner’s placed the Border Lodge Credit Union into liquidation and appointed the NCUA’s Board as liquidating agent after examiners found "issues that raised serious concerns."

Border Lodge Credit Union served 1,097 members and had assets of approximately $3.1 million.

Border Lodge Credit Union is the eleventh federally insured credit union liquidation in 2012.

Read the order.

Read NCUA's press release.

Earnings at $6.4 Billion, Surpassing 2011 Total

Net income at federally-insured credit unions through the first three quarters of 2012 exceeded total industry earnings for all of 2011, according to NCUA. Credit unions are reporting almost $6.4 billion in earnings through the first nine months of 2012 compared to $6.3 billion for all of 2011.

Third quarter earnings were $2.1 billion. This was driven by higher fee income and other operating income coupled with declines in interest expenses and provisions for loan and lease losses. The industry’s return on average assets ratio was at 86 basis points for the quarter.

Total assets grew by $5.3 billion to end the third quarter at $1,012.9 billion, while loans increased by $9.4 billion during the quarter to $591.1 billion. This was the sixth consecutive quarterly increase in total loans.

On the other hand, shares (deposits) at credit unions grew by less than $1 billion during the third quarter to 869.7 billion. As a result, the loan to share ratio increased by 101 basis points during the quarter to 67.97 percent.

Industry net worth rose to $104.5 billion, an increase of $2.1 billion for the quarter. The industry’s net worth ratio rose 15 basis points during the quarter to 10.31 percent.

Credit union asset quality continued to improve as both the delinquency rate and net charge-off rate showed modest declines during the quarter.

Read the press release.

No Corporate CUs Participating in CLF as of October

The October financial report for the Central Liquidity Facility (CLF) shows that no corporate credit unions have stepped up to act as agent members, despite the efforts of the NCUA Board.

The NCUA Board tried to encourage corporate credit union participation in the CLF by modifying the definition of net assets for calculating the leverage ratio to “total assets less CLF stock subscriptions, loans guaranteed by the NCUSIF, and member reverse repurchase transactions.”

However, most, if not all, corporate credit unions cannot afford to purchase CLF stock as an agent for their members. A corporate credit union acting as an agent for its members must subscribe to CLF capital stock in an amount equal to 0.5 percent of its paid-in and unimpaired capital and surplus of its members.

As a result, the borrowing capacity of the CLF has dramatically fallen with the redemption of U.S. Central Bridge FCU's CLF stock.

View the report.

Business Lending Contributed to Easten New York FCU's Failure

NCUA's Office of the Inspector General (IG) released a report on the failure of Eastern New York Federal Credit Union. As of September 2012, the estimated loss to the NCUSIF was approximately $3.6 million.

The IG report concluded that Board of Directors (Board) gave the credit union's CEO broad authority to conduct various and significant transactions with very little oversight. As a result, these business ventures, including complex credit union service organization arrangements, unsound business loan originations, and excessive holdings of fixed assets, proved to be catastropic for the credit union.

According to the report, the credit union's business loan portfolio grew rapidly from one loan of $200,000 in 2007 to 26 loans totaling approximately $3.5 million by the end of 2009. However, 17 loans totaling $3.1 million or 88 percent of the total dollar value originated were made to two separate, but related, families creating an excessive concentration risk.

The report noted that the business loans were poorly underwritten and had almost no credit analysis. In addition, the CEO and the Chairman of the Board, who approved all these loans, did not meet the regulatory requirements related to business lending experience. Also, in many cases, loan approval documentation was not received until well after loan proceeds were dispersed.

NCUA’s Asset Management and Assistance Center estimated impairment losses from Eastern New York's business lending operations to be $2.4 million.

Read the Material Loss Review.

Thrivent Financial Bank Becomes a Credit Union

The National Credit Union Administration (NCUA) has chartered Thrivent Federal Credit Union (FCU), which has acquired certain assets and liabilities formerly held by Thrivent Financial Bank.

The new credit union is sponsored by Thrivent Financial for Lutherans, a fraternal benefits society. Thrivent FCU will have approximately $500 million in assets. Thrivent Financial Bank’s 47,000 clients will become member-owners of Thrivent FCU upon the transfer of their accounts. The credit union will have a potential membership of 2.5 million members nationwide.

In addition to NCUA, the conversion was approved by the Federal Deposit Insurance Corporation, the Federal Reserve and the Office of the Comptroller of the Currency.

Read the press release.

ABA Comments on NCUA's Proposed Rural District

ABA in a November 19 comment letter urged the National Credit Union Administration Board to withdraw its proposal to amend the definition of “rural district.”

Under the proposed definition, a geographic area would qualify as a rural district if it has, among other criteria, a total population that does not exceed the greater of 200,000 people or 3 percent of the population of the state in which the majority of the district is located. Currently, a rural district cannot exceed 200,000 in population.

“ABA believes that the new population threshold … for a rural district is contrary to congressional intent,” the association said. “Congress explicitly stated that a meaningful affinity and bond, an interaction, and sense of cohesion or identity among a credit union’s membership were essential for a credit union to fulfill its public mission.”

But the NCUA’s proposed rural-district definition would permit the cobbling together of both rural and urban census blocks, and they would have little affinity or commonality of interest as intended under the law. “Moreover, the potential geographic area of a rural district under the amended definition could be so vast that it would make it nearly impossible for a federal credit union to fulfill its public mission,” ABA said.

Read the letter.

$184.7 Million NCUSIF Commercial Loan Mystery

Between July and August, the financial statement of the National Credit Union Share Insurance Fund reported that Other Investments went from zero to $184.7 million.

According to the financial notes, Other Investments consisted of $184.7 million in commercial loans with maturies through December 31, 2017.

When I inquired with NCUA as to why the Other Investments were not part of Receivables from the Asset Management Estates, I was told by NCUA spokesperson John Fairbanks:

"[T]he NCUSIF purchased these loans in August 2012. They are wholly owned loans of the NCUSIF, held as an investment.

I cannot comment further as the purchase is part of the ongoing supervision of an operating CU."

This does raise some interesting questions:

Was this purchase of $184.7 million in commercial loans from one of the credit unions under NCUA conservatorsip?

Does this transaction represent a form of Section 208 assistance to a troubled credit union?

Review the August NCUSIF Financial Statement.

Chatter Yak! Correction

Earlier this week, I did a post about Chatter Yak! based upon an article appearing in Credit Union Journal. The publication erroneously mentioned that the founders of Chatter Yak!, who are now part of the management of CitizensFirst CU, owned the credit union service organization.

