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:
Could it show irreparable harm if the court did not stay the order?
Could it demonstrate the likelihood of prevailing on the merits of the case?
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.