O ~United ~GA States General Accounting Office GAOs~ JWashington, D.C. 20548 General Government Division 1 8B1 158469 B-274539 April 8, 1997 The Honorable Spencer Bachus Chairman, Subcommittee on General Oversight and Investigations Committee on Banking and Financial Services House of Representatives The Honorable Bill McCollum House of Representatives Subject: Allegations of Improper Management Practices at NCUA This letter responds to your June 12, 1996, letter regarding the National Credit Union Administration (NCUA). You were concerned about certain allegations made by former Board Member Robert H. Swan about management practices at NCUA. These allegations were made in his May 1, 1996, statement before your committee about 3 weeks after his involuntary termination. Mr. Swan's term as board member expired in August 1995, and he continued to serve as a holdover board member for approximately 8 months before his termination by the President. Under the Federal Credit Union Act of 1934, as amended (hereafter referred to as the act), NCUA, an independent agency, is the federal regulator of all federally chartered, as well as federally insured state-chartered, credit unions.' NCUA is governed by a three-person board consisting of a chairman, vice chairman, and a board member. These persons are appointed by the President and confirmed by the Senate to serve 6-year terms on a staggered basis. On December 31, 1995, about 11,700 credit unions, having total assets of over $300 billion, were under NCUA jurisdiction. The current NCUA Chairman, Norman D'Amours, was appointed to his position in November 1993. According to Mr. Swan, an adversarial relationship between Mr. D'Amours and himself developed in 1994 and continued until he was terminated in April 1996. Mr. Swan sued the President in connection with his 'The Federal Credit Union Act is codified at 12 U.S.C. 1751, et seq. GAO/GGD/OSI-97-44R NCUA Management Practices __ · .l t/?~-f B-274539 removal from office. On November 22, 1996, the U. S. Court of Appeals for the District of Columbia Circuit affirmed a summary judgment in favor of the President. In addition, according to Vice Chairman Shirlee Bown6, an adversarial relationship between Mr. D'Amours and herself developed in 1995. Mr. Swan and Ms. Bown6 were not only dissatisfied with Board operations but were dissatisfied with certain actions of some key NCUA staff members, most notably, NCUA's Executive Director, Karl Hoyle. Mr. Hoyle, who was hired by Mr. D'Amours, oversees most of the daily operations of the agency and also serves as Mr. D'Amours' executive assistant. Disagreements between the Chairman and other Board members were evident not only in minutes of meetings of the NCUA Board but also in other internal and external communications. The failure of Capital Corporate Federal Credit Union (Cap Corp) raised especially strong disagreements between the Chairman and the other Board members. (Enc. I briefly describes Cap Corp's activities and capitalization prior to failure.) In addition, the Chairman has confirmed that difficulties have existed between himself and the industry's two largest trade associations (who work on behalf of credit unions) but not, in his opinion, with credit unions on the whole. Our objective was to test the validity of Mr. Swan's allegations about activities and procedures at NCUA and to address the related concerns you raised. Your concerns are described in detail in enclosure II. To facilitate our work, we divided the allegations made by Mr. Swan into three groups: (1) the internal operations of the NCUA Board and the role of the chairman; (2) the role of NCUA staff in establishing official NCUA policy; and (3) the legality and propriety of NCUA actions in sponsoring and promoting a 1996 conference, "Serving the Underserved." We believe these three groups include the substance of your concerns and Mr. Swan's allegations. The first group of allegations made by Mr. Swan suggests that the Chairman and/or the Executive Director violated the act or another law by unilaterally performing certain actions that the law requires to be taken by the Board as a whole. Specifically, we considered the following allegations: (1) the Chairman improperly excluded Board members from participating in Board affairs by controlling or restricting information flow, (2) the Chairman improperly manipulated the Board's meeting agendas, (3) the Chairman unilaterally adopted NCUA policies or regulations, and (4) the Chairman ordered staff to conduct surveillance of Board members. The second group includes the allegation that NCUA staff exceeded their authority by establishing or attempting to establish official policy, a function reserved to the Board. Finally, the third group of allegations relates to events surrounding a conference sponsored by NCUA for member credit unions on "Serving the Underserved." Mr. Swan told your committee that "credit unions have been asked by examiners at the 2 GAO/GGD/OSI-97-44R NCUA Management Practices B-274539 time of examination and on other occasions to make contributions ... " to support the conference. Moreover, he suggested that NCUA had violated the Federal Advisory Committee Act (FACA). Much of the information we gathered during our review was in the form of interviews with the affected parties. Board Member Yolanda Wheat was not interviewed by us because she joined the Board subsequent to Mr. Swan's departure. We obtained relevant documentation where available, such as internal memorandums and file notes, Board minutes, minutes of Regional Directors' meetings, and relevant reports of the Inspector General. In many cases, however, sufficient documentation that might either support or refute Mr. Swan's allegations was not available so we had to rely on the sometimes conflicting oral accounts we were given by participants, each of which reflected that participant's perception of events. We could not always make a determination regarding each allegation presented. In such cases, we presented whatever evidence was available. (See enc. III for a more complete description of the scope and methodology of our work.) Former Board Member Swan and the current Chairman and other NCUA Board members were asked to comment on this letter. Their comments and our evaluation are discussed on p. 10 of this letter. RESULTS IN BRIEF First, we did not find any evidence that the Chairman of the NCUA Board acted illegally in his conduct of Board operations as alleged by Mr. Swan. However, because of the apparent distrust and animosity that existed among Board members and in some cases extended to certain senior staff, the influence and effectiveness of the other Board members were almost certainly diminished. Second, for the most part, actions taken by NCUA staff that we were able to document appear to have been primarily the implementation of policies determined by the Board, although certain actions arguably could be characterized as the making of new policy. Policymaking and policy implementation form a continuum, and legitimate disagreements can occur about the boundary between them. Members of the Board, in carrying out their oversight responsibilities, should have the right and opportunity to discuss and determine whether any particular action by staff may have crossed that boundary. Largely because of poor communication between the Chairman and the Board members, together with the Chairman's control of the agenda, it appears that the Board, as a whole, did not always have that opportunity. Third, while the NCUA has the legal right to sponsor, plan, and promote educational conferences for credit unions, such as the 1996 conference, the NCUA failed to 3 GAO/GGD/OSI-97-44R NCUA Management Practices B-274539 provide timely direction to regional managers and examiners about their proper role in such an undertaking. Because of this failure, some examiners contacted credit unions to solicit financial support for the conference. Although these actions appear not to have been illegal, we believe they were inappropriate and that such conduct could jeopardize the professional relationship that should exist between a financial institution and its examiner. INTERNAL OPERATIONS OF THE NCUA BOARD AND THE ROLE OF THE CHAIRMAN Under the act, the Board's powers and responsibilities include comprehensive regulation and supervision of federal and federally insured credit unions, management of the NCUA, and the adoption of rules for the transaction of the Board's business.2 The act does not define the term 'management." However, the act sets aside some managerial functions as specific to the chairman. It specifies that the chairman shall be the spokesperson for the Board, shall represent the Board and the NCUA in its official relations with other branches of the government, and shall determine each Board member's area of responsibility. Moreover, the act provides that the chairman shall direct the implementation of the adopted policies and regulations of the Board. Thus, the chairman's legally recognized role could be described as a dominant one. During Mr. D'Amours' administration, he has looked to Executive Director Hoyle for management of the agency on a day-to-day basis. Thus, Mr. Hoyle has played a key role in implementing policy and other matters on behalf of the Chairman. Although some of the actions taken by Mr. D'Amours and Mr. Hoyle may raise concerns from a management perspective, our review has not established that the Chairman or Executive Director acted unlawfully. Were Other Board Members Excluded Improperlv From Participating in Board Affairs by Restrictions Placed on the Flow of Documents and Information From Staff and Others to the Board Members? Mr. Swan stated to your committee that there were instances in which senior management instructed staff not to communicate with Board members despite specific requests for information. Vice Chairman Bown6, Mr. Swan, and both of their executive assistants stated that the flow of information to their offices from NCUA staff had been curtailed. For their part, Chairman D'Amours and Executive Director 2 Theprovisions pertaining to-the general management of the NCUA and the Board are contained in section 102 of the act as amended, 12 U.S.C. 1752a. NCUA's rules of procedure are set forth in 12 C.F.R. part 791. 4 GAO/GGD/OSI-97-44R NCUA Management Practices B-274539 Hoyle deny that this happened except in the case of Cap Corp. It is their contention that senior management has consistently responded to every request from all Board members and that staff were free to contact them. One example of allegedly impeded information flow to Mr. Swan and Ms. Bown6 that was of strong concern to them involved the resolution of the Cap Corp failure. Later in the year, after the establishment of the conservatorship in January 1995, Mr. Hoyle instructed NCUA staff to clear through his office all internal communications regarding Cap Corp, including communications to the Board. Mr. Hoyle confirmed that Mr. Swan and Ms. Bowne were not advised of this instruction, but learned of it only when Mr. Swan's executive assistant requested certain information from NCUA's Office of General Counsel. Mr. Hoyle told us that information about Cap Corp had been improperly divulged outside the agency, and he wanted to ensure better internal control over information thereafter. The controls placed on information flow to Board members with regard to Cap Corp do not appear to have violated the act. Although the Executive Director imposed access controls on information relating to Cap Corp, we found no evidence that these controls resulted in the withholding of information from a Board member that might have limited his or her authority to exercise regulatory or management responsibilities. Whether this could have happened is a matter of speculation. Mr. Swan told us he had not requested any additional Cap Corp information from Mr. Hoyle after he established the controls. Ms. Bown6 could not say what documents, if any, were withheld, but her concern was that information or documents could be withheld from a Board member. Other alleged instances of interference with Board members' communication were more difficult to document. It is possible that informal communications from NCUA staff to both Ms. Bown6 and Mr. Swan diminished during Mr. D'Amours' chairmanship. We believe that it is reasonable to assume that the staff might react this way if they perceived increasingly strained relationships at the Board level. Because most senior staff were directly supervised by the Executive Director, who in turn reported to the Chairman, it could be possible that staff communications with Ms. Bown6 and Mr. Swan were inhibited without any explicit instructions having been given. Ms. Bown6 and Mr. Swan told us that during the tenure of former NCUA Chairman Roger Jepsen, there was a more collegial atmosphere at NCUA. They said informal contacts between Board and staff at that time were frequent and cordial and were often initiated by NCUA staff. They said this was not the case during Mr. D'Amours' chairmanship. (See enc. IV for a more complete description of the alleged restrictions and relevant evidence.) 5 GAO/GGD/OSI-97-44R NCUA Management Practices B-274539 Was the Board Agenda Being Improperly Manipulated by the Chairman? Mr. Swan said he attempted in early 1996 to include on the Board's agenda a discussion of procedures used to set the agendas for Board meetings. NCUA regulations specified that the chairman had authority to set the final agenda for Board meetings. However, Mr. Swan believed that this authority was being abused because certain issues that he and Ms. Bown6 had wished to discuss at Board meetings were not included in the agenda. Ms. Bown6 told us she agreed that this had been a problem for her as well. The issues that Mr. Swan and Ms. Bown6 had wanted the Board to discuss involved certain actions taken by NCUA staff. Mr. Swan and Ms. Bown6 were not in agreement with these actions and wanted the Board to review them. Examples included an executive performance appraisal, a new procedure for reviewing proposed credit union mergers, and a credit union examination that resulted in a disputed rating of a credit union. Mr. D'Amours and Mr. Hoyle stated that staff were taking the actions under general authority that the Board had previously delegated to them. The Board members were frustrated by their inability to bring these issues to a vote by the Board because they said that the Chairman would not place the issues on the agenda. In an opinion dated February 16, 1996, the NCUA General Counsel found that Board member requests for agenda items should be honored but that the chairman could control the timing of placing items on the agenda. A partial solution to this problem was adopted by the Board at its October 16, 1996, meeting. The agenda rule was changed so that the chairman or any two board members, acting together, could require that items be placed on the Board agenda within 60 days of the submitted request. Ms. Bown6 proposed an alternative rule that would entitle a single Board member to submit an agenda item for consideration at a regular Board meeting. In addition, her proposed rule would have required that a special Board meeting requested by any member be held no later than 10 days from the date of the request. However, Ms. Bown6 told us that her proposal was never brought to a discussion or vote of the Board. Were NCUA Staff Ordered to Conduct Surveillance of Board Members? Former Board Member Swan stated to your committee that NCUA staff were instructed to conduct surveillance of Board members and report back to Mr. Hoyle. Chairman D'Amours and Executive Director Hoyle acknowledged one such activity in which NCUA Regional Directors were requested to report the content of Mr. Swan's public speeches. We found no evidence to support two other allegations of surveillance made by Mr. Swan. (See enc. V.) 6 GAO/GGD/OSI-97-44R NCUA Management Practices B-274539 On March 17, 1995, Mr. Swan addressed the annual meeting of the Virginia Credit Union League, a trade organization representing credit unions in Virginia. In its subsequent newsletter to members, the League reported several criticisms of NCUA made by Mr. Swan. For example, Mr. Swan was reported to have referred to NCUA's resolution of Cap Corp as an "assassination" rather than a liquidation. Mr. Swan confirmed to us that he had used that term. This was and continues to be a sensitive issue because the resolution of Cap Corp caused some of its member credit unions to experience losses. According to Mr. D'Amours, Mr. Swan's characterization of NCUA's actions was of concern to Mr. D'Amours partly because of the possibility that these credit unions might sue NCUA to recover their losses. 