Part Two of Community Capital, Race, Equity and the Credit Union Movement is a case study of the abrupt liquidation in 2010 of a $750,000 credit union founded by the historic black fraternity, Alpha Kappa Psi.
The story is told from the viewpoint of the credit union participants. Co-author McCray presents eleven historical documents in the Appendix. These include the minutes of NCUA’s closed board meeting approving the liquidation and a 32 page transcript of the November 5, 2010 US District Court hearing in which the credit union challenged NCUA’s action.
Reading the documents along with the author’s descriptions presents two very different versions of events. Ultimately the Judge in November ruled in favor of NCUA’s actions.
What is unusual in this case is the credit union’s perspective. Rarely if ever do the board members and leaders of a credit union which is the target of an NCUA takeover, ever speak out.
Speaking Out
So what is the value of reviewing this event 14 years later?
As noted in the final excerpt below, the credit union raised a fundamental constitutional question about NCUA’s summary liquidation action that may have relevance today.
The details of the story and in the official record of both parties’ actions are not pretty. NCUA examiners were at times arbitrary–for example going in and unilaterally changing the credit union’s 5300 call report for June 30. The agency was informed of the approval of a $100,000 CDFI grant for the credit union, but acted before the funds could be disbursed.
NCUA’s characterizations of the credit union were uniformly negative, often with a factual basis, but absent any context or recognition of the credit union’s unique business model and the founders’ commitment. The conflicts became personal-on both sides.
This story is a unique first hand account of regulatory and credit union failure. When a credit union ceases operations, it is a shared responsibility by both NCUA and the coop. In this situation, the effort to merge the credit union with HOPE FCU is apparently not even considered by the agency.
In every failure there are lessons that may lead to future improvements. However because NCUA is intimately involved in failures, before and after, the bureaucratic instinct is to get rid of the problem as quickly as possible to avoid any regulatory embarrassment or accountability.
The agency will then bring up these unexamined failures as “object lessons” when proposing new rules or as precedents for new authority over credit unions.
Most recently at last week’s NCUA board meeting a new incentive compensation rule was justified by board members asserting such incentives had contributed to WesCorp’s and a California Credit union’s failures 16 years earlier. Both references were at best misleading if not irrelevant to the actual problems causing each credit union’s demise.
For example, the fact that NCUA had a full time corporate examiner on site for years at WesCorp monitoring every aspect of the credit union and sending reports back to head office, went unmentioned.
When failures occur, the regulator’s goal is just to move on. In past open board meetings all three members supported a look back at the agency’s management of the Corporate liquidation events. But nothing has been done to learn from the largest NCUSIF losses in credit union history that in retrospect were based on dramatically erroneous projections of potential investment shortfalls.
Without independent review of regulatory actions and objective “look backs” with the benefit of known outcomes, the credit union system will continue to pay the costs of past failures with future ones.
Whatever one’s assessment of McCray’s description of the closing of Alpha Kappa Psi FCU, all should be thankful he and his colleagues made their points of view public.
The Due Process Arguments
A final excerpt from the Alpha Kappa Psi FCU liquidation-the legal appeal from pages 216-217:
Due process requires that legal proceedings must be carried out fairly and under established rules and principles. In the banking industry, courts have held that due process was satisfied by a post-deprivation hearing. However, the question here was, “Does being heard after the liquidation has already taken place satisfy Fifth Amendment due process requirements for a natural person credit union?”
Are the due process protection considerations the same for corporations as distinct from individuals in membership cooperatives?
Thus, this was a “case of first impression”—that is, a legally significant case that could establish a legal precedent because it was the first time this factual scenario would be considered by a federal court.
There are two fundamental differences between banks and natural person credit unions—individual association versus corporate form, and initial capitalization levels. Banks and credit unions differ greatly. First, banks are for-profit commercial enterprises, while credit unions are not-for-profit associations.
Second, banks are corporations. Natural-person credit unions are unincorporated associations of individuals. Third, the courts have long held that constitutional protections differ between corporations and individuals. The courts have only held that corporations are entitled to First Amendment protections. Hence, post deprivation hearings (i.e., after an action has resulted in loss of life, liberty, or property) do not violate banks’ due process rights since courts have not held that corporations are entitled to Fifth Amendment due process protections at all.
However, natural-person credit unions, as cooperative associations of individual members, are different. They have full constitutional rights and are entitled to individual due process protections. Thus, a post-deprivation hearing did not satisfy individual Fifth Amendment due process protections.
Therefore, KAPFCU believed that the NCUA liquidation and dissolution order was unconstitutional because it was based on a closed-door meeting, and because a post-deprivation hearing could not satisfy individual Fifth Amendment due process concerns as a natural-person credit union. KAPFCU believed its due-process rights were doubly violated.