Claiming NCUA Has 'Gone Too Far,' Banks File Lawsuit Over Utah FOM

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As they have been threatening to do for the past 60 days, the bankers filed suit last week against NCUA for its actions allowing the escape of three credit unions from the Utah tax trap carefully set by the bankers.

In an action filed in federal court here, the bankers claim the NCUA board violated its own chartering regulations when it approved during a public meeting April 24 what was then the largest community field of membership ever for a federal credit union. The NCUA board OK'd Tooele FCU for an FOM that encompasses six counties surrounding Salt Lake City. NCUA then used its newly passed FOM rules just days later to approve-behind closed doors-the same expansive FOM for two other Utah credit unions, $2.5-billion giant America First CU and Goldenwest CU, which were also fleeing the tax bill that had been put before the state's legislature.

The third state-chartered credit union fleeing its Utah charter, Mountain America CU, was approved separately by NCUA to convert to a federal charter serving more than 110 select groups.

The NCUA actions, all within a week of each other, allowed the three Utah credit unions to escape a legislative trap laid by the bankers over the past decade. In legislation passed earlier this year, the three were severely restricted on member business lending and were targeted for taxation by a plan that is currently being considered by a legislative task force. The quick flight to federal charter allowed them to skirt the new business lending restrictions, as well as any future state tax initiatives.

In its suit, the American Bankers Association and the Utah Bankers Association, which has been pursuing the three Utah credit unions for years, charge the grant of the unprecedented FOM for Tooele FCU was purposely used by NCUA to secretly set the stage for the other two controversial charter requests. Under NCUA's newly adopted rules, once the NCUA board had approved a new precedent for an FOM in open meeting, its regional directors can approve on their own the same FOM without public review.

"Tooele was clearly a stalking horse for these other two credit unions," said Howard Headlee, president of the Utah Bankers Association. "NCUA clearly went too far this time."

The Violation

The bankers claim the six-county region approved for Tooele, which includes as many as two-million people who live, work or worship in Davis, Morgan, Salt Lake, Summit, Tooele and Weber counties, violates provisions of HR 1151, the 1998 Credit Union Membership Access Act, as well as NCUA's own chartering rules and regulations, which require that a community FOM consist of a "well-defined local community."

"There's no way that anyone can say that those six counties qualify as a single well-defined community," maintained Headlee. "The facts are clear and NCUA's actions are clearly egregious."

During the April 24 debate on the Tooele application, staffers in NCUA's West Coast Region Six office asserted that the fact that residents in the six counties view Salt Lake City as their center for commerce, social and religious activities, and that all but one of the counties are included in the so-called Wasatch Front Regional Council, provided those people with a commonality, thus qualifying the area as a well-defined community under the agency's chartering rules.

"There's all kinds of justifications on why it's a community," stated Scott Earl, president of the Utah League of CUs, which is based in Salt Lake City, noting that people throughout the region view the capital city as their social, religious and commercial center. "It's a very close-knit community."

In Defense Of Decision

In a prepared statement, NCUA Chairman Dennis Dollar, who voted for the Tooele FOM, defended the board's actions. "We are confident that NCUA's actions in these Utah conversion applications were consistent with the letter and spirit of the Credit Union Membership Access Act, all applicable NCUA regulations, and the principles of diversification necessary for long-term credit union safety and soundness. We will vigorously defend the agency's position and are extremely confident that the courts will affirm NCUA's actions in this matter," said Dollar.

But the bankers see it differently. Edward Yingling, vice president for the ABA, said the six counties do not qualify as a single Metropolitan Statistical Area under the U.S. Census Bureau's guidelines, but as two separate MSAs.

He noted that there was even disagreement among the three NCUA board members on the issue of whether it qualified as a single community, as Deborah Matz dissented on the vote to approve the Tooele charter because of her own doubts. During the debate, Matz pointed out the difficulty in defining the six-county area as a single community whose residents interact on a regular basis. Afterwards, she acknowledged political considerations, in her dissenting vote.

"I don't think it meets the requirements (for a single community)," she said. "Above and beyond that, I felt that approving it was bad timing because it gives ammunition to the bankers."

The ABA has sued NCUA on two prior occasions over FOM, and Yingling pointed to the ever-larger community grants approved by NCUA, saying it was only a matter of time before they went back to court over the issue.

Bankers Waiting

"We've been looking at various approvals for several years and have come close to filing suit before. In this case we thought NCUA had gone so far, we thought we just had to bring the suit," he said. "If you look at the rationale for the approval, not one of them stands up under analysis. They (NCUA) were so bound and determined to create a footprint by which the state charters could flip."

The suit, to which four local banks-Bank of Utah, Liberty Bank, First Utah Bank and Frontier Bank-also signed on as plaintiffs, was filed in federal court in Salt Lake City, where the bankers believe they will find a more sympathetic audience, rather than in Washington, D.C., where most challenges to NCUA's actions are heard.

This is the third time the bankers have sued NCUA over its field of membership policies. The first time, in the landmark case against AT&T Family Federal Credit Union (now Truliant FCU), the courts ruled that NCUA violated the Federal Credit Union Act with its multiple groups FOM policy, forcing credit unions to lobby Congress to overturn the ruling with HR 1151.

The bankers sued again over NCUA's interpretation of the new law, but the courts ruled in favor of NCUA in that case.

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