Friday, May 30, 2014

House Votes to Bar Using Funds for Disparate Impact Litigation

The House of Representatives approved, by a 216-190 vote, an amendment offered by Rep. Scott Garrett (R-N.J.) that would prohibit the Justice Department from using funds for litigation in which it seeks to prove illegal discrimination based on the “disparate impact” theory.

Prior to the vote, bank and credit union trade groups wrote to House members urging their support for the amendment.

“Under the disparate impact theory, even when a lender takes every step to prevent discrimination and treats all consumers fairly and equally, a neutral policy can serve as a basis for very serious and harmful claims in the absence of intentional discrimination,” the trade groups wrote.

“Smaller lenders, in particular, will find it difficult to manage this type of litigation risk,” they said. “Left unchecked, disparate impact enforcement could increase the cost and undermine the availability of credit throughout the economy.”

Read the letter.

Thursday, May 29, 2014

NCUA Approves Five Star CU's Purchase of Bank

The National Credit Union Administration approved the purchase of Flint River National Bank in Camilla, Georgia by $260 million Five Star CU headquartered in Dothan, Alabama.

The deal is scheduled to close in early June.

This is the fifth transaction involving a credit union purchasing a bank in the last two years.

Wednesday, May 28, 2014

Navy FCU Sued for Not Paying Overtime

A complaint filed in a U.S. District Court in Nevada alleges that Navy Federal Credit Union (Navy FCU) willfully violated the Fair Labor Standards Act (FLSA) by requiring off-the-clock work by non-exempt employees.

The plaintiff is a Member Services Representative (MSR), who has worked for Navy FCU for almost six years.

The job description for MSRs states the position is non-exempt from overtime.

According to the complaint, Navy FCU maintained a uniform corporate policy to force MSRs to work off-the-clock before and after their shifts.

Plaintiff estimated off-the-clock work was 30 to 45 minutes per shift.

In addition, the complaint alleges that Navy FCU failed to record and maintain accurate timesheets regarding hours worked.

When plantiff complained to Navy FCU's management about not keeping accurate time records, plaintiff's ex-manager used the N-word.

Moreover, Navy FCU's management told plaintiff to stop placing comments on time sheet showing the actual, accurate times worked.

The complaint further alleges that working off-the-clock is still occuring and is part of a company wide practice to decrease non-exempt employees' compensation.

The complaint seeks class certification for all MSRs who performed any uncompensated off-the-clock work for Navy FCU. The size of the class is estimated at 500 employees or more.

The complaint requests a jury trial and is seeking all available damages including but not limited to wages, liquidated damages, attorneys' fees, punitive damages and costs.

The plaintiff is represented by Cogburn Law Offices.

List of Credit Unions that Missed Filing Deadline

As I reported last week, 104 credit unions missed their deadlines for filing their Call Reports.

Below is a link to an excel spreadsheet with the credit union name, asset size, and number of days late.

The largest credit union was Energy One FCU in Tulsa (OK) with $243 million in assets. The credit union with the most days late was Animas Credit Union in Farmington (NM).

To review the list, click here. You will get a pop up window asking you to log-in. Close that window and the excel spreadsheet should open.

Tuesday, May 27, 2014

Chairman Hensarling Challenges Regulators on Reputation Risk

House Financial Services Committee Chairman Jeb Hensarling (R-Tex.) has sent letters to four Federal banking agencies (Fed, OCC, FDIC, NCUA) challenging their use of 'reputation risk' as a factor in supervision of depository institutions.

Hensarling wrote that "it would be an abuse of regulatory discretion to use vague, subjective, and unquantifiable indicators like a firm's reputation to justify regulatory outcomes that could not otherwise be justified under an objective CAMELS analysis."

He goes on to write that the introduction of reputational risk "can all too easily become a pretext for the advancement of political objectives."

He poses three questions to the regulators and request that they respond by no later than June 12th.

Below is Chairman Hensarling's letter to NCUA.

Friday, May 23, 2014

Life Line CU Closed

The Virginia State Corporation Commission closed Life Line Credit Union, Inc., of Richmond, Va., and appointed the National Credit Union Administration Board as receiver to act as liquidating agent. Virginia Credit Union, Inc., headquartered in North Chesterfield, Va., assumed all member shares.

The Virginia State Corporation Commission made the decision to close Life Line and discontinue its operations after determining the credit union is insolvent and has no reasonable prospect for restoring viable operations. Life Line CU had a net worth ratio of 4.78 percent as of the first quarter of 2014.

