oversight

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)

  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
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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

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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
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 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.

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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.)




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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.)



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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.

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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

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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.



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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").

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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