NCUA Summarily Executes 6 Credit Unions Without Due Process

The NCUA simultaneously liquidated six Philadelphia credit unions on April 5, ending 308 total years of operations for these six charters in an unprecedented action that denied these credit unions their due process under the law.

The agency’s press release used its standard verbiage for this drastic move, saying it liquidated the six small institutions after determining the credit unions were insolvent and had no prospect for restoring viable operations.

But that’s not what the numbers say.

These credit unions have been through economic thick and thin for decades, and their total size $4.8 million could not pose a serious threat to the share insurance fund. Plus, these six credit unions had an average net worth of 17.0%.

The trade press is reporting criminal investigations into the credit unions’ joint manager Service Center for Credit Unions Inc. and says the center itself is being closed. But that’s not the central issue here.

I believe this action, based on the information available, shows the NCUA at its most unaccountable. It is one more extraordinary example of why administrative or congressional action is necessary to protect credit unions from continued arbitrary abuse of the NCUA’s regulatory authority.

Let me repeat, closing six long-serving charters at once is an unprecedented event. Liquidation was instant. There was no conservatorship and 10-day appeals process.

An NCUA spokesman confirms there was no conservatorship. He says the agency will not comment on the process that led to the decision to liquidate, not even who made the ultimate decision, because these are supervisory issues not subject to public disclosure. An NCUA board member’s aide says the closures were ordered by “delegated authority. In other words, not by the board itself.

As shown in the table below, combined assets of the six at Dec. 31, 2015, were $4.8 million. These small credit unions averaged only $797,749 in assets and they served a total of 1,699 members.

PERFORMANCE METRICS FOR CLOSED PHILADELPHIA CREDIT UNIONS
For closed Philadelphia credit unions | Data as of 12.31.15
© Callahan & Associates | www.creditunions.com

FIELD OF MEMBERSHIP AND KEY RATIOS
For closed Philadelphia credit unions | Data as of 12.31.15
© Callahan & Associates | www.creditunions.com

Sources: Peer-to-Peer Analytics by Callahan & Associates

Why should the credit union community care? These credit unions are so small they couldn’t survive in today’s market, right? What’s the problem?

Complete Absence Of Due Process

The day after the NCUA closed the credit unions, board member Mark McWatters made the following statement at NACUSO:

Maybe it’s because I’m an attorney, but due process is a concern to me. It’s in our Constitution. It’s a bedrock principle. Due process basically means that if the government has something to say against me, then you need to let me be heard and let me defend myself, and to do so in front of an objective judge or panel.

McWatters said it also troubles him greatly any time he hears allegations of examiner retaliation or retribution. It’s completely offensive to the U.S. Constitution.

Let board member McWatters know if you agree about due process. At GAC he asked for more dialogue with the industry. Reach out to him at mmcwatters@ncua.gov. Six credit unions are shuttered the day before he says he’s troubled at NACUSO. Now is the time to write to him and make your voice heard.

Immediately liquidating these six credit unions negates any chance of that due process McWatters refers to. These credit unions in their Dec. 31, 2015, call reports show an average net worth of 17.0% or a total of $845,067. This amount does not include the allowance accounts of $79,268, representing 121.8% of the reported delinquent loans of $65,080.

How does $845,067 of net worth disappear virtually overnight?

According to the NCUA spokesman, each of these credit unions had individual, on-site exams within the past year.  This means the agency had six different opportunities to review the books and record-keeping practices; six independent exams to verify loan and savings accounts; six times to review bank statements and reconcile with the general ledgers.

It’s hard to imagine, no matter what the source of the problem, that six individual exams could have missed irregularities equal to an average of 17.0% of assets and in one instance exceeding the credit union’s 25.4% net worth.

These credit unions had been in operation collectively for 308 years, with one chartered in 1939, one in 1950, two from the 60s, one in 1976, and the youngest in 1995.

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These credit unions had survived multiple recessions, world and regional wars, the deregulation experience of the 80s, the Great Recession, and continuous market changes — only to be closed overnight by examiners. These six credit unions’ legacy of volunteers, member service, and the idea that cooperative member-owners can have a say in their institution’s future were negated in one fell swoop.

These credit unions are part of cooperative history. They are part of the story of members working to provide an option that can respond to their specific circumstances. Credit unions, unlike banks and savings and loans, are an interdependent system. Just as members rely on one another to make the loans and savings balance, so do credit unions work together to enhance both operational opportunities plus contribute to common funds for emergencies (thus, the NCUSIF and CLF).

The regulator has a responsibility to recognize both this past investment and to make every effort to sustain the future of every credit union given a charter.