3 Mr. D'Amours said that because of his concern about Mr. Swan's speech, he gave instructions that Mr. Swan's future speeches be monitored and their contents reported to the Office of the Chairman. The reporting mechanism that resulted from the monitoring activities was not systematic, and we were unable to determine how long it was in effect or how many of Mr. Swan's speeches were monitored. However, Mr. D'Amours said that Mr. Swan subsequently apologized to the Board for the Virginia League speech and that the monitoring arrangement was then discontinued. Ms. Bown6 said she assumes that some surveillance of her has been done. While she has no specific knowledge of such activities, she said that she does believe, based on comments that were made to her by the Chairman, that some form of reporting had taken place. Did the Chairman Unilaterally Adopt Policies Against the Wishes and Without the Consent of Other Board Members? The chairman is statutorily responsible for directing the implementation of policies that are adopted by the Board. Because policies are often expressed in general terms, their implementation can result in a variety of outcomes. Such policies are generally left to the staff to implement, and if the implementation is questioned, the Board should then resolve the issue. However, the line between policymaking and policy implementation can be hard to draw. We could find no stated policy that the Chairman had unilaterally adopted. However, there have been cases where two Board members disagreed with actions taken by NCUA staff, believing the actions were not consistent with policy as they saw it. 3 0n November 22, 1996, 96 of the credit unions did file suit, and this is now pending. 7 GAO/GGD/OSI-97-44R NCUA Management Practices B-274539 ROLE OF NCUA STAFF IN ESTABLISHING NCUA POLICY Did NCUA Staff Establish or Attempt to Establish Official NCUA Policy Without the Knowledge or Consent of the NCUA Board? Mr. Swan cited cases to us in which he believed that NCUA staff had engaged in policymaking activities. In some instances, Vice Chairman Bown6 agreed with Mr. Swan. For example, they both alleged that in 1995 Executive Director Hoyle had, in opposition to their views, changed NCUA's policy on approving or disapproving proposed mergers of credit unions. Section 205 (c) of the Federal Credit Union Act provides that the NCUA Board use six criteria for reviewing merger proposals. An excerpt from the act listing the six criteria is shown in enclosure VI. The authority to decide on these mergers using the six criteria has been delegated by the Board to the regional directors. On April 18, 1995, Mr. Hoyle sent a memorandum to the regional directors requiring them to forward certain merger proposals to him for review prior to approval. Although the criteria, set forth in Mr. Hoyle's memorandum could be construed as merely amplifying the existing criteria, the memorandum was sent despite Mr. Hoyle's knowledge that Ms. Bown6 and Mr. Swan disagreed with the concept it described. (For more details on this and other alleged staff policymaking activities, see enc. VII.) The making and the implementation of policy are overlapping parts of a continuous process. NCUA's formal policies are set forth in its regulations as established by the Board. These regulations are frequently expressed in general terms. The implementation of regulations requires the chairman and staff to make general and specific judgments that should reflect established policy. It is reasonable to expect that good faith disagreements might arise from time to time about whether a particular decision or action by the staff represented merely the implementation of an existing policy or the establishment of a new one. In this case, disagreements did occur, and they were not always -amicably resolved. Even when a majority of the Board disagreed with policy implementation, informal or formal means of timely addressing the problem were not clearly available to them. Poor communication between the Chairman and the other Board members, and the Chairman's control of the Board agenda contributed to the problem. THE LEGALITY AND PROPRIETY OF NCUA ACTIONS IN SPONSORING AND PROMOTING A CONFERENCE ON "SERVING THE UNDERSERVED" In June 1995, NCUA began planning an educational conference for credit unions. Two primary goals of the conference were for credit unions of all sizes to learn how to better serve their current members and to find new ways to expand their membership to include groups of people who do not have access to credit unions. The conference 8 GAO/GGD/OSI-97-44R NCUA Management Practices B-274539 was held in Chicago in August 1996. Mr. Swan made two allegations about the conference: that NCUA examiners illegally solicited contributions in support of the conference and that NCUA violated FACA in establishing an advisory committee to plan it. Did NCUA Examiners Illegally Request Credit Unions to Make Contributions to Projects Initiated by the NCUA? In his statement before your subcommittee, Mr. Swan alleged that examiners had, at the time of examinations, requested credit unions to donate funds in support of the conference. Both Mr. Swan and Ms. Bown6 told us that certain credit unions had complained to them in confidence about such solicitations and there were press reports of this activity from unnamed sources. We found that regional managers were told to encourage participation by credit unions in their regions. In this regard, we identified evidence of a few cases where examiners asked credit unions to support the conference by providing funds that would be allocated to assist other, financially weaker, credit unions to participate in the conference. These cases occurred in NCUA's Region VI. (See enc. XI for more details.) In no case that we found, however, did any examiner personally accept money from a credit union or direct a contribution of funds to or for a specific credit union. Although solicitations of support that have been identified do not appear to constitute an illegal act, we believe they were inappropriate and could jeopardize the professional relationship that should exist between a financial institution and its examiner. The NCUA embodies a dual role in its relationships with credit unions and the credit union industry. It is an educator and a supporter of the industry, but it is also a regulator, supervisor, and examiner of individual credit unions. Confusing or mixing these two functions could impair the NCUA's ability to function as an effective regulator. Because of this risk, we question whether it was the best practice for NCUA to have taken the initial lead in planning and sponsoring a conference such as this. Having decided to do so, NCUA did not, at the very beginning, issue instructions to regional managers prohibiting any examiner solicitations for contributions. Instead, regional managers were told to encourage credit union participation in the conference and to report on the expected participation by credit unions in their regions, including credit unions that needed financial assistance to attend and credit unions that would provide such financial assistance. In some cases, contributions were then solicited by examiners. The lack of clear instructions at the outset put some regional management and staff in a position that could have raised questions about a possible compromise of the regulatory process. 9 GAO/GGD/OSI-97-44R NCUA Management Practices B-274539 Did the NCUA Violate FACA by Establishing an Advisory Committee? Based on our review of the information NCUA provided in connection with the planning of the "Serving the Underserved" conference, it appears that the agency did not violate FACA, 5 U.S.C. App. §§ 1-15. The statute applies to committees that offer policy advice.4 A committee that is "primarily operational, rather than advisory," is not covered by FACA.5 We agree with NCUA that the group that planned the conference was primarily operational and, therefore, not subject to FACA. AGENCY COMMENTS AND OUR EVALUATION Chairman D'Amours, Vice Chairman Bown6, and Mr. Swan each provided comments on a draft of this letter. Enclosure XII includes Chairman D'Amours' letter. Vice Chairman Bown6's letter and our response appear in enclosure XIII. Although Chairman D'Amours agreed with our basic conclusion that staff did not act illegally, he suggested that the Board members needed to take more responsibility for acquiring information from staff, and he offered his own views about the reason for a breakdown in the collegiality of the Board. He also agreed that NCUA should have provided more detailed and timely written instructions to regional staff concerning NCUA's proper role in supporting the conference. In this respect, Chairman D'Amours stated that NCUA would provide such instructions should it sponsor or promote similar conferences in the future. We have addressed technical points raised by Chairman D'Amours in the letter and enclosures, where appropriate. Vice Chairman Bownd did not agree with all aspects of our findings and conclusions and raised concerns about certain statements in the letter. She reiterated her view that a communication problem had developed in NCUA and that controls, which restricted the flow of information to Board members, inhibited their ability to perform their duties. Also, she felt that we had not correctly characterized her efforts to change the Board's rules to reduce Chairman D'Amours' control of the Board agenda. We have made changes to address her concerns, where appropriate. 4 Judicial Watch, Inc. v. Clinton, 76 F.3d 1232, 1233 (D.C. Cir. 1996); Sofamor Danek Group, Inc. v. Gaus, 61 F.3d 929 (D.C. Cir. 1995). 5 SeeH.R. Rep. No. 92-1017, 92d Cong., 2d Sess. 4 (1972) (quoted in Sofamor Danek Group, 61 F.3d at 934 n. 28). See also S. Rep. No. 1098, 92d Cong., 2d Sess. 8 (1972); 41 C.F.R. § 101-6.1004(g); (GSA regulation exempting from "advisory committee" definition any committee established "to perform primarily operational as opposed to advisory functions"). 10 GAO/GGD/OSI-97-44R NCUA Management Practices B-274539 In general, Mr. Swan did not agree with the conclusions drawn from our review. However, he presented no new information that would cause us to change our conclusions. Mr. Swan also raised some issues concerning the way in which our review was conducted. We have responded to these issues in a separate correspondence. We are sending copies of this letter to the Chairman and Board members of NCUA, and former Board Member Robert Swan. In addition, copies will be sent to the Ranking Minority Member of the Subcommittee on General Oversight and Investigations. Copies will be available to others upon request. The major contributors to this letter are listed in enclosure XIV. If you have any questions or wish further clarification, please call me on (202) 512-8678. Thomas J. cCool Associate Director, Financial Institutions and Markets Issues Enclosures- 14 11 GAO/GGD/OSI-97-44R NCUA Management Practices CONTENTS Page LETTER 1 ENCLOSURES I FAILURE OF CAP CORP 14 II QUESTIONS THE HOUSE BANKING SUBCOMMITTEE ASKED US TO INVESTIGATE 15 III SCOPE AND METHODOLOGY 17 IV ALLEGED RESTRICTIONS PLACED ON THE FLOW OF DOCUMENTS AND INFORMATION TO BOARD MEMBERS 19 V ALLEGED SURVEILLANCE OF BOARD MEMBERS 21 VI THE FEDERAL CREDIT UNION ACT (EXCERPTED) 22 VII ALLEGED ESTABLISHMENT OF OFFICIAL NCUA POLICY BY NCUA STAFF 24 VIII CENTRAL OFFICE REVIEW OF MERGER PROPOSALS (MEMORANDUM FROM THE EXECUTIVE DIRECTOR TO ALL REGIONAL DIRECTORS, APRIL 18, 1995) 29 IX PROPOSED INTERPRETIVE RULING AND POLICY STATE- MENT: SUPPLEMENTAL CRITERIA FOR VOLUNTARY MERGERS (IRPS 95-1) 30 X LETTER TO CREDIT UNIONS, LETTER NO. 169, APRIL 1995 49 XI EVENTS SURROUNDING THE ALLEGED EXAMINER SOLICITA'IION OF SUPPORT FOR NCUA-SPONSORED CONFERENCE 52 XII COMMENTS FROM NCUA BOARD CHAIRMAN 54 XIII COMMENTS FROM NCUA BOARD VICE CHAIRMAN 57 12 XIV MAJOR CONTRIBUTORS TO THIS LETTER 65 ABBREVIATIONS CAMEL capital, assets, management, earnings, and liquidity Cap Corp Capital Corporate Federal Credit Union FACA Federal Advisory Committee Act IRPS Interpretive Ruling and Policy Statement NCUA National Credit Union Administration OCDCU Office of Community Development Credit Unions 13 ENCLOSURE I ENCLOSURE I FAILURE OF CAP CORP On January 31, 1995, a majority of the NCUA Board, Mr. Swan dissenting, voted to place Cap Corp into conservatorship. The Board appointed the Director of the Office of Corporate Credit Unions as conservator. Cap Corp was a corporate credit union, whose only members were other credit unions. It was one of the 45 corporate credit unions nationwide at the time. These institutions serve credit unions in several ways-as providers of short-term liquidity, as check processors, and as investors of varying proportions of the unloaned deposits of the credit unions. Cap Corp had a special class of members' investment accounts that were exposed to loss. These accounts were uninsured and were also subordinated to other member accounts. The eventual failure of Cap Corp resulted in losses to those special member accounts. 