The End of Kappa Alpha Psi FCU’s Journey to the “Promised Land” (Part II of II)

In the previous article, I outlined the unprecedented action this young credit union took to oppose NCUA’s efforts at forced liquidation. The credit union’s legal challenge stated in part:

“NCUA knowingly, intentionally attempted to summarily liquidate and revoke the charter of KAPFCU with total and reckless disregard for the truth.”

“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. For these reasons, if the rushed liquidation is allowed to continue, KAPFCU will suffer irreparable harm.”

The Roots of Black Belief

Recently a friend shared reflections on Martin Luther King’s last sermon. It was given on April 3, 1968, to support the Memphis garbage workers (“I am a Man”) strike.

It is remembered as the “I have been to the Mountaintop” speech as King was killed the next day. Those final words were prophetic, but there were many other truths he spoke that are relevant to this day. I believe these are why Kappa Alpha Psi FCU stood up to the NCUA.

King said in part:

“. . .we’ve got to strengthen black institutions. (That’s right, Yeah) I call upon you to take your money out of the banks downtown and deposit your money in Tri-State Bank. (Yeah) [Applause] We want a “bank-in” movement in Memphis. (Yes) Go by the savings and loan association. I’m not asking you something that we don’t do ourselves in SCLC. Judge Hooks and others will tell you that we have an account here in the savings and loan association from the Southern Christian Leadership Conference. We are telling you to follow what we’re doing, put your money there. [Applause] You have six or seven black insurance companies here in the city of Memphis. Take out your insurance there. We want to have an “insurance-in.” [Applause] Now these are some practical things that we can do. We begin the process of building a greater economic base, and at the same time, we are putting pressure where it really hurts. (There you go) And I ask you to follow through here. [Applause]

“Now the other thing we’ll have to do is this: always anchor our external direct action with the power of economic withdrawal. Now we are poor people, individually we are poor when you compare us with white society in America. We are poor. Never stop and forget that collectively, that means all of us together, collectively we are richer than all the nations in the world, with the exception of nine. Did you ever think about that? After you leave the United States, Soviet Russia, Great Britain, West Germany, France, and I could name the others, the American Negro collectively is richer than most nations of the world. We have an annual income of more than thirty billion dollars a year, which is more than all of the exports of the United States and more than the national budget of Canada. Did you know that? That’s power right there, if we know how to pool it.

“Let us rise up tonight with a greater readiness. Let us stand with a greater determination. And let us move on in these powerful days, these days of challenge, to make America what it ought to be. We have an opportunity to make America a better nation. (Amen)”

NCUA Pre-empts the Court:

On Friday, August 13, 2010, NCUA filed a brief in the DC Federal Court of Judge Emmet Sullivan responding to the complaint by 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, 2010 to file its reply to NCUA’s brief. NCUA’s liquidation nullified further court review. Why liquidate the credit union before the court’s expedited legal process had even run its course?

The credit union was serving the mission of the largest black professional fraternity using a virtual business model. No checking accounts, no ATMs, and no debit card withdrawals. Just regular savings to fund loans to students and black professionals to support “achievement”–a fraternity goal.

The risk of any NCUSIF loss was de minimus. The credit union’s lawyers were pro bono. Their goal was to merge the credit union, if NCUA wanted to cancel the charter. They sought an impartial hearing for this request.  Their motive was to preserve  the pride and dignity of their fraternal colleagues who began the effort and to continue a credit union offering for members.

NCUA held all the resources and power and used it to destroy this new charter.

A Legal Precedent

Their efforts to appeal NCUA’s unilateral actions may however have lasting value. For the credit union’s lawyers were not credit union attorneys. They had no prior experience to know how unprecedented their challenge would be. But their effort may have shown a legal path that could benefit members in the years to come.

Credit unions are member-owned, one-person, one-vote. The lawyers argued that NCUA’s actions violated two individual constitutional rights: due process and equal protection. Could this black-sponsored credit union have identified a legal standard that could benefit every credit union member which is subject to arbitrary NCUA dictates? Could NCUA have erred on both the facts of the case as well as the law?

Or was this just a little regulatory nuisance that NCUA wanted to dispose of quickly?

When reported these events in August 2010, more than 9,000 views were recorded. Almost 100 comments were filed. Many similar experiences of regulatory arrogance were recounted in these posts.

The Continued Use of Summary Authority to the Present Day

Kappa Alpha Psi FCU was not the only credit union to find its charter abruptly ended.

In September 2010, NCUA without warning liquidated five corporate credit unions with total assets of over $67 Bn. The agency stated any appeal efforts would risk personal liability—the credit unions were marched straight to NCUA’s chopping block.

Other credit unions were subjected to this authoritarian power mode even though the economic crisis was almost a year into recovery. The $846 million Arrowhead CU in June 2010, was conserved to remove a management team that challenged examiners’ exaggerated estimates of loan losses. Others were forced to merge, including the $600 million USA FCU into Navy FCU in September 2010.

But these were not just crisis incidents. NCUA continued to use this unchecked authority to end credit union charters without due process. On April 5, 2016, NCUA simultaneously liquidated six Philadelphia credit unions ending 308 total years of operations. These six were given no appeal rights.

These credit unions had been through economic thick and thin for decades, and their total size — $4.8 million — could not pose a serious threat to the share insurance fund. They reported an average net worth of 17.0%.

NCUA performed another instant liquidation on May 29, 2020 of IBEW Local Union 712 Federal Credit Union in Beaver, Pennsylvania. According to CUToday, “Chartered in 1964, IBEW Local Union 712 served 2,935 members and had assets of approximately $14.8 million according to the credit union’s most recent Call Report. NCUA did not provide a reason for the liquidation.”

This regulatory silence and lack of accountability continues to this day, for example in all conservatorships in which NCUA takes total control of the credit union from the board and members. When recently asked about the status of Municipal CU in New York, NCUA’s Office of External affairs stated: “we do not comment on our efforts or conditions related to conserved credit unions.”

