Judge Strikes Down NCUA's Approval Of Broad Utah FOM

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A federal judge here dealt NCUA and its community chartering practices a blow when it struck down a precedent-setting community charter that was eventually used to ease the way for three large credit unions to evade the state's tax threat by converting to federal charters.

In its Dec. 9 ruling, the U.S. District Court for the Central District of Utah said the bankers were right in asserting that a broad six-county community encompassing more than 1.4 million people-or two-thirds of the state's population-awarded Tooele FCU violated provisions of the FCU enacted under HR 1151, the 1998 CU Membership Access Act. Specifically, the court ruled that in granting the broad community-at the time the largest ever awarded a federal credit union-NCUA failed to prove that the area qualified as a "well-defined local community," that geographic boundaries were not clearly defined; and that the residents of such communities have common interests or interact.

The community charter granted for Tooele FCU in public debate by the NCUA board on April 24, 2003 was used just days later by NCUA to justify approving the same community charters behind closed doors for two other Utah credit unions, Mountain America CU and Goldenwest CU, enabling them to escape a tax trap carefully set by the Utah bankers. The same six-county FOM was later approved for Utah Community CU, enabling that credit union to convert to the federal charter.

The bankers, who lobbied hard for the Utah legislature to pass a tax on the largest state-chartered credit unions, saw the court decision as vindication of their charges that NCUA was conspiring to help the state's credit unions elude their tax trap. "The decision by NCUA has reeked of politics since day one. That politics has been sent back to NCUA," said Howard Headlee, president of the Utah Bankers Association, which launched the court challenge.

The American Bankers Association agreed. "In this case it is clear NCUA gerrymandered common bonds to fit the pre-existing footprints of state-chartered credit union seeking to avoid Utah state law by converting to federal charters," said Edward Yingling, head of the ABA, which joined the Utah bankers in the legal challenge.

NCUA was mum on the ruling last week, saying only the court's decision was sent to its Region V office in Tempe, Ariz. for review.

While NCUA would normally be expected to appeal the court's ruling, the dynamics of the NCUA board may preclude that. That's because Dennis Dollar, one of the two board members to vote for the Tooele FCU charter in the two-to-one vote, has departed the panel. That leaves current NCUA Chairman JoAnn Johnson, who also voted for the controversial charter, and Deborah Matz, who voted against. That could make things sticky if the now-two member NCUA board (Johnson and Matz) are asked to vote again on the disputed charter, as the court suggests, or if they are asked to vote whether to appeal the case.

Both CUNA and NAFCU, which supported NCUA as intervenors in the case, were undecided on what course to take last week. Bill Donovan, vice president and chief lobbyist for NAFCU, noted that even if NCUA does not appeal the case, NAFCU, CUNA or Tooele FCU could appeal as intervenors because that qualifies them as co-defendants.

Donovan doubted the court's ruling will have much impact outside of the four Utah charters. "The judge's ruling is pretty much case-specific," he said.

"It's important to keep a perspective on the court's ruling," said Eric Richards, chief counsel for CUNA. "It is still possible for NCUA to reaffirm the charters. It's important to keep in perspective just how limited the impact is."

In fact, there's some evidence that the bankers court victory could amount to a shutting of the barn door after the horse is gone. NCUA has approved more than 600 community charters, several even broader than the Utah grants, over just the past five years-an average of 10 every month. But the flow has slowed dramatically in recent months, indicating that most federal credit unions interested in changing to a community base have already done so. NCUA said there were only four community grants in October, one of the fewest monthly totals in more than a decade, and just five and eight in September and August.

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