Despite ongoing federal court proceedings addressing its actions, the NCUA has moved forward with the liquidation of the $780,000 Kappa Alpha Psi Federal Credit Union.

“Whenever we liquidate a credit union, we are mindful of the responsibility to return funds to members in an expeditious manner,” wrote John McKechnie, NCUA director of public and congressional Affairs, in an e-mail sent after the liquidation. “In this case, as with other liquidations, we were prepared to do that either by transferring the shares to another credit union or paying them directly to the members. Kappa was unwilling to support a share transfer to another institution, and accordingly, NCUA provided the funds directly to the members,” he added.

The agency sent out the checks before the credit union was able to submit its final briefs in the dispute and before Judge Emmet Sullivan made a final ruling. The agency's priority, McKechnie said, was protecting the members' money and their assets. “NCUA wanted to make certain that the members received their funds as soon as possible.” McKechnie reiterated. “The liquidation was done in the interest of protecting the members and their assets.”

McKechnie said the agency sent checks totaling $700,047 from 1,472 accounts but that the agency held back two accounts with $44,975 because they were pledged on loans at the CU.

The agency's move capped a week of legal filings and counter filings as the two sides battled over whether the agency had been right to have issued an order of liquidation against the CU on Aug. 3. The credit union charged in its complaint against the agency that NCUA acted “with total and reckless disregard for the truth” in the liquidation. It also maintained, contrary to the agency's assertions in the liquidation order, that it had moved its net worth ratio to 3.67% from having been “minimally capitalized.”

Further, KAPFCU argued that the agency surprised the CU's leadership with the move and that it acted precipitously to liquidate the CU.

But the NCUA countered in its filing that the credit union could not have been surprised by the liquidation because it had been struggling since 2007.

According to the NCUA's brief and exhibits, the agency sent KAPFCU three nonpublished letters of understanding and agreement since April 2008 before it finally issued its Aug. 3 liquidation order.

In addition, the exhibits showed the agency published one LUA with the CU and sent three letters from its regional director and one preliminary warning letter, all about ongoing problems that KAPFCU never appeared to overcome.

The agency's April 2007 LUA listed recordkeeping lending practices and revised business plan as sources for concern. “Loan documentation is inadequate,” the agency wrote. “Notes are missing, are not signed, or do not list the collateral. Titles are not obtained which show the credit union as lienholder.”

In response the credit union agreed that it would develop a record keeping process, properly reconcile its statements with the banks and Southwest Corporate where it had accounts, revise its loan policy, obtain training about how to properly evaluate and underwrite a loan, cease granting unsecured loans in excess of $2500.00 and submit a revised business plan.

A second LUA in late August 2008 included the same concerns and carried similar expectations from the CU and carried this paragraph:

“In consideration of Kappa Alpha Psi Federal Credit Union entering into this modified agreement, the undersigned regional director hereby agrees to refrain from recommending any formal administrative action in connection with the specific conditions addressed in this agreement as long as the credit union and its officials make a sustained, effective and good faith effort to comply with all the terms of this agreement, including the required time frames.”

But a Jan. 16 letter from Keith Morton, NCUA's region IV director, carried this sentence in boldface type: “Your credit union is operating in an unsafe and unsound manner for which substantial, immediate, corrective action must be taken.” The letter then outlined the problems NCUA's examiners found on an examination of the credit union on Sept. 30, 2008. These included recordkeeping, reconciliation of bank accounts, an out of balance general ledger and lack of training on safe and sound loan underwriting.

The agency's filing also attacked the credit union's assertion that it had improved its net worth ratio. The NCUA included an affidavit with its brief from C.W. Phariss, one of its supervisory examiners.

“The credit union's actual net worth at the time of the filing was actually 1.09%,” Phariss testified in the affidavit. “The credit union's net worth calculation for June 2010 was inflated by the KAPFCU board's decision not to appropriately recognize a significant liability of $20,238 for a data processing expense. Due to their decision to disregard common accounting practice and NCUA guidance on accounting for small credit unions by reversing a previously recognized liability, a Call Report correction was required before NCUA could validate the accuracy of the 5300. Contrary to the plaintiffs' statements, principal examiner Ron Blosch did not validate the June 30, 2010 filing made by KAPFCU officials because he knew the numbers were inaccurate.”

As of press time, the case remains unresolved. Lawyers for the NCUA and KAPFCU have asked Judge Sullivan to reschedule deadlines for their briefs and to postpone when he will hear arguments in their case.

In their joint request, lawyers asked the court to postpone the date by which KAPFCU would have to provide arguments as to why it has the authority to block the credit union's liquidation and what standard of review the court should use from noon Aug. 16 to noon Aug. 23. The parties asked that the court schedule a hearing on the case between Sept. 15 and 30.

“Significant events have transpired since the Aug. 11 order prompting the parties to seek leave from the court to alter the deadlines,” the lawyers wrote in their joint motion. The motion did not mention that the agency has since moved forward with the liquidation.

The court has ordered all briefs remaining in the case to be filed by Sept. 30 and will hear arguments on the case on Oct. 15.

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