14 ENCLOSURE II ENCLOSURE II QUESTIONS THE HOUSE BANKING SUBCOMMITTEE ASKED GAO TO INVESTIGATE At a hearing on May 1, 1996, Mr. Robert Swan, former Board member of the National Credit Union Administration (NCUA), made certain allegations to the Subcommittee on General Oversight and Investigations, House Banking Committee concerning management practices at NCUA. Based on Mr. Swan's testimony, Subcommittee Chairman Spencer Bachus and Representative Bill McCollum raised questions of concern, as set forth below, and asked us to conduct an investigation. Flow of Information and Efforts to Control the NCUA Board 1. Is the NCUA Board being dominated improperly by its Chairman? 2. Are other Board members being excluded improperly from participating in Board affairs by restrictions placed on the flow of documents and information from staff and others to the Board members? 3. Is the Board agenda being improperly manipulated by the Chairman? 4. Has the Chairman unilaterally adopted policies against the wishes and without the consent of other Board members? 5. Has the NCUA violated the law in its operation of the Board of Directors? Surveillance of Board Members 6. Have NCUA staff been ordered to conduct surveillance of Board members? 7. Has this or any other staff action undermined the authority of Board members? Establishment of NCUA Policy 8. Have NCUA staff established or attempted to establish official NCUA policy without the knowledge or consent of the NCUA Board? 9. Have the positions of Board members been misrepresented to outside parties? 15 ENCLOSURE II ENCLOSURE II 10. What role have the Offices of the Executive Director, General Counsel, and the Director of Corporate Credit Unions played in any misrepresentations? Solicitation of Contributions 11. Have NCUA examiners, at the time of examination, illegally requested credit unions to make contributions to projects initiated by the NCUA? 12. Has the NCUA violated the Federal Advisory Committee Act by establishing an Advisory Committee? 16 ENCLOSURE III ENCLOSURE III SCOPE AND METHODOLOGY The questions raised in your request letter are based upon the opinions and perceptions of Mr. Swan as stated in his allegations before your Subcommittee's hearing. Documentary evidence was not always available, which means that in some cases we had to rely on the oral recollections of Board members and various NCUA officials, that did not always coincide. Several of Mr. Swan's statements indicated that Ms. Bown6 had also been adversely affected by certain management practices. For that reason, we tried to ascertain Ms. Bown6's views as well. Our effort to document and/or test the validity of Mr. Swan's and Ms. Bown6's assertions of misconduct on the part of Chairman D'Amours and other NCUA staff included an examination of any counter allegations or explanations of the issues raised that were obtained through interviews, records of internal NCUA communications, and published reports. In view of the legal and ethical issues raised, our investigative work included the cooperative efforts of our Offices of General Counsel and Special Investigations. In the course of our review, we obtained relevant documentation where available, such as internal memorandums and file notes, Board minutes, minutes of regional directors' meetings, and relevant reports of the Inspector General. In many cases, documentation was not available, and we had to rely on oral accounts we were given by participants. In addition, to better understand NCUA's policies and management practices we reviewed the Federal Credit Union Act (the act) and applicable NCUA regulations. We interviewed at length each Board member and his or her executive assistant. We also interviewed other NCUA staff, including certain members of the Offices of Executive Director, General Counsel, Inspector General, Community Development Credit Unions (OCDCU), and Corporate Credit Unions. There were allegations that examiners had solicited credit union contributions in support of an NCUA-sponsored 1996 summer conference, "Serving the Underserved." To learn more about conference plans and examiner activities, in addition to OCDCU staff, we interviewed NCUA's six regional directors. In NCUA's far west Region VI, where the complaints were concentrated, we conducted on-site and/or telephone interviews with the Regional Director, Associate Director for Programs, and three examiners including one supervisory examiner. We also interviewed senior managers of the four credit unions that reportedly had been solicited in California, Hawaii, and Oregon. While there were credit unions other than those in Region VI that had allegedly been solicited, we did not learn their identities. 17 ENCLOSURE III ENCLOSURE III We also interviewed officials of the industry's two largest trade associations, the private contractor who was retained to organize the NCUA conference, and the National Association of State Credit Union Supervisors. We worked primarily at NCUA's Central Office in Alexandria, VA, from June through November 1996. Our work was done in accordance with generally accepted government auditing standards. 18 ENCLOSURE IV ENCLOSURE IV ALLEGED RESTRICTIONS PLACED ON THE FLOW OF DOCUMENTS AND INFORMATION TO BOARD MEMBERS Mr. Swan stated to your subcommittee that there were instances in which senior management instructed staff not to communicate with Board members despite specific requests for information. Vice Chairman Bown6 and the executive assistants of both Mr. Swan and Ms. Bown6 all stated that the flow of information to their offices from NCUA staff had been curtailed. Chairman D'Amours and Executive Director Hoyle both deny that this happened. It is their contention that senior management had consistently responded to each Board member's requests and that staff were free to contact them. Ms. Bown6 cited two instances where she believed that she was denied information. First, in 1995, NCUA was considering three candidates for the presidency of a credit union. NCUA management selected one of them and recommended him to the NCUA Board for approval. Ms. Bown6 reported that she requested information regarding the other two candidates, but she said that her request was denied. The Director, Office of Corporate Credit Unions, was processing this selection. He told us he could not recall having received Ms. Bown6's request. Second, Ms. Bown6 said she was unable to obtain detailed information regarding the actions of the NCUA management team that was involved in the conservatorship of Cap Corp. She said that she requested the minutes of the team's meetings and was incorrectly told that no minutes existed. Thereafter, as a result of a Freedom of Information Act lawsuit filed by the Pentagon Federal Credit Union, Ms. Bown6 learned that minutes did exist. Ms. Bown6 was unable to recall whom she had asked about the minutes, and we did not identify which staff member may have been involved. There was another case of allegedly impeded information flow to Mr. Swan and Ms. Bown6 that was of strong concern to them both. This also involved the resolution of Cap Corp. Later in the year, after the establishment of the conservatorship in January 1995, Mr. Hoyle instructed NCUA staff to clear through his office all internal communications regarding Cap Corp, including communications to the Board. Mr. Hoyle confirmed that Mr. Swan and Ms. Bown6 were not advised of this instruction, but learned of it only when Mr. Swan's executive assistant had requested certain information from the NCUA Office of General Counsel. Mr. Hoyle told us that information about Cap Corp had been improperly divulged outside the agency, and he wanted to ensure better internal control over information thereafter. Mr. Hoyle told us that he had never withheld information requested by Ms. Bown6 on Cap Corp or any other issue and stated that he had no statutory authority to do so. However, he said he had issued the instruction as a way to emphasize to all concerned the need for strict control of such confidential information. 19 ENCLOSURE IV ENCLOSURE IV The Office of the Inspector General investigated the source of press leaks of sensitive information about four other corporate credit unions during the summer of 1995. In a report dated September 20, 1995, the Inspector General stated that the source of these leaks had not been determined. The report found that there was inadequate control over unauthorized access by NCUA stalff to confidential data regarding corporate credit unions, which made it difficult to fix responsibility. The Inspector General was not asked to investigate the information leak regarding Cap Corp. 20 ENCLOSURE V ENCLOSURE V ALLEGED SURVEILLANCE OF BOARD MEMBERS In addition to having his speeches monitored, Mr. Swan told us that the Office of the Chairman had monitored his travel vouchers. He said that while this procedure had not resulted in actual harm to himself, he believed it constituted personal harassment. Mr. Hoyle's former deputy acknowledged that she had made copies of the travel vouchers of both Mr. Swan and Ms. Bown6. She explained that this occurred in the early months of Mr. D'Amours' administration. She said it was simply a precaution that was taken in the early days and that it was discontinued when the extra copies were found to be unnecessary. She said that no use had ever been made of this material and that no harassment had been intended. Mr. Swan reported that on one occasion his desk had been searched. He said that both official and personal papers had been disturbed, although nothing was apparently taken. He advised Mr. Hoyle of this and was told that no such search had been authorized. Mr. Swan said that he had no actual evidence of the search. The Inspector General was not asked to investigate this matter. 21 ENCLOSURE VI ENCLOSURE VI THE FEDERAL CREDIT UNION ACT (EXCERPTED' 22 ENCLOSURE VI ENCLOSURE VI mit a report to the Congress on compliance by (c) In granting or withholding approval or insured credit unions with the requirements of consent under subsection (b) of this section, the the national flood insurance program. Board shall consider- (B) Contents.-The report shall include (1) the history, financial condition, and a description of the methods used to determine management policies of the credit union; compliance, the number of insured credit unions examined during the reporting year, a listing (2) the adequacy of the credit union's and total number of insured credit unions found reserves; not to be in compliance, actions taken to correct (3) the economic advisability of the trans- incidents of noncompliance, and an analysis of action; compliance, including a discussion of any trends, patterns, and problems, and rec- ommendations regarding reasonable actions to credit union's management; improve the efficiency of the examinations proc- (5) the convenience and needs of the mem- esses. bers to be served by the credit union; and (6) whether the credit union is a cooperative § 1785 § 205 association organied for the purpose of promot- ing thrift among its members and creating a Requirements governing insured credit source of credit for provident or productive pur- unions-4(a) Every insured credit union shall poses. display at each place of business maintained by it a sign or signs indicating that its member (d) Prohibitima.- accounts are insured by the Board and shall (1) n GeneraL-Except with the prior include in all of its advertisements a statement written onsent ofthe Boar to the effect that its member accounts are insured by the Board. The Board may exempt (A) any person who has been convicted of from this requirement advertisements which do any criminal offense involving dishonesty or a not relate to member accounts or breach of trust or has agreed to enter into a pre- advertisements in which it is impractical to trial diversion or similar program in connection include such a statement. The Board shall pre- with a prosecution for such offense, may not- scribe by regulation the forms of such signs, the (i) ecome or continue as, an institu- manner of display, the substance of any such tionaffiliated party with respect to any insured statement, and the manner of use. dit union; or credit union; or (bX1) Except with the prior written approval of the Board, no insured credit union shall- (-) otherwise participate, ditly or indirectly, in the conduct of the affairs of any (A) merge or consolidate with any insured credit union; and non/nsur~ credit union or inst/tution; (B) any insured credit union may not per- (B) assume liability to pay any member mit any peron referred to in subparagraph (A) accounts in, or similar liabilities of, any to engage in any conduct or continue any rela- noninsured credit union or institution; tionship prohibited under such subparagraph. (C) transfer assets to any noninsured credit union or institution in consideration of (2) ni 10 prohibition period the assumptio of liabilities for any portion of certain e the member aounts in such insured credit (A) In general-If the offense referred union; or to in paragraph (1XA) in connection with any (D) convert into a noninsured credit union person referred to in such paragraph is- or institution (i) an offense under- (2) Except with the prior written approval of the Board, no insured credit union shall 1007, 1008, 1014, 10, 135, 617, 1906, merge or consolidate with any other insured 7 of ti 18, United States Code, or credit union or, either directly or indirectly, acquire the assets of, or assume liability to pay (I) section 1341 or 1343 of such title any member accounts in, any other insured which affects any financial institution (as credit union. defined in section 20 of such title); or 24 NOVEMBER 1994 23 ENCLOSURE VII ENCLOSURE VII ALLEGED ESTABLISHMENT OF OFFICIAL NCUA POLICY BY NCUA STAFF Mr. Swan was especially critical of the actions taken by NCUA staff during the period when Cap Corp was under conservatorship and, ultimately, liquidation. Minutes of the January 31, 1995, Board meeting show that Vice Chairman Bown6 voted in favor of the conservatorship. Nevertheless, she was not entirely comfortable with all aspects of how it was handled. The minutes of that meeting indicated that Mr. Swan voted against the action in part because he wanted to give the Cap Corp board and its credit union members additional time to complete a rescue plan that would be financed by the members. NCUA staff explained that there were practical difficulties posed by such a delay, together with some doubt that a rescue plan could have been completed at all. This was because a 60-day moratorium on member withdrawals, imposed by the Cap Corp board, was to end on February 6, 1995, and detailed operational arrangements would have to be completed by that time to implement the conservatorship and meet what were expected to be very large member withdrawals on that date. NCUA staff were critical of the Cap Corp board for allegedly inadequate contingency planning during the 60-day moratorium. In addition, NCUA staff said that Cap Corp had borrowed in excess of its regulatory limit, and Cap Corp was directed not to borrow any more. NCUA staff said the possibility of a full-scale run on Cap Corp deposits could not be dismissed. Ms. Bown6 told us that she did not expect the sale of nearly all of Cap Corp's investments during the first month of the conservatorship. She was not provided timely information about