Chatter Yak! in fact was a wholly-owned CUSO of Vacationland Federal Credit Union.

Neither Ralofsky nor Roth benefitted from the transaction.

Assessments for 2013 to Range from 8 to 16 Basis Points

The NCUA Board today announced the proposed range of assessments for 2013.

NCUA projects an NCUSIF premium range between zero to 5 basis points in 2013. NCUA also projects a Stabilization Fund assessment range of 8 to 11 basis points in 2013.

H.R. 6474 Would Phase Out Credit Union Tax Exemption

A bill, H.R. 6474, would phase out the credit union federal tax exemption and 28 other federal tax expenditures over a five year period.

In addition, the bill eliminates or replaces many other tax expenditures and lowers personal and corporate tax rates.

H.R. 6474, Implementation of Simpson-Bowles Spending Reductions Act of 2012, was introduced in the House in late September by Rep. Dennis Ross (R - FL).

Read the bill.

Nebraska Bank to Acquire Tiny Credit Union

Credit Union Journal is reporting that First York Ban-Corp of York, Nebraska has agreed to acquire tiny Glenvil Cooperative Credit Union of Glenvil, Nebraska in a rare acquisition of a credit union by a bank.

The $3 million-asset Glenvil approached First York about acquiring it. The credit unions was having problems hiring management.

Glenvil Cooperative is a single branch credit union that has reported small losses four years in a row and was undercapitalized with a net worth ratio of 5.4 percent as of September 30.

The deal requires approval from the Nebraska Department of Banking and Finance, the FDIC, the Federal Reserve, and the NCUA.

$5.1 Billion Owed to Treasury

Buried in the last paragraph of a NCUA press release heralding the repayment of a Medium Term Note for failed Western Corporate FCU, NCUA mentioned that agency has outstanding borrowings of $5.1 billion from the United States Treasury. This is up from $3.2 billion as of June 25, 2012.

This borrowing from the Treasury helped the Temporary Corporate CU Stabilization Fund to handle the front loaded corporate credit union resolution cost.

While credit unions are ultimately responsible for repaying this $5.1 billion in debt and have until 2021 to repay the debt, they should also recognize that they received a significant benefit from the Treasury. This made the cost of corporate credit union bailout resolution more manageable for credit unions.

Timely and Transparent Communications

Recently, a federal regulator for financial cooperatives adopted requirements on the timely disclosure of material events and senior management compensation to the owners and investors of the cooperatives.

The Farm Credit Administration (FCA) in September revised the FCA's regulations governing disclosures of senior officer compensation, supplemental retirement plans, and compensation committee responsibilities. The final rule also contains new requirements to hold nonbinding, advisory votes on senior officer compensation

In addition, the final rule requires the timely and transparent communication to shareholders and investors of significant or material events that occur at Farm Credit System institutions between annual reporting periods.

The rule requires the boards of directors to develop policies to identify events to be communicated. Notice must be made within 90 days of the event’s occurrence. The events may be communicated in either a separate notice to shareholders or as part of the quarterly report to shareholders.

If the FCA has adopted such rules for Farm Credit System associations, which are member-owned financial cooperatives, then why hasn't NCUA adopted the same disclosure requirements for federally-insured credit unions?

Glaring Omission

Recent information has disclosed that less than $130 million of the $170 million in out-of-court settlements has gone to the Temporary Corporate Credit Union Stabilization Fund (Stabilization Fund). More than $40 million of the settlement went to two law firms that employed by NCUA on a contingency fee arrangement.

However, during the October 4 Virtual Town Hall Meeting, NCUA Chairman Debbie Matz stated that the $170 million in settlements was going to the Stabilization Fund, when the agency knew this was not true.

Below are excerpts from the transcript of the Town Hall Meeting dealing with the lawsuits and the out-of-court settlements.

Todd Harper: We have a question here about the lawsuits that NCUA has been bringing. What is the latest with the lawsuits against the big lenders who caused the big losses at the corporates? Is there talk of a settlement? And I think Mike McKenna, you’re probably in the best place to answer that.

Mike McKenna: Well, we’ve sued a number of different underwriters. We’ve sued Goldman Sachs, Bank of Scotland, JPMorgan, Wachovia, UBS, and Barclays. We’ve settled with 3 underwriters. We’ve settled with Deutsche Bank, Citi Group, and HSBC for approximately $170 million.

Todd Harper: We have a question here about the $170 million that NCUA has already received to date in settlements with Wall Street financial underwriters. How will this $170 million that NCUA has collected affect future Corporate Stabilization Fund assessments charged to credit unions?

Chairman Debbie Matz: That $170 million is returned to the Corporate Stabilization Fund and is used to reduce corporate assessments going forward.

While NCUA Chairman Matz is correct that the settlements will lower future assessments, the failure to acknowledge that less than $130 million of the $170 million in settlements was being applied to the Stabilization Fund balance is a glaring omission on the part of Chairman Matz. If this information had been disclosed, it could have raised additional uncomfortable questions for the agency.

Issues NCUA's Inspector General Needs to Examine in the Hiring of Law Firms

In a recent blog post, I reported that Representative Issa requested that NCUA's Inspector General review if NCUA must comply with an executive order signed by President George W. Bush in 2007, titled "Protecting American Taxpayers from Payment of Contingency Fees." The executive order prohibits federal agencies from entering into contingency arrangements with outside law firms.

NCUA last year hired two law firms under a contingency arrangement associated with lawsuits filed against investment banks over mortgage-backed securities sold to failed corporate credit unions.

As the Inspector General conducts its review, there are several issues it should explore beyond whether the agency is subject to the 2007 executive order and whether this was the best option for the agency.

First, the Inspector General needs to review whether the bids were subjected to competitive open bidding process. It is unclear from the Wall Street Journal story whether the bidding process was open. John Ianno, the NCUA's associate general counsel, told the Wall Street Journal that he was not aware if the agency interviewed any other law firms for this work.

Second, the Wall Street Journal story noted that then-general counsel Robert Fenner, who entered into the contracts with the two law firms, worked with Mr. Frederick of Kellogg Huber at the Justice Department. Kellogg Huber was one of the two law firms selected. Did Fenner's connection with Frederick influence the awarding of the bid?

The Inspector General should disclose what factors led to the selection of the two law firms, especially Kellogg Huber.

Range of Future Assessments Shrinks

NCUA is reporting that the upper end of projected assessments associated with the Temporary Corporate Credit Union Stabilization Fund (Stabilization Fund) declined between December 2011 and June 2012.

