Court Won’t Put Humpty Dumpty CDCU Back Together

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WASHINGTON – A federal judge this morning rejected a bid by Kappa Alpha Psi FCU to reverse NCUA’s liquidation of the African-American institution, saying the credit union regulator was within its right to shutter the tiny failure, the nation’s first Internet-only credit union, in August.

“The NCUA finding,” said U.S. Judge Emmit Sullivan, “is not arbitrary and capricious and abusive and this court must uphold the liquidation.” A judicial unwinding of an NCUA liquidation is unprecedented.

The August liquidation created a cause celebre over the summer among small credit union and community development credit union advocates who make up the majority of credit union closures. Directors of the six-year-old credit union–never more than $800,000 in assets–argued that federal law allows them up to ten years to achieve adequate net worth and that NCUA could have easily saved them by endorsing their application for a $100,000 secondary capital grant under the Troubled Asset Relief Program’s Community Development Capital Initiative, which were awarded just weeks after the NCUA closure.

The NCUA liquidation came under increased scrutiny after the Aug. 4 liquidation order because NCUA agreed to Judge Sullivan’s order to show cause, then two days later liquidated the credit union--even before a show cause hearing was scheduled.

Judge Sullivan noted that NCUA examiners and its Southwest Region Four had given the Dallas-based credit union, chartered by the African-American college fraternity, ample opportunity to correct financial and recordkeeping deficiencies but the credit union continued to sink even further.

NCUA said the credit union’s delinquency ratio had soared to 23.8% at March of this year and its net worth ration had declined to below 2%. The agency’s decision to liquidate the CDCU was based on increasing loss estimates for the NCUSIF to cover deposits for Kappa Alpha Psi FCU. The final loss estimate for the tiny credit union was $134,000.

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