the conservatorship once it had been established by the NCUA Board.' For example, she said that she did not know that a (conservatorship) board had been formed at the staff level. The NCUA's Board minutes did not reflect a detailed discussion of the conservator's plan to substantially liquidate Cap Corp's investment portfolio. However, such a plan might reasonably have been anticipated since other options to rescue Cap Corp, considered by NCUA staff and the Board during the 60-day moratorium, had not been accepted or supported by the Board at that time. In the absence of such an arrangement, NCUA, as conservator, continued to be responsible for managing Cap Corp's portfolio. As stated in its February 1995 testimony, GAO believed that the portfolio 'C: 'vember 22, 1996, 96 credit union members of Cap Corp filed suit against the NCUA Board regarding its handling of the Cap Corp failure. Each of these credit unions held a class of Cap Corp instruments known as preferred capital shares; these shares were not federally insured and the shareholders experienced losses as a result of the failure. Because this matter is being litigated, we shall not comment on it in detail. However, as stated in our February 28, 1995, testimony (GAO/T-GGD-95-107), we believed that Cap Corp's portfolio, which was concentrated in collateralized mortgage obligations, was excessively risky and was thus inappropriate for Cap Corp to hold. 24 ENCLOSURE VII ENCLOSURE VII appeared subject to an unacceptably high level of interest rate risk. Under that condition, it might be expected that a substantial liquidation of investments could be necessary to reduce the exposure to additional losses. Liquidation of the portfolio is not equivalent to outright liquidation of the institution, in which its affairs are wound up and its charter surrendered. However, as the portfolio is liquidated, the adverse impact on the institution's earnings may cause it to become nonviable. For example, an institution's holdings of high-yield securities are sold because they are judged to be too risky, and if the proceeds of this sale are reinvested in low- yielding, low-risk securities, the institution may not be able to retain deposits or outside credit. On April 12, 1995, the NCUA Board authorized the liquidation of Cap Corp. It also permitted another corporate credit union to purchase most of Cap Corp's assets and assume liability for Cap Corp's members' accounts. This permitted the members to continue receiving services. Only after that transaction was Cap Corp financially liquidated. Another instance in which Mr. Swan alleged NCUA staff had established policy was in regard to credit union mergers. NCUA's regional directors are authorized to approve or disapprove proposed mergers of credit unions in their respective regions. On April 18, 1995, Executive Director Hoyle sent a memorandum regarding merger proposals to the regional directors. The purpose of the memorandum was to permit NCUA's Central Office to review a merger proposal before it was approved in cases where the merger would, in the regional director's view, have certain anticompetitive effects. The review process and participants were not described. The memorandum stated five criteria for evaluating such a merger application. See enclosure VIII. In December 1994, NCUA staff had drafted for presentation to the Board an Interpretive Ruling and Policy Statement (IRPS) on this subject. The criteria set forth on pp. 8-14 of the IRPS, as shown in enclosure IX, were similar to those in Mr. Hoyle's memorandum. Had the Board approved the IRPS as drafted, it would have been issued for public comment and could have become an NCUA regulation. However, the IRPS was not introduced to the Board. Mr. Hoyle said it had been withdrawn because it was informally opposed in advance by both Mr. Swan and Ms. Bown6. Their position was that the statutory criteria for NCUA approval of a proposed credit union merger were already sufficient and the additional criteria were either unnecessary or inappropriate. Therefore, Mr. Hoyle's memorandum appears to have been issued, although it was already understood that a majority of the Board could be expected to disagree with its contents. Mr. Hoyle said that Mr. D'Amours had approved the memorandum but that the other Board members had neither been consulted nor advised of it at the time the memorandum was sent to the regional directors. Mr. Hoyle's memorandum continued to be in effect despite the opposition of Ms. Bown6. In November 1996, Ms. Bownd told us 25 ENCLOSURE VII ENCLOSURE VII that she continued to oppose the criteria because she believed that they go beyond the traditional standards of credit union safety and soundness and member benefits. Ms. Bown6 said that this was clearly a policy issue that the Board should debate and decide, not the executive director. Mr. Hoyle asserted that the use of his criteria did not constitute new policy, and thus did not require Board approval. We believe it could be argued that Mr. Hoyle's criteria were simply refinements of the criteria in the act. This is an example of the difficulty of separating policymaking from policy implementation. However, Mr. Hoyle acknowledged to us that he might have found a better way to deal with the merger issue. Under the circumstances, Mr. Hoyle's action could be viewed as a step by the Chairman toward circumventing the Board members' opposition and adopting new criteria. On the other hand, the memorandum on ils face simply directed regional directors to provide to the executive director additional information about their recommendations to approve merger applications under specific circumstances. The issuance of the memorandum itself does not appear to have been inconsistent with the provision of the act authorizing the chairman "to direct the implementation of the adopted policies and regulations of the Board." 2 As of September 1996, according to Mr. Hoyle, no proposed mergers had been forwarded to him for review under the requirements of his memorandum. Subsequently, Ms. Bown6 advised us that she believed regional staff had sent merger applications to Mr. Hoyle for his review prior to approval. We did not attempt to verify this. Another example of alleged policymaking by NCUA staff was a Letter to Credit Unions (Letter No. 169) dated April 1995 that Mr. Hoyle signed for the Board. The text of this letter, which appears in enclosure X, briefly described a procedure by which credit unions should attempt to evaluate the risk profile that exists in their assets and liabilities. Quantitative limits of risk-taking acceptable to NCUA were set forth in the letter. The limits were described as guidelines to both credit unions and NCUA examiners. It is important to understand the problem that the letter was addressing. In the first half of 1994, many credit unions had experienced declines in the market value of their investments because of an unexpected rise in market interest rates. It was clear at the 'Section 102 of the act, 12 U.S.C. § 1752a(e), provides as follows: The Chairman shall be the spokesman for the Board and shall represent the Board and the (NCUA) in its official relations with other branches of the Government. The Chairman shall determine each Board member's area of responsibility and shall review such assignments biennially. It shall be the Chairman's responsibility to direct the implementation of the adopted policies and regulations of the Board. 26 ENCLOSURE VII ENCLOSURE VII time to NCUA management that NCUA examinations had not been adequate to identify the degree of risks that credit unions were undertaking. The failure of Cap Corp emphasized the need for better risk management and better NCUA supervision. Mr. Swan objected to this letter on the grounds that it did not reflect the views of the Board and that it was a premature attempt to set stricter controls over credit unions before proposed but controversial changes in official NCUA regulations had been adopted by the Board. However, Ms. Bown6 told us that the text of this Letter To Credit Unions had been reviewed in advance by her office and that it was acceptable to her. Thus, while Mr. Swan may have disapproved of Letter No. 169, a majority of the Board approved its message. Even if the letter had established "new policy," it would not have been a unilateral act by the Chairman. However, Ms. Bown6 said she still questions the appropriateness of the Executive Director, rather than the Chairman, having signed this letter. In another example of alleged policymaking by staff, Mr. Swan's office was concerned that the Office of Corporate Credit Unions was using an unfair procedure for assigning a composite CAMEL rating for corporate credit unions. The composite CAMEL rating is related to the examiner's numerical rating of five components-capital, assets, management, earnings, and liquidity-that measure the soundness of each credit union. This rating is regarded as a key indicator of the safety and soundness of all credit unions. Since at least 1989, the procedure for assigning composite CAMEL ratings for corporate credit unions provided that the composite rating should generally be equal to the lowest of the five CAMEL components. The examiner was given discretionary authority to improve the composite rating by one step. This contrasted with the procedure for assigning composite CAMEL ratings to natural person credit unions, where an arithmetic mean of the five components formed the basis of the composite rating. Thus, the rating system for the corporates had the potential result of a lower composite rating than it would have received under the other procedure. In January 1995, the examiner's authority to improve the rating by one step was withdrawn, and any recommended improvement needed the approval of the Director, Office of Corporate Credit Unions. In October 1995, Mr. Swan's executive assistant proposed to Ms. Bown6's executive assistant that the NCUA Board should require that composite corporate ratings be determined by a procedure similar to the one used for natural person credit unions. Ms. Bown6 told us she had taken exception to the CAMEL rating given to one corporate credit union. Although two Board members disagreed with the rating given to this institution, the rating was not changed. This was because of two official delegations of Board authority and a Board regulation that were in effect at the time. First, the Board 27 ENCLOSURE VII ENCLOSURE VII had delegated its authority to examine corporate credit unions to the Director, Office of Corporate Credit Unions. Second, the Board had delegated to the Chairman alone the authority to bar the exercise of any delegation. The Chairman had not interfered with the examiner's rating of the institution. In addition, under NCUA's Rules and Regulations, the Chairman was given authority to set the agenda for Board meetings, and the other Board members stated that this arrangement had caused a delay in addressing the problem. The revised procedure for assigning composite CAMEL ratings for corporate credit unions may not fit a narrow definition of policymaldng because the development and implementation of examination procedures for such credit unions had been specifically delegated by the Board to the Office of Corporate Credit Unions. Nevertheless, if a majority of the Board disagrees with policy implementation, informal and formal means of addressing the problem could have been used. The vice chairman and former Board member expressed frustration at their inability to discuss this issue at a Board meeting. 28 ENCLOSURE VIII ENCLOSURE VIII CENTRAL OFFICE REVIEW OF MERGER PROPOSALS (MEMORANDUM FROM THE EXECUTIVE DIRECTOR) (APRIL 18. 1995) Naoional Credit Union AdmnirisTrc ion -~~.....7 ~E!/SSG:bog ;~~~~~~ SSIC 6300 TO: All Regional Directors FROM: Executive Director Karl T. Hoyle SUBJ: Central Office Review of Merger Proposals DATE: April 18, 1995 This is to clarify the circumstances that will require you to submit merger proposals between healthy credit unions for Central Office review. Merger proposals must clearly support any claims that the consolidation is 'for the good of the members" or that member services will be improved. As always, when granting or withholding approval, conditions imposed by Section 205(c) of the Federal CreditUnion Act must be addressed. Mergers between healthy credit unions will be forwarded to the Executive Director for review only when you recommend approval and one or more of the following conditions exists: (1) The claim that the merger will benefit the member is not clearly and convincingly supported. (2) The merger appears to be of a predatory nature. (3) The merger is being consummated primarily for growth rather than service. (4) The competitive effect on other credit unions in the consolidated and proposed operational area could be perceived to be detrimental. (5) The motivation for the merger appears to be potential financial benefits for the directors and management officials. Please call me if you have any questions. cc: Office of General Counsel E&l Director E&l Director of Supervision :bbgmergert,.doc 29 ENCLOSURE IX ENCLOSURE IX PROPOSED INTERPRETIVE RIfLING AND POLICY STATEMENT: SUPPLEMENTAL CRITERIA FOR VOLUNTARY MERGERS (IRPS 95-1) GCIJJE:bhs SSIC 6300 TO: Distribution List FROM: Deputy General Counsel James J. SUBJ: IRPS 95-1 DATE: December 16, 1994 Attached is the latest draft of IRPS 95 -1, merger criteria. Majr changes in the body of the document are in bold. Please provide your comments to Bob Fenner by Jnu 15, 1995. Distribution Karl Hoyle John Butler Russ Clark Allen Carver Bob Loftus Dave Marquis Frank Thomas Len Skiles All Regional Directors 1775 Duke Street - Alexandrla. VA 22314-3428 - 703-518-6300 30 ENCLOSUREIX ENCLOSUREIX NATIONAL CREDIT UNION ADMINISTRATION Friday 12/6194 5:00 PM 12 CFR Part 708b Interpretve Ruling and Policy Statement; Supplneental Critera for Volunary Marger AGENCY: National Credit Union Administration ("NCUA") ACTION: Proposed Interpretive Ruling and Policy Statement 95-1 ("IRPS 95-1') SUMMARY: The NCUA Board ("Board") proposes merger criteria to supplement the criteria found in the Federal Credit Union (FCU) Act and provide additional guidance to federallyinsured credit unions on the evaluation process used by the agency'to determine whether to approve a voluntary merger involving at least one federally- insured credit union. This proposal clarifies how NCUA interprets relevant sections of the FCU Act, NCUA's Regulations and NCUA's chartering policy regarding merger. DATE: Comment must be postmarked or received by NCUA (30 days after publication inthe Feda Rel giste ADDRESSE .Send coments to Becky Baker, Secrery of the Board, National Credit Union Admbinration, 1775 Duke Street, Alndr, VA 22314-3428, or via NCUA's eodronic bulletin board to Becky Baker at 703 - 518 - 6480. DRAFT 31 ENCLOSURE IX ENCLOSUREIX FOR FURTHER INFORMATION CONTACT: Richard S.Schulman, Associate General Counsel, or Michael J. McKenna, Staff Attorney, Office of General Counsel, at the above address or telephone: (703) 518-6540. SUPPLEMENTARY INFORMATION: The Proposed IRPS A Background Section 205(c) of the FCU Act sets forth six criteria that the Board shall consider in "ging or withholding approval or consent' of a merger. 