According to the agency's analysis, the estimated range of future Stabilization Fund assessments is now between $6 billion and $8.9 billion compared to a projected range between $6 billion and $9.3 billion six months earlier.

The agency cited several factors for the narrowing of the range of future assessment estimates, including changes in housing prices, interest rates, unemployment rates and mortgage prepayments.

In addition, NCUA noted a slight improvement in the performance of the legacy assets backing the NCUA Guaranteed Notes.

Read the press release.

NCUA Liquidates Women's Southwest FCU

The National Credit Union Administration (NCUA) liquidated Women’s Southwest Federal Credit Union (WSFCU) of Dallas, Texas.

NCUA made the decision to liquidate WSFCU and discontinue operations after determining the credit union was insolvent and had no prospect for restoring viable operations.

As of the end of September 2012, the credit union had a net worth ratio of 7.54 percent. The credit union also reported that 5.07 percent of its loans were 60 days or more past due. In comparison, a year earlier the credit union reported a delinquent loan rate of 0.27 percent.

WSFCU served 743 members and had deposits of approximately $2 million.

WSFCU is the tenth federally insured credit union liquidation in 2012 and the second credit union in Texas to be liquidated this year.

Read the press release.

Representative Issa's Letter to NCUA IG

Below is the letter sent by Rep. Issa to NCUA's Inspector General regarding the hiring of two outside law firms by NCUA under a contingency fee arrangement.

NCUA Closed US Central Bridge FCU

The National Credit Union Administration (NCUA) closed U.S. Central Bridge Corporate Federal Credit Union (U.S. Central Bridge).

This means that U.S. Central Bridge redeemed its CLF stock and the agent group is now no longer providing CLF coverage for member natural person credit unions. As a result, credit unions and their corporates no longer have the CLF as a source of backup liquidity, unless they join the CLF directly.

Read the press release.

John Worth's Response Regarding Future Bank Versus CU Assessments

Two months ago, I wrote a blog post regarding NCUA's Chief Economist John Worth's comparison of future FDIC assessments compared to TCCUSF assessments.

I wrote John Worth asking him what assumptions he used. Here is what he wrote:

"All the FDIC information is drawn from the recent Assessments final rule.

o The rates are the low, midpoint, and upper bound of the ranges in Risk Category I (lowest risk) initial base assessment rate. For example for 2013 that would be 5,7,and 9 from Table 3 in the rule. Of course, some CUs might by in higher risk categories, so this understates the actual assessment burden.

o I use the rates in table 3 until 2018 (assuming DIF < 1.15) and rates in Table 4 thereafter. The rule notes the expectation that DIF will reach 1.15 in 2018. o The assessment rates for Risk Category I reflect the goal of having large and complex institutions bear the burden of moving the DIF from 1.15 to 1.35. Thus the large and highly complex institutions assessment rate. So that concern is fully addressed. o Again mirroring the rule – I didn’t make a downward adjustment for TLGP – that might move the DIF to 1.15 somewhat sooner, so could be a small overstatement, but won’t materially impact the results. During the most recent assessment cycle we forecast no NCUSIF assessment for the coming year. Future year forecasts are highly speculative. The key distinction is that the NCUSIF is near its statutory max, while the DIF assessment are required to bring the DIF back to required minimum. Comparing corporate and DIF assessment provides a reasonable basis for comparison. If there are downturns in economic conditions both the DIF and NCUSIF would perform worse than expected, potentially requiring higher assessments in either case. Finally, as you know over the past 20+ years there have only been a handful of NCUSIF assessments and there have been several dividend payments. Dividends will reduce corporate assessments, but are not factored into the projected assessment levels."

NCUA Hired Law Firms Could Experience Huge Payday

The Wall Street Journal (paid subscription) is reporting that law firms hired by the National Credit Union Administration (NCUA) may experience a huge payday.

NCUA last year hired two law firms, Kellogg Huber Hansen Todd Evans & Figel PLLC and Korein Tillery LLC, on contingency arrangement to recover losses incurred by failed corporate credit unions from their purchases of mortgage-backed securities from investment banks prior to the 2008 financial crisis.

"The law firms were hired under what is known as a contingency arrangement, which would give them one-fourth of any judgment or settlement, according to congressional investigators who reviewed the contracts. It could mean a payday of hundreds of millions of dollars for the firms."

President George W. Bush signed an executive order in 2007, titled "Protecting American Taxpayers from Payment of Contingency Fees," prohibiting federal agencies from entering into these arrangements with outside attorneys. The order was left unchanged by President Barack Obama.

However, the agency claims that it doesn't have to follow the executive order "because it is an independent agency acting as a liquidator of failed credit unions."

House Oversight Committee Chairman Darrell Issa (R., Calif.) requested that NCUA's Inspector General investigate whether the executive order applies to the agency.

Representative Issa said the high attorneys' fees hurt customers because it reduces the amount of any funds recovered from the investment banks, which would be used to replenish the Temporary Corporate Credit Union Stabilization Fund, created by Congress in 2009 to pay for the losses of failed corporate credit unions.

Credit Union Journal (paid subscription) is reporting that of the $170 million in out-of-court settlements NCUA has recovered to date from Wall Street banks, "only $127.25 million flowed into the estates of the failed credit unions.”

The Wall Street Journal notes that NCUA acknowledged that the selection process of the law firms was not public.

A Justice Department spokeswoman commented for the Wall Street Journal article that the Justice Department was "unaware of any other federal agency that has outside firms on contingency fee contracts."

NuVision Abandons Underserved Community

NuVision's tagline is "Enjoy Life, Bank Easier." For the residents of an underserved East Los Angeles community, this just became a tad more difficult.

NuVision Federal Credit Union announced its intention to close its East Los Angeles branch on Mednick Avenue as of October 31.

The article points out that more than a quarter of the households in this community have incomes at or beneath the poverty level.

NuVision concluded that the branch, which opened 5-1/2 years ago, “is not performing at the expected level for a branch of its size and that has been open for this length of time.” In other words, it was not turning a profit.

The article also noted that the credit union just opened a branch in Costa Mesa. According to geocoding software on the FFIEC's website, the median family income of the census tract of the new branch is 114 percent of the core based statistical area's median family income.

Credit unions talk about putting people before profits, this action does not seem to be the case for this credit union.

Read the article.

Gesa CU Pays $1 Million for Naming Rights to Carousel

Gesa Credit Union provided a gift of $1 million to a group that has proposed building a carousel in Kennewick, Washington. In return, the credit union received the naming rights to the carousel for twelve years.