The Journey to the Promised Land

Is Kappa Alpha Psi FCU’s fate just another instance of a decade’s long ongoing abuse of NCUA authority?

Does this credit union’s unmatched courage taking a stand have any meaning today?

Why did these credit union novices fight when others did not dare?

I believe their actions were living out the charge that King gave that final day in Memphis:

“We just need to go around to these massive industries in our country (Amen), and say, “God sent us by here (All right) to say to you that you’re not treating His children right. (That’s right) And we’ve come by here to ask you to make the first item on your agenda fair treatment where God’s children are concerned.”

Members’ Rights

NCUA does not respect members’ rights. Be they black, brown, or white; young, old or in between; male or female. When member-owned institutions, created through volunteer labor, are summarily closed or merged, the systemic failure that allows this will either be changed or there will be no more cooperative movement.

Injustice, whether by public or private organizations, always targets the vulnerable first. Be they the economically fragile, or the uninformed and unempowered. When violation of rights is left unchallenged, the inequities will extend across the entire population.

Will Kappa Alpha Psi’s stand make a difference today? I think hearing again this promise should inspire everyone to realize change is possible-even in those exercising unchallenged power.

Yes, I believe Kappa’s example will be remembered.

NCUA and a Black-Founded Credit Union (Part I of II)

In 2010 NCUA’s regulatory activity reigned unchecked. Even though the economy was on the mend its penchant for shutting down credit unions was unabated.  It would ultimately lead to the liquidation of five corporate credit unions in September—the most catastrophic decision in credit union history.

On August 3rd, 2010, six years after founding, Kappa Alpha Psi FCU ($750K, Dallas, Tx) fell under NCUA’s knee having been served a surprise order of liquidation and charter revocation.

In the regulatory environment, one might assume this was just another small credit union falling prey to economic circumstances.  But then something happened that no other credit union had dared in this situation. The credit union appealed NCUA’s action, filing a complaint contesting the order on both factual and constitutional grounds.

KAPFCU requested  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.”

In response, a federal judge in DC granted a temporary injunction and scheduled a hearing on the issue in the time provided for an appeal.

Who  is Kappa Alpha Psi (source: KAP web page)

“The Kappa Alpha Psi®  college Fraternity, was born in an environment saturated in racism.  Indiana became the 19th state of the Union in 1816 and it founded Indiana University in Bloomington four years later. The state of Indiana became a stronghold for the Ku Klux Klan.

In the school years of 1910-11, a small group of Black students attended the University. Most  working their way through school. Realizing that they had no part in the social life of the university they decided that a Greek-letter fraternity would do much to fill the missing link in their college existence. . .

It became the first incorporated Black Fraternity in the United States, granted a charter by the Indiana Secretary of State on May 15, 1911.

Kappa Alpha Psi® is the 1st historically black Greek Letter intercollegiate Fraternity incorporated as a national body.  The Fraternity has over 125,000 members with 700 undergraduate and alumni chapters in nearly every state of the United States, and international chapters in Nigeria, South Africa, the West Indies, the United Kingdom, Germany, Korea and Japan.

One of the Objectives of the Fraternity is: “To promote the spiritual, social, intellectual and moral welfare of members.”  Reliance would be placed upon high Christian ideals and the purpose of ACHIEVEMENT.

The Fraternity seeks to raise the sights of Black youths and stimulate them to accomplishments higher than might otherwise be realized or even imagined.

Local chapters participate in community outreach activities to feed the homeless, provide scholarships to young people matriculating to college, serve as mentors to young men, participate in blood drives and serve as hosts of seminars for public health awareness to name a few.”

The Credit Union’s Brief History

Kappa Alpha Psi FCU, chartered in 2004, was in its sixth full year of operation when NCUA struck.  It was classified as a “new” credit union, that is, in operation for less than 10 years and its total assets did not exceed $10 million.

NCUA Regulations provide that ‘new credit unions’ must be ‘adequately capitalized’ or (6%) Net Worth Ratio within 10 years.

NCUA based 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 the June 30, 2010 second quarter however, the credit union was moderately capitalized with a net worth ratio of 3.67%– a 600% increase since its December 31, 2009 rating.

These numbers, for reasons never explained, were not reflected on the credit union’s second quarter 2010 Call Report posted by NCUA. Who altered Kappa Alpha Psi FCU’s second quarter Call Report to make it appear insolvent? What was the basis for the change? Why was the credit union not contacted?

Read Part II for the outcome tomorrow:

Why Kappa Alpha Psi FCU’s Stance Matters Today

Member Merger Voices Ask: “Where was NCUA?”

When NCUA passed a revised 708b merger disclosure rule, effective October 2018, it also established a member-to-member communication process through its CURE office.

Following are member comments posted in this process. They all point to a common shortcoming summarized by one member: Where was NCUA when these actions were approved?

Brief Summary of Members’ Multiple Concerns

The first comment is from a family of members who question the choice of an out of state merger partner. They note that the manager that has already moved to Florida (from Wyoming) but still receives a “retention bonus” of $240,000. The second commenter asks why no merger benefits were presented. The third points out that the merger discussion via telcon is after the voting deadline. The final set of six comments are members all opposed to the proposed merger because they believe their credit union provides better value.

These voices suggest that the cancellation of these financially sound, long-standing charters are not serving members’ interests. Each merger provides immediate compensation benefits to senior managers far above what they would receive if no combination took place.

There is no indication these member concerns were either followed up by NCUA or answered by the credit union. Every comment demonstrates that members were not involved or consulted when the merger was being considered. Rather, they are expected to ratify a decision made without their knowledge or input.

Merger Comments Follow

1. We Oppose: Manager Has Already Moved to Florida

Greater Wyoming FCU into NuVision

“Me (and three other family members who are also GWFCU members) are opposed to the merger at this time. GWFCU indicates they have looked at Wyoming Credit unions but have only approached one in Casper, which was two years ago, until they looked at NuVision.

