Defunct Bronx CU Fined $500K by FinCEN

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

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

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

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

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

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

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

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

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

Read the FinCEN press release.

Read the enforcement order.

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

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

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

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

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

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

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

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

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

Read the letter.

NCUA Thumbs Its Nose at Federal Courts

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tiny Philadelphia CU Under Cease and Desist Order

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

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

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

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

Read the press release.
Read the final order.

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

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

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

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

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

According to the article,

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

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

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

Read the story.

ABA Sues NCUA over Its Final FOM Rule

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

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

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

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

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

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

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

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

Read the complaint.
Read the press release.