The carousel will be called "The Carousel of Dreams presented by Gesa Credit Union."

While this donation will enhance the stature of the credit union CEO in the local community, I'm not sure this gift is in the best interest of the members of the credit union, especially since the credit union has only paid $3.6 million in dividends (interest) to its members on their savings through the first six mionths of 2012.

After all, the donation of a credit union’s members’ money to an outside party is a highly sensitive issue.

Read the story.

Navy FCU and Nonbank SIFIs

Is Navy Federal Credit Union a nonbank systemically important financial institution (SIFI)?

Dodd-Frank Act requires designated nonbank SIFIs to be supervised by the Board of Governors and subject to prudential standards.

Title I of the Dodd-Frank Act defines a “nonbank financial company” as a domestic or foreign company that is “predominantly engaged in financial activities,” other than bank holding companies and certain other types of firms.

The Financial Stability Oversight Council analyzes three factors -- size, interconnectedness, and substitutability -- when making the determination to designate a nonbank financial company as a SIFI and to subject the entity to Federal Reserve supervision.

I think we can all agree that Navy is predominately engaged in financial activities. Thus, it is a nonbank financial company.

Navy FCU has consolidated assets of $51.6 billion, as of September 2012. This is in excess of $50 billion size threshold used to determine whether a nonbank financial company is a SIFI.

Navy FCU is also systemically important to the National Credit Union Share Insurance Fund (NCUSIF) and the credit union industry. As of July 2012, the NCUSIF had approximately $10.95 billion in equity. This means that Navy FCU is almost 4.5 times larger than the NCUSIF. The failure of Navy FCU could swamp the resources of the NCUSIF and would likely cause federally-insured credit unions to expense their one percent NCUSIF capitalization deposit, as this asset becomes impaired. This impairment charge would cause credit unions to contract lending and other services.

As NCUA Chairman Fryzel testified in 2009 regarding the creation of the Temporary Corporate Credit Union Stabilization Fund to handle the failure of several corporate credit unions, "the current structure of the NCUSIF requires that credit unions take all these insurance expense charges at once, which would result in a contraction of credit union lending and other services...such a large, sudden impact on credit unions’ financial statements could further destabilize consumer confidence."

The same applies to Navy FCU. As Henry Meier, Associate General Counsel for the Credit Union Association of New York, recently wrote on his blog, New York's State of Mind, "the biggest credit unions pose the greatest risk to the most credit unions." So, the failure of Navy FCU would most likely have a destabilizing impact on the $1 trillion credit union industry.

Navy FCU is an important source of credit to civilian Department of Defense employees and enlisted personnel in our Armed Forces. The failure of Navy FCU could potentially affect the availability of credit to this community in the short run. although in the long-run I believe other competitors would fill the void.

Furthermore, the National Credit Union Administration is not designated as a primary financial regulatory agency by Title I of the Dodd-Frank Act. In determining whether a nonbank finacial company should be regulated by the Federal Reserve, the Financial Stability Oversight Council will look at the degree to which the company is already regulated by 1 or more primary financial regulatory agencies.

While I don't know if the Financial Stability Oversigt Council will make the determination that Navy FCU is a nonbank SIFI subject to Federal Reserve supervision, I believe there is enough evidence to support such a finding.

Number of Problem CUs Fell During Q3

The number of problem credit unions, as well as shares (deposits) and assets in problem credit unions fell during the third quarter. A problem credit union is defined as having a CAMEL code of 4 and 5.

Problem credit unions decreased by 17, for a total of 382 as of Sept. 30. Assets and shares were $26.3 billion and $23.5 billion, respectively.

The number of problem credit unions with $500 million or more in assets was unchanged between the end of the second quarter and the end of the third quarter.

There were 7 credit unions with more than $1 billion in assets on the problem list. These 7 credit unions have $11.3 billion in shares.

There were another 4 credit unions with between $500 million and $1 billion in assets on the problem list.

During the quarter, there were 10 fewer problem credit unions with between $100 million and $500 million in assets. As of the end of September, there were 30 credit unions in this cohort.

As a percentage, CAMEL code 4 and 5 credit unions represented 2.8 percent of total insured shares and 2.5 percent of total industry assets.

Year-to-date, there have been 16 credit union failures -- the same number that failed in all of 2011. Seven were assisted mergers, and nine were involuntary liquidations, of which six were assisted purchase and assumptions.

FCUs Are Subject to New York's Mortgage Recording Tax

The Court of Appeals for the State of New York ruled that Hudson Valley FCU is subject to the mortgage recording tax.

Hudson Valley asserted that it was not required to pay the mortgage recording tax (MRT) on mortgage obligations issued to members because (1) the Federal Credit Union Act (FCUA) exempts federal credit unions and their property from state taxation and (2) as instrumentalities of the United States, federal credit unions are immune from state taxation under the Supremacy Clause.

However, the Court wrote "if federal credit union mortgages were intended to be excluded from state MRTs, such immunity would have been plainly stated in the FCUA. Instead, although the FCUA contains an extensive list of exemptions relevant to federal credit unions, it makes no mention of mortgages or loans of any kind."

The Court disagreed with Hudson Valley that the mortgage recording tax "is tantamount to an illegal direct tax on the credit unions themselves."

The Court also concluded that the credit union's assertion that the mortgage recording tax would thwart the efforts of credit unions to serve people of modest means and would have serious financial ramifications for federal credit unions to be unfounded.

The Court opined "contrary to its assertions, there appears little danger that the MRT will drive federal credit unions out of business."

The Court further rejected the federal instrumentality argument.

Read the Decision

Lynn Municipal Employees CU Cited for Unsafe and Unsound Practices

The National Credit Union Administration (NCUA) has entered into a Letter of Understanding and Agreement (LUA) with the Lynn Municipal Employees Credit Union of Lynn, Massachusetts and the Massachusetts Division of Banks.

The LUA requires the credit union to take steps to correct unsafe and unsound practices, including:

• Failure to comply with the requirements of previous enforcement actions.
• Operating without adequate supervision and direction by the credit union’s board of directors over senior management.
• Failure to maintain accurate books and records.
• Failure to establish appropriate internal controls.
• Engaging in unsafe and unsound underwriting standards and practices.

For example, the LUA states that that the credit union will make the following improvements to its loan underwriting process. It will ensure:

(i) credit reports reviewed during the underwriting process contain credit scores;
(ii) loan documentation includes discussion of why members with adverse credit are granted loans;
(iii) debt-to-income ratios are calculated correctly and include all debts from the member’s credit report and loan application; and
(iv) loan notes are completed accurately and ensure proper procedures are in place in the event that loan notes are changed.

