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SALT LAKE CITY, Utah-Judge Dale Kimball, for the U.S. District Court for the District of Utah Central Division, ruled Dec. 9 that that the community charter approval for Tooele Federal Credit Union and three subsequent ones be remanded to NCUA for review in light of new information provided by the plaintiffs. The American Bankers Association-in connection with the Utah Bankers Association, Bank of Utah, Liberty Bank, First Utah Bank, and Frontier Bank, FSB-sued NCUA in July 2003 charging that the agency’s approval of a six-county field of membership as a community charter for Tooele Federal Credit Union was “arbitrary and capricious.” The same fields of membership were subsequently approved at the regional level for American First Federal Credit Union, Goldenwest Federal Credit Union, and University of Utah Federal Credit Union. The four credit unions, CUNA, NAFCU, and the Utah League of Credit Unions then stepped in as intervenors in the case. The lack of certain information that the banker-plaintiffs brought up throughout the case arose in the decision, including whether the Wasatch Front Regional Council (WFRC) should be relied upon to define the community; the metropolitan statistical areas (MSAs) along the Wasatch front; and actual statistics on membership in the Church of Jesus Christ of Latter-Day Saints. The defendants had argued that these facts were not part of the administrative record and should not be permitted in the case, but the judge said the Federal Rules of Evidence permit “judicial notice of “adjudicative facts” that are “not subject to reasonable dispute” and that are either “(1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot be reasonably questioned.” Kimball allowed the bankers’ documentation in the case. This documentation, according to the judge, showed that the two pages from the WFRC Web site included in Tooele’s package was not enough to support the conclusion of community. Additionally, the fact that MSAs were redrawn weeks after NCUA’s decision which indicates “there may have been substantial evidence at the time of the NCUA decision demonstrating that the Salt Lake and Ogden areas represent at least two well-defined local communities,” Kimball wrote. Finally, he said, NCUA did not rely on statistics at all in determining membership in the Latter-Day Saints. On these specifics, Kimball wrote, “This court finds no support in the record for the expanded community charter under the political subdivisions prong. To the extent that the NCUA addresses the political subdivisions factor, it seems to rely on the [Office of Management and Budget's] MSA for Salt Lake, Davis, and Weber counties and the WFRC. However, neither the MSA nor the WFRC encompass all six counties.” He pointed out that the counties did not share school districts or other services. “These facts diminish the likelihood that the area is local but, as is the case with any information that is not favorable to a finding that the community is local, the NCUA did not address or analyze it,” Kimball noted. As for the church connection, the judge said those gatherings take place at the neighborhood level and “TFCU’s representations that there was weekly interaction among a six-county area was misleading to or misunderstood by the NCUA.” Judge: Don’t Be A Rubberstamp Regulator Kimball added, “The main difficulty the court sees presented by this case, however, is the failure of the NCUA to recognize and critically assess the size of the community it was analyzing as “local,” especially given its regulations recognizing that the term “local” was intended to limit such charters. “Because the informal process in front of the NCUA does not allow for input by the public or other entities, the NCUA must have some gatekeeping responsibility to ensure that the “local” requirement is satisfied. It cannot act as a rubber stamp or cheerleader for any application brought before it. This case is troubling because there is no indication in the record that the NCUA questioned any of the data TFCU provided or that the NCUA queried into areas that would diminish the likelihood of finding a “local” community. If the NCUA had conducted a critical analysis of the information provided, it should have recognized areas of concern that required further discussion.” The very fact that two state universities were within the bounds of the field of membership, and NCUA noted as supporting evidence, should have pointed to a possibility of two separate communities, Judge Kimball said. NCUA also ignored Ogden as its own local community, the judge’s finding read. “Based on the record before it, this court cannot conclude that the NCUA examined the relevant data and articulated a rational connection between the facts found and the decision made.The failure of the NCUA to address the existence of any undisputed factors demonstrating the absence of a “local” community make it impossible to conclude the action was the product of reasoned decision making,” Kimball wrote in conclusion of the Request to Invalidate Agency Action. “Even affording the NCUA discretion in the interpretation of its own regulations, this matter must be remanded for further analysis on the issue of whether the six-county area constitutes a “local” community within the parameters of the NCUA regulations. The word local was intended to be a limiting factor, but there is no indication in the record that the NCUA analyzed any issue that may have tended to diminish the likelihood of finding more than one local community in the six-county area. This is contrary to the statute and NCUA regulations implementing the recent amendments. As the only entity involved in the process at the agency level, the NCUA must critically analyze the facts provided in the application to ensure that incomplete and erroneous information does not lead to an improper conclusion.” Bankers Rejoice The bankers proclaimed the decision a major victory. ABA Executive Vice President Edward L. Yingling commented, “Essentially, the court has concluded that NCUA did not do its due diligence as a regulator. We strongly agree with that conclusion and hope NCUA will start acting less like a rubber stamp and more like a regulator charged with upholding the law. As the court said, NCUA `cannot act as a rubber stamp or cheerleader for any application brought before it.’” Yingling said NCUA had a “history of ignoring the law and congressional intent by approving geographic common bonds that are too broad.” He explained that `local’ was added to limit geographic common bonds in the Credit Union Membership Access Act. “In this case, it’s clear NCUA gerrymandered common bonds to fit the pre-existing footprints of state-chartered credit unions seeking to avoid Utah state law by converting to federal charters. We’re pleased the court has called NCUA on this and demanded more accountability.” Yingling said. “We hope NCUA will accept the court’s admonishment and change its ways. Meanwhile, ABA will remain vigilant and will challenge the agency as needed to defend our members’ interests.” UBA President Howard Headlee added, “The judge was simply stating the obvious, anyone even remotely familiar with the State of