“There are five Wyoming Credit Unions with main offices in Cheyenne and as far as I know none of them were approached. I was told it is unprofessional to work with more than one merger possibility at a time. When the wellbeing of the members is at stake management should be looking at all possibilities and when they fail to do that it is a disservice to the members.

“We will lose board representation, all of our assets and our CEO. Ms. Stetz may be working in Florida but will no longer represent our credit union. I think we should take a step back and look at other merger proposals or see if we could hire a new CEO since Ms.Stetz has already moved to Florida. Our Credit Union will be less than one percent of NuVision and local needs will get lost in the needs of other larger markets. Until I have more than one option, I will not vote in favor of this merger.”

In the Member Notice CEO Stetz (apparently in FL) will receive additional compensation of a retention bonus of $240,000 if she remains for two-year transition or $218,000 if she leaves sooner. Loan Officer Brother’s additional compensation is $107,000 bonus over two years or $102,000 if she leaves before then.

2. No description of Specific Benefits-We Should Know Trade-offs Involved

Ball State FCU into Finance Center CU

“I have had accounts with the Ball State Federal Credit Union since 1996. I do have two questions/concerns.

1. In the relevant literature I received from the BSFCU, there is no description of how specific member benefits and applicable policies would change after the proposed merger. Can we get more details about that? It seems that an informed vote would hinge upon knowing the specific consumer trade-offs involved. My letter from the BSFCU stipulates that a detailed member Welcome Kit, indicating all changes to services and member benefits, will be mailed “at least 30 days before the conversion date.” But I’m guessing that is still subsequent to the July 14, 2020 special member meeting for voting on the merger?
2. If the Financial Center First Credit Union is the “continuing credit union,” how is the BSFCU able to “retain the Ball State name and identity”?”

3. When Do Members Get An Open Discussion on the Proposed Merger?

Friendship International Airport FCU (FIAFCU) into Central CU of Maryland

“I understand COVID-19 restrictions on everyone…What I do not understand is why shareholders are not provided a TELCON meeting to discuss the proposed merger. If you have to vote by Feb. 8, 2021 and TELCON is held on Feb. 10. 2021, when do the members get the benefit of an OPEN discussion on the proposed merger?

“Why did the Board of Directors vote NOT to distribute a portion of FIAFE’s net worth in a SPECIAL DIVIDEND? Why did the Board of Directors vote to provide 3 employee members $57,000 + pay their taxes? Not to discount the fantastic job that Delores, Ron and Dorothy did for all of us, and it is much appreciated, but why not split the profit with all of the members.

“If a special dividend of 1% were to be implemented, it would be less than the three board members are to receive. Where was NCUA when these actions were approved? It seems if one were to compare the net worth of the two credit unions, FIAFE appears to be the more efficient and profitable credit union with a Net Worth/Total Asset percentage of 33.43% compared to 10.55% for Central CU.”

Data provided in Member Notice

Credit Union at 6/30/20 Total Net Worth Total Assets Net Worth Ratio
Friendship International FCU $2.1 MN $6.3 MN 33.20%
Central CU of Maryland $4.5 MN $43 MN 10.50%
Combined Net Worth Ratio 13.40%

4. I’m absolutely against the merger; This is the first time I have heard of it

Columbus Metro FCU ($260 mn-10.6% net worth) into Telhio CU ($952 MN and 9.6% net worth) ( excerpts from six comments)

    • The CMFCU has been a great resource for our members for years. Management wins, members lose Being through this and it’s a mean to the end.
    • I am absolutely against the merger. I have enough problems with their last upgrade they did. It will just cause more problems for senior trying to get information from their…
    • I am concerned that Telhio Credit Union money market interest rates are much lower than Columbus Metro Credit Union and the deposit requirements to obtain higher rates are more…
    • I received an email this morning informing me of this proposed merger between Telhio and Columbus metro federal credit union. This is the first that I have heard of any such talks…
    • I just so happen to be a member of both banks. CMFCU has better accounts as far as Christmas and vacation savings, although I never liked that they transfer the money annually out…
    • I urge a NO vote. With ongoing pandemic, unsent financial statements and misleading net worth values, it’s no time to consider merging. Columbus Metro began seventy (70) years ago…

Merger Related Financial CEO Disclosures provide:

  • Under CEO’s new employment agreement, he will receive salary and benefit increases of $1,600 per month: $19, 200 annually;
  • 100% vesting of split dollar policy increases payout by $6,400 per year for 20 years: $128,000
  • Payment of unused sick and vacation: $135,539.

Total CEO additional immediate compensation benefit: $282,739.

The Question: Where is NCUA?

In his February 11th virtual stakeholder update, Chairman Harper reiterated his long-stated commitment to consumer protection:

“We must also strengthen the agency’s consumer financial protection program to ensure that all consumers receive the same level of protection regardless of their financial provider of choice.”

Cooperative Self-dealing Contrary to Member Interest

In June 2018 NCUA passed an updated merger rule requiring that additional compensation benefits for senior managers be disclosed. Public reports, especially in CUToday shown below, had documented the regular practice of secret payments to incent managers to merge their credit union.

In NCUA’s analysis the problem was the secrecy of the payments; therefore the rule’s solution was to just publish them. NO. The error was NCUA’s sanctioning these payoffs greasing palms to induce these so-called “voluntary” mergers of sound, long-serving credit unions in the first place.

The payola continues, but now out in the open. Managers act as if they are private owners, negotiating their personal benefits while promising members nothing more than a “brighter future” once new leadership takes over. The conflict of interest in these merger arrangements is unconstrained.