At the time of liquidation and subsequent assumption by Virginia Credit Union, Life Line was a federally insured, state-chartered credit union that served 2,076 members and had assets of $7.9 million, according to its most recent Call Report.

Life Line Credit Union is the fifth federally insured credit union liquidation in 2014.

Read the press release.

Read the order closing the credit union.

104 CUs Late Filing Call Reports, Face Fines

The National Credit Union Administration (NCUA) announced that 104 credit unions were late filing their first quarter 2014 Call Reports.

The agency in January warned credit unions that beginning with the first quarter 2014 Call Report that it would assess civil money penalties against credit unions for filing their Call Reports late.

NCUA is in the process of reviewing each late filing to determine the assessments and whether any mitigating factors exist to warrant forbearance.

NCUA will make public the names of late filers at a later date.

The following table summarizes the number of late filers by charter type, asset size, and days late.

Read the press release.

Thursday, May 22, 2014

Lawsuit Alleges CU Allowed Online Payday Lender Unauthorized Access to Bank Account

A lawsuit by James Dillon alleges that San Antonio-based Generations Federal Credit Union and three bank defendants allowed online payday lenders to initiate unauthorized debits of the plaintiff's checking account.

According to the complaint, the plaintiff obtained five payday loans over the internet from lenders based offshore or on Indian reservations, which carried interest rates ranging from 139 percent to over 700 percent and, in some cases, thousands of dollars in finance charges.

According to the plaintiff, these loans violated North Carolina’s usury statute and various other state laws.

The plaintiff alleges that the Originating Depository Financial Institutions (ODFIs) should have known that the lenders were engaged in making payday loans in states where the loans were unlawful and that they violated RICO by knowingly facilitating the collection of usurious loans through the ACH Network.

Beginning on paragraph 100 of the complaint are the allegations against Generations Federal Credit Union.

"On or about July 1, 2013, CashCall initiated a debit transaction in the amount of $313.96 from Plaintiff’s checking account in North Carolina through the ACH Network. The ODFI originating this transaction was Defendant Generations.

On or about August 2, 2013, and September 20, 2013, CashCall initiated debit transactions in the amount of $294.46 from Plaintiff’s checking account in North Carolina through the ACH Network. The ODFI originating these transactions were Defendant Generations.

CashCall has subsequently sold Plaintiff’s debt to another third-party collection company which continues to initiate unauthorized debits from Plaintiff’s checking account through ACH debit entries originated by Defendant Generations."

In April, a U.S. District Judge the denied the defendants' motion to dismiss the lawsuit.

Read the complaint.

Read the Judge's opinion and order.

Wednesday, May 21, 2014

NCUSIF Losses from Eight Small CU Failures, October 2013 - March 2014

The Office of the Inspector General (OIG) of the National Credit Union Administration (NCUA) recently reviewed eight failed credit unions that are not subject to a Material Loss Review.

The Dodd-Frank Act requires the NCUA OIG to perform a limited review where the National Credit Union Share Insurance Fund (NCUSIF) incurred a loss below the $25 million threshold with respect to an insured credit union.

The OIG reviewed eight failed credit unions that incurred losses to the NCUSIF under $25 million between October 1, 2013, and March 31, 2014.

The following tables comes from the OIG's Semiannual Report to Congress and identifies the estimated loss to the NCUSIF and the reason for the failure of each credit union (click on the image to enlarge).

Monday, May 19, 2014

CEO Pay at Large State Chartered CUs Was Almost $1 Million for 2012

The average total compensation for chief executive officers at state chartered credit unions with at least $1 billion in assets for 2012 was almost $1 million.

The information on CEO compensation was pulled from the credit unions' Form 990 informational returns. Federal credit unions are not included in this analysis because they do not file a Form 990 with the Internal Revenue Service and do not disclose information on CEO pay.

Compensation information is provided for 111 CEOs from 106 state chartered credit unions with at least $1 billion in assets as of December 31, 2012. Only Meriwest Credit Union was excluded due to a missing Form 990.

Total compensation includes base salary, bonus and incentives, other reportable income, retirement and deferred compensation, and nontaxable benefits.

Thirty-two CEOs at state chartered credit unions reported total compensation packages in excess of $1 million for 2012. MidFlorida Credit Union's CEO, Kevin Jones, was the highest compensated executive earning slightly more than $5 million.

The mean and median 2012 total compensation packages were $992,204 and $745,675, respectively.

The average 2012 base salary for CEOs of large state chartered credit unions was $501,505. The median base salary was $432,800.