Lynn Municipal CU has 398 members and almost $2.2 million in assets.

Read the press release.

Read the enforcement order.

Wirz: NCUA Charter Conversion Rules An Exercise in Government Abuse

Earlier this week, I wrote that NCUA's conversion rules needed to be re-examined.

Adding fuel to the fire is Henry Wirz's scathing commentary on NCUA's role regarding credit union conversions in the October 15th edition of Credit Union Journal (paid subscription).

Henry Wirz, the CEO of SAFE CU in North Highlands, CA, wrote that NCUA's rules governing the charter conversion process are "an exercise in government control." He denounces NCUA for "government overreach and abuse of authority."

Wirz derides NCUA for making "it possible for vigilante justice to rule" the conversion process.

Wirz states that NCUA has made a mockery of the credit union principle of democratic governance.

NCUA's Role in Conversion Process Needs Scrutiny

On December 13, 2005, Representative Jeb Hensarling (R -TX) requested that the Government Accountability Office (GAO) investigate how the National Credit Union Association (NCUA) addresses the conversion of federally insured credit unions to mutual savings banks.

Representative Hensarling requested this review after two Texas credit unions requested redress from a federal court in order to complete their conversions.

For those individuals not familiar with the issue, NCUA had invalidated the conversion votes of the two Texas credit unions over how a single two-sided sheet of paper was folded as part of the mailing to the credit unions' memberships.

Representative Hensarling in his letter posed 3 issues that he wanted the GAO to examine:

• Whether the NCUA’s actions conform with, or exceed, the powers granted by the 1998 Credit Union Membership Authorization Act (CUMAA) which grants the NCUA the authority to oversee the methods and procedures of a conversion vote.

• Whether the NCUA’s rules and guidelines for conducting a conversion are “no more or less restrictive than that applicable to charter conversion by other financial institutions,” as required by law.

• Whether the behavior of the NCUA in overseeing conversions acts as an undue hindrance on the ability of credit unions to convert.

Regrettably, the GAO did not act on his request.

Over the last 7 years, NCUA obstructionism has only become worse, making it very difficult, if not impossible, for a credit union to exercise its right to change charters.

It seems the time is right to examine NCUA's tyrannical role in the conversion process.

Small Credit Unions and Complexity

The NCUA Board is proposing to raise the asset threshold for a small credit union from less than $10 million in assets to less than $30 million in assets. It is also proposing to exclude small credit unions from NCUA’s definition of a complex credit union.

According to the Board, raising the asset threshold from $10 million to $30 million would mean an additional 1,603 federally-insured credit unions (FICUs) would be defined as a small credit union and bring the total number of FICUs covered by the definition to 4,041 or 58 percent of all FICUs.

In addition, 230 out of the 1,603 FICUs would no longer be defined as complex. This means that these 230 FICUs would no longer be subject NCUA's risk-based net worth requirement.

However, there are 409 banks with less than $30 million in assets and they are subject to risk-based capital requirements.

While small credit unions do not pose an undue risk to the National Credit Union Share Insurance Fund (NCUSIF), I believe most people would agree that complex credit unions are engaged in riskier activities than non-complex credit unions. These complex institutions should be expected to hold more capital to offset the risk they pose to the NCUSIF.

Credit Unions Face A Regulatory Tax Because of Their Tax Exemption

Last week, I spoke at the Credit Union Water Cooler Symposium in Nashville, Tennessee.

Below is a video segment from the Conference where I told the audience that the preservation of the credit union tax exemption has imposed a regulatory tax on credit unions. This regulatory tax appears in the form of business lending and capital restrictions.

I know that some within the credit union industry would like to have their cake and eat it too. But that is unlikely to happen.

Material Loss Review on O.U.R. FCU

NCUA's Inspector General released a Material Loss Review on the failure of O.U.R. Federal Credit Union, a low-income credit union in Eugene, Oregon.

According to NCUA, the failure of O.U.R. FCU will result in an estimated loss to the National Credit Union Share Insurance Fund (NCUSIF) of $3.7 million. While the loss did not exceed the $25 million threshold, the Inspector General Office concluded that the circumstances surrounding the loss to the NCUSIF were unusual enough to warrant a review.

The IG report found that several factors contributed to the failure of O.U.R. FCU:

• Suspcious activity;
• Ineffective board oversight;
• Weak controls; and
• Inaccurate accounting.

The IG report was also critical of NCUA examiners noting that the agency missed the opportunity to prevent or reduce the loss to the NCUSIF, including incomplete examinations and ineffective resolution of issues raised during examiniations.

The report notes that the credit union was under a net worth restoration plan since March 2010. In addition, the credit union was issued a Letter of Understanding and Agreement (LUA) in August 2010, which specifically listed concerns and expectations related to record keeping, the debit card program, interest rate risk, and capital levels. Neither regulatory action was made public by NCUA.

Read the IG Report.

FCUs that Recently Opted In to Low Income Designation

On August 7, NCUA notified 1,003 federal credit unions that they were eligible for a low-income designation. The agency gave these credit unions 30 days to opt-in to this designation.

A low-income credit union is not subject to the member business loan cap of 12.25 percent of assets and can issue secondary capital instruments.

NCUA in September stated that 553 federal credit unions had opted in to the designation; but extended the deadline for another 30 days.

ABA filed a Freedom of Information Act request with NCUA to obtain a list of the credit unions that had opted in.

Below is a link to a spreadsheet that contains the name and other information about the credit unions making this low-income selection as of early October.

NCUA reported that 615 credit unions had made the decision to become low-income designated credit unions.

Twelve credit unions had assets in excess of $1 billion with Michigan State University FCU being the largest credit union opting for low-income designation.

Pennsylvania had the most credit unions to opt-in to this designation with 69, followed by Texas with 50 and New York with 42. A total of 41 states, plus Puerto Rico and Washington D.C., had at least one credit union opt-in to the low-income designation.

One hundred seventy-seven credit unions that opted in to the low-income designation reported holding some member business loans on their books. Three of the credit unions were already grandfathered from the business loan cap.

To review the list, click here.

Vermont CUs Can Use the Term Bank in Ads

On October 5, the Vermont Department of Financial Regulation ruled that a state chartered credit union can use the terms “bank” or “banking” or derivative terms or phrases in advertisements. However, a state chartered credit union is required to disclose that it is a credit union. The disclosure that a state chartered credit union is a credit union will be clear and conspicuous so that reasonable consumers can read, see or hear and understand the information.