NCUA blesses this cooperative self-dealing even when common sense and member reactions show these mergers are not serving members. The boards fail to exercise any meaningful fiduciary responsibilities required by rule 704.1 and especially Guidance on Director Duties in NCUA letter 11-FCU-02. Management and board unite in their failure of care, duty and loyalty to members. The result is a cancelled cooperative charter that members created and still value.

The Regulatory Abdication

Multiple NCUA offices facilitate these manager-led sellouts. The regional offices approve the transactions with misleading and vague member notices, CURE posts all the notices, ONES approves mergers with credit unions over $10 billion, and the division of consumer access sits idly by as these transactions multiply.

The member harm is now available for the whole world to see. Just because these payments are now public does not make them proper. Why should a manager(s) be paid additional compensation for giving up their leadership responsibility while accelerating benefits and additional compensation for themselves that nothing more than sinecures? The alleged future merger benefits are so vacuous as to be meaningless or laughable: for example how do 20 additional Southern California branches benefit Xceed’s members in Rochester, NY?

If these boards and managers had presented these merger “plans” to support a new charter, they would have been rejected out of hand. Yet CURE and Regional Directors routinely approve these boilerplate submissions sometimes copied word for word from other merger packages.

The credit unions in these so-called voluntary mergers all report sound financial performance with high capital levels. Chairman Harper’s consumer protection efforts should start within his own Agency, at all levels. For the casual corruption now routinely blessed by the agency suggests it has no commitment to either member “rights” or “best interests,” both terms used in the regulatory requirements.

Disclosure does not make these payoffs and asset transfers any less disreputable or deceitful. NCUA’s administrative “benedictions” merely shows unprincipled conduct permeates the entire process.

The members have done their part. Will Chairman Harper now do his?

Background Articles Reporting Merger Self-dealing–Activity Continuing Today

What NCUA Staff Found When Investigating (Secret) Merger Compensation  (5/25/18 CUToday)

“During the Q&A with the NCUA board members following a proposal calling for greater disclosures in mergers, agency staff were asked about the types of bonus compensation paid to executives and volunteers at CUs that were acquired that they had uncovered in examining merger agreements.

Staff told the board that in “75% to 80%” of mergers they had found “significant merger-related compensation” being paid to people at the credit union that was being acquired, nearly all of which was kept from members when voting on the merger.

In one case, staff said, it found a total payout in the low-seven figures paid to 18 people at a credit union, with the bulk of that money going to four people. In another case, an acquiring credit union discovered after the fact that the board of the acquired CU had cut a deal in which each of them were to be provided with expensive season tickets to a local football team’s games for a three-year period.

NCUA Board Member Rick Metsger asked staff about how some credit unions have worked to “obfuscate” payments being made to officials at the acquired CU, and staff responded that one common method is that instead of having a clearly articulated dollar amount being paid, benefits are paid out in a different fashion, such as a split-dollar life insurance plan.

At another credit union, staff said it found the merger agreement called for the CEO of the acquired CU to be paid for a guaranteed five years of employment, even if at any point that CEO quit or the acquiring CU terminated him.”

Secret Pay Packages (06/12/2018-CUToday)

“The new NCUA rules came after CUToday reported extensively on lucrative pay packages and other benefits going to senior executives and even board members at credit unions that were being absorbed in mergers. As reported, in most cases these pay packages were not being disclosed to members prior to or at the time members were voting on the merger; instead, members were often told only that the merger was about “improved products and services.”

A number of sources told it was common practice for larger credit unions to approach managers and boards at smaller CUs with offers of paying out incentives well into six figures from the smaller CU’s capital, which in many cases could be substantial. Often, none of that same capital was paid back to members of the disappearing CU.”

Happy Independence Day, CU Members (6/23/18-CUToday)

Just in time for Independence Day, credit union members have been given more rights in their respective democracies. Too bad so many who came before them didn’t have the same rights and weren’t able to make informed votes. . .

The new rule comes after CUToday has reported earlier on just how much undisclosed compensation has gone to and goes to the management and volunteers of credit unions in some mergers, where the capital that belongs to everyone suddenly goes to a few in management—and the board—to entice them to agree to merging into another CU.”

NCUA Leadership Is in a Rut – Part 2

Part I showed how the changeover of NCUA board chairs has perpetuated a leadership vacuum at the agency frustrating effective policy development and positive relations with the industry. Following is a recent example of this challenge.

A classic case of ineffective pubic policy  is NCUA’s management of the corporate credit union crisis. It also demonstrates the embedded cultural mindset from the agency’s actions in this event.

This regulatory hangover continues whenever any corporate topic arises. Since 2009, NCUA’s attitude in supervising the corporate system could be described as, “If you don’t have a seat at the table, then you must be on the menu.”

The absence of market expertise at the NCUA board and staff level has created policy decisions by rote. Lacking different perspectives and professional insights, the existing culture plods on. When governmental backgrounds are the dominant experience senior officials bring to their roles, the disconnect with credit unions competing in the open market can become great.

Policy On Autopilot

One example of this bureaucratic legacy is from the NCUA board’s January 2021 meeting. It approved by a 3-0 vote a final rule 704 permitting corporate credit unions to invest in the subordinated debt of natural person credit unions. However, this “loan” must be deducted 100% when computing a corporate’s net worth ratio.

The following is the logic for this rule from the board memorandum:

NCUA claims open-ended authority: The FCU’s “broad mandate,” “plenary grant of regulatory authority,” and “an express grant of authority” can be exercised as “the Board deems appropriate.” The words are presented as unrestricted power to do whatever the board wishes. An unchecked authority.

Under the FCU Act, the NCUA is the chartering and supervisory authority for Federal credit unions (FCUs) and the federal supervisory authority for federally insured credit unions (FICUs). The FCU Act grants the NCUA a broad mandate to issue regulations governing both FCUs and FICUs. Section 120 of the FCU Act is a general grant of regulatory authority and authorizes the Board to prescribe regulations for the administration of the FCU Act. Section 209 of the FCU Act is a plenary grant of regulatory authority to the NCUA to issue regulations necessary or appropriate to carry out its role as share insurer for all FICUs. The FCU Act also includes an express grant of authority for the Board to subject federally chartered central, or corporate, credit unions to such rules, regulations, and orders as the Board deems appropriate.

