Upon Further Review, The Lawsuit Stands

March 4, 2015 at 8:22 am Leave a comment

With apologies to those of you who have the temerity to consider football boring, yesterday afternoon the credit union industry was granted the legal equivalent of a referee reversing his call based on an instant replay review. Not just any ruling, instead of the game being over, NCUA can continue to fight to reclaim funds on behalf of credit unions.

Specifically, I am referring to a ruling by the Court of Appeals for the 10th Circuit which revived a lawsuit NCUA brought against Barclays Capital, Inc. seeking more than half a billion dollars for the role it played in issuing mortgage-backed securities sold to the now defunct U.S. Central Federal Credit Union and Western Corporate Federal Credit Union. NCUA is essentially claiming that the bank violated security laws by failing to accurately disclose the quality of mortgages in mortgage-backed-securities purchased by these entities. As you all remember, these and other securities tumbled in value in less time than it took House Republicans to demonstrate that they still don’t know how to govern.

If successful, NCUA would use these funds to offset credit union premiums paid into the Temporary Credit Union Stabilization Fund. All this is a rather long winded way of saying that the success of this and other lawsuits could directly impact your credit union’s bottom line.

Things looked bleak for the home team until recently. Barlays successfully argued in federal district court in Kansas that NCUA waited too long to bring its lawsuit. The court ruled that NCUA only had three years from the date it was appointed Conservator in 2009 to bring a lawsuit. Yesterday’s ruling reverses that decision. It increases the likelihood that, barring a successful appeal by the bank to the Supreme Court, Barclays will ultimately agree to settle up with NCUA.

I’ll save you most of the gory legal details – if you really want to know the difference between a statute of limitations and a statute of repose, I’ve included a link to the decision. Suffice it to say that NCUA’s lawsuit was saved because the court ruled that Barclays lawyers had to honor a pledge not to challenge NCUA’s right to bring the lawsuit after three years had passed.

What is a Complex Credit Union, Anyway?

In its revised Risk-Based Capital Proposal, NCUA broached the idea that more than asset size be used to determine whