NCUA Files Response to Judge and then Liquidates Kappa Alpha Psi FCU: Regulation Without Appeal?

Why liquidate the credit union before the court’s expedited legal process had even run its course?


On Friday, August 13, NCUA filed a brief in the DC Federal Court of Judge Emmet Sullivan responding to the complaint by the Kappa Alpha Psi FCU challenging NCUA’s liquidation order of August 3.  Several hours later, NCUA carried out the liquidation, mailing checks to the savers and assigning loans to the agency’s asset management unit.

The credit union had until noon, Monday, August 16 to file its reply to NCUA’s brief.  NCUA’s liquidation action would appear to nullify any further court action or review.  The question is why liquidate the credit union before the court’s expedited legal process had even run its course?

Kappa Alpha Psi FCU is a startup credit union, six years old with 1,468 members and $800,000 in assets.  It has been run solely by volunteers, contributing years of sweat equity.  There are no paid employees.  Their size makes them no risk to any insurance fund.   The credit union’s board was willing to agree to a merger to continue credit union services.

As a virtual credit union, the members of Kappa Alpha Psi FCU did not use their funds for daily living expenses.  There were no checking accounts, ATM withdrawals or debit card access.   Members would request withdrawals by email and then checks were sent out.  There was no operational necessity for the liquidation to proceed.

NCUA has all the resources and is represented by the Department of Justice.  The credit union has no money to pay lawyers who worked pro bono, hoping to prevail and then perhaps be reimbursed by the court  or the continuing credit union.  The volunteers do not have resources for an extended legal process.  They said their desire for an impartial hearing was motivated by their pride and dignity for the credit union and for their fraternal colleagues.

The liquidation is a small tragedy. NCUA’s actions to preempt further court review defy common sense.   They had nothing to lose.   They held all the cards and could have facilitated any resolution that made sense for the members and sponsoring organization.

Or did NCUA hold all the cards?  Were NCUA’s own actions proper?  Did this concern motivate their payout to abort any further legal recourse by the credit union? Is NCUA treating the court the same way they treat troubled credit unions?

What Would the Court Hearing Require?

Law is not my expertise.  My understanding is that for Kappa Alpha Psi FCU to have prevailed in its challenge to NCUA’s liquidation order, it would have to meet three tests:

  1. Could it show irreparable harm if the court did not stay the order?
  2. Could it demonstrate the likelihood of prevailing on the merits of the case?
  3. Is there a broader public interest in the outcome of this case?

We have NCUA’s side of the case and the initial credit union’s first filing but not their response, due by noon today.  The third criteria however is the one that may have the most consequence for the credit union system.

Is there a Broader Public Interest?

It is exceedingly rare for a credit union to formally challenge an NCUA conservatorship, liquidation or other formal order.  In virtually all situations, the management and board are removed from the premises and cut off from both resources and the information record necessary to ask a court to review such actions in the 10-day period provided.   This practical inability is enhanced by the Agency’s preference to act in a “surprise” manner on a Friday afternoon that further works against the ability of the individuals to respond in the 10 day period.

Additionally management’s future professional careers are often at stake.  NCUA will hint or suggest that future legal action against boards and managers is being contemplated (see US Central press release by the Agency) to discourage appeals.

In essence NCUA is the sole authority that determines the facts it wishes to consider, judges the record it has created with its own staff, and then executes what it believes to be the most appropriate action or penalty.   There is no divided responsibility as in other over financial institution regulation.  The only recourse is an appeal to judicial review, a remedy that is virtually impractical for plaintiffs and not subject to any formal process of discovery or proceeding.

The difficulty in appealing an NCUA action may be the most important issue in this case.  For the credit union volunteers and its lawyers, who were not credit union attorneys, had no prior experience knowing how unprecedented their challenge would be.

This discovery by the well intentioned but inexperienced lawyers in this situation could be why NCUA is preempting the legal process.   Credit unions are member, individual consumer, owned institutions.   The Federal Credit Union Act provides no due process or equal protection in NCUA’s exercise of authority in this situation.  So is it possible that NCUA may not only have erred on the merits of the case but also in their actions under the law?

Credit Unions Are Unique

Kappa Alpha Psi FCU’s is a small case with potentially enormous implications for the credit union system in America.

As member owned cooperatives, credit unions serve only the financial wellbeing of their members –they do not have to satisfy the expectations of corporate shareholders for market beating returns.  There are no private owners whose interests must be considered.  This structure gives credit unions the ability to take the long view when an institution is in difficulty or more broadly when the economy goes through its inevitable cycles of value.