The average 2012 bonus and incentive pay was slightly more than $155 thousand. The median bonus and incentive payment was $86,873.

Other reportable compensation averaged $161,620 for 2012. The median other reportable income was $16,480.

The mean and median 2012 retirement and other deferred compensation were $161 thousand and $39.2 thousand, respectively.

Friday, May 16, 2014

Health One CU Conserved

The Director of the Michigan Department of Insurance and Financial Services placed Health One Credit Union, headquartered in Detroit, into conservatorship and named the National Credit Union Administration as agent to handle the credit union’s day-to-day operations.

The Michigan Department of Insurance and Financial Services placed Health One into conservatorship because of the recent discovery of unsafe and unsound practices.

The credit union reported a loss of $181,746 for the first quarter of 2014 after reporting a loss of $1.3 million for 2013. The credit union reported a net worth ratio of 3.90 percent and a delinquency ratio of 7.97 percent.

Health One Credit Union has 3,882 members and assets of $18.2 million, according to the credit union’s March 31, 2014.

Read the NCUA press release.

Order from Michigan Department of Insurance and Financial Services.

Is NCUA Ready to Supervise a Credit Union that Conducts Its Own Stress Test?

The transcript from the April 24 NCUA Board meeting makes it pretty clear that NCUA does not have the staffing or resources to supervise a credit union that conducts its own stress test.

NCUA Chariman Debbie Matz asked Scott Hunt, the head of the Office of National Examinations and Supervision, the following questions.

"The final rule provides that three years after enactment, a credit union can apply to conduct their own stress test. Does your office have the necessary staffing to supervise that if you agree that a $10 billion credit union at that point can do their own stress test? Are you staffed to handle that?"

You have to go to the fourth paragraph of his response to get the answer, which is no.

Scott Hunt said: "So basically it would pull together both personnel resources, information data gathering as well as an investment in software that we don't have today so the short answer on that is no, we are not ready to take this on."

Hunt notes the difference between the FDIC and NCUA with regard to data collection. He states: "The FDIC has accumulated significant bank data over the years through their Call Report. Their Call Reports are hundreds of pages long in comparison to the very high-level data we gather from our credit unions in the 20 to 30 page range." So, the dearth of detailed information is one factor limiting NCUA's preparedness.

Hunt further points out the difference in staff expertise. He states that FDIC has "acquired resources where they possess the skills and expertise," which NCUA does not possess and will need to acquire. He notes that stress tests are not generic exercises and require considerable judgement.

He also says that "[i]t would require an investment in analytical software that we currently don't possess." This would be an additional expense for the agency, if it decides to allow credit unions to conduct their own stress tests.

Wednesday, May 14, 2014

Too Interconnected to Fail

Credit unions have had a history of being too interconnected to fail.

Whenever a corporate credit union got into financial trouble, NCUA has stepped in to bailout credit unions.

In January 1995, Capital Corporate Federal Credit Union (CapCorp) failed because of a sharp rise in interest rates in 1994. To prevent a run on CapCorp and a fire sale liquidation of CapCorp's assets, which would have magnified CapCorp's losses, NCUA guaranteed the $700 million of uninsured deposits for 483 credit unions that were members of CapCorp.

According to a 1995 study on CapCorp's failure, the Government Accountability Office wrote:

"Up to $70 million of Cap Carp's losses, originally projected to be $100 million, would be borne by its member credit unions through the loss of Cap Corp's total capital-- approximately $33 million in retained earnings and $37 million in MCSDs held by its members. NCUA's analysis indicated that these losses could be absorbed by the member credit unions without causing any of them to fail. The losses to the member credit unions could have been even larger if NCUA had decided not to cover the approximately $700 million in uninsured member deposits because, in the absence of this support, a run on Cap Corp could have forced the sale of assets at lower than expected prices." (emphasis added)

Fast forward to 2008 and 2009, once again the credit union industry teetered on the abyss as five corporate credit unions failed. The interconnectedness between corporate credit unions and natural person credit unions caused NCUA to take decisive action to stabilize the industry.

As NCUA Chairman Debbie Matz stated in a 2010 speech,

"[a]bout 90 percent of natural-person credit unions had investments in corporates. If the corporate system had collapsed, natural-person credit unions would have suffered huge and insurmountable losses – shattering confidence in all of America’s credit unions. Natural-person credit unions would have lost about $30 billion in net worth – about one-third of their net worth at the time. At least 800 natural-person credit unions would have collapsed.

On top of all that, your federal Share Insurance Fund would have had to levy huge assessments on the surviving credit unions, to cover the remainder of the losses. Many of those remaining credit unions might not have withstood the strain."