12 U.S.C. §1785(c). The Act withhoingor does not, howver, limit the Board's review to these six statutory criteria as the sole and exclusive criteria for its consideration. For the reasons discussed below, the Board now believes additional guidance is needed and isproposing to delineate the criteaia it will use to evaluate merger proposals and that credit unions must address when proposing a merger. Although the Board has naver fomrily adopted a "mOer policy", in IRPS 94-1, NCUA's crtwing nd field of mnarship policy statm t, 59 Fed. Reg. 29066, (June 3, 19S, to Board biefy addressed mergers inthe conxt of field of membershp. The Board sttd that merging credit unions mut met the rquirements under the field of memberhip rules. Id., at 29078. As momre fuly discussed belw, a merging credit union's field of membership must match the "operational areu" of the continuing credit union. DRAFT 2 32 ENCLOSURE IX ENCLOSURE IX The process of how NCUA approves mergers was not in controversy until the proposed merger of three large west coast credit unions. The proposed merger has caused many in the credit union industry to consider the potential effects of such a merger and similar large mergers that may be likely to follow. The Board is not stating that it opposes merges of two or more large credit unions. The merits of any merger proposal must be weighed individually. NCUA intends, however, to carefully analyze motivs that underlie a merger proposal. NCUA is not inclined to approve mergers in which growth is the primary consideration, but will look to assure that a merger application substantially mees the requirements as addressed in the various authorities discussed below and any resulting from this proposed IRPS. The FCU Act provides six areas of considerion, set forth below, which the Board must address in a merger. With the exception of emergency mergers, full consideration must be given to the Act's six criteria, operational area requirements, and other critria established in a final IRPS. This proposed IRPS sets out six new criteria to supplement the six criteria found in the FCU Act. These proposed criteria are addressed below under section D. B. Authorsties 1. FCU Act nd the Rules and Reaulations The FCU Act specifically requires Board approval of mergers of ll insure credit unions, both federal and state chartered. 12 U.S.C. §1785(b). To aid Ft Bord in its supervisory authority over mergers, the FCU Act sets forth a list of subject areas that must be addressed. In approving or disapproving a merger under 12 U.S.C. §1785(c), the Board must, at a minimum, consider DRAFT 3 33 ENCLOSURE X ENCLOSUREIX (1) the history, financial condition, and management policies of the credit union; (2) the adequacy of the credit union's reserves; (3) the economic advisability of the trnsaotion; (4) the general character and fitness of the credit union's management (5) the convenience and needs of the member to be served by the credit union; and (6) whether the credit union is a cooperative association organized for the purpose of promoting thrft among its members id creating a sourme of credit for provident or productive p.poss. In addition to the above, the Board requires that a merger pose no risk to the Natonal Credit Union Share Insurance Fund ("NCUSIF"). 12 C.F.R.§708b.105(b). These re the same citeria the Board considers in approving insurance for state chartered crdit unions. See, 12 U.S.C. §1781(c); reserves are covered in 12 U.S.C. §1781(bX5) and (6). Merger procedures are set forth in Part 708. (The Board also has the authority to approve emergency mergerm, 12 U.S.C. §1785(h). Howvr, because such margs are subject to their own statutory criteria and are exempt from other provisions of the FCU Act, they would not be covered under this propoed IRPS.) 2. IRPS 94T ad the "oerational Area" ReWremea t IRPS 94-1 was issued primarily as a guide on chartlrig credit unions and cg in fields of membeship. Within the context of change of ield of mmberhip, however, it does address mergers. A merging credit union must mt oprational am requirements if it does not shae a common bond with the continui credit union. The IRPS defines "opeational area" as that area which "nmay reasonbly be served by a DRAFT 4 34 ENCLOSURE IX ENCLOSURE IX credit union service facility and is accessible by the groups to be included inthe field of membership. ...."-59 Fed. Reg. at 29078. The greatest difficulty in applying 'operational area' to a merger isfound when a federally insured state chartered credit union (FISCU) proposes to merge into a federal credit union (FCU). Under such conditions, the merging credit union becomes an FCU and, "the field of membership rules applicable to a credit union corerting to afederal charter apply." 59 Fed. Reg. at 29085. The problem inthese mergers isoften caused by the great differences between NCUA' field of membership requiements and thmse state credit union laws that either do not recognize or more liberally construe acredit union's operational area. Inconverting to an FCU, the FISCU may be required to change its field of membership. Consequently, the continuing credit union may not automatically gain all of the groups inthe merging credit union's field of membership. Field of membership requirements for a merger are met only if (the merging credit union's) groups could have been added to the continuing credit union without the benefit of the merger. This requires analyzing each individual group in the merging credit unionts field of membership as if the continuing crdit union was expanding its own field of mebrship to inude-those groups without a merger. Inthis latter situatin, IRPS 94-1 states that As with noew multiple ca tiona federl credit unions, oceupational and associatio groups may be added to occupationalassociational federal credit unions intwo ways. Ifthe group is part of an occupational or associational common bond which constitutes a mapjority of the federal credit union's field of mimership, the group may be added regardless of location. These commonry DRAFT 5 35 ENCLOSURE IX ENCLOSUREIX called "common bond additions." For any other occupational or associational common bond, the aroup must be within the credit union's ooerational area. These are commonly called "select employee additions." (Erhphasis added) 59 Fed. Reg. at 29085. The proposed policy will require a craedit union to make and report this analysis when seeking merger approval. In some cases, this will require amending the merging credit union's field of membership. IRPS 94-1 also provides that when a state chartered credit union is merged into a federal charter, operational area requirements for each group to be added to the cotinuing crdit union's field of membership may be waived, "on a proper showing that the (continuing] credit union will continue to be able to provide quality service to its current field of membership as a federal crdit union.... Any subsequent fied of membership amendments must comply with applicable amendment procedures." 59 Fed. Reg. at 29085. This provision does not revoke operational area requirements for a merger olving a state chartered edit union. It Is dlsrantiary on the part a NCUA; it only pemits groups already receivin quality credit union services, kaed ou-side of what NCUA would have termined to be the credit union's operational area, to continua to hve credit union servie afr the merger. In exerising its discreon, NCUA will a ooridr whthr th groups hve servies ava e thrugh ohr redit un Mrgr pW must den a how opeionre requmreme for each sele employee group have been met bedore NCUA can approve thl mrger. Any waivers of operational area for state chartered credit unions should be disicsd fuly with the regional off before the merger plan is submitted for approval. C. How Current NCUA Pofcy Affecs Merge DRAFT 6 36 ENCLOSURE IX ENCLOSUREIX The Board believes that the criteria in the FCU Act and operational area requirement do not impose difficulties inmost mergers. If,for example, two small federal credit unions operating inAkmidria, Virginia, desired to merge for valid remaons wa members.in the same operating area, there would be no operational area conceam and the merger would likely be approved. Even f operational are isan issue, the ob ept of a planned service facility will most likely alleviate any serious concerns. IRPS 94-1 states in pertinent part that acredit union may add groups within the operational area of one of its planned service facilities if: * The planned facility begins operation shortly after the group is added; and " The current field of membership constitutes8 significant portion of the total field of membership to be served initially by the proposed facility. Although the addition of a now aeect group alone isnot enough to justify -planned service facility, it is permissible to include new group as partial ustification for such a facility. 59 Fe.d Rg. at 2905. Inmergers, the contining credit uion my be able to use the service facilities (or branches) of the merging credit union as planned service facii for the pupose of meeting the operational area requiments for field of membehip expansion. Inthe above example, if the merging Alexandri credit union w serving a select employee group from a branch office in New York City, the planned service facliy concept would allow that portion of the field of membership to be tanerred DRAFT 7 37 ENCLOSURE IX ENCLOSUREX intact to the continuing credit union, ifthe continuing credit union's current field of membership included individuals in the area of the branch who would constitute a -significant poron" of the merbers to be served by the continuing credit union through that branch The anaiys applied in the moty d sma credit union mrge beomens more dificult to apply in larger mergers, especially if the merging credit union serves numerous select employee groups over awide geographic area The Board recognies tet by adding new ritia it may incrase the bden on mrging et unions, partcularly when FISCUs with a diverse field of mnmn hip mrge int FCU. Howver, the Board believ this era effort isessential if credit unions we to maintain thir unique identity to their mna.erhi. D. Pmpoad Merger Crdtei The Board proposes that in any merger, othr than an emergeny merger, involving a federallyinsurd credit union, th dx issues disaussed bmow wail as th six statutoy aibria be addressed in ny merger plan submitted to NCUA. Propod Cteon 1. The ppoee of the nmger. Althmugh tBoawd I proposeng til se a specifi cutedon, it ans sential aubject thlt crdit union n ent should addr w t or not the Boam adopit a fin MIRP Is being Included to _require mnagement to focua on carunt operadorn and services, td goals, anticipated and ft capility to provde quady lsvce to an expanded field o mmberhp. In 8 38 ENCLOSURE ENCLOSUREIX effect, it provide a general overview and basis for responding to both the statutory crteria and those set forth below. The Bord is weM aware that the decision to mrge s aIbuiness dectdalr credit union mnagenmet and it does not intend to ubstitute its busines judgment for that of management. t does, however, intend to requir cre unions to adces the issue and evaluate it in terms of a merger being a unmd business decison. pmdpo Crion 2. The competitive effec on ther credit unio, incudclings credit unions, in the merger partners' present and prospective operational areas. The Act requires NCUA to consider the "economic advisabiity" of t" merger, 12 U.S.C. §1785(cX3), and NCUA Regulations require the Board to determine tht th proposed merger does not present an undue risk to the NCUSIF, 12 C.F.R §708b.15(b). The Board believes consideration of the "ecanomic advisability" criria extends beyond th dirt economic effects on the merg ingstitutio to the dirt and indiredt econaic impact on smaller credit unios which may be affected by the mrgr. Smaliler crdlt unions can easily have their fields of mebership and their ability to contiuo a e ng effected by the merger of larg crdit unions. Such mergers couldd permit th w, lrger ntinuing crdit union to use its greer conmic powm to solicit an ti hl sm credit union's odsting and potentil mbership. Ifth merg wer not approvd, one of the merger cldidt alone would be lias ely to dominate tho smaller credit unions' operanal ar Itfollow that mergers of large credit unions can cree inevitable trend towrds th daecine and merger of smier credit unions. Fromn a safety and soundness viwpont for an individual cedit unio, d of afield of nmemd hip through a merger my b desirabi DRAFT 9 39 ENCLOSURE IX ENCLOSURE and a prudent method for reducing risk. In rulemaking or in establishing a policy of general applicability, however, the Board must be concerned with safety and soundness in a broader context The declining number of credit unions Increases concentrion of risk and can have adverse consequences for the credit union system. IRPS 94-1 permits credit unions to more easily add smll groups to their field of membership without NCUA approval. Concerns have been expressed that this policy alone has increased the ability of larger credit unions to undercut other credit union' ability to offer services and atact members. The Board is concerned that a merger policy should not add to the difficulties that small credit unions already face inattracting new members and improving the level of services. The ultimate result of such a policy may lead to a decrease in productive small-credit unions and an increase in mergem under duress. Recognizing tht, as a geenra premise compeition within a given system can be healthy, the Board must also consider whether in a given situation, due to the unique nature of credit unions, it can be harmful. The Board, therefore, proposs to require that credit uions addrss the competitive effct of their proposed merger on other credit unions, prticularly small credit unions, intheir posens and prospecth opertioal areas. Proposed Crimn 3. The extent to which merge prtners srve their e in fields of membership. The Board must condr the "history, financial condition, and mnagemnent policies of the credit union" as well as the convenience and needs of th members to be served by the credit union." 