The credit union system in America creates and funds its own insurance program using a uniquely cooperative financing model of a 1% deposit, its own liquidity fund to act as a lender of unfailing reliability, and its own combined regulatory system at the federal level in NCUA.

Unlike other insured institutions where the insurer is a receiver for purposes of liquidation, NCUA is given multiple tools and resources to assist cooperatives when they have periods of difficulty.  Credit unions and NCUA receive no tax dollars.   They embody the self- help standard in both their own institutions and regulatory structure.

Moreover system resources are routinely available to assist credit unions in situations like Kappa Alpha Psi.   In fact one credit union service organization, upon reading of the credit union’s difficulties, committed in writing to provide at no charge for three years or longer, the computer and back office services the credit union would need to reach the point of viability in the 10-year period given for new charters in the law.

Questions for the Credit Union Community and its Leaders

NCUA’s current crisis mindset brings with it a great temptation to tilt the facts.   In the current environment, the appeal process is too limited for troubled credit unions.  NCUA’s preference to make problems go away (via merger or liquidation) instead of collective workouts needs rebalancing.

In what forums can responsible credit union leaders ask for clarification of these matters without impugning themselves?   Should credit unions not in trouble worry about those who are?  Should this worry be any less when the troubled credit union is small?

These are stressful times for regulators.  However NCUA’s liquidation has prevented another solution from being developed. The seeming lack of common sense in this situation is an embarrassment for NCUA, for the credit union system, for an administration committed to changing the character of Washington, and for those who believe in an America of equal protection regardless of economic circumstance.

Kappa Alpha Psi FCU’s case is important.  The key issue still to be sorted out is what kind of precedent will it turn out to be.




Aug. 16, 2010


  • Wow, this is amazing. NCUA seems immune from accountability.
  • This does not surprise. We are a small, well capitalized, high rated cu. The last exam was a new experience in defensive strategy.
  • The denoument! It looks like the NCUA liquidated this one. Still don't understand why all the fuss for such a small credit union.
    Delechia Thompkins
  • Thank you Chip for bringing clarity to this situation. Thank you Kappa Alphi Psi FCU for fighting for your credit union.
  • I don't understand why small credit unions are viewed so negatively by Regulators as well as some industry insiders these days. It's as though they do not see the value of small CU's anymore. Lucky for us, our membership does. I want to thank Chip for keeping this issue in the spotlight. The DFI and the NCUA have become downright abusive and there is no excuse for this type of behavior. If Kappa Alpha Psi FCU had a merger partner lined up there was no need for a liquidation. Why were they not allowed to merge? There needs to be some sort of appeals process.
  • When the law is on your side you usually prevail. I along with Mr. Filson am not a legal expert, but I doubt NCUA would proceed without thinking they are on solid legal ground. Everyone involved with credit unions knows that there are so many credit unions that have no idea what is going on and should be closed or merged. I am tired of having existing credit unions pay for the mistakes that have been allowed to go on for years. If you cannot do it right, move aside for those that can
    Jody Major
  • This is not the first time, nor, I predict, will it be the last that NCUA defies logic and accountability for their actions.
  • Sounds like NCUA is acting like our current administration...doing whatever it likes and lacking common sense.

  • Another example of government without representation - doing what it wants to control the people...
    Doloros B
  • NCUA failed to find the problems with so many large credit unions which inevidently cause the share insured funds to decline. Small credit unions are just a drop in the bucket to the fund. All credit unions should pay attention to what just happened.

    Power with no accountability can affect us all. We should not forget...We bailed NCUA out, why can't they find better workout plans for it's members? Sounds like a bank in disguise. Take the money but don't give back. I wonder will there be in bonuses at the end of the year.HMMMMM
  • NCUA Examiners spend an average of 40 hours examining our low-income credit union and then act as if they've been managing it for 20 years and know what's best for the credit union when they write their report. They have no idea (and don't care to know) what the culture of the membership and community is, why some policies need to be "differet" and are referred to as "unsound" when they are clearly working; why "best practices" simply can't be best practices for our operation; etc. etc. They impose change that makes zero sense to management and members, and completely destroy the people helping people concept. Challenging is futile, they rule.
  • Anonymous
  • Anyone know of situations where regulators have been too patient and not put a credit union out of its misery as quick as it should? The focus should be on the members and share insurance fund that we all have to support if federally insured rather than unnecessary stuff, i.e., race, small v large credit union, etc. Are regulators given a pat on the back for being too patient and then eventually having to pull the plug; probably not but rather only the bad news is reported.
  • Economic times have been hard on financial institutions and many other businesses. Rather than the isolated liquidations where the issues are extreme, a focus should probably be on predatory mergers where larger ones try to pick off smaller ones.
  • Unfortunately, it is easy to take pot shots at the regulator without knowing all the facts. Also unfortunate that they cannot defend the agency publicly as they should and let the facts flow. If the stories could get out on what they probably experience at some credit unions, we would probably all be surprised!
  • This is more than unfortunate. I am baffled that they gave them till the 16th then pulled the rug from under the CU. It is certainly a travesty!
  • Anonymous
  • This is exactly why credit union CEO's have been silent in face of the atrocities being played out by our regulator.
    Sally Fontenot
  • Very Machiavellian! But, what is so different about Big Brother in this case? It seems that no matter the name you give them, regulators or bureaucrats, they seem to lack one important ingredient: common sense. Hey!

    NCUA, take a closer look at these "investments" you have allowed which have cost our membership billions!
  • Mr Former Examiner: I don't think the articles author is debating the specific issues of this credit union's performance or their guaranteed long term future viability. The issue is not should the CU exist or not -- even though that should be an issue for the members to decide based on what I've read on this issue to date. Remember that new credit unions should have 10 years to demonstrate financial viability and the data here clearly does not conclusively tell me they would not be able to do that in the next couple of years. Still, to me the primary issue is about process and finding the most reasonable alternatives to very expensive and damaging liquidation procedures. Is our system regulator (seperate regulator for coops by design) here to support a strong industry or aid in its demise.

    In addition, I think this brings out into the open something that is very troubling to many of us regarding NCUA's unchecked power and stacked deck persuasion tactics that make them judge and jury. More troubling what little respect they have for our own legal system and due process. Once they decided to liquidate despite the court case they effectively closed the door.

    The agency can make all the excuses they want for why they closed this CU. Their process and rational though when alternatives existed need clear explanation. It is our money (NCUSIF) they are spending!!!
  • As a former exqminer I can tell you that NCUA has many faults but the action they took here was warranted. If anything they probably gave this credit union too much time to correct their problems. We all pay when they allow credit unions to continue to operate in a unsound/unsafe matter. One would only need to look at the track record for this credit union to see that it probably needed to be closed long before this!
  • What the NCUA has done to our industry in the last 18months is a travisty. Every word out of the examiner mouths is "we will do whatever it takes to protect the insurance fund".They have been given their marching orders and are ready to pull the "300" on whoever they can. We are all held accountable to our boards and members, yet who is the NCUA accountable to?
  • The key element in the scenario Mr. Filson describes is the seeming subversion of due process. It seems premature to label the NCUA's actions as Machiavellian, yet they appear on the surface to be, at least, heavy-handed with a flavor of arrogance. It would seem appropriate that CUNA should make an inquiry as to the details of the decision to liquidate and perhaps solicit congressional oversight of the procedures should the NCUA not be forthcoming. Certainly an effort to ascertain the facts should be pursued before a condemnation. While power can corrupt, not all with power are corrupt. Should we not focus our efforts on finding, exposing and dethroning those who misuse their power?
    Mike Murray
  • Why would NCUA risk contempt of a federal judge, and the adverse pubilcity of liquidating a credit union with such a prominent African American organization FOM? Certainly, a credit union of less than one million in total assets did not represent any material threat to whatever is left of the NCUSIF. One has to think that such a rapid, risky action to liquidate that credit union and sweep it under the rug must have been motivated by some desire to cover up whatever may have been happening there. Perhaps it was being used as a conduit for some nefarious purposes? Perhaps with some level of administration involvement? It also came just shortly after the takeover of the Chicago FI with ties to a social organization. Perhaps the same scenario there.
  • Small credit unions around the country, the ones that CUNA and NAFCU use to defend the tax exemption, are watching to see if CUNA or NAFCU stand up against this arrogant abuse of power. Callahan seems to be the only voice left willing to even suggest criticism of the imperial NCUA.
  • NCUA, under Ms. Matz, has already succeeded in muting CUNA and credit unions. Now it wants to intimidate Federal Judges. Even the mafia didn't mess with Federal Judges.
  • Anonymous
  • Anonymous
  • Anonymous
  • Anonymous