Debbie Matz further stated:

"To stabilize the system, NCUA placed guarantees on shares at all corporates. As a result, credit union investments in the corporates are backed by the full faith and credit of the United States government." (emphasis added)

While NCUA has put in place more stringent regulations with regard to corporate credit unions, natural person credit unions and corporate credit unions still remain too interconnected.

It is only a matter of time before a corporate credit union gets into financial trouble and NCUA will guarantee all uninsured deposits of a corporate credit union's members to prevent a run.

Tuesday, May 13, 2014

Performance of CU ITT Student Loans

The following tables provide information on the performance of private student loans at seven credit unions that participated in ITT's Student CU Connect program.

The seven credit unions that participated in ITT's Student CU Connect private student loan program were Eli Lilly Federal Credit Union, in Indianapolis, Ind.; Bellco Credit Union, in Greenwood Village, Colo.; CommunityAmerica Credit Union, Lenexa, Kan.; Workers’ Credit Union, Fitchburg, Mass.; Directions Credit Union, Toledo, Ohio; Veridian Credit Union, Waterloo, Iowa; and Credit Union of America, Wichita, Kan.

The first table looks at the dollar amount of outstanding private student loans at the seven credit unions between 2011 and 2013. The National Credit Union Administration only started to collect this information from credit unions beginning in 2011. Not all the student loans are part of the ITT Student CU Connect program; however I suspect the bulk of the delinquencies and net charge-offs are associated with the program.

The next table reports on the net charge-offs of non-federally guaranteed student loans. These seven credit union reported cumulative net charge-offs of over $40.4 million on private student loans between 2011 and the end of 2013.

The last table reports on the dollar volume and number of delinquent private student loans at these seven credit unions. For example, in 2013, these seven credit unions reported 16,672 private student loans worth almost $18.5 million were at least 60 days past due.

Monday, May 12, 2014

Numerica CU Will Bank Pot Growers and Processors, But Not Retailers

The Spokesman-Review is reporting that Numerica Credit Union is the first financial institution in the state of Washington willing to accept clients whose business is the growing or processing of marijuana. Numerica’s executive group decided against creating accounts for pot retailers in order to comply with Justice Department guidelines. The credit union plans to limit its aggregate deposit exposure to these businesses to 5 percent of the credit union's total deposits.

Read the story.

Thursday, May 8, 2014

Numerica CU Buys Naming Rights to Performing Arts Center

Numerica Credit Union with $1.3 billion in assets recently bought the naming rights to the Performing Arts Center of Wenatchee at the Stanley Civic Center.

The credit union will pay $500,000 over 10 years for the naming rights.

The agreement will change the theatre’s name to the Numerica Performing Arts Center.

While buying the naming rights to a theatre may enhance the credit union's brand presence, it is not the intended purpose of the credit union tax exemption.

This is just another reason for ending the credit union industry's preferential tax treatment.

Read the announcement.

Wednesday, May 7, 2014

Large CUs Should Report Overdraft Program Revenues

Beginning with the March 31, 2015 Call Report, banks with at least $1 billion in assets will be required to report revenues from consumer overdraft-related service charges.

This change in the call report arose from the Consumer Financial Protection Bureau's desire to develop an understanding of market-wide behavior and activity with regard to overdraft protection programs.

In a 2013 letter, the American Bankers Association, the Financial Services Roundtable, and the Consumer Bankers Association noted that "using the Call Report process creates a significant data gap in that it excludes a significant number of deposit-like products from non-bank financial institutions."

The joint trade associations wrote:

"[I]t is not clear why credit unions which are widely engaged in overdraft protection programs and whose mission is serving the consumer market - were left out of the reporting process even though their regulator is both an FFIEC member and a Federal financial institution regulatory agency."

Credit unions with $1 billion or more in assets should begin to report revenues related to their overdraft programs. There is not any policy justification for excluding these large credit unions from reporting this data.

The decision to exclude credit unions from the data collection project renders hollow the Consumer Financial Protection Bureau's claim that they will be a data driven agency. When it comes to credit unions, this agency seems to wear rose-colored glasses.

Monday, May 5, 2014

Michigan CU Regulator Adds Sensitivity Rating Component

In an April 10 letter to state-chartered credit unions, the Michigan Office of Credit Unions announced that its was moving from CAMEL to CAMELS.

The Office of Credit Unions wrote that it believed this was a prudent time to make the change by adding the Sensitivity component.

