Hearing on the State of the Credit Union Industry

NCUA Chairman Debbie Matz testified that as of September 30, 2010, aggregate net worth of the credit union industry was $90.6 billion, which equates to a net worth ratio of 9.97 percent of total assets. Ninety-eight percent of all credit unions were at least adequately capitalized or better and 94.8 percent of all credit unions were well capitalized.

Her testimony noted that since the end of 2006, the delinquent loan ratio and net charge-off ratio have more than doubled. She also noted that 270 of the 633 credit unions, which have a 3, 4, or 5 CAMEL rating and make member business loans (MBLs), business lending is the primary or secondary contributing factor for the supervisory concern.

NCUA requested that three changes be made to the Federal Credit Union Act that are technical and non-controversial.

"Change the Net Worth definition to allow certain loans and accounts established by the NCUA Board to count as net worth. NCUA‘s ability to resolve problem credit unions at the least cost to the NCUSIF has been limited by the Financial Accounting Standard Board‘s changes in accounting standards, in combination with the existing statutory definition of net worth. Since NCUA does not have the ability to adjust the definition of net worth similar to the Federal Deposit Insurance Corporation‘s authority, this results in the dilution of a credit union‘s net worth when it acquires another credit union, regardless of whether or not NCUSIF assistance is provided to facilitate the acquisition. This increases costs to resolve failed institutions and necessitates more outright liquidations instead of mergers. Liquidations immediately cut members off from credit union services.

Amend the Act to clarify that the equity ratio of the NCUSIF is based on NCUSIF only, unconsolidated financial statements. Evolving accounting standards could result in the consolidation of the financial statements of the NCUSIF with regulated entities when NCUA exercises its role as the government regulator and insurer by conserving failed institutions. The requested amendment would be consistent with Congress‘ original intent in defining the NCUSIF equity ratio, and prevent insured credit unions from being assessed artificially-inflated insurance premiums resulting from the consolidation of financial statements with failed institutions.

Streamline the operation of the Stabilization Fund. As currently written, the Stabilization Fund must borrow from the U.S. Treasury to obtain funds to make expenditures related to losses in the corporate credit union system. The Stabilization Fund then assesses federally insured credit unions to repay the U.S. Treasury borrowing over time. Relevant amendments to Section 217(d) of the Act would give NCUA the option of making premium assessments on federally insured credit unions in advance of anticipated expenditures, thereby avoiding borrowing directly from the U.S. Treasury. In addition, while the existing statutory language includes the implicit authority for ongoing advances, a clarification of this in the statute is recommended."

During the question and answer part of hearing before the Senate Banking Committee, NCUA Chairman Matz made some interesting comments:

1. NCUA will be issuing next year a proposed regulation on concentration limits.

2. NCUA will examine all state chartered credit unions with over $250 million in assets annually.

3. NCUA examiners were given guidance and told that credit unions get only one shot at addressing Documents of Resolutions. If credit unions do not comply within 90 to 120 days, NCUA will escalate administrative actions.

4. NCUA would like the authority to exam third party vendors.

5. A small number of credit unions are at the aggregate member business loan limit.

6. When asked about the number of problem credit unions, Chairman Matz answered 50 credit unions. (Editorial comment: At the end of October, there were 378 credit unions with either a CAMEL 4 or 5 rating. I suspect the 50 number is the number of credit unions that NCUA may have slated to close or involuntarily merge.)

To view the hearing, click on this link.

NCUA's Equitable Sharing Provision of TCCUSF Expenses

NCUA is proposing to add a new amendment to its corporate credit union rule that would provide for the equitable sharing of Temporary Corporate Credit Union Stabilization Fund (TCCUSF) expenses among all members of corporates, including both credit union and noncredit union members.

