The Most Important Audit Ever: NCUSIF’s Future Hangs In The Balance

This is the first in a series of articles analyzing the NCUA’s closing of the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) and retaining the majority of surplus funds for its own use. Read Part 2: Smoke And Mirrors At The NCUA. Read Part 3: Save The NCUSIF Model From The NCUA. Read Part 4: Think What $2.5 Billion Could Do In The Movement’s Hands.

Rarely do year-end audits have profound consequences. The Dec. 31, 2017, audit conducted by KPMG on the behest of the regulator’s Office of the Inspector General (OIG) is important for two reasons:

1. The merger of the TCCUSF into the NCUSIF will decide the future of at least $3 billion of estimated surplus recoveries. Do these funds belong to credit union members or can the NCUA divert their use for natural person credit union problems, a use specifically prohibited by the enabling legislation?
2. The NCUA has changed the upper cap on the NCUSIF’s Normal Operating Level (NOL) from 1.3% to 1.39%. This allows the fund to retain over $1 billion more of credit union capital before paying a required dividend to members. This is the first time since the 1984 change of the NCUSIF from a premium-based fund to a 1% deposit structure that the board has changed the cap of the NOL range of 1.2-1.3%. This action thus sets a precedent, for good or ill, for future board reviews.

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The Scope Of The Audit

An NCUA spokesman says no firm date for the audit’s release has been set but that last year it was in mid-February.

In addition to certifying the accuracy of the NCUSIF’s financial statements, the audit report will also review compliance with certain provisions of laws, regulations, contacts, and grant agreements, non-compliance with which could have a direct and material effect on the determination of financial statement amounts.

The NCUA board’s decision to retain TCCUSF money for use in the NCUSIF for problems in natural person credit unions was specifically prohibited in the congressional explanation accompanying the TCCUSF enabling legislation. This explanation reads in part:

Th(is) subsection further requires that such expenditures be connected to the conservatorship, liquidation, or threatened conservatorship or liquidation, of a corporate credit union, and requires that the board certify that, absent the existence of the stabilization fund, the board would have made the identical payment from the NCUSIF. These provisions are intended to ensure that the activities of the fund are restricted to resolving problems in the corporate credit union system, and not used for any other purposes, such as for dealing with natural person credit union problems.

Congress is explicit that the special TCCUSF assessments from credit unions, totaling more than $4.8 billion, are to be used only for resolving problems in the corporate credit union system. NCUA Board members have referred to proposed partial refunds as rebates This (partial rebate) means we project returning between 54 and 63% of the special assessments to credit unions and their members. This is from a July 20, 2017, statement by board member Rick Metsger.

Board Members Affirm Use For Natural Person Losses

In a Dec. 8, 2017, speech in Salem, OR, Metsger again confirmed the board’s intent to use the corporate bailout money to pay for natural person credit union losses. He referred to two taxi medallion credit unions now in conservatorship and said that staff continues to evaluate the conserved credit union (portfolios). This evaluation factors into what the share insurance reserves need to be, and in turn the effect on the equity ratio. … This reinforces why we needed to increase the fund’s Normal Operating Level this year, to account for any significant losses that otherwise might have required a sudden and significant premium charge to credit unions. (Emphasis mine.)

Hypothetical natural person losses were the primary basis for increasing the NOL cap to 1.33% according to footnote 32, page 43 of the board memorandum of Sept. 28, 2017. These explicit statements of the board’s intention to use the surplus from the TCCUSF to cover natural person credit union losses directly conflicts with congressional intent for the fund’s use.

Raising The NOL Cap By Circumventing The NCUSIF Statute

The NOL is set by law as a range from 1.2% to 1.3%. The board does have the authority to raise the upper cap, but not by premium assessments. This increase can only be achieved by increasing retained earnings, not assessments. See 12 USC $178(c)(2)(B).

Board member Metsger’s statement above is a confirmation of the intent to circumvent this legal requirement.

Board chair Mark McWatters acknowledged the same after the board’s Sept. 28 meeting. According to press accounts, he explained that he first thought of borrowing the funds to use in the NCUSIF.

I discovered we couldn’t borrow funds, McWatters said. So, the next idea was to merge the funds together, meaning negating the need for check writing by credit unions (for the NCUSIF), and turning it around and back to the credit union community. This statement of administrative convenience for adding TCCUSF recoveries to the NCUSIF negating the need for check writing is a process expressly restricted by two legal statutes.

In its so-called merger action, NCUA acted contrary to both the TCCUSF’s enabling legislation and the legal process for increasing the NOL cap of the NCUSIF. The NCUA Board chose two easier wrongs over the harder rights by this decision.

This is the first in a series of articles analyzing the NCUA’s closing of the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) and retaining the majority of surplus funds for its own use. Read Part 2: Smoke And Mirrors At The NCUA. Read Part 3: Save The NCUSIF Model From The NCUA. Read Part 4: Think What $2.5 Billion Could Do In The Movement’s Hands.