It’s a loan: “Treating the purchase of such subordinated debt instruments as lending ensures consistent treatment between natural person credit unions and corporate credit unions.”

It must be fully deductible from the capital ratio: “The Board believes that fully deducting such instruments from Tier 1 capital ensures any potential losses do not affect the capital position of the investing corporate credit union. This measured approach strikes the right balance between providing corporate credit unions the flexibility to purchase natural person credit union subordinated debt instruments and avoiding undue systemic risk to the credit union system.”

The Result: A Nonsensical Rule

This “updated” rule restores an activity, previously allowed but then revoked, to make a loan. But only if it is 100% deducted in calculating the required net worth ratio.

Loans are a credit union’s primary purpose. Few “loans” would ever be made on the condition that the institution must “write it off“ when calculating capital compliance.

In effect, NCUA confesses a lack of confidence in its own supervisory decisions. For NCUA must first approve all the subordinated debt issuance by natural person credit unions. The rule’s logic is that this approval and oversight are so suspect that the only prudent behavior is to write it off if a corporate purchases this loan debt. This is not mere risk rating; it is 100% reduction from capital when calculating net worth.

The write off is not proper accounting under GAAP. It is an imposition of regulatory accounting practice or RAP. There is no limit to RAP interpretations; see authority claimed above.

No facts were offered to support this claimed risk. Has any issuance of subordinated debt ever been written down or subject to a loss? What is the evidence to document this risk? Moreover, how important is this debt option for credit unions? If it is an important, why discourage its use this way?

If NCUA is so concerned about investments or loans used as capital by the recipient, then why aren’t credit unions required to write down their home loan bank equity requirements?

Or closer to home, why aren’t the corporates required to write off their CLF capital investments. Are they not at risk?

The ultimate rationale is that this is the way we have done it before. The result is that past errors of policy, guidance, interpretations compound far into the future. The mind set continues.

In addition, the February 2020 proposed rule included a requirement for a corporate credit union to fully deduct the amount of the subordinated debt instrument from its Tier 1 capital to ensure consistent treatment between investments in the capital of other corporate credit unions and natural person credit unions. Under the current regulation, corporate credit unions are currently required to deduct from Tier 1 capital any investments in perpetual contributed capital and nonperpetual capital accounts that are maintained at other corporate credit unions.”

This rule is not based on any assessment of actual risks, Moreover it perpetuates “confirmation bias” errors that have been extraordinarily costly to the corporate and credit union system.

Which Leadership Model Will New Chair Harper Follow?

He inherits a decade-long policy of top-down mandates. Former board member McWatters described the situation this way in a 2015 speech to Pennsylvania League’s Annual Meeting:

“NCUA should not treat members of the credit union community as Victorian era children—speak when you’re spoken to and otherwise mind your manners and go off with your nanny—but should, instead, renounce its imperious ‘my-way-or–the-highway’ approach and actively solicit input from the community on NCUA’s budget and the budgetary process.

“With the strong visceral response within the agency against budget hearings, it seems that some expect masses of credit union community members to charge the NCUA ramparts with pitchforks and flaming torches to free themselves from regulatory serfdom. I, conversely, welcome all comments and criticism from the community.

“I champion the right of the regulated to speak to the regulator on the record regarding the expenditure of their limited resources. . . It’s simply a matter of respect and professionalism evidenced through the lens of transparency and full accountability.”

‘Step Down from the Ivory Tower’

McWatters also cautioned against the view that board nomination validates knowledge:

Regulatory wisdom is not metaphysically bestowed upon an NCUA board member once the gavel falls on his or her Senate confirmation. NCUA should not, accordingly, pretend that it’s a modern-day Oracle of Delphi where all insight of the credit union community begins once you enter the doors at 1775 Duke Street in Alexandria, Virginia.”

Duty vs Loyalty

The Chair’s approach to board leadership also affects how agency staff perceive their jobs. Is staff supposed to provide their professional judgment, or are they just expected to fall in line with the Chair’s approach?

This staff dilemma was described by former Chairman Rick Metsger: “As I told Mark Treichel, the then executive director of the agency when I became chairman when he offered his loyalty, I said I didn’t want his loyalty, but I did expect his loyalty to the mission of the agency and that he would offer unvarnished opinions and options to help me make the best decisions possible.”

Harper’s Challenge: Reset or More of the Same?

Todd Harper was chief policy advisor to Chairman Matz. Her top-down leadership approach to policy is what prompted the above comments by board members and staff who worked with her.

Will Harper follow her leadership and policy example? Or will he embrace the widespread belief that there needs to be a reset in Agency and credit union relations?

NCUA Leadership Is in a Rut Part 1

Since 2017 there have been four NCUA Chairmen designated by the President. Two republicans and two democrats.

The Board’s primary responsibility is the “management” of the agency as stated in the Federal Credit Union Act. The chair sets the agenda and is the primary spokesperson for the Agency.

Any organization that undergoes four changes of the titular leader in the same number of years would face unusual difficulties in both policy and operational effectiveness.

In the past decade, no one has accused NCUA of being well governed. Less than optimal outcomes can be endured in normal times. When crisis occurs, ineffective decisions can be destructive. A prime example is the ruinous handling of the corporate legacy asset resolution plans in 2008-2010.

These prior mistakes compound; the legacy perpetuates in subsequent decisions. The errors become hard-to-shed precedents especially when there is an organizational aversion to back-testing past events.

An Example of Effective Leadership

In October 1981 when Ed Callahan became NCUA chair, the economy had double digit unemployment and inflation. Credit unions had only one concern: survival. Only in 1977 had NCUA become an independent agency governed by a three-person board. The CLF was still in formation. The NCUSIF was out of cash and using 208 guarantees to assist troubled credit unions to work through problems.