12 U.S.C. §1785(c)(1) and (5). Whie incrsing the number of pesons eligible for credit union srvice isa iudabl goal, NCUA is opposed to the DRAFT - 10 40 ENCLOSURE IX ENCLOSUREIX addition of new groups under circumstances where they may not be adequately served. The Board isconcerned that some mergers may result in a lack of quality credit union service to some groups inthe continuing credit union's field of membership. The Board believes that the extent to which each credit union isserving its existing field of membership may indicate how well the continuing credit union may serve its new field of membership. Ifa credit union isnot adequately serving its current field of membership and seeks to add new groups through a merger, the Board believes such action would call into question the credit union's management policies as well as the benefits the members would derive from the merger. The Board proposes that credit unions address the extent to which they are currently serving their existing field of memberhips. A credit union may choose to dmonstate this with service status reports. Such reports may show the number of primary potential members of each select group and the number of persons from each select group who have actually enrolled as credit union members. These reports should also show the aggregate share and loan activity by select group. If NCUA determines that a credit union isnot adequately serving its current mmbers, the merger may be disapproved until service levels show improvement. It is mportant to note here tht th Board recognize th the percentage of a cndit unionsa fidof nmmbenrhp currntly being saed may not be indicative of adequate servic Threfore, as a gwl rule, nd he Boad will not view percentage of penetration of field of membmip as th sole factor inevaluating this cdteon. Low penetrton of current eligible memberMhp ao will not automatically preclude a merger, but the Board will expect acrdIt urdon to explain th rasons for low penetration. .ikewl, high penettion will not necesarily satisfy th crm on f tIn level of serviceappe Inadequat. Hem DRAFT 11 41 ENCLOSURE IX ENCLOSUREX too the Board will expect explanations on such matters as lack of offered services or low utilization of offered services. The Board believes that requiring these types of Issues to be addressed will aid credit union management in evaluating the soundness of the (mergeras a business decision. Proposed Criterion 4. The effects of the proposed merger on the continued ability of credit unions to operate as a cooperative movement This proposed criterion is derived from 12 U.S.C. §1781(c)(1)(E) and 1785(c)(6) and the Congressional purpose underlying the FCU Act to established a system 'o mice more available to people of small means credit for provident purposes through a natonal system of cooperative credit, thereby helping to stabilize the credit strun"e of the United States." 12 U.S.C. §1751 (emphasis added). The Board is concerned that mergers consummated primarily for growth can adversely affect the ability of credit unions to operate as a cooperative movement. The cooperative nature of credit unions applies to the individual credit union's ability to serve as a cooperative organization as well as the ability of the local and national credit union communities to meet that goal. It is, thwmfor, inconsistent with the spirit of the cooperative movement to sanction mergers which would result in the demise of smaller cooperatives on which the industry was founded. The Board is concaned that an accelerated decline in the number of small credit unions may resui, from th pressures of large "regionar credit unions formed through predatory field of membership expansion and ill conceived mergers. This proposed criterion requires the credit union parties to the merger and NCUA to reflect on whether they meet the definition of a cooperative association not only as individual credit unions, but as part of the credit union community as a whole. Evaluating competitive effect on other credit unions DRAFT 12 42 ENCLOSURE IX ENCLOSURE IX in response to criterion 2 should provide some assistance in addressing this criterion. Propowd Criterion 6. The expected financial benefits to be derived by directors and management officials of the merger partners. The Board must consider the general character of the credit union's management as well as the needs of the credit union's members. 12 U.S.C. §§1785(c)(4) and (5). Benefits such as larger retirement incomes or golden parachutes may be a major motivation for a proposed merger. NCUA does not believe that management involved in the merger process should be permitted to receive any special personal financial benefit from the transaction. Such benefits reflect poorly on the character of management and are not in the best interests of the members. Therefore, the Board proposes to require that credit unions proposing to merge address the anticipated financial benefits to be derived by the management officials of the merging credit unions. Proposed Criterion 6. If the merger partners do not have the same common bond or are not located in the same operational area adl the continuing credit union is a federal credit union, whether each group in the merging credit union's field of membership meets o tionl a requirmenr. If not, identify which groups, other than members of record, will be served by the continuing credit union Section 708b.101(c) of NCUA's Regulations requires compliance with the Boards chartering policies if the continuing credit union is an FCU. IRPS 94-1 requires the merging credit unions to comply with operational area requirements if the merging credit unions do not share the same common bond. DRAFT 13 43 ENCLOSURE IX ENCLOSUREIX Most mergers fall into one of two field of membership categories. First, there are mergers where the credit unions have the same common bond or are located in the same operational area. If the merging credit unions have the same common bond, they may merge without regard to the locations of their respective service facilities. If they are in the same operational area, they can merge as multiple group fields of membership. The second category involves credit unions with widely spread dissimilar fields of membership (such as two credit unions serving multiple group fields of membership). They may only merge when they are located in the same operational area. In this case, the credit unions may merge only if at least one of the service facilities of the merging credit union is within the operational area of the continuing credit union. Groups served by a non-operational area facility may be merged, but only as members of record. New members may not be included unless a significant portion of the continuing credit union's existing members (or persons currently eligible to be members) could be served by that facility. As discussed above under "Authoti, the continuing credit union needs to analyze each indvdual group in the merging credit union's field of membership as if .te continuing credit union was seeaing a field of membership o from the NCUA E. Procedurs Currently, the Board has delegated merger approval authority to the six NCUA regions. The recent proposed merger of three large credit unions has convinced the Board that some mergers proposals need to be addressed first by the region with final action from the Board. In any merger proposal, the NCUA region would complete all required DRAFT 14 44 ENCLOSUREIX ENCLOSUREIX investigations, work with the credit unions to finalize a proposed field of membership, and ensure that all the criteria have been satisfactorily addressed. The Board proposes that the regions communicate all mergers exceeding $100 million to the Board at least five days before approving the merger. A majofity of the Board would be required to pull the merger proposal from the region for further discussion or request that it be placed on the Board's agenda. F. Request for Comments The Board requests comments from all interested parties on the content of the proposed IRPS, including whether it should only apply to credit union mergers above a specified asset amount (e.g., assets of the merging credit union or the resulting credit union). In addition to the five proposed criteria, the Board seeks comments on when it, and not the region, should consider a merger proposal. For example, should the Board itself only consider merges of certain asset size credit unions, or large mergers involving FISCUs and FCUs. Should the Board extend only limited delegated authority to the regions, and if so, how large a credit union merger should the region be able to approve? Should th Board review and approve mwge wheretheresulting credit union's asset eed S250 million, or where'the resulting credit union exceeds $100 million in ases? Other merger proposals could be considered by the Board on a coe by cam basi. The Board also requests comment on whether merger proposals should be published in the Federal Register for written public comment The Board is considering the value DRAFT 15 45 ENCLOSURE IX ENCLOSURE IX of holding public hearings in situations where a merger could affect other credit unions, and welcomes corfiments on that issue as well. Regulatory Prccdures Regulatory Flexibty Act The proposed IRPS is designed to clarify existing statutory authority and agency policy. As proposed the IRPS could have an affect on a substantial number of small credit unions. However, the analysis and burden imposed on these credit unions wouldnot be significat. For the most part competitive effect (criterion 1)and operational (criterion 5)would generally not be in issue. Executbve Order 12612 Executive Order 12612 requires NCUA to consider the effect of its actions on state interests. The proposed IRPS will apply to all federally insured credit unions. The proposed mIRP 1 not delgnad or intended to intme wi thte tat reg of state chartered Institutions nor doea itlm Imo federa field of m er hlip requirmnts on atte charter cdit unions. However, th Fd Cred Union Act requires the Board to consider th me general clbrtera when revwiwng all mergs, whter nvolving only federal cd unions or only hartwed cedit unons. The Board beleves tht, with th eaepom of field of memberhip requireen, a subject reserved for the approIpat charterng authority, up criteria deemed necessay for proper evaluation of mergeproposals must be applied on a uniform ba Whe nrqidred by tab law, the approval of a merger Involving a stat chartered credit union by the DRAFT 16 46 ENCLOSURE IX ENCLOSURE IX appropriate state supervisory authority will still be required See, 12 C.F.R. g708.101(d) and 708.104(aX6). PaperworkReducton Act The proposed IRPS, ifadopted, will impose additional paperwork requirements on a merging credit union. The paperwork requirements will be submitted to the Office of Management and Budget (OMB) for review under the Paperwork Reduction Act. Written coients on the paperworkre should be forwded direcy tte OMB Desk Officer indicated below at the following address: OMB Reports Management Branch, New Executive Office Building, Room 10202, Washington, D.C. 20530. Attn Milo Sunderhauf. NCUA will publish a notice in the Federal Register once OMB action is taken on the submitted requirement By the National Credit Union Administration Board on January 27, 1995. Becky Baker Secretary of the Board Acordingly, NCUA proposes IRPS 95-1 to rad as follows: Interpreive Ruling and Policy Statement 9U- - Supplemental Crteria for Voluntay Mergers DRAFT 17 47 ENCLOSURE IX ENCLOSURE IX Part 708b.104(b) of NCUA's Regulations requires merging credit unions to submit a merger plan to NCUA The merger plan must address the following subjects as well as the six criteria found at Section 205(c) of the Federal Credit Union Act 1) The purpoe of th merger. 2) The competitive effect on other credit unions, indcuding small credit unions in t merging credit unions' present and prospective operationa areas. 3) The extent to which t. merger prtners serve tmh d fields of m n 4) The effects of the proposed merger on the continued ability of credit unions to operate as a cooperative movemenL 5) The expected financial benefits to be derived by directors and management officials of the merger p iers. 6) Ifthe merger prtne do not have the sme oommon bond or ae not locate in the same operational mu gathe confinuing redit union is a federa credit union, wher each group in the mrging credt union's field of membership meets operantionald requirements. n denti whi groups, other th members of rcord, will be served by the cohiing cedit uni DRAF 4818 48 ENCLOSURE X ENCLOSURE X LETTER TO CREDIT UNIONS, LETTER NO. 169. APRIL 1995 NATIONAL CREDIT UNION ADMINISTRATION NATIONAL CREDIT UNION SHARE INSURANCE FUND LETTER LETTER N.169 TO CREDIT UNIONS DATE: April199 DEAR BOARD OF DIRECTORS: Intoday's changing interest rate environment, credit union officials are faced with increasingly complex investment decisions and asset-liability management (ALM) planning. This letter isintended to clarify the National Credit Union Administration's (NCUA's) position on divestiture of Collateralized Mortgage Obligations (CMOs) and Real Estate Mortgage Investment Conduits (REMICs) that fail one or more parts of the high-risk securities test (HRST). The guidelines set forth in this letter may also assist in your analysis of future investment purchases and decisions. The most significant investment fluctuations that credit unions have experienced involve CMOs and REMICs. We conducted a special review last fall of credit unions that reported large investments in CMOs and REMICs. We found that * 57 percent of these.credit unions were holding at least one security that failed one or more parts of the HRST; · 29 percent of these credit unions ran the HRST semiannually or less often (normally at the request of an examiner or auditor); and, * 39 percent of the managers of these credit unions did not have an adequate understanding of the risks involved in these investments. As a result of the findings of this review, I have placed a high priority on examining credit unions that hold high concentrations of investments that may pose a significant risk to safety and soundness. Our examiners will be working with the management of these credit unions to ensure that sound investment policies and adequate asset-liability management (ALM) planning are in place. It is apparent that credit unions who hold CMOs and REMICs often do not hay ·a clear understanding of the requirements for testing and periodic retesting. Furthermore, many credit unions fail to understand what NCUA expects therr do when the investments fail one or more parts of the high-risk securities te (HRST). 