The new proposed Section 704.21 provides that when the NCUA Board assesses a TCCUSF premium on federally-insured credit unions (FICUs), NCUA will request existing non FICU members to make voluntary payments to the TCCUSF. In the event one or more of these non FICUs declines to make the requested payment, or makes a payment in an amount less than requested, the proposal requires the corporate conduct a member vote on whether to expel that non FICU. NCUA writes that non FICU members will not likely pay without some encouragement. (Emphasis added)

The proposed amendment defines non FICU to mean every corporate member that is not insured by the National Credit Union Share Insurance Fund (NCUSIF). This would include trade associations, CUSOs, non credit union cooperatives, banks, insurance companies, and privately insured credit unions.

Through this proposed amendment, NCUA is seeking to shift the cost of the TCCUSF expense from FICUs to non FICUs, even though the real beneficiaries from creation of the TCCUSF are the NCUSIF and FICUs, not non FICUs.

If it weren’t for the creation of the TCCUSF, FICUs were looking at a huge one-time assessment in 2009 associated with NCUA’s efforts to stabilize the corporate credit union network and the conservatorships of U.S. Central and Western Corporate Federal Credit Unions. FICUs were facing a one-time assessment of 99 basis points to restore the NCUSIF back to its normal operating level of 1.30 percent of insured deposits – 69 basis points write down of its one percent NCUSIF capitalization deposit and a premium assessment of 30 basis points. Testifying before the House Financial Services Subcommittee on Financial Institutions and Consumer Credit on May 29, 2009, NCUA Chairman Fryzel stated that the 99 basis point cost to FICUs would equate to a 72 basis point reduction in each FICU’s return on assets and 65 basis point reduction in net worth.

Furthermore in a June 2009 letter to FICUs, NCUA wrote how both the NCUSIF and FICUs benefited from the creation of the TCCUSF. The TCCUSF “allows the Board to improve the NCUSIF’s equity ratio to better position the NCUSIF to cover future insurance losses. Essentially, it means insured credit unions will not bear a significant, current, concentrated, onetime burden for stabilizing the corporate system.”

Non FICU members of corporates, however, did not face this one-time assessment. Non FICUs did not benefit from shifting the obligation of resolving failed corporate credit unions from the NCUSIF to the TCCUSF and from the spreading out of the cost associated with corporate resolutions over a number of years.

Moreover, to call this payment voluntary or a gift is a sham.

NCUA would like you to believe that it is an innocent by-stander and not influencing the actions of non FICUs regarding the fictitious voluntary payments. NCUA wrote that it “does not ultimately make the determination of whether a non FICU should make a payment to the TCCUSF or the amount of the payment. The non FICU makes that determination. NCUA also does not make the determination of the adequacy of any payment. The members of the affected corporate make that determination when deciding whether or not to expel the non FICU member.”

In fact, NCUA is sending an invoice to non FICUs. If a non FICU does not pay up the requested amount, the corporate is required to hold a special meeting of the members to vote on the expulsion of the non-paying, non FICU member.

Most casual observers would hardly view this as voluntary and definitely not a gift. According to The American Heritage College Dictionary Third Edition, the word “voluntary” means “1) arising from or acting on one’s own free will or 2) acting, serving, or done willingly and without constraint or expectation of reward.”

Is this payment being done willingly without constraint?

In my opinion, non FICUs are being coerced into making this payment by a rogue agency that is abusing its powers.

Beehive Will Cost NCUSIF More Than $25 Million

NCUA's Inspector General stated that it will perform a Material Loss Review on Beehive Credit Union. The Inspector General in its 2011 Annual Performance Plan stated that the loss to the NCUSIF from this soon-to-be closed credit union will exceed $25 million.

What is odd is that while NCUA's Inspector General has announced that it preparing to look into the causes of this credit union's failure, neither the Utah credit union regulator nor the NCUA have bothered to seize this credit union.

Deficit Commission Report Calls for Eliminating CU Tax Exemption, Falls Short of 14 Votes Needed for a Vote on the Plan

The National Commission on Fiscal Responsibility and Reform released this week its report, The Moment of Truth.

Among its recommendations for reforming the corporate tax code was the elimination of all corporate tax expenditures, including the credit union tax exemption. Both the Office of Management and Budget and the Joint Committee on Taxation identify the credit union tax exemption as a corporate tax expenditure.

