Involuntary Liquidations - NCUA's Enforcement Manual

Credit Union Regulatory Guidance Including: NCUA, CFPB, FDIC, OCC, FFIEC

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Hello, this is Samantha Shares. This episode covers N C U A’s authority to Involuntarily Liquidate a Credit Union.

The following is an audio version of N.C.U.A.’s Liquidation authorities. This podcast is educational and is not legal advice. We are sponsored by Credit Union Exam Solutions Incorporated, whose team has over two hundred and Forty years of National Credit Union Administration experience. We assist our clients with N C U A so they save time and money. If you are worried about a recent, upcoming or in process N C U A examination, reach out to learn how they can assist at Mark Treichel DOT COM. Also check out our other podcast called With Flying Colors where we provide tips on how to achieve success with N C U A.

And now liquidations.

INVOLUNTARY LIQUIDATIONS

1. What is the purpose of this chapter?

This chapter provides guidance in processing involuntary liquidations.

2. What are the types of involuntary liquidations?

a. Title I involuntary

Undersection120 of the FCU Act, 12 U.S.C. section1766, the NCUA Board can place a solvent federal credit union into involuntary liquidation for violations of its charter, its bylaws, the FCU Act, or the NCUA Rules and Regulations. Also, under section120, 12 U.S.C. section1766, the NCUA Board can place a federal credit union into involuntary liquidation upon finding that the board or liquidating agent did not conduct a voluntary liquidation in an orderly or efficient manner or in the best interests of the members.

The rules and regulations relating to these administrative proceedings are contained in NCUA Rules and Regulations section747, Subpart E. The effect of this action is the elimination of a federal credit union as a legal entity after due process provided for by section120(b) of the FCU Act, 12 U.S.C. section1766, and Part 747, Subpart E, of the NCUA Rules and Regulations. It is the most drastic enforcement action that can be taken against a solvent federal credit union.

Since Title I liquidation is not a commonly used administrative action, examiner involvement will differ from case-to-case.

b. Title II involuntary

Section 207 of the FCU Act, 12 U.S.C. section1787, requires the NCUA Board to close for liquidation any federal credit union it deems bankrupt or insolvent. In these cases, the NCUA Board must also appoint itself as liquidating agent. In addition, the NCUA

Board can accept appointment as liquidating agent of a bankrupt or insolvent federally-insured, state-chartered credit union.

c. Purchase and assumption

A purchase and assumption (P&A) is an action similar to a merger, but unlike a merger the NCUA Board places the credit union into involuntary liquidation first. In a P&A, another credit union or another financial institution assumes all or part of the assets, liabilities, and shares.

3. What are the goals for an involuntary liquidation?

The primary goals of an involuntary liquidation are:

► Prompt return of members' shares.

► Payment to the creditors.

► Disposition of the remaining assets to the NCUSIF.

4. What are the grounds for an involuntary liquidation of an insolvent credit union pursuant to section207 of FCU Act?

The grounds for this most severe action is insolvency or bankruptcy as defined in

section700.2(e) of NCUA Rules and Regulations.

For a liquidation pursuant to section207, 12 U.S.C. 1787, of the FCU Act, the credit union has no right to a pre-closure administrative hearing. The federal credit union's charter is immediately revoked and the credit union is placed into involuntary liquidation. The credit union may, however, challenge the action in U.S. District Court within 10 days. It is critical, therefore, that the finding of insolvency be based upon tangible evidence and indisputable circumstances using the most current information available.

The examiner prepares a supplemental memorandum for the liquidation package that contains all significant data to support the recommended action, including an analysis of the various exceptions to insolvency set forth in section700.2(e) of the regulations. It is imperative that the administrative record adequately supports insolvency. The examiner must be prepared to testify in court to establish the reasonableness of the insolvency calculation. For this reason, involuntary liquidations require the concurrence of the Office of General Counsel to ensure that the liquidation package is legally sufficient.

A Notice of Revocation of Charter and Involuntary Liquidation and Appointment of a Liquidating Agent will be served on the federal credit union. The order is effective immediately upon service, and all assets, books and records of the credit union immediately become the property of the NCUA. Agents for the Liquidating Agent will be appointed as provided in section207(a) of the FCU Act, 12 U.S.C. section1787.

5. What are the grounds for an involuntary liquidation of a solvent credit union?

Pursuant to the authority in section120(b)(1) of the FCU Act, 12 U.S.C. section1766(b)(1), the NCUA Board may suspend or revoke the charter of a federal credit union that has violated any provision of its charter, its bylaws, the FCU Act, or NCUA regulations. This type of action may also be taken for reasons of bankruptcy, but generally liquidation of insolvent credit unions are initiated under section207 of the FCU Act, 12 U.S.C. section1787.

Examples of conditions that may warrant recommending revocation of charter in a solvent credit union include:

► Abandonment of the credit union's operations and affairs by the officials.

► Plant closing and officials refusing to vote to present the question of liquidation to the members. Such plant closing may force insolvency under the concept of an ongoing concern, or may cause a dissipation of the assets and expose the creditors and the NCUSIF to a greater than normal risk.

► Other specific serious violations of its charter, its bylaws, the FCU Act, or regulations that cannot be reversed and that may cause insolvency.

► Serious operational deficiencies that the officials have not acted to correct and which, if allowed to continue, may cause insolvency.

Abandonment shall be deemed to have occurred when all or most of the elected and the appointed officials have demonstrated by their actions, or failure to act, an intent to end operations. Proof is evidenced when an active quorum cannot or will not be formed by the remaining officials.

The examiner recommends a Notice of Intent to Revoke Charter whenever the timeframe for due process will not create a greater risk of loss to the members, the creditors, and the NCUSIF than exists at the time of the recommendation. The examiner should be aware that the credit union will continue ...