Historic Legal Hearing on NCUA’s Supervisory Action Continues Today

A complaint filed by Kappa Alpha Psi FCU suggests its liquidation runs deeper than regulatory obligation.

 
 

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.

 

 

 

Aug. 9, 2010


Comments

 
 
 
  • This case will have a profound impact on NCUA's actions. At the very least, the agency (again) did not read the political winds very well and realize that closing a credit union representing African-Americans would cause a legal reaction. If the credit union prevails, NCUA will have to write formal policies regarding the conservatorship or closing of credit unions. If you noticed, I did not say amend the policies because I highly doubt the NCUA has formal policies, instead operating by the seat of their pants.
    Anonymous
     
     
     
  • NCUA has been in a CYA mode since they got caught mishandling the corporates.

    Dilemma for CU's is that the NCUA = government.

    Government CYA's almost always win.

    Sadly,

    Dick
    D. Cranium
     
     
     
  • Chip et al: If I am correct, the nature and deails of this action by NCUA resemble very closely the Stocksdale S&L Complain(Illinois) filed either against the FDCI or OTS back during the S&L Crisis. If my memory is correct, the Federal Courts overturned the overly aggressive and unnecessary action by the Regulator and restored the S&L and its key shareholders. When we heard at the NAFCU conference that NCUA Board views "Troubled CU's" as all "3,4, + 5" rated cu's, one could see this coming; and this small cu won't be the last !
    Anonymous
     
     
     
  • I agree this is a major event that is taking place. It makes one wonder whether all of the recent CU liquidations have been warranted. It will be very nteresting following how this plays out.

    Good job Chip

    Bill Garcia

    President/CEO

    Solutions in Finance Inc

    Bill Garcia
     
     
     
  • What a shock....This is what happens when there are NO checks and balances in place....When the insurer is also the regulator, it lends to a conflict of interest and poor decisions are made. NCUA is now establishing a track record of either acting too slow, ie..the Corporate mess or over reacting....The actions and reactions of an organization are a reflection of the leadership.
    Unknown
     
     
     
  • A good question to ask is why has there a single very large $100K non-member deposit paying from 1.5% to 3.5% when the member deposits were only paying 1.%. Maybe the NCUA has been looking at other activities/practices?
    robert joyner
     
     
     
  • Maybe it’s time that some credit unions, with legal direction, get together and produce a set of guidelines when it is permissible to take legal action against your regulator and/or NCUA. I agree with some of the previous comments that this CYI attitude of NCUA is getting old. It seems ironic that the ones that created one biggest financial disaster in credit union history are still in charge of regulating the very financial institutions they are driving into oblivion. A smart person once told me, “Don’t follow dumb with stupid”. Well “dumb” has already happen and here comes “stupid”!
    Anonymous
     
     
     
  • As a long time CEO, I believe that the NCUA was asleep at the wheel regarding corporates and all of us that work hard to build a solid CU are the scapegoats. Talk about concentration risk and all other risks, the greatest risk we have is the NCUA.
    Anonymous
     
     
     
  • Thanks for reporting on this. Not trying to get too inside NCUA's head, I think prior comments on NCUA's motivations are valid. This action by NCUA on KAPFCU reinforces the notion that credit unions need to stand up to any regulatory exam's questionable sitations and findings. When first presented, don't agree with any criticisms; take time to verify them and to consider alternatives to prescribed corrective action. Kick sand on the umpire's shoes if needed but not so much you get thrown out of the game. I believe if more CUs held examiners and examiner supervisors to account for their findings, the KAPFCU case may not have happened; it's not too late to stand our ground, state or Federal.
    Dan Clark
     
     
     
  • I work for a small credit union. We are well capitalized, over 20% and haven't gone in the "red" in our 37 year history until the NCUA write-down, which was their fault to begin with yet we all have to suffer. We feel that we are being mishandled by our NCUA regulator, as that person is trying to micro-manage us. In our case, we should be the least of their worries. But what can anyone do because there is no one to complain to until it gets too far, in this case the courts? Like everyone else, I won't be surprised if NCUA mishandled the situation. GO KAPFCU!
    Anonymous
     
     
     
  • NCUA has been a rogue agency for at least three years now. For the most part, their unionized field staff are some of the most incompetent and unreasonable people in the business of regulation. The CAMEL codes are of almost no value, because they are almost completely subjective. If they mishandled the KAPFCU situation, I will not at all be surprised.
    Anonymous
     
     
     
  • Someone needs oversight over the NCUA. There was no good reason for this action. The NCUA is going to destroy the credit union industry by trying to cover their lack of oversight on the corporates by now forcing marginal credit union out of business. We credit unions need to stop these actions.

    John Coleman

    CEO ILWU Credit Union
    John Coleman
     
     
     
  • So many experts in the industry. They have all the answers to every problem even though they can't run their own shops. When times get tough these people come up with all the same excuses. It's the economy, people are not borrowing. Congress hurts us, its NCUA's fault. Look in the mirror. Maybe the person looking back does not carry their own load, does not always make the right decisions and could do a better job. If you have all the answers and can solve all the problems of credit unions and the world, then run for office, get elected or get on the NCUA board.
    Jody Major
     
     
     
  • I have served on our credit union board for 27 years and until recently I believed that NCUA and state regulators have been reasonably fair in their suggestions for changes necessary to protect the members. I now believe that isn't their main concern, which I think is to protect the insurance fund. Where was the NCUA in protecting credit unions from the corporates? I'm not anti-government, but NCUA needs to be a part of a reasonable checks and balance system and not to act as a bully in working with credit unions. They have too much power.
    Terry
     
     
     
  • In the words of Albert Einstein:

    "The problems that exist in the world today cannot be solved by the level of thinking (and people) that created them."

    Phil
     
     
     
  • The NCUA is blissfully ignorant of the fact that they will all be out of jobs when they succeed in destroying the CU industry in the name of insurance fund safety. As they say, "With friends like NCUA and our government, who needs enemies..."
    Pat White
     
     
     
  • I was working for a small credit union until July 27, 2010. Our NCUA Examiner created a non-NCUA document and when employees would not sign the document, she blocked the exit and informed employees that they could not leave until they sign her document. We have her on camera blocking the entrance. This examiner is pushing a merger and has created a hostuke work envirnoment because we are against the merger. We are trying to find an attorney today. I am glad that credit unions are beginning to standup to NCUA.

    Sandra Taylor
     
     
     
  • Why do we have an entitlement society now? Used to be an honest days work for an honest days pay. Nowadays, seems like no one wants to accept responsibility for their actions; ever notice that?
    Anonymous