Utah knows that Morgan and Tooele are not part of the same local community.” “These mega-credit unions are clearly operating outside the limits of the law,” Headlee said. “They have lost in state court, in the state legislature and now in federal court.” He pointed out NCUA’s approval came just after the Utah legislature changed credit unions’ classification to “non-exempt” and a task force was established to set a tax rate. “As usual, Howard Headlee has already begun spouting his `credit unions are operating outside the law’ line,” Utah League of Credit Unions CEO Scott Simpson stated. “That is a lie. Credit unions do and always have operated strictly within the law, and to continue to say otherwise is absolutely irresponsible and shameful.” He added that the defendants have “a lot of decisions to make.” NCUA Special Assistant to the Chairman and Director of External Affairs Nick Owens would only say, “The agency has received the decision. We are reviewing the opinion and evaluating our options.” “We haven’t decided what to do next yet,” Bingham McCutchen, LLP attorney Paul Lambert, who represents the intervenors, told Credit Union Times. “Obviously we were not pleased with the outcome of the decision but I think it’s important to keep a perspective on it,” CUNA General Counsel Eric Richard advised. “Number one, the judge expressly declined to rule that the charters that NCUA had granted were illegal as a matter of law. It was ruled that NCUA’s process had not been sufficient to test all the information about it and he sent these charters back to NCUA for further evaluation and analysis.” It is still possible for NCUA to reaffirm the fields of membership or modify them, he said. “Meanwhile,” Richard said, “it’s important to keep in mind, this is one district judge in Utah, one district out of the entire country, who had made this ruling; the community involved in this case had a unique configuration and as far as I know there are no others like it around the country; and this is not the end of the world for us but the bankers would probably like to portray it as (such).” NAFCU Director of Regulatory Affairs Gwen Baker expressed “great concern about the tones of the opinion.” She pointed out that there is no definition for the term `local’ or legislative history, however, “the opinion reads as a conclusion.” “We believe that, in the end, a reexamination of the materials and evidence related to this matter will once again demonstrate the area in question satisfies NCUA’s definition of community,” National Association of Community Credit Unions Executive Director Marc Selvitelli commented. NACCU was not an intervenor in the case. NASCUS, also, did not sign on as an intervenor in the case but offered its support in a statement following the decision, reading, “NASCUS believes the NCUA acted properly in its role as federal regulator when considering and approving the FOM request.” Simpson remarked, “Obviously, there are folks who are going to cry victory and I think that’s premature. There are some obvious procedural issues,” he admitted but the league needs to send a “clear message” that in spite of changes, if there are any, the federal charter is far superior to the Utah credit union charter. CUs Hanging in the Balance But while the defendants are trying to decide their next move, no one is quite sure what the credit unions can and cannot do in the interim. “One of the problems with the opinion is the judge didn’t address that issue,” Richard said. “Right now the most likely approach is NCUA will have to come up with some interim plan for what happens while they do their reevaluation.” He added that he has not heard suggestions of expulsion of existing members. If NCUA accepts the remand or an appellate court upholds it, the credit union trades are unsure what sort of influence they might have on the procedures at this point. NAFCU Senior Vice President and General Counsel Bill Donovan said, “A little time will have to pass before we can answer that question. It would depend on the procedures that NCUA chooses in complying with the judges decisions.” Another factor is that either NCUA or the intervenors can appeal the decision, CUNA’s Richard explained. “We cannot know at this point the actual impact of this ruling,” Simpson said. “Obviously we need time, as do the various attorneys involved, to examine it more completely. We did not get what we wanted from this ruling, but it is important to note that neither did the banks. They were asking the court to rule on these issues in place of NCUA, and the court refused to do so. While the attorneys for the credit union-defendants hash out their next move, ABA has no doubt what is coming. ABA Public Relations Specialist Charlotte Birch said, “We fully expect NCUA to appeal, so we know this isn’t the end of the road necessarily. The language in the court decision is pretty strong, so we think it would be very difficult for NCUA to approve the same footprint again.” For example, page nine of the decision states that Salt Lake and Ogden represent at least two well-defined local communities. The court also apparently rejects the idea of a “hub-and-spoke community,” where each county has ties to Salt Lake City, as insufficient to demonstrate common interests. “The court says this type of reasoning directly contradicts the insertion of the term “local” in the regulations. In short, NCUA would have to have a whole lot of chutzpah to reapprove Tooele as it is now.” Initially, the Tooele field of membership was approved 2-1, over NCUA Board Member Debbie Matz’ opposition. Since then former Chairman Dennis Dollar has left the board and only Matz and Chairman JoAnn Johnson remain. “Having won the decision in the earlier lawsuit by ABA over whether the rules were consistent with federal law, I would suspect NCUA would not roll over and retreat.” Dollar commented. “I believe NCUA will aggressively defend their position.” He stressed that NCUA’s field of membership policies have not only provided millions of members access to affordable services, but it also has saved a number of credit unions through diversification. “Conversion to a community charter has saved hundreds of community credit unions that have lost their single sponsor or (where there was) a downturn in an industry that was the credit union’s main field of membership,” the former chairman said. Dollar stated that Congress left the definition of `local’ open to NCUA interpretation because they knew each case is different. He added that, while the agency should review the decision, as per the court’s order, “it was already a strong package that complied with NCUA regulations.” He said he does not expect that the decision will have a “chilling effect” on community charter applications nor NCUA’s approval of them. Board Member Matz, through Executive Assistant Steve Bosack, declined to comment for legal reasons. The controversial case, along with taxation efforts and other issues, has caught the attention of the mainstream media in Utah, which has 1.2 million of two million residents who are credit union members, Simpson said. The Salt Lake Tribune and Deseret News both covered the decision. -

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