Chairman Callahan’s approach was twofold: implement deregulation so that credit unions, not the government, could make the essential business decisions to serve members and effectively compete in the changing market; and secondly, build a regulatory infrastructure and supervision capable of overseeing the deregulated industry.

But his approach was not top-down but bottom-up policy implementation. To succeed, he initiated a multi-faceted open dialogue with credit unions. The first effort was a 24-minute video produced by the Illinois Credit Union League entitled: “Deregulation–What Does It Really Mean?” The video featured a panel discussion of three credit union CEOs, CUNA’s Vice President for Governmental Affairs, and Bucky and Ed from NCUA.

A comment in the video by Chairman Callahan illustrates his approach to policy leadership:

Do you want government off your backs?

“Even though I think credit unions want deregulation, I am more committed to the fact that we have to respond to their needs. If they don’t want deregulation, we will see that it doesn’t happen.

“Write us a letter so that we can respond to your needs. I will read each one personally.”

Three months later, April 1982, the NCUA board approved the complete deregulation of all savings accounts with full credit union support. It took the other depository institutions until June 1987 to shed their regulatory deposit limits.

The key to success was having participants with experience in the room, even some who had made mistakes, but who were willing to learn from their involvement. Secondly, persons who would come at issues from a variety of viewpoints and backgrounds–not a single framework–but with multiple perspectives.

A Mutual Process

This engagement with the industry resulting in share deregulation was just the beginning. The insights of credit union leaders were crucial in all areas of policy development.

Before developing a new NCUSIF financial structure, the agency received input from all segments of the industry to prepare a Report to Congress, required by the Garn-St. Germain Depository Institutions Act of 1982. In April 1983 this seven-chapter, 100-page credit union share insurance analysis was submitted. It ended with a list of over 60 names of industry contributors, many of whom were quoted in the study.

The recommendations in that joint study became the basis for the 1% deposit NCUSIF restructure, A Better Way, passed by Congress in 1984. The dramatic change occurred because of the support of the entire system.

In a similar manner, the Central Liquidity Facility was completely opened to all credit unions in an innovative partnership with US Central, the corporate network and the CLF. This liquidity safety net is an example of a public-private partnership based on the unique principles of cooperative design. NCUA ended this valuable partnership when it liquidated US Central.

From 1982 forward, credit unions recorded annual, sound double-digit growth. This mutual approach built a regulatory infrastructure responsive to the moment. The credit union system prospered for the next 25 years.

Bureaucracy is built on the adherence to traditional practice when making decisions. This “mind set” or “culture,” may suffice in normal times. But when changes to meet credit union needs is necessary, then the approach “we’ve always done it this way” will not suffice.

When the 2008/09 financial crisis happened, the agency took a different approach. The legacy of which continues.

Part II will show how this hangover of poor regulatory decisions can infect subsequent rules for decades.

Timeless Wisdom: The Relationship between NCUA and Credit Unions

“The relationship between credit unions and the regulatory agency is one founded on mutual self-respect, and on the realization that both sides share equally in the responsibility for the survival and future development of credit unions.

It seemed as though we would never escape the attitude that the regulator knows best (but) a dramatic change has taken place in the last few years. We now have a federal regulatory agency which openly concedes that credit union people know more about running credit unions than the agency does.

The nature of the federal bureaucracy, being what it is, there will be a great amount of inertia to cause it to revert to a less creative and less cooperative approach to regulation credit unions. I would not like to see that happen.”

– Frank Wielga, CEO Pennsylvania State Employees Credit Union, NCUA 1984 Annual Report, pg. 14.

A Picture Where Words Matter

On January 4th the NCUA board published a request for information (RFI) seeking “input on how best to streamline and improve agency communication with its stakeholders.”

This formal 8-page process listed dozens of existing communications, loads of data and website activity as examples of current efforts.

Below is my “comment” using a 1982 Agency photograph.

It shows NCUA Chairman Ed Callahan holding an open press conference following the monthly board meeting. In the picture are representatives from CUNA, credit union newsletter writers, and NCUA personnel including the Public Affairs Officer. This was standard agency practice for all board meetings in DC and on the road. Senior staff would attend as necessary. Responding to credit union and press interest was more than an obligation as a public servant; it was also an opportunity to listen and learn how the agency was viewed.

When is the last time an NCUA board member held an open press conference? Or did a Q&A following a speech?

Real communication occurs when a person engages in a “dialogue” with their audience. It demonstrates the presenter’s ability, confidence and mastery of their subject.

Communication, Like Leadership, Starts at the Top

Authentic communication is not a public relations strategy. It is leaders willing to expose their ideas in public discourse.

To improve the agency’s presentations, the place to start is at the top. Forget the typed out scripted board exchanges, the deluge of press releases, the flood of email updates.

Schedule monthly, or more frequent, zoom or in person conferences welcoming all comers, especially the press. Bona-fide conversations are the heart of real communications.

The best way to learn what is on a person’s, or industry’s mind, is to listen. In real time. With live people on Zoom or in-person.

Will the new NCUA Chairman lead by example? Or with press releases?

Following is an American Banker article from 1984 reporting on NCUA and credit union’s progress.  The story is built around an interview with Chairman Callahan and the policy of deregulation.

Callahan mans the credit union helm through the seas of deregulation

Author: Robert B. Lieberman
Date: Apr. 9, 1984
From: American Banker(Vol. 149)
Document Type: Interview
Length: 673 words

WASHINGTON — When Edgar F. Callahan became chairman of the National Credit Union Administration in 1981, one of his first moves was to initiate a battle for deregulation of credit unions.

Many politicians and regulators were skeptical, Mr. Callahan recalled in an interview, in part because of the financial problems of the airline and trucking industries under deregulation. “There are still people saying it [deregulation] is bad,” the 55-year-old agency chief added.

