On Trial: NCUA’s Treatment Of Small CUs

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WASHINGTON – When lawyers for tiny Kappa Alpha Psi FCU meet those for NCUA Wednesday in a show-cause hearing to liquidate the all-African-American credit union something more will be on trial: the federal regulator’s ability to save small credit unions from extinction.

“That’s one of the things we hope to show,” Robert Cooper, a Washington lawyer who is both a fraternity brother and member of the credit union, said last week as he urged the federal judge for its day in court.

The tiny credit union has no brick and mortar assets, being the industry’s only virtual credit union, and consists of a website, a rented post office box, an account at Southwest Corporate FCU and a part-time manager paid by the nationwide fraternity.

The court face-off comes as NCUA is on pace to merge out or close more than 150 small credit unions – those under $10 million – again this year, as many as half of them tiny credit unions under $2 million, similar to Kappa Alpha. NCUA’s growing assessments for the corporate credit union bailout on all credit union, now more than 2% of assets for the past two years with another assessment coming this fall, are pushing increasing numbers of these small credit unions to the brink.

The six-year-old credit union insists that despite its poor financial numbers NCUA could easily extend its life through any one of a number of methods that would comply with provisions of the newly passed bank reform law, which requires NCUA to make extra efforts to maintain credit unions that primarily serve minorities and women.

For a credit union with just $750,000 of assets to achieve NCUA’s adequately capitalized status would require just $45,000. They Kappa Alpha lawyers argue their own figures show the credit union had more than $22,000 in net worth in mid-year – a figure disputed by NCUA. And, pointed out the Kappa Alpha lawyer, NCUA’s own regulations and the Federal CU Act gives new charters up to 10 years to achieve adequate capitalization.

The lawyer for Kappa Alpha also argues in court documents that NCUA could easily throw it a lifeline by approving a small grant from its Community Development Revolving Loan Fund or endorsing the credit union’s request for a $100,000 capital grant from the Treasury Department’s Troubled Asset Relief Program. NCUA has declined to do either.

In court documents filed Friday, NCUA said despite the 10-year window for achieving adequate capital, the time is up for Kappa Alpha, which the regulator insists shows no sign of being able to reach minimum net worth standards. “Based on the history of NCUA’s interaction with Kappa, the NCUA Board found that there was no reasonable prospect that Kappa would become adequately capitalized,” said NCUA in response to a Show Cause order issued by Judge Emmit Sullivan last week.

“Kappa Alpha Psi Federal Credit Union was never able to generate consistent operational profits, build its net worth position, maintain their records in a sound manner, grant quality loans or adequately collect on delinquent loans. Those factors led to the involuntary liquidation action that the NCUA Board took on Aug. 3,” John McKechnie, chief spokesman for the agency, told Credit Union Journal last week.

He also said the tiny credit union did not meet the requirements for CDCI TARP money because of concerns over its long-term viability, capability of management and its troubled financial condition. “NCUA has spent considerable time and resources in an attempt to help the credit union to achieve adequate capitalization. Unfortunately, the effort was not successful.”

“Involuntary liquidation was deemed the most appropriate course of action,” said McKechnie.

This case shows how just a little amount of funds could mean a big deal to some credit unions on the verge of death.

Under dispute is Kappa Alpha’s accounting for a $20,150 vendor’s bill. NCUA says the credit union failed to accrue for the debt, which would could boost the credit union net worth ratio by 2.9%.

Lawyers for the credit union say the credit union’s own numbers showed net worth at mid-year of more than $25,600, or 3.67%. But NCUA’s financials erased all of that net worth and show negative $22,200 of net worth. The lawyers say their figures, plus a commitment from an undisclosed source for a non-member deposit of $100,000, would put it on the right track toward a strong financial condition.

In their effort to forestall the liquidation, the Kappa Alpha lawyers point to a letter sent to all credit unions and NCUA examiners earlier this year by NCUA Chairman Debbie Matz emphasizing the difficult circumstances being experienced by small credit unions in underserved communities. “NCUA is very aware of the distinct qualities inherent in credit unions that primarily serve consumers in low- and moderate-income areas,” wrote Matz. “The challenges these credit unions face are real but by no means are insurmountable.” She noted the assistance for small credit unions available through the agency’s community development fund.

Representatives for the tiny credit union acknowledge they are up against steep odds, as Judge Sullivan told them only NCUA, not the court, can reverse the liquidation order. But they told the Judge they want to close their credit union on their own terms, which most likely will be a merger into Mississippi’s HOPE Community FCU. “We’re willing to be cooperative, your honor, we just don’t want to do it with a gun at our head,” said Cooper.

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