To read the order, click here.

Fiscal Watchdog: CU Tax Exemption Worth $2 Billion Annually

Eliminating credit unions’ federal income tax exemption would generate $2 billion a year in revenue and reduce the U.S. corporate tax rate by 0.2 percent, according to a policy paper and related corporate tax reform calculator released by the Committee for a Responsible Federal Budget, a bipartisan policy group focused on federal budget and fiscal issues.

The paper reviewed several reforms that could lower the U.S. corporate tax rate, which is the highest in the developed world.

“Within the tax corporate tax code, there are a number of narrowly focused provisions which benefit only one or a few industries. Though some of these tax expenditures may have important justifications, they can also lead to an unequal playing field where the government is picking winners and losers,” the paper said.

“Examples include various tax preferences for extractive industries like oil and gas, the exemption of credit union income, the low-income housing credit which subsidizes housing construction, and the Blue Cross/Blue Shield deduction.”

Read the report.

Conserved CU Merged without NCUSIF Assistance

Conserved Trinity Credit Union of Trinidad, Colorado was merged into Power Credit Union of Pueblo, Colorado.

The Colorado Division of Financial Services placed Trinity Credit Union into conservatorship July 27 and appointed NCUA as conservator.

NCUA announced that the merger did not receive any assistance from the National Credit Union Share Insurance Fund.

Read the press release.

CUs that Borrowed From Fed During Q3 2010

Credit unions were not active borrowers from the Federal Reserve's Discount Window during the third quarter of 2010, as economic and financial conditions improved.

According to data released by the Federal Reserve, only 9 credit unions borrowed from the Discount Window during the third quarter of 2010 and only one credit union, Northwest Community Credit Union, borrowed from the Federal Reserve more than once during the quarter.

The credit unions that borrowed from the Federal Reserve's Discount Window were:

• ACHIEVA CU, CLEARWATER, FL
• CRESCENT CU, BROCKTON, MA
• ELEVATIONS CU, BOULDER, CO
• ESL FCU, ROCHESTER, NY
• NORTHWEST CMNTY CU, SPRINGFIELD, OR
• REDSTONE FCU, HUNTSVILLE, AL
• ST ANNES CU OF FALL RIVER, FALL RIVER, MA
• TALERIS CU INC, CLEVELAND, OH
• VISIONS FCU, ENDWELL, NY

El Paso's FCU Closed

The National Credit Union Administration (NCUA)liquidated El Paso’s Federal Credit Union (EPFCU) of El Paso, Texas.

NCUA made the decision to liquidate EPFCU and discontinue operations after determining the credit union was insolvent and had no prospect for restoring viable operations.

The credit union reported a loss of almost $63,000 through the first half of 2012. In addition, the credit union reported that 9.29 percent of its $1.4 million in loans were at least 60 days or more past due. However, the credit union was classified as well-capitalized as of June with net worth ratio of 11.38 percent.

EPFCU served 1,035 members and had deposits of approximately $4.4 million, according to the credit union’s June 2012 Call Report.

EPFCU is the ninth federally insured credit union liquidation in 2012.

Read the press release.

NCUSIF Losses by CU Asset Size, 1998 - 2012

NCUA in its proposed rule regarding the definition of a small credit union published information on the history of failures among credit unions of various asset size categories that caused losses to the National Credit Union Share Insurance Fund (NCUSIF) from 1998 through year-to-date 2012.

Since 1998, there have 262 credit union failures that have resulted in $945.4 million in losses to the NCUSIF.

The following table shows the the number of failures, NCUSIF losses, and average size of loss by asset size group. This information does not include losses from the failure of five corporate credit unions.

Landmark CU to Acquire Hartford Savings Bank

Landmark Credit Union said Tuesday it has applied to regulators to acquire Hartford Savings Bank.

New Berlin-based Landmark, which with $2 billion in assets is Wisconsin's largest credit union, said it hopes to acquire the bank by the end of this year.

Hartford Savings Bank has more than $190 million in assets.

Read the story.

Durbin Amendment Hurts Consumers, Community Banks, and Credit Unions

Despite retailers’ $8 billion windfall nearly a year after the Durbin amendment’s implementation, consumers still aren’t getting the lower prices they were promised, bank and credit union trade groups said in a September 21 letter to congressional leaders.

The trade groups also cited a recent Government Accountability Office (GAO) report that shows the many hardships that community banks and credit unions have endured since the amendment went into effect.

“[F]or smaller community banks and credit unions, which were supposed to be ‘exempted’ from the fallout of this legislation, interchange revenue dropped by 5 percent in just the first three months of implementation, and that was before the network exclusivity and routing provisions took effect in April 2012,” they said.

The study also notes that community banks and credit unions are struggling to maintain viable debit programs and some have had to raise fees. “The GAO … concludes that even more harm to community banks and credit unions is likely as the marketplace evolves,” the trade groups said.

They emphasized that any further regulation involving interchange fees is not only unnecessary, but an insult to consumers who have yet to see discounts for using their debit cards. “It’s clear that some retail groups will never be satisfied with any amount of windfall they receive,” the trade groups said. “It’s time to put this epic battle to a close before even more damage is done.”

Read the letter.

Annoying Challenge

NCUA has made the user experience of researching the financial information of a credit union more annoying.

You now have to type in a two word challenge before you can download a pdf of a credit union's call report.

My problem is sometimes I can't make out some of the words they want you to type. For example, below is an image of the challenge I got during a research search.

In comparison, the Federal Deposit Insurance Corporation (FDIC) does not require any challenge to access bank call reports.

Come on NCUA, make the user experience of your website more enjoyable and less frustrating.

Technology CU to Remain a Credit Union

An overwhelming majority of Technology Credit Union’s members who voted opposed the credit union’s plan to switch to a mutual savings institution charter.

According to the credit union's press release, approximately 25 percent of eligible members voted, with nearly 77 percent of those voting against becoming a mutual savings institution.

Technology Credit Union expressed frustration with the regulatory process and rules governing how a credit union can communicate with its members during the conversion process.

Barbara Kamm, President and CEO of Technology Credit Union stated:

“Members at the special meeting voiced frustration, saying we did not make a compelling case for charter change. We, too, are frustrated that we were unable to communicate our views effectively and in the open manner we would have preferred because of the regulatory process and the related rules that govern how credit unions can communicate about charter change with their members.”

Read the press statement from Technology Credit Union.

