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.