49 ENCLOSURE X ENCLOSURE X Part 703.5(g)(1) of the NCUA Rules and Regulations prohibits federal credit unions from purchasing fixed-rate CMOs or REMICs that fail any one of the three parts of the HRST, which are: · Average Life Test, * Average-Life Sensivity Test, and · Price Sensitivity Test. These tests must be applied not only at the time of purchase, but also periodically after purchase. If a security fails any one of the three parts of the HRST, divestiture may be required. These cases will be reviewed by our examiners on an individual basis. In addition, Part 703.5() requires that the Price Sensifvity Test be applied to floating or adjustable rate CMOs or REMICs. For Federally Insured State Credit Unions, CMOs/REMICs that fail one or more parts of the high-risk securities test (HRST) are non-conforming investments that require the establishment of a special reserve as required by Section 741.9(a)(3). If your credit union finds that it is holding securities that fail one or more parts of the HRST, you should immediately dispose of them or. within five business days of discovery, develop and submit to NCUA a written action plan that at a minimum includes: * an ALM modeling.analysis that demonstrates the impact that both holding and selling the failed instruments will have on earnings, liquidity and capital; * evidence of the credit union's ability to hold the failed instrument(s) and manage the risks under +(-) 300 basis points interest rate shocks; * an individual dollar loss figure for each failed security that will trigger their sale; * a monthly log of market bids offered for the failed securities; and * a monthly monitoring process to evaluate the stress test results for all CMOs and REMICs. In failed CMO and REMIC cases, NCUA examiners will assess the credit unir action plans. This assessment will consider the reasonableness of the plan the credit union's ability to manage the balance sheet risk. Specific factors examiners will focus on will be the ability of the credit union officials to: * satisfactorily explain the securities characteristics and risks to the ew * obtain and adequately evaluate the security's market pricing, cash' ·test modeling; 50 ENCLOSURE X ENCLOSURE X ·.define, explain and document how the failed securities fit into the credit union's ALM strategy; · analyze the impact that either holding or selling the failed securities will have on earnings, liquidity and capital indifferent interest rate scenarios; and · demonstrate the likelihood that the failed securities may again pass the high risk security tests at a future date. After a careful review of the above factors, the examiner and the credit union management should be able to agree on whether divestiture isappropriate and necessary. Ifthe examiner does not feel that a suitable action plan has been developed, the credit union will be required to sell the failed CMOs or REMICs in accordance with a written directive which will be given to the credit union by NCUA. NCUA will also propose revisions later this year to Part 703 of the NCUA Rules and Regulations (Investment and Deposit Activities) to update the regulation for the changing environment that exists today in complex investment areas. You will, as always, be given ample opportunity to comment on these proposed changes, and your comments will be carefully considered. Credit unions need to carefully look at all investments; regardless of what they are or who offers them. We also believe that credit unions investing or depositing large amounts in any financial institution should obtain sufficient information about the operational and financial condition of these institutions in order to make informed investment decisions. This includes analyzing the safety of the institution standing behind the investment. Credit union investment policies should include the requirement and the criteria for an evaluation of the risk involved with every type of investment and deposit that the credit union makes. NCUA examiners have been instructed to review each investment a credit union makes to determine its appropriateness in relation to the credit union's overall funds management goals. For the National Credit Union Administration Board, Karl Hoyle Executive Director FCU 3 51 ENCLOSURE XI ENCLOSURE XI EVENTS SURROUNDING THE ALLEGED EXAMINER SOLICITATION OF SUPPORT FOR NCUA-SPONSORED CONFERENCE Through two memorandums dated February 22 and April 30, 1996, Executive Director Hoyle requested and encouraged the regional offices and NCUA examiners to provide active support to the conference. We were told that other conference instructions of Mr. Hoyle's were communicated by voice mail, but we were unable to document them. Through interviews, the six regional directors or their designated associates described to us the support activities in their respective regions. During telephone interviews with five of the six NCUA regions, we found that they engaged in similar types of activities but provided varying levels of support in promoting the conference. Managers from three regions said they promoted the conference during speeches (at industry meetings). Two of the three also said that they promoted the conference by contacting credit union leagues as well as state credit union supervisors. Two of three regions, which reported that they contacted small credit unions, said that they alerted them of the availability of scholarship funds. Examiner involvement in conference activities was an area of concern to NCUA officials from the initial planning stages of the conference. Three of the regional managers indicated that they provided conference materials to their examiners for distribution (to credit unions) at the time of examination. However, these three regions reported that they gave specific instructions or emphasized to their examiners that they were not to solicit (credit unions) for financial donations. The two other regional managers indicated that they were not comfortable with examiner involvement. To insulate their examiners, they did much of the promotional activities themselves. Region VI appears to have been the most active regarding the conference. For example, among the six regions, Region VI was the only one to specifically identify support of the conference in its 1996 annual goals and objectives. As directed by Region VI management in January/February 1996, the region's examiners were to (1) identify credit unions that might require financial or manpower assistance to attend the conference and (2) identify and seek support commitments (financial and/or manpower) from credit unions in the region with assets of $100 million or more. Also, Region VI was the only one in which complainant credit unions were identified to us by name. Four credit unions were so identified, along with three examiners, including one supervisory examiner said to have been involved in their solicitation. Some of the credit unions expressed discomfort; and concern about NCUA examiner solicitation. Similarly, the examiners expressed discomfort at being put in this position. 52 ENCLOSURE XI ENCLOSURE XI NCUA management became concerned about press reports of inappropriate examiner solicitations being made. Responding to this concern and the request for guidance concerning examiner conference activities, on March 21, 1996, NCUA Ethics Officer, James Engel, drafted a memorandum to all examiners noting complaints about the promotional appeals and providing strict constraints on promotional activities of examiners. This memorandum was not accepted by Mr. Hoyle or issued to examiner staff. Subsequently, on April 30, 1996, with the ethics officer's approval, Mr. Hoyle issued a memorandum to all regional directors requesting continued distribution of conference materials and encouraging staff to promote credit union attendance. Regarding fundraising, the memorandum stated that "under no circumstances should contributions to the scholarship program be requested." Although Mr. Hoyle's instructions to the regions were less restrictive than Mr. Engel's draft examiner guidance proposal, the prohibition against soliciting donations was emphasized. Also, the memorandum instructed that matters concerning contributions or scholarships were to be referred to the National Association of Credit Union Chairmen. According to the Region VI management, Mr. Hoyle's memorandum constituted the first written directions received for making the promotional contacts concerning the conference. However, the memorandum was written over a month after (1) the examiners had been told to cease their promotional contacts and (2) regional conference attendance/scholarship information had been reported to the NCUA Office of Community Development Credit Unions. In an April 16, 1996, letter to the Hawaii Credit Union League, Chairman D'Amours indicated that NCUA had heard of some complaints about implied pressure by NCUA examiners, calling the charges inaccurate. According to Messrs. D'Amours, Hoyle, and Engel, they contacted some of the third parties who had forwarded complaints and asked for but were not given the names of the credit unions making the complaints. Mr. Swan, Ms. Bown6, and others stated that the sources who had confided in them did not wish to go public, fearing NCUA retaliation. Similarly, press reports indicating examiner solicitation for contributions in NCUA Region V did not result in identified complainant credit unions. Consequently, no further action was taken. 53 ENCLOSURE XII ENCLOSURE XII COMMENTS FROM NCUA BOARD CHAIRMAN National Credit Union Administration fefrofth Chairman February 28. 1997 Thomas J. McCool Associate Director. Financial Institutions and Market Issues United States General Accounting Office Washington, D.C. 20548 Deor Mr. McCool: Thank you for the opportunity to comment on your report on algations made by former National Credit Union Administration Board Member Robert H. Swan about management prcties at the NCUA. I appreciate your staffs professionalism and the many months of hard work that have gone int this report While I welcome your conclusion that neither individual NCUA Board members nor NCUA staff acted illegally while conducting agency business, I do not agree with every aspect of the report For exanmpl, I disagree with your suggestion that the events described in the report may have dininihed the effctiveness of NCUA board members It is important to stress the responsibility of each board member to fully participate in the afrai of the agency and to take an active rcle in requesting the information needed to prperly dicarge thWir responsibi'lies. Parts of the report suggest an overall lack of collegiality' that might be consrued as attributable to management prctices of the Chairman and Executive Director. Wlthout discounting any possibiity, I believe that in the interest of belaSc, another possible impediment to collegiality should be noted. Upon joining NCUA as Chaiban of the Board, I sought to effbctuate a better separtion between the Agency and industry tade-groups. The NCUA Board under my Chairmuhip began to address needed regulatoy chnges the many felt wer long ovrdue in order to strngthe the safety and soundne of both corporate and natural person creadit union. These regulawy changes were passed by a majority of the Board and occasioned a strongly vitupram raction from some trade group and Industy leaders. Mr. Swan corniulndy pposrd regtory changes intended to weaken Vade group control of 'In bfr.t o(he 350 BSod _am tan diSu thmeme coveed by the rpmrn.the vow w bum 93% of t ' Oflthl am wme n unaa Mr.D'Aminlwmw tmmiy Mn o m. In oan Mr. Swe m An. ino*ty 4f%of tdhfa 54 ENCLOSURE XII ENCLOSURE XII Thomas J. MeCool February 28. 1997 Page 2 corporate credit unions 2, the conservatorship of Cap Corp and sale of its investments3. and proposed amendments to NCUA's corporate credit union regulation. Mr. Swan's speech to the Virginia Credit Union League, noted in the report. was only one symptom of the depth and pervasiveness of the invidious reaction to these reasonable Board initiatives. In your report you determined that NCUA staff did not make policy but simply implemented policies established by the NCUA Board. I agree there is a fine line between policymaking and policy implementation and will continue to strive to ensure that the line is not crossed. However, In one particular instance addressed on pages 2 and 3 of Enlosure VII and involving credit union mergers, actions by NCUA staff clearly did not circumvent Board policy, notwithstanding any contrary inference. While Board mambers did disagree on interpretation of merger criteria. action by NCUA staff did not change those criteria. The memorandum regarding central office review of merger proposals of healthy credit unions. which was reviewed for legal ramifications and approved by NCUA's General Counsel. did not involve establishing new criteria for approving mergers. Rather. it established standards by which the Chairman would exercise his properly delegated authority to detenmine whether certain mergers would be scheduled for considertion by the full NCUA Board. The NCUA General Counsel agreed with and gave express approval of the Chairman's and staffs actions with regard to the memorandum. I agre with your finding that NCUA's sponsorship and promotion of a conference to see the underserved was proper and legal. I also agree with your finding that NCUA should have provided more detailed and timely written instuctions to regional staff concerning NCUA's proper role in supporting the conference. We appreciate and will folow this advice should we sponsor or promote similar conferences in e future. I remain personally unaware of any improper solcitaons by staff conrning the undaserved conference. Enosure II sets forth the questions the House Banking Subcommittee asked GAO to inivegate. It is clear from a careful reading of your report thea the answer to each quedon I 'no or a qualied 'no", but to the casua reader, It might not be so apparent. I suggst that you set forth the answers to each question in the enclosure to provide greate caiy. "Tb1 pause fir hfmul caffias of lat ws nead in GAO's 199IImer Qse" wisingimrns Iisr cA.sodal ,if,,e ~ fe ;,iktf Psm amn_ (pagam 153. 154). GAOkm Ised. a fou I in mdosel V t e draft tropr. di CApital Coapson's CMO esssin were _smwe riyr&ym impnkpm far hme insealumoi to hIM 55 ENCLOSURE XII ENCLOSURE XII Thomas J. McCool February 28 . 