On Tuesday, a Federal judge granted a show cause hearing** in response to a complaint filed by Kappa Alpha Psi Federal Credit Union. The complaint challenges NCUA’s serving a “surprise” Order of Liquidation and Charter Revocation upon Kappa Alpha Psi FCU ($750K, Dallas, TX) on August 3. (**Correction from original post)
Many may assume at first reading that the liquidation of this small credit union is merely another financial institution falling prey to economic circumstances. NCUA is fulfilling its obligatory regulatory role. But the complaint suggests much deeper issues.
A Historical Proceeding
The credit union’s complaint, which it filed in the US District Court on August 6, contests the regulator’s actions on factual as well as constitutional grounds.
“NCUA knowingly, intentionally attempted to summarily liquidate and revoke the charter of KAPFCU with total and reckless disregard for the truth,” the credit union says in its complaint.
“KAPFCU will suffer irreparable harm if the Respondents are not restrained from breaking or entering contracts, liquidating assets, expending money and/or winding down the credit union,” the credit union says.
To avoid such harm, KAPFCU requested – and was granted – a temporary restraining order against NCUA. “Petitioner fears that before a show cause hearing can be held, the Respondent will complete what has already been threatened, and that is to hastily liquidate assets, expend money, enter or break contracts and disrupt the ongoing operations of the credit union.
“The publication of the order of liquidation and revocation is defamatory, casts KAPFCU in a false light, and has caused an erosion of public confidence,” the complaint continues. “For these reasons, if the rushed liquidation is allowed to continue, KAPFCU will suffer irreparable harm.”
The Facts of the Case
In a letter released earlier this year that provides guidance for low income and community development credit unions, such as KAPFCU, NCUA Chairman Debbie Matz is quoted: "NCUA is very aware of the distinct qualities inherent in credit unions that primarily serve consumers in low- and moderate-income areas. The challenges these credit unions face are real but by no means insurmountable, and I am confident that this new guidance will enhance both the quality of NCUA supervision, and the credit union's ability to serve those consumers who need affordable financial services the most.”
Kappa Alpha Psi FCU was chartered in 2004 and is in its sixth full year of operation. It is a “new” credit union, as it has been in operation for less than 10 years and its total assets do not exceed $10 million.
“NCUA Rules and Regulations require that ‘new credit unions’ must be ‘adequately capitalized’ or (6%) Net Worth Ratio within (10) years. The current legislation supports this position,” the complaint notes.
NCUA is basing its liquidation order on the credit union’s net worth ratio, asserting that because the financial institution was minimally capitalized at the end of first quarter 2010 with no reasonable prospect for becoming capitalized, prompt corrective action was warranted. The credit union notes its first quarter net worth ratio was 1.95%; by second quarter 2010, however, the credit union was moderately capitalized with a net worth ratio of 3.67%. This is a 600% increase since its December 31, 2009 rating.
These numbers, for reasons yet to be determined, are not reflected on the credit union’s second quarter 2010 Call Report released by NCUA. Who altered Kappa Alpha Psi FUC’s second quarter Call Report to show that it was an insolvent financial institution? What was the basis for the change? Why was the credit union not contacted about the changes?
What’s Next?
NCUA agreed to a voluntary stay of the proceedings until the hearing on Tuesday, August 10. U.S. District Court Judge Emmet Sullivan gave NCUA until Friday, August 13, at noon to respond to why the court should not halt the liquidation, which would allow the credit union to secure an alternative outcome such as the proposed merger or even continued operation.
Likewise, Judge Sullivan gave the credit union until Monday, August 16, to file an expanded argument as to why the court has the legal authority to grant the injunction the credit union is requesting.
Why it Matters?
The actions taken by Kappa Alpha Psi Federal Credit Union could have a critical impact not only on the members of this one credit union but also on the members of every credit union in the United States. The outcome of these hearings could establish a legal precedent covering the proper conduct of NCUA’s regulatory processes. This is an important public policy issue of interest to all 92 million credit union members.
Click here to download a PDF with more information on Kappa Alpha Psi’s financial performance.