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WASHINGTON, DC (August 6, 2010) Federal District Court for the District of Columbia issued a Temporary Restraining Order today against the National Credit Union Administration blocking the surprise liquidation and revocation of Kappa Alpha Psi Federal Credit Union.
Last week, Region IV of the National Credit Union Administration (NCUA) served a surprise liquidation order on Kappa Alpha Psi Federal Credit Union (KAPFCU), the first "virtual" credit union authorized by the NCUA and the only Low Income designated credit union (LICU) that operates on a national footprint. KAPFCU is also a Certified Community Development Financial Institution (CDFI).
Unfortunately, the NCUA issued an Order of Liquidation and Revocation on August 3, 2010. The basis of this decision was that KAPFCU was "minimally capitalized" with a Net Worth Ratio of 1.95% on March 31, 2010 with no reasonable prospect to recover.
As of March 31, 2010 KAPFCU had a NWR of 1.95% or "minimally capitalized" which was still the highest NWR that KAPFCU had achieved historically. However, KAPFCU's second quarter results were 3.67% or "moderately capitalized" for June 30, 2010 after which, NUCA elected to "Liquidate" the credit union on August 3, 2010.
The August 3, 2010 liquidation was based on the false impression in the press and media was that KAPFCU's NWR had dropped down to 1.95% and had no reasonable chance for recovery. The reality is that KAFPCU is a new credit union, starting from scratch 0%, which had built its NWR up to 1.95% as of March 31, 2010 and even higher to 3.67% by June 30, 2010. This chart is a visual depiction of KAPFCU Net Worth Growth since its inception in November 2004 through June 30, 2010 right before our involuntary liquidation on August 3, 2010.
KAPFCU - Net Worth Ratio (2005-2010) by Kappa Alpha Psi Federal Credit Union
Thus, KAPFCU insists that any adverse NCUA action in August that was based on March 31, 2010 data as opposed to the June 30, 2010 financial statements is arguably "intentional, malicious and discriminatory" treatment. It is also troubling that NCUA chose the unusual and extreme measure of liquidation, without consideration of a merger, when KAPFCU had suffered only one loan loss (for less than $4,500) in its six year operating history.
NCUA Rules and Regulations give new credit unions ten (10) years to become "adequately capitalized" and achieve a Net Worth Ratio of 7%. Net Worth is a measure of financial health and stability. KAPFCU is in its sixth year of operation and has a current NWR of 4% (7/31/2010). It was 3.67% according to our 2nd Quarter call report (6/30/2010). Therefore, KAPFCU was within the applicable NCUA Rules and Regulations for an institution of its size and character.
Consequently, the NCUA decision to liquidate KAPFCU on August 3, 2010 under these conditions was ill-advised, improper and legally actionable. NCUA rushed to liquidate KAPFCU not because they were failing, but because KAPFCU was becoming too successful. This was a NCUA abortion of a African-American credit union.
NCUA chastised KAPFCU for failing to comply with our approved Revised Business Plan (July 2008). However, they fail to acknowledge that this RBP was approved prior to the Corporate Stabilization assessments. KAPFCU has sustained $18,000 loss due to NCUA Corporate Stabilization assessments. These are involuntary costs assessed on all credit unions to recapitalize large corporate credit unions following real estate related losses. KAPFCU had no exposure to the real estate or mortgage-backed securities. This was money taken from KAPFCU to fund other large corporate credit unions these assessments were completely unrelated to its operations.
The precipitous decline in KAPFCU's NWR to 0.58% on 12/31/2009 was a result of the involuntary Corporate Stabilization Assessment of $18,000 KAPFCU had no exposure to real estate risk or mortgage-backed securities, nevertheless we were required to contribute to the recapitalization of larger corporate credit unions that suffered millions in losses from risky investments.
Additionally, the supervisory guidance regarding Corporate Stabilization states that credit unions should not be punished/prejudiced for losses due to Corporate Stabilization. Thus, KAPFCU's Corporate Stabilization Adjusted NWR is actually 4.29% (3/31/2009) and 5.97% (6/30/2010), which means KAPFCU operations are actually in compliance with the previously approved RBP.
On January 15, 2010 the National Credit Union Administration, NCUA Chairman Debbie Matz issued Letter to Credit Unions 10-CU-01 " Supervising Low Income Credit Unions and Community Development Credit Unions." The Letter, which was provided to NCUA examination staff and shared with the boards of directors of all federally insured credit unions, provides guidance on the characteristics, benefits, and unique challenges of low-income credit unions and community development credit unions.
The NCUA offers Technical Assistance Grants (TAG) and other benefits to designated Low-Income Credit Unions because they provide desperately needed development and financial services to traditional under-served and hard-to-serve populations. There is a strong public policy need for these services.
Unfortunately, NCUA examiner (CAROLYN PENALUNA) evaluated KAPFCU as if it was a mature institution with over $10,000,000 in assets. KAPFCU is a new credit union with less that $850,000 in assets, and a certified low income and community development credit union. The accounting rules and regulations are different but KAPFCU was improperly evaluated on a much higher standard.
The Real Problem: overzealous examiners, forcing full accrual accounting, in total disregard to important policy implication for Low Income or Community Development Credit Unions is a recipe for disaster. An examiner can lose their jobs if they fail to "flag" a credit union that subsequently fails. Unfortunately, the NCUA imposes no penalty for destroying a credit union. This creates an incentive for examiners to become excessively overly critical and over scrutinize small credit unions in order to cover their own professional careers. However, there is NO penalty for destroying a perfectly good, albeit small credit union.
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