Size Must Not Override Member-Owner Due Process

There is no asset size that protects any credit union from internal problems, let alone the competitive thrusts of the market or economic dislocations. When due process is overlooked, short circuited or forgotten, then every credit union’s sustainability is in jeopardy of judgment and, in this case, summary execution. 

For whatever reason, the NCUA liquidated these credit unions without efforts to find real options. The NCUA makes no mention of trying to merge loan and savings accounts. This abrupt liquidation creates a permanent stain not only on these members and their organizations, but also on the NCUA’s respect for the needs of members who might choose ongoing credit union service.

Critically, due process also provides the space to explore options and develop solutions that can be outside the immediate circle of resources and possibilities.

These six credit unions’ total assets of $4.8 million were in no way a safety and soundness threat to the future of the NCUSIF.  Required liability bonds can cover losses from internal malfeasance. Credit union support organizations, such as the leagues and CUSOs, and sponsors themselves can help turn around or repurpose credit unions. The NCUA did not give the Pennsylvania league a chance to help; rather, the agency just informed the league of its intent to liquidate immediately.

It is drastically easier today to repurpose an existing credit union charter than to seek a new one a process that takes on average three to five years and external capital commitments. Virtually every credit union operating today has repurposed much of its operations.

Moreover, this is an ongoing opportunity. Just one example is that in the greater Philadelphia area there are at least 12 community development financial institutions that might benefit from a depository charter a testament to the need for cooperative services with targeted groups and credit union solutions.

This Rush To Judgment Requires A Public Hearing

The apparent summary execution of these six credit unions raises questions of due process and the agency’s own examination processes and calls into question the NCUA’s commitment to the future of the credit union system.

Negating overnight this 308 collective years of human effort without some willingness to consider options is unconscionable for individuals who claim to protect the interests of member-owners.

The apparent summary execution of these six credit unions raises questions not only of due process and the agency’s own examination processes, it calls into question the NCUA’s commitment to the future of the credit union system.

This rush to judgment following multiple generations’ efforts to serve members, and the NCUA’s continued expansion of its annual examination and supervisory program, raises the question of what really happened?

Was this summary liquidation to avoid institutional embarrassment about examination failures? The media reports quote one service center staffer who says examiners were there for weeks.

Is closure trying to hide what happened so no one would find out what examiners did or did not do? Is the regulator putting the blame on possible dishonesty by the credit unions’ joint CEO to cover its own mistakes?

If credit unions and the public do not learn what has occurred, who made the decision to liquidate, and the factual basis for these unprecedented multiple closures, neither the NCUA nor credit unions can learn and avoid repeating these mistakes.

Whenever problems occur there is always blame to go around. Credit unions, not to mention the general public, must know why this override of due process happened, to ensure this outcome is not repeated in the future.

The need for accountability is clear: Who at the NCUA, within the leagues or trades, or within the cooperative community will stand with the six to find out what happened? That would be the cooperative thing to do.

The NCUA Serves None But Itself

Randy Karnes, the CEO of a *CU Answers, a CUSO that specializes in helping credit unions, especially smaller ones, compete via network strategy, expresses a more general concern about the NCUA.

His observations illustrate the NCUA’s institutional shortcomings of which the situation above is just the most recent example. He wrote while attending NACUSO and after hearing board member McWatters:

While CUSOs might be worried directly about the agency’s programs towards CUSOs, what most of us worry more about is the fact that the agency is a major negative factor in killing our marketplace. It is a contributor to a shrinking investor base, to a worsening mindset about investment, and to the idea that we should emulate vendors of scale instead of vendors of innovation.

The biggest thing I wish the NCUA would address is the weakness of safety and soundness’ arguments that do not take into account cooperative design and the customer-owner psyche.

Customer-owner morale is a key component of credit union strength and therefore safety and soundness. When agents of the system such as the examination community overwhelm the customer-owner core of a cooperative the co-op rots from the inside out. Rotting from the inside out is not a good condition for safety and soundness.

There are no guidelines or tactical measurements for cooperative health. Therefore, agents especially examiners do not toe the line or get compensated for cooperative health: Safety and soundness designed by and for the insurance fund is missing a core and primary driver.

The NCUA lacks the skill to inspire, it simply has forgotten its need to balance fostering with policing. It no longer serves a community of owners, but primarily its own self-interest.

The NCUA lacks the skill to inspire, it simply has forgotten its need to balance fostering with policing. It no longer serves a community of owners, but primarily its own self-interest.

Callahan Analyst Liz Furman and Senior Writer Marc Rapport contributed to this report.