1997 Page 3 One could quibble with some of the wording and opinions expressed in your report, but considering the important challenges facing credit unions. I believe it would not be in the best interests of NCUA or the credit union system to rehash discredited allegations. As a final comment on the report. there are a limited number of instances of what are, in my view. factual errors or omissions. These points are addressed in an enclosure to this letter. Again, notwithstanding these concerns about the report, I appreciate its professionalismrn and the opportunity to comment. I hope that Former Board Member Swan's allegations are finally put to rest, and that this report will enhance NCUA's effectiveness as a federal financial regulator. Sincerely. Norman E. D'Amours Chairman, NCUA Board Enclosure 56 ENCLOSURE XIII ENCLOSURE XIII COMMENTS FROM NCUA BOARD VICE CHAIRMAN National Credit Union Administration March 14, 1997 Office of the Vice Chairman Mr. Thomas J. McCool Associate Director, Financial Institutions and Market Issues United States General Accounting Office Washington, D.C. 20548 Dear Mr. McCool: ThanL you for your letter.of February 13,1997, and for sharing with me a draft of the, GAIOs response to. Chairman Bachus. I appreciate the - opportunity to comment-on this draft and have chosen to do so in writing. I apologize for the delay in my response but a family illness required my attention. The following are my comments on sections in the order they appear in the draft. Letter Page Regarding flow of information between NCUA staff and Board Members, the report states that the Chairman and Mr. Hoyle contend that senior staff responded to every request and were free to contact Board Members. As I explained during several interviews, from my perspective a communications problem did develop in this agency. Whereas there had been a free flow of information between senior staff and my office, it became necessary for my executive assistant and me to seek information from these same staffpeople. It is the responsibility of senior level employees to keep all Board Members fully informed on pertinent issues; at their level they understand pertinent issues and it is not a defense that the Board Member didn't make a request or 'ask the right question." (The report acknowledges the changes in commumcation on Page 7.) The report concludes that controls placed on the information flow to Board Members (with regard to Cap Corp) do not appear to have violated the Act. This Board manages the agency. Therefore, any controls that explicitly or implicitly restrict flow of information inhibit that Board Member's ability to perform the duties required by the Act. 1775 Duke Street v.etandria, VA 22314-3428 - 703-518-6300 57 ENCLOSURE XIII ENCLOSURE XIII Mr. Thomas J. McCool March 14, 1997 Page 2 Further, while the Chairman dearly has additional duties, the Board Members share equal responsibility in setting policy and that responsibility is, without question, hampered when critical information is tampered with in any way. Further, the Act gives the Chairman, and certainly not a staff member, no authority over the actions of a Board Member. Mr. Hoyle's suspicion that information was improperly divulged was insufficient justification for See conunent 1. improperly withholding information from the Board. If he had a concern, the proper course of action was to bring that concern to the full Board. All of this was discussed in some, if not all, of the interviews with See comment 2. I felt some frustration from these interviews because it seemed that: held some strong opinions of his own, about the staff role at NCUA. He appeared defensive for staff and argumentative on their behalf. Although he was not hostile or uncivil with these arguments, it seemed that he was opinionated and lacked the objectivity I would have thought appropriate for an investigator. Letter PaMe , Regarding the agenda rule. Apparently there was some misunderstanding regarding my concerns and the actions taken. My proposal would have allowed any one Board Member to submit an agenda item and have that item considered by the Board at a regular meeting. Furthermore, under current :regulations, any Board Member can request a special meeting and the Chairman must call such a meeting. However, there is no time constraint on the Chairman and an issue could become moot before a special meeting takes place. My proposal also would have required a special meeting be held no later than ten days from the date of the request. The action taken on October 16, 1996, regarding the agenda was passed by a majority of the Board. ryve no quarrel with that. However, I was disappointed in the staff work for this issue. I had requested the item by See comment 3. submitting a B-1 and had offered the proposal described above. The staff brought to the Board and recommended the proposal that passed. Staff did not include as an option at the board meeting my proposal. I expect staff to provide the full Board with any options a Board Member feels appropriate to be considered, on any issue. 58 ENCLOSURE XIII ENCLOSURE XII Mr. Thomas J. McCool March 14, 1997 Page 3 Enclosure IV Pare I- The letter states: 'Ms. Bown6 cited two instances where she believed that she was denied information." The first instance is described incorrectly. Actually, this information had to do with the need to place an item on the agenda. A major corporate credit union had been without a permanent CEO for some time. Due to the CAMEL rating which resulted partially from the lack of a CEO, NCUA had to approve the selection. Three names were submitted. I learned from the NCUA reading file that one ie comment 4. name had been approved and no mention was made of the other two. The corporate's board went forward in their attempt to hire the person approved. I inquired from the Director of the Office of Corporate Credit Unions what problems he found with the other two and advised him that he was required to notify the corporate of those findings. I was told that no problems were found and that it was his intent to "later" o.k. them. I told him that the Board was justified in assuming the other two were not approved. The person approved declined the job. (This occurred in August of 1995.) The corporate's board submitted another name, a former NCUA employee. The Director of the Office of Corporate Credit Unions prepared and signed a letter that in my view was inaccurate and irresponsible. I learned of this letter from a source outside NCUA and at this time cannot remember the source. However, once having learned of it I questioned both Mr. Carver (Director of OCCU) and Mr. Hoyle. I was told that the letter was not actually sent to the corporate. However, I do know that it received some circulation outside the agency. I was concerned about this staff conduct, especially in view of the size and importanci the corporate. I asked the Chairman, based on these concerns, to bring the issue of a CEO for the corporate to the Board. He refused. His view was that he had total control over the agenda. General Counsel gave a verbal opinion that the Chairman had total control. He later gave a written opinion that differed, which I believe is in your files. The issue of the corporate CEO then became moot, because the Director of OCCU apparently faxed a letter to the corporate approving one of the names from the previous list and the corporate in turn faxed a response withdrawing the name of the former NCUA employee. 59 ENCLOSURE XIIIENCLOSURE XIII Mr. Thomas J. McCool March 14, 1997 Page 4 (All three letters: the two page letter on the former NCUA employee, the letter accepting a name from the previous list, the response letter withdrawing the name of the former NCUA employee were dated November 15, 1995.) Even though I had expressed concern on the issue when I learned of the content of the denial letter for the former NCUA employee, the other letters and the information therein were not made available to me until I learned of the action and asked for the letters. Again, this was all discussed previously with GAO. Enclosure VII Page 1- The statement: "Vice Chairman Bown6 also disagreed with certain aspects of the conservatorship, although she voted in See comment 5. favor of taking that step at the January 3, 1995, NCUA Board meeting." I don't know how the writer came to this conclusion. (Possibly this has been confused with my vote on the first corporate proposal.) The statement: "She said she could not obtain information about the conservatorship once it had been established by the NCUA Board." I don't remember that statement. We did talk about the informality of information due to the staffs work load and long hours. Also, we discussed the fact that I did not know that a Board had been formed at staff level, or that minutes were being kept, etc. The statement: "The Board minutes did not reflect a detailed discussion of the conservator's plan to substantially liquidate Cap Corp's investment portfolio. However, such a plan might reasonably have been anticipated in view of the fact that other options to rescue Cap Corp, considered by the See comment 6. NCUA staff and the Board during the 60-day moratorium, had not been accepted or supported by the Board at that time." I strongly disagree with that assumption on the part of GAO staff. 60 ENCLOSURE XIII ENCLOSURE XIII Mr. Thomas J. McCool March 14, 1997 Page 5 The following are part of the minutes of the January 31, 1995, Board Meeting. "Chairman D'Amours clarified that the Agency has been working from the very beginning to avoid liquidation. Mr. Carver agreed. The Chairman inquired whether this had been clearly communicated to everyone; i.e., that liquidation still remains the last option. Mr. Carver responded affirmatively." Statements repeatedly made by Chairman D'Amours, Karl Hoyle, and Allen ee comment 7. Carver to the Bachus committee staff conflict with D'Amours statement at the January 31, 1995, NCUA Board Meeting. I believe your staff had access to these minutes. Enclosure VII Pare 3- Regarding Mr. Hoyle's memorandum on mergers, you state, 'As of September 1996, according to Mr. Hoyle, no proposed mergers had been forwarded to him for review under the requirements of his memorandum.' As previously noted to your staff, we were told by regional staff that merger applications were sent to Mr. Hoyle. In addition, I believe the mere existence of this memorandum affected the work of regional staff on mergers. Moreover, the memorandum was sent in the aftermath of the proposed Patelco-First Technology-Seattle Telco merger controversy. Enclosure V/IPoe 4- Regarding Letter 169, the report states that it was acceptable to me. However, as I previously advised your staff, the letter was very technical. I questioned E&I staff on whether this made any changes and whether it implemented any of the proposed changes to 703. I was ee comment 8. assured the letter did not. When I began to receive comments from the industry and'again questioned, I was again assured this was not the case. Enclosure VII Pane 4- Regarding the CAMEL rating for one corporate, the report mentions three delegations. I want to clarify two of them. The Board had delegated to the Chairman the authority to bar the exercise of any delegation generally, not only regarding examination of corporate credit unions. The Board had not delegated to the Chairman the authority to approve the final agenda for Board meetings. A previous Board had done this by regulation. 61 ENCLOSURE XI ENCLOSURE XI Mr. Thomas J. McCool March 14, 1997 Page 6 Again, thank you for the opportunity to comment. If you have any questions, please contact me. Sincerely, BownhireB Vice Chairman 62 ENCLOSURE XIII ENCLOSURE XIII COMMENTS FROM NCUA BOARD VICE CHAIRMAN The following comments represent our response to Vice Chairman Bown6's comments made on a draft of this letter on March 14, 1997. GAO COMMENTS 1. Ms. Bown6 expressed concern that restrictions on the flow of information to Board members, tampering with critical information, and withholding information from the members inhibited the Board's ability to execute its duties under the act. She did not specifically disagree with our conclusion that controls on the distribution of information did not violate the act. As discussed on page 5, we were unable to corroborate Ms. Bown6's allegations that she had been denied information and do not believe that the controls on information flow violated the act. We agree, however, that Board members should be entitled to all information relating to agency business. 2. Ms. Bown6 raised an issue concerning the way in which our review was conducted. Our work was conducted in accordance with generally accepted government auditing standards. These standards include systematic supervisory review of work while it is underway and of the completed product. On that basis we have assured ourselves that our standards were appropriately met. 3. Ms. Bown6 was disappointed that the NCUA staff had not offered to the Board her proposal regarding the submission of agenda items and the timing of a special meeting. She stated that the staff brought to the Board and recommended only the proposal that was passed. Ms. Bown6 told us that the staff did not include her proposal as an option. We discuss the issue of the Chairman's control of the agenda on page 6. Also, we amplified our discussion of Ms. Bowne's proposed rule and the changed agenda rule. 4. Ms. Bown6 commented that our first example of her being denied information (noted on p. 19, enc. IV) was described incorrectly and that this information had to do with the need to place an item on the agenda. In separate interviews on June 24 and November 5, 1996, Ms. Bown6 cited this instance (the consideration of three candidates for the presidency of a credit union) in which she believed she had been denied information. While this example may also be a related agenda issue, we have characterized it as an information issue based on our discussions with her. 63 ENCLOSURE XIII ENCLOSURE XIII 5. Ms. Bown6 did not understand our original characterization that she disagreed with certain aspects of the conservatorship although she had voted for it. We changed our discussion to include the fact that the minutes of the January 31, 1995, Board meeting show that Vice Chairman Bown6 voted in favor of the conservatorship. Nevertheless, she was not entirely comfortable with all aspects of how it was handled. 6. On page 24 of enclosure VII, we state that "The Board minutes did not reflect a detailed discussion of the conservator's plan to substantially liquidate Cap Corp's investment portfolio. We further state that "such a plan might reasonably have been anticipated in view of the fact that other options to rescue Cap Corp, considered by the NCUA staff and the Board during the 60-day moratorium, had not been accepted or supported by the Board at that time." Ms. Bown6 strongly disagreed with our latter statement, and pointed out that the minutes of the January 31, 1995, Board meeting showed that "Chairman D'Amours clarified that the Agency has been working from the very beginning to avoid liquidation." We interpret statements made by Chairman D'Amours in the Board minutes quoted by Ms. Bown6 as relating to the liquidation of Cap Corp itself and not the liquidation of Cap Corp's portfolio. Regardless of the ultimate form of resolution of Cap Corp itself, weaknesses in the investment portfolio required that it be substantially liquidated. 7. The Vice Chairman wrote that statements repeatedly made by Chairman D'Amours, Karl Hoyle, and Allen Carver to the Bachus committee staff, conflict with Mr. D'Amours statement at the January 31, 1995, NCUA Board meeting. We have no information about any statements made to the Bachus committee staff on this point. 8. Ms. Bown6 makes reference to our statement on page 27, enclosure VII, that Letter No. 169 was acceptable to her. She does not dispute her original agreement with Letter 169. However, Ms. Bown6 points out that she had a number of questions relative to the technical complexity of the issues raised. 64 ENCLOSURE XIV ENCLOSURE XIV MAJOR CONTRIBUTORS TO THIS LETTER GENERAL GOVERNMENT DIVISION. WASHINGTON. D. C. Lawrence D. Cluff, Assistant Director, Financial Institutions and Markets Issues Charles M. Roberts, Evaluator-in-Charge Marion L. Pitts, Senior Evaluator Thelma A. Jones, Writer Editor OFFICE OF SPECIAL INVESTIGATIONS, WASHINGTON. D. C. Donald Fulwider, Deputy Director for Investigations Barney Gomez, Assistant Director for General Crimes Kevin P. Craddock, Special Agent OFFICE OF THE GENERAL COUNSEL. WASHINGTON. D.C. Paul G. Thompson, Attorney Advisor (233502) 65
Allegations of Improper Management Practices at NCUA
Published by the Government Accountability Office on 1997-04-08.
Below is a raw (and likely hideous) rendition of the original report. (PDF)