Tiny CU Is Causing A Big Headache For NCUA

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WASHINGTON-A six-year-old credit union that is the nation's first internet-only credit union asked a federal court here last week to stop NCUA from liquidating the institution, as assessments for the corporate bailout and several disputed charges erased all of its capital.

"Once the liquidation occurs," said Ken Cooper, a Washington lawyer representing Kappa Alpha Psi FCU and a member of the African-American fraternity that sponsored it, "then the cow is out of the barn. There's no undoing it."

Lawyers for the tiny credit union-just $750,000 in assets and 1,341 members-were asking the U.S. District Court for the District of Columbia to review NCUA's Aug. 3 liquidation order and to have it rescinded.

But lawyers for NCUA insisted once a liquidation order is issued by the NCUA Board it cannot be overturned-even if a court finds no cause for the liquidation. "I think that actually the bell has been rung when we placed it into liquidation. There's no way to stop it from ringing," said Fred Haynes, the Justice Department lawyer appearing in behalf of NCUA. NCUA attorneys noted last week the agency has never rescinded a liquidation order.

The dispute comes just three weeks after President Obama signed into law the bank reform bill which has a provision requiring NCUA to make special efforts to preserve minority and women-run credit unions.

The two sides were negotiating on a deal last week that would fall short of a full liquidation and allow the fraternity sponsor of the credit union to save face. It would amount to a purchase and assumption agreement with HOPE Community CU under which the Jackson, Miss.-based community development credit union, another African-American credit union, would assume all of the member deposits of Kappa Alpha Psi FCU and continue service to the tiny institution's members. But there continued to be disagreement on the small loan portfolio, 41 loans amounting to about $400,000, which NCUA said it needed time to analyze for quality.

Bob Fenner, NCUA's general counsel, told Judge Emmit Sullivan that NCUA was still analyzing the loans to determine their worth and their condition and so NCUA was not ready to assign the loans to HOPE Community to complete what would be a merger instead of a full liquidation. "We have serious concerns about the loan underwriting process; about delinquencies and other irregularities," said Fenner, who said NCUA is not willing to transfer the loans to other federally insured credit unions that would assume those liabilities.

The dispute boiled down to what kind of liquidation would be effected for Kappa Alpha Psi FCU, according to Fenner. If the judge consented, NCUA could issue checks to all members of the credit union immediately and complete the liquidation. Or, if the two sides agreed, the liquidation could be conducted as a P&A, with HOPE Community offering to pay out members.

The lawyers for Kappa Alpha Psi, all members of the fraternity, continued dispute the solvency of the institution and insisted they preferred a merger with HOPE Community, which would allow their fraternity to avoid the stigma of an outright liquidation. "We're willing to be cooperative," said Cooper, who is credit union member, "but we don't want to do it with a gun at our head."

Judge Sullivan, an African-American himself, told the credit union lawyers at the outset of last week's court session he is not a member of the African-American fraternity but is sympathetic to what the credit union's board and members are trying to do, but he doubted whether he has the legal authority to overturn the NCUA decision. "My heart goes out to you," said Judge Sullivan. "But I can't rule from my heart."

Still, Judge Sullivan agreed to give the credit union lawyers seven days to argue in a "show cause" hearing against NCUA's liquidation.

Cooper said they will try to show that not only is there legal authority to overturn the liquidation order, but that there are several reasons why small credit unions like his are being squeezed by NCUA. Among them, he said, are the mounting costs assessed by NCUA to pay for the corporate credit union bailout, which have wiped out all of the credit union's net worth. In addition, the Federal CU Act allows newly chartered credit unions as long as ten years to reach NCUA normal minimum capital standards, known as prompt corrective action, or PCA, said Cooper. He also said there was disagreement on the due date of a $20,000 debt the credit union owes, that if pushed forward several months as the credit unions believes should be done, would add to its net worth.

Under the credit union's calculations, it had $27,525 in net worth at mid-year, for a net worth ratio of 3.67%, putting it well on the way to reaching NCUA's PCA requirements. But figures published by NCUA show the tiny credit union with $22,200 of negative net worth at June 30, making it clearly insolvent. Ken Bynum (no relation to HOPE Community CEO Bill Bynum), another lawyer representing Kappa Alpha Psi, said NCUA examiners agreed with their estimate of net worth three weeks ago but apparently changed their assessment, prompting the liquidation order. "I don't know where it went between now and then," Bynum told Credit Union Journal.

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