But since Mr. Callahan began his six- year term in charge of the agency that charters, supervises, and insures more than 11,000credit unions, deregulation has occurred. It has come primarily in the form of interest rate ceilings being eliminated from the accounts of federally chartered CUs.

The results? Membership, loans, and savings in CUs are growing, while operating fees charged CUs by the agency are shrinking. Among the specifics:

* In 1983, savings at federal credit unions grew to approximately $75 billion, a 20% increase over 1982.

* In 1983, insured loans were up 15% from 1982.

* Membership in CUs grew by more than one million during that same period.

“We think we’re well into deregulation,” Mr. Callahan said. “A lot of needless government intervention in business decisions of credit unions is being put back into credit union hands. Credit unions have now broadened their base so that they are better prepared for the economic uncertainties of the future.”

One sign of this came when Vice President George Bush’s task force on streamlining the financial services industry recently decided that there is “no need to alter or change [credit unions] in any way at this time.”

And President Reagan sent the NCUA chairman a letter in 1982 congratulating him and credit unions for solving problems with “self-help solutions.”

Not everything has been coming up roses for credit unions and Mr. Callahan, though.

For the past two years, the NCUA has levied extra insurance premiums on credit unions to add liquidity to the National Credit UnionShare Insurance Fund. Many members opposed the added fees. Said one member in a letter to the NCUA, “Assessment of additional or double premiums each year is a stiff penalty to pay, especially for the small credit unions such as ours.” Similar comments called for an alternative method of strengthening the fund.

And last November, Ernst & Whiney independent auditors released a report saying, in effect, that the NCUA did a shoddy job of estimating losses relating to credit unions before the fiscal year beginning in October 1982 and in reporting those losses at the end of the year.

“Willing to Discuss Issues”

Still, credit union managers generally laud Mr. Callahan and the NCUA.

“He has been accessible and willing to discuss issues with credit union managers,” says Terry Spence, president of the Rockwell Federal Credit Union.

“I wish he was still here in Illinois,” says Gene Artemenko, president of Chicago-based United Airlines Credit Union.

Mr. Callahan supervised hundreds of credit unions as Director of the Illinois Department of Financial Institutions from 1977 until he was appointed to the NCUA in 1981.

Regarding the future, the NCUA is now supporting a bill before Congress that it says will strengthen the credit union insurance fund without basing premiums on risk factors, which the agency says cannot be equitably administered. The industry is divided on how to base the fund. Many credit union members support risk-based premiums.

In addition, he said, state and federal examiners are scheduled to meet for the first time as early as the beginning of next year to discuss ways of improving their trade.

Mr. Callahan, who once held three jobs at the same time and who says he is “used to hustling,” has a varied background. It includes positions as Illinois Deputy Secretary of State, a math teacher and part-time football coach, and a school principal.

He now boasts of having two families, one with over 40 million credit union members and one that includes eight children.

“Just keeping up with a family of eight has kept me running,” he jests.

One Credit Union’s Alpha and Omega

Alpha: The Government Giveth

Esau Jenkins – pre of Citizens’ Committee of Charleston County announces Credit union approved!

From The Pittsburg Courier, October 8, 1966, page 16.

Omega-The Government Taketh Away

C O Federal Credit Union Conserved

ALEXANDRIA, Va. (Jan. 5, 2021) – The National Credit Union Administration today placed C O Federal Credit Union in Charleston, South Carolina, into conservatorship.

C O Federal Credit Union serves members of The Citizen Committee of Charleston County, South Carolina, who live in Charleston County and members of the International Longshoreman’s Association — Local #1422 in Charleston.

C O Federal Credit Union is a federally insured, federally chartered credit union with 785 members and assets of $4,488,256 and over 10% net worth according to the credit union’s most recent Call Report

Member services will continue uninterrupted at the credit union’s main office at 117 Spring St., Suite C, Charleston, South Carolina.

Long Live the Government!

The Greek letters alpha and omega

Hauptman’s First NCUA Board Meeting-A Ray of Hope

Whether the event is a first date, a rookie’s initial at bat, or a novice composer’s first ballad, the promise of an initial appearance is often projected into future success.

Kyle Hauptman’s first NCUA board meeting, one week after being sworn in, was a two-day marathon. How could he possibly process the hundreds of pages of budgets and board action memorandum and make a meaningful contribution?

I believe his premiere was positive for several reasons.

Not Following a Script

Public NCUA board meetings are supposed to enlighten because they are the only authorized occasion that individual members may debate issues with each other. Internal preparation for the board meetings is handled among policy advisors and staff shuffling among the three directors to seek a consensus or positions on agenda items.

Unfortunately, board meetings are rarely enlightened discussions of the core issues. Rather, the board members read prepared statements, staff presenters are provided questions in advance, and answers readily supplied . The meetings are stage-managed public relations exercises. No views are changed or positions further illuminated. The recent virtual meetings, audio only format, has made this approach even more pronounced.

Hauptman’s remarks however sounded as if he was not reading a script. And in so doing, he made some interesting observations.

The first was to call NCUA’s insurance role a “monopoly,” an accurate term, but one I do not recall being uttered by another board member. A monopoly is not a positive characterization in a free market economy. With that description, he cautioned that such authority must be used carefully.

He also noted that all NCUA funding comes from credit union members. The government, he asserted, should not be holding money that the members can use to meet their needs. The fact that all agency expenses are paid by the industry is known, but rarely acknowledged by agency leaders.

Newcomers to NCUA’s board often begin with fresh insights and comments. They have yet to be caught up by the bureaucratic vortex of expertise and self-interest which can overwhelm outsiders’ initial perceptions. But that centrifugal pull may be tempered by his first major decision, the choice of his Senior Advisor.