The Sensitivity or "S" component of CAMELS examines the impact of interest rate changes on net income and net worth of a credit union. It also looks at the ability of a credit union to measure, monitor, and manage its interest rate risk exposure.

The letter notes that while the Federal Financial Institutions Examination Council adopted a Sensitivity rating in 1997, NCUA never implemented this component.

Well, I guess it is better late than never.

When will NCUA join the party by adding S to the end of CAMEL?

Read the letter.

Friday, May 2, 2014

More on Eli Lilly FCU and ITT Private Student Loans

According to the Indianapolis Business Journal, Eli Lilly FCU had to restate its 2012 financials after it recorded a $26 million loan loss provision at the end of 2012, when it reserved “70 percent of total loan balances for a specific Private Student Loan program.”

As a result of this loan loss provisioning, Eli Lilly FCU went from a previously reported 2012 profit of $8.9 million for 2012 to a $13.9 million net loss in 2012. The net worth for the credit union fell from 9.82 percent in 2011 to 8.24 percent in 2012.

Mike Renninger, principal of Carmel financial consultancy Renninger & Associates, commenting on the losses from the ITT student loan program said: “Somebody ought to have massive egg on their face for doing this.”

Read the story.

Three NCUA Assisted Mergers in First Quarter of 2014

Three credit unions were merged with assistance from the National Credit Union Administration during the first quarter.

The credit unions were Jayhawk FCU (Lawrence, KS), Union Settlement Federal Credit Union (New York, NY) and Oldham Family Alliance Federal Credit Union (Baltimore, MD).

Jayhawk was merged into Mid America CU; Union Settlement was absorbed by Lower East Side People's; and Oldham Family Alliance was merged into Members First of Maryland.

NCUA did not disclose the nature of the assistance provided to the three closed credit unions.

Thursday, May 1, 2014

Lawsuit Links CUs to Predatory Loan Practices at ITT Educational Services

A lawsuit by the Consumer Financial Protection Bureau (CFPB) against ITT Educational Services (ITT) links a student loan credit union service organization (CUSO), Student CU Connect, and indirectly credit unions to a predatory private student loan program.

Seven credit unions founded Student CU Connect (SCUC) -- Eli Lilly Federal Credit Union in Indianapolis, Ind.; Bellco Credit Union in Greenwood Village, Colo.; CommunityAmerica Credit Union in Lenexa, Kan.; Workers’ Credit Union in Fitchburg, Mass.; Directions Credit Union in Toledo, Ohio; Veridian Credit Union in Waterloo, Iowa; and Credit Union of America in Wichita, Kan. (check out the November 5, 2009 press release).

Eli Lilly Federal Credit Union was the originating entity of the student loan participations. (I will note that Eli Lilly FCU has ended this loan program with ITT). Participating credit unions made a three year commitment to fund a pre-specified amount of student loans each quarter.

The press release for SCUC makes it clear that this program was a good source of revenues for credit unions.

Paragraphs 120 through 128 of the CFPB complaint describe the SCUC private loan program (link to the complaint can be found at the end of this commentary).

The complaint notes that from March 2009 until December 2011 SCUC originated $189 million in student loans to ITT students. SCUC was only available to ITT students.

Paragraph 121 discusses the connection amongst ITT, SCUC, and the lead credit union, Eli Lilly FCU.

"SCUC was the brainchild of ITT or its paid consultants, and ITT was actively involved in the creation and support of SCUC by developing the underwriting criteria, providing a credit facility, and paying the credit union membership fees in the lead credit union on behalf of the students who took out SCUC loans. ITT was also actively involved in the servicing and collection activities of SCUC. In addition, ITT provided a stop-loss guarantee to the program participants: if defaults exceeded 35%, ITT would make the credit unions whole for any further defaults."

Paragraphs 123 and 124 of the complaint point out that the SCUC loans were targeted at subprime borrowers. According to the complaint, 46 percent of the borrowers had credit scores below 600 and "were subject to interest rates of 13.75% or 16.25% and origination fees of 10%."

The complaint states that a majority of these SCUC loans ended in default.

In paragraph 127, ITT's consultants projected a gross default rate of 63 percent on SCUC loans. In paragraph 154, ITT projected that the gross cumulative default rate for the SCUC pool of loans from 2009, which is the oldest and most seasoned pool of loans, would exceed 70 percent.

While the lawsuit targets ITT, credit unions that funded this private student loan program should not get a free pass.

Where are the credit union regulators and why haven't we seen any enforcement orders or civil fines against credit unions?

Read the CFPB complaint.


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