The report stated that eliminating business tax expenditures would allow for the corporate tax rate to be lowered and would also help to reduce the deficit. Lower corporate tax rates will make American businesses more competitive and abolishing special subsidies will create an even playing field for all businesses instead of artificially picking winners and losers.

While the Commission's deficit reduction plan fell short of the 14 votes needed to present its recommendations to Congress for a vote, a bipartisan majority, 11 out of 18 members, voted for the plan.

I believe this Commission has provided a valuable service in advancing the discussion. But the path to fiscal sustainability won't be easy. The special interests, which include credit unions and their trade associations and federal regulator, will vigorously fight to preserve their favorable tax treatment.

CUs Used Federal Reserve's Emergency Loan Facilities

The Federal Reserve released data on Wednesday showing that several corporate and natural person credit unions accessed its emergency loan facilities during the financial crisis.

Three credit unions used the Federal Reserve's Term Auction Facility -- U.S. Central (Lenexa, KS), Marine CU (Fond Du Lac, WI), and Service CU (Portsmouth, NH).

U.S. Central FCU between July 14, 2008 and September 11, 2008 accessed the Federal Reserve's Term Aucttion Facility (TAF) 5 times. The amounts borrowed ranged from $500 million to $5 billion. Each borrowing from the TAF had a duration of 28 days.

Marine CU borrowed from the TAF five times. The first borrowing was October 22, 2009 for $10 million. The subsequent four borrowings from the TAF were for $28.3 million with the last borrowing occuring on March 11, 2010 for 28 days.

Service CU borrowed 6 times from the TAF. Each borrowing was $12 million. The first borrowing was February 12, 2009. The last loan was originated on November 5, 2009. Durations of loans varied between 28 days and 84 days.

In addition, two corporate credit unions -- Members United Corporate FCU and Wisconsin Corporate CU -- used the Federal Reserve's Commercial Paper Funding Facility. The Federal Reserve purchased $268 million in commercial paper from Members United on October 27,2008 and $98.3 million in commercial paper from Wisconsin Corporate CU on October 28, 2008.

Recap of 10 Costly Credit Union Failures

NCUA's Inspector General (IG) issued a report summarizing significant findings associated with 10 costly natural person credit union failures between November 2008 and October 2010. The report notes that (1) poor strategic planning and decision making; (2) inadequate policies and internal controls; and (3) fraud contributed to these failures.

The following table lists areas of concern that were common with each failure (click on table to enlarge).












Appendix B lists various recommendations to NCUA management to address concerns identified by the IG report and managements comments regarding these recommendations.

For example, to address concentration risk, the IG recommends that credit unions provide more information on their call report breaking out unfunded commitments by loan type. NCUA management agreed with the recommendation and will add two additional categories of unfunded commitments not currently captured on the 5300 Call Report: indirect and third-party loans.

CU Member Files Lawsuit Over Gift Card Fees

A class action lawsuit has been filed against Visa, Services Credit Union and 1st MidAmerica Credit Union alleging that these companies failed to disclose administrative fees for gift cards.

The plaintiffs, Karen Rhodes and Gene Rhodes, allege that the defendant companies deducted administrative fees before the "valid through" date, making the cards worth less than face value. The lawsuit was filed in Madison County Circuit Court.

Karen Rhodes claims she bought a gift card for her father-in-law that had a $50 value with a valid thru date printed on its face. Unknown to her, the actual value of the Visa Gift Card was only $35 at the time she purchased it because the defendants had imposed administrative fees of $2.50 per month before she even bought the gift card. When her father-in-law went to use the card it actually had a value of $2 due to the application of monthly administrative fees.

The suit claims that the credit union violated the Illinois' Consumer Fraud and Deceptive Business Policies Act.

The lawsuit is asking the court to declare a class action for everyone who bought gift cards from the credit union around the same time and to repay the members the costs of the administrative fees.