A Credit Union Veteran Goes to DC

Sarah Canepa Bang, Hauptman’s first personnel decision, may not be in the same role as Jimmy Stewart of Mr. Smith Goes to Washington fame. But she brings a lifetime of credit union experience with several cooperative and credit union organizations in multiple states. She knows where bodies have been buried. And where saints have trod. She has achieved hard earned success and experienced economic setback.

For decades a CEO or senior manager, as well as serving in numerous volunteer roles, Sarah brings a thorough appreciation of how NCUA’s actions affect members, not just institutions. She is approachable and listens, aware she does not have all the answers.

Most importantly in an industry in which relationships are vital for collaborative advantage, she can bring to Hauptman views and connections that will give him information to set informed priorities and make member-focused decisions.

Discernment and earned life experiences are combined in these two capable NCUA newcomers. That is a promising union for a country and industry navigating unprecedented events.

The $3.0 Billion Question in 2021 for Credit Unions and NCUA

As credit unions enter a New Year, a $3.0 billion dollar question hangs over the cooperative system. Will the AME surpluses be returned in full, or will NCUA devise a way to hold back funds as it did when closing the TCCUSF in 2017?

The September 30, 2020, update on the five corporate AME’s shows a total of $3.035 billion in surplus. This would return the membership capital, a portion of paid in capital, and even a liquidating dividend for the credit union members of four of the five corporates. Only WesCorp members will receive nothing as that estate still reports a loss.

There are two kinds of payouts. The thousands of credit unions with membership capital in the former Members United, Southwest, and Constitution corporates should receive $572 million, $712 million and $36 million, respectively, according to the September data.

The balance remaining in the US Central estate after allocating $620 million to the four other AMEs is $1.065 billion. This should go to the eleven active corporates that will share according to their pro rata ownership of membership and paid in capital at US Central. These percentages are listed below in the column headed % USC MSC.

(Source: NCUA)

NCUA documented these obligations with receiver’s certificates sent to all credit unions upon liquidation. The agency reported an initial payment of $171.4 million to over 900 Southwest Corporate shareholders in July.

Will Credit Unions Receive Their Money?

The distribution process seems simple enough. All NGN’s holders are paid off and the trusts wound up. The legacy assets are released, sold and the cash distributed. Except that is not NCUA’s traditional instinct.

When NCUA recommended closing the TCCUSF earlier than the 2021 final NGN maturity, credit unions were in favor, expecting a portion of their $5.0 billion in premiums to be returned years early. Instead NCUA “merged” the $3.1 billion into the NCUSIF, not returning the cash to credit unions.

Congress in establishing the TCCUSF in 2009 explicitly rejected this use of the funds: “These provisions are intended to ensure that the activities of the Fund are restricted to resolving problems in the corporate credit union system, and not used for other purposes, such as for dealing with natural person credit union problems.”

To merge and retain the funds, NCUA repudiated all previous analysis by raising the NOL above 1.3%, a distortion still practiced today. And it immediately expensed $650 million in the year’s final quarter to add to NCUSIF’s loss reserves—without explanation.

When NCUA closed the TCCUSF, it promised future “dividends” which were actually refunds of premiums paid. Credit unions received a $735 million “dividend” in 2018, and a second $160.1 in 2019. However, NCUA still held onto at least $1.3 billion more in surplus by keeping the NOL at 1.38 versus the 1.3 cap in place for 35 years.

In closing the TCCUSF early, NCUA has returned only 29% ($895 million) of the TCCUSF surplus to credit unions. The Agency retained or spent the other 71%.

Government Craves Funds

The innate bureaucratic reluctance to return credit union money is supported by some NCUA board members who openly advocate for more NCUSIF funding. Board member Harper covets the FDIC’s flexibility, the freedom to assess and risk rate premiums, and its ability to set the NOL at whatever level the FDIC determines is necessary.

Harper’s statements show a misunderstanding of the NCUSIF’s unique financial model. Credit unions’ cooperative undertaking is to always maintain 1% of insured shares as a perpetual underwriting commitment. In return for this open-ended funding, credit unions, fearful that government would just spend these ever-flowing deposits, asked for and received statutory and operational guardrails on the fund’s management. These are the constraints that Harper now wants to undo.

The FDIC’s premium model Harper frequently references has required government bailouts on at least three occasions. NCUSIF, never. That’s why the NCUA 1984 restructuring was called “A Better Way.”

As former NCUA Chairman Ed Callahan prophesized in NCUA’s 1984 Annual Report, “Don’t set it up and forget about it. It’s unique. It’s a better way. But just as important, it’s yours to monitor—because if you don’t it’ll go just like everything else government touches. When government gets more money, it wants to spend more. Our goal is to spend less. You have to hold us to that promise.” (How to Keep Your Insurance Fund Strong and Cost Effective, pg 18, NCUA 1984 Annual Report)

Action Required

Start by asking the NCUA board to publish a plan for winding up the AMEs and distributing the cash. The audits will soon be done. There are no reasons to withhold any details of the remaining assets and their value.

Every credit union will benefit from this clarity and knowing there is a commitment to return the funds. The Corporate system will also gain additional capital to expand their services.

Already there are discrepancies between the latest AME numbers and the membership capital totals NCUA published. It is vital to NCUA’s credibility to produce its plan with full details. Another regulator described the importance of such action as follows:

“The essence of an effective deposit insurance system is the trust of the banking public in the operations of the deposit insurer. The only way to build trust is to make those operations transparent so that your stakeholders have the information and the means to hold you accountable. It is all about being accessible, understandable, and responsive to both regulated entities and those we seek to protect vis-à-vis deposit insurance.

“If you do not trust the system in which you live, you do not feel a part of it. It is not your government.” –Jelena McWilliams, Chair FDIC

When NCUA closed the TCCUSF in 2017 (ahead of the 2021 NGN final maturities) credit union’s expectation was an early return of their special premiums. But the Agency disavowed that hope by keeping all the money. Let’s ensure the money goes to where it belongs this time, all $3.0 billion plus.