Illinois CU Fined for Improper Loan

Moline-based DHCU Community Credit Union was fined $10,000 by the Illinois Department of Financial and Professional Regulations for making an improper unsecured loan to a member of its executive management team.

On September 21, 2011, the credit union made an unsecured loan for $350,000 to a member of its executive management staff.

However, the maximum unsecured loan limit for a credit union under Illinois administrative rules is $40,000.

During an examination in March, the improper loan was identified. The state credit union regulator gave the credit union until May 31, 2012 to divest the loan.

The credit union asked for an extension to June 30, 2012 and the extension was granted.

A follow up examination to see if the loan had been divested found that only a portion of the improper loan had been divested and the remaining balance ($85,000) had been reclassified as "Other Assets."

The credit union failed to remedy the violation and was fined $10,000.

Read the civil penalty order.

Keeping Member-Owners in the Dark

Credit unions love to talk about how their members are owners.

But the reality is that most credit unions don't act as if their members own the institution.

If they did, then a credit union would disclose to its members a material event that affects the operation of a credit union.

For example, when is the last time you read about a credit union disclosing a regulatory enforcement action that it entered into with its regulator.

If credit union members are owners, they should be notified about events that could adversely impact their ownership interest. They should not be kept in the dark.

At a minimum, credit unions with at least 2,000 member-owners should be subject to the same transparency requirements as publicly-owned companies.

NCUA Redefines "Fleet" for Business Lending Purposes

In a new legal opinion letter to Community First Credit Union in Jacksonville (FL), NCUA updated its definition of a "fleet" as the agency viewed its current definition as overly restrictive.

John Hirabayashi, President and CEO of Community First CU, stated that NCUA's definition of fleet hampered a credit union’s ability to establish relationships with small businesses.

NCUA had previously defined the term "fleet" to mean two or more vehicles used to deliver a product or service integral to business. The new definition is five or more vehicles that are centrally controlled and used for a business purpose, including for the purpose of transporting persons or property for commission or hire.

NCUA based its new definition upon auto industry standards and the Internal Revenue Service's definition of a fleet.

This means that a credit union making vehicle loan to a member with fewer than five vehicles will not have to comply with the maximum loan-to-value ratio for member business loans of 80 percent.

This revised definition will provide credit unions with greater flexibility in making vehicle loans to their members for business purposes and allow credit unions to pursue small business customers.

Read the letter.

Trades to CFPB: Support Safe Harbor for Qualified Mortgages

Ten trade groups, including the ABA, CUNA, and NAFCU, on Friday wrote to the Consumer Financial Protection Agency reiterating their position on the “qualified mortgage” -- or QM -- standard under the pending ability-to-repay rule. We “want to express our continued strong support for a QM that meets three critical requirements,” they said in a letter to CFPB Director Richard Cordray.

Those requirements are: the QM must be broadly defined to include the vast majority of very high quality loans originated in today’s market; its product, documentation and underwriting requirements must be based on objective, bright-line standards; and lenders and investors must be granted a clearly defined legal safe harbor from ability-to-repay litigation when they originate loans that meet the QM standards.

“We believe a broad definition of QM with bright-line standards embedded in a legal safe harbor is the only sure means to serve the widest array of qualified borrowers with affordable credit,” the trade groups said. “A legal safe harbor with such standards will reduce the uncertainty associated with QM litigation and ease the need for lenders and investors to establish conservative credit overlays.”

They added that such a safe harbor also will permit claims by borrowers when the standards have not been met. “In short, a safe harbor will result in far more mortgage borrowers obtaining sustainable credit than a QM rule with a rebuttable presumption,” the trade groups said.

Read the letter.

CFPB Should Drop APR Proposal

Sixteen trade groups, including ABA and the National Association of Federal Credit Unions, urged the Consumer Financial Protection Bureau to drop a proposal to create a new, higher “all in” annual percentage rate calculation that would include additional fees and charges. The APR measure is part of the CFPB’s massive proposed rule intended to combine and simplify mortgage disclosure requirements under the Truth in Lending Act and Real Estate Settlement Procedures Act.

The trade groups noted that the CFPB’s own research shows that consumers confuse the APR with the note rate and it is of little value to them. “Simply adding additional fees to an unhelpful formulation that consumers do not use or understand will add significant costs and complications to the rulemaking effort, with no measurable benefit to the borrower,” they said.

The trade groups also pointed out that the APR is embedded in numerous other mortgage finance rules as a trigger for added compliance requirements, and it isn’t clear how the reconfigured APR would affect such rules. They emphasized that the Dodd-Frank Act doesn’t require wholesale changes to the APR and urged the CFPB to simplify the RESPA-TILA rulemaking by focusing only on elements needed to implement the statute’s requirements.

Finally, the trade groups asked the CFPB to publish a single version of Regulation Z that would reflect how it would be amended by all pending proposals. “This would improve our ability to provide input that CFPB will need before the comment periods close,” they said.

Read the letter.

Privately Insured CUs Face Another Special Assessment

American Share Insurance announced that privately insured credit unions will be assessed a special assessment of 9 basis points.

American Share Insurance stated that low yields on investments and the continuing funding of loss reserves required the special assessment.

The premium will be assessed of all primary insured member credit unions of record as of September 30.

In the prior three years, privately insured credit unions paid assessments of 15 basis points each year.

553 FCUs Opt for Low-Income Designation

NCUA announced that 553 federal credit unions opted for a low-income designation. As a result, there are now 1,740 low-income designated credit unions.

On August 7, the agency notified more than 1,000 federal credit unions that they were eligible for low-income designation. The credit unions had until September 10 to opt-in.

The initiative was included as part of the Obama Administration's relief package for 27 drought-stricken states.

The newly designated low-income credit unions serve 5.9 million members and manage more than $49 billion in combined assets.

Nearly half (260) of the credit unions—representing 49 percent of new LICU assets and 50 percent of new LICU members—that accepted the LICU designation are headquartered in states affected by the drought.

ABA has filed a Freedom of Information Act request for the list of 553 credit unions that received this low-income designation.

Read the NCUA press release.

Undercapitalized Credit Unions, June 2012

There were 120 undercapitalized credit unions with $7.25 billion in assets as of June 30, 2012.

This is down from 132 undercapitalized credit unions at the end of the first quarter of 2012.

Seven credit unions were critically undercapitalized and 21 credit unions were significantly undercapitalized.

Video of Mortgage Recording Tax Case

The Court of Appeals, New York's highest court, has posted a video of the oral arguments in Hudson Valley Federal Credit Union v New York State Department of Taxation and Finance.

As background, Hudson Valley Federal Credit Union sued the state of New York and its tax department seeking a declaration that Hudson Valley FCU and other federal credit unions are exempt from New York's mortgage recording tax.

However, lower courts ruled against Hudson Valley FCU stating that the mortgage recording tax "is not a tax on property, but a tax upon the privilege of recording a mortgage."

Video of Oral Arguments

Report on NCUA's Examination and Compliant Processes for Small CUs

NCUA's Office of the Inspector General (IG) released a report on NCUA's examination and complaint processes for small credit unions.

The report was requested by Senator Tim Johnson, Chairman of United States Senate's Committee on Banking, Housing, and Urban Affairs.

The report found that "NCUA’s examination process has clear standards and policies to conduct examinations. However, we noted inconsistencies in the manner in which NCUA carried out the procedures to implement those policies."

The IG believed that the inconsistency arose from the agency’s organizational structure consisting of five separately run regional offices with each having its own supervision manual. The IG report found that no two regional supervision manuals were the same and each region had its own customized approach to conducting risk-focused examinations.

However the report concluded that the exam inconsistencies have been addressed by the implementation of a new National Supervision Policy Manual.

Furthermore, the report concluded that NCUA examinations were completed in a timely fashion. NCUA guidelines state examiners should complete all examinations/supervision contacts within 60 calendar days from the start date.

The report found that on average NCUA completed regular FCU and joint FISCU examinations in 28 days and 32 days, respectively. Also, credit unions with CAMEL composite ratings of 1 or 2 took less time to complete the exam than credit unions with CAMEL 4 or 5 composite ratings. The IG report noted that it takes a greater time commitment to work on troubled institutions.

The IG report found that "NCUA has an adequate appeals process, which allows credit unions to question examination results."

According to logs from the five regional offices, between January 1, 2007 and December 31, 2011, each regional offices averaged six examination-related complaints annually with an average resolution time of 43 days. According to the logs, 85 percent of the complaints were decided in favor of the agency.

The report did note that there were some operational and organizational deficiencies associated with compliance monitoring, the regional determination process, the Supervisory Review Committee, and the Ombudsman position, respectively. For example, the report found that "Ombudsman position does not organizationally report directly to either the agency’s highest-ranking official or the NCUA Board, as required by the criteria which originally established the position."

Read the report.

NCUA Sues UBS Securities

The National Credit Union Administration (NCUA) is suing UBS Securities over the sale of more than $1.1 billion of mortgage-backed securities to U.S. Central Federal Credit Union (US Central) and Western Corporate Federal Credit Union (WesCorp). Both corporate credit unions subsequently failed.

The lawsuit, which was filed in Federal District Court in Kansas, alleges UBS Securities violated federal and state securities laws. NCUA argues that UBS Securities made numerous misrepresentations and omissions of material facts in the offering documents of the securities sold to the failed corporate credit unions.

The complaint also claims systemic disregard of the underwriting guidelines stated in the offering documents.

These misrepresentations caused US Central and WesCorp to believe the risk of loss was minimal.

In its complaint, NCUA requested a jury trial.

NCUA has filed five similar lawsuits against J.P. Morgan Securities, LLC, RBS Securities, Goldman Sachs, and Wachovia. In addition, the agency has settled claims worth more than $170 million with Citigroup, Deutsche Bank Securities, and HSBC.

Read the press release. Read the complaint.

Secondary Capital

Given NCUA's recent decision to designate over 1,000 federal credit unions as low-income credit unions, the agency needs to revisit its regulations governing secondary or supplemental capital for low-income designated credit unions.

Low-income credit unions have the authority to issue secondary capital accounts that are uninsured and subordinate to all other claims, including claims of creditors, shareholders and the NCUSIF.

However, NCUA in a 2010 report noted its experience with the depletion of supplemental capital accounts at corporate credit unions and low-income designated credit unions had raised reservations.

NCUA acknowledged that heighten disclosures may not be sufficient to inform investors about the risk and uninsured status of the secondary capital accounts. Moreover, in an August 14, 2003 letter to Representatives Oxley, Frank, and Sherman, the agency wrote that "experience has shown that when uninsured accounts are offered to natural-person customers of a financial institution, and then the accounts suffer losses, confusion about insured status and issues of reputation risk and systemic confidence result."

NCUA needs to develop and enforce disclosure standards sufficient to inform prospective investors of the risk and uninsured status of such supplemental capital accounts. The agency also needs to put in place suitable standards to protect investors and credit union members.

Furthermore, if credit unions are allowed to offer these accounts to one another, this could increase systemic risk. Ideally, a credit union investing in secondary capital issued by a low-income credit union should be required to deduct this investment from its net worth. However, credit union net worth standards are written into law, so NCUA does not have this discretion. The next best alternative is for NCUA to put into place real and meaningful limits on the amount that credit unions may invest of their net worth in the secondary capital of a low-income credit union.

Additionally, secondary capital is not core capital and no credit union should rely entirely on secondary capital as its source of net worth. NCUA needs to specify a required minimum amount of primary capital that a low-income credit union should hold.

NCUA is well aware of these issues; but has failed to act. NCUA needs to promulgate regulations overseeing these concerns with respect to secondary capital.

Pension Shortfall at Commonwealth CU?

Credit Union Journal (paid subscription) is reporting that Kentucky's Commonwealth Credit Union may face a pension funding shortfall of approximately $60 million, which could put a serious dent in the net worth position of the credit union.

Commonwealth CU participates in the Kentucky Employees Retirement System (KERS), which is severely under-funded. Starting in fiscal year 2014, new Governmental Accounting Standards Board rules will require KERS to split out and pass down to all program participants their share of the under-funding.

Commonwealth CU did not respond to request for comments from Credit Union Journal.

Minn. FCUs Can Make Unlimited Biz Loans to Lake Wobegon

In order to speed the recovery to the Gulf region affected by Hurricane Isaac, the National Credit Union Administration (NCUA) announced that all federal credit unions headquartered in Minnesota will be designated as low-income credit unions.

In making the decision to designate all Minnesota federal credit unions as low-income, NCUA Chairman Debbie Matz stated: "Most Americans consider themselves of modest means."

NCUA Chairman Matz further justified the agency's action by stating that the Mississippi River starts in Minnesota and flows into the Gulf.

NCUA stated that this action would allow Minnesota credit unions to make unlimited business loans to the residents of Lake Wobegon.

Upon hearing the news, Garrison Keillor applauded NCUA's decision by declaring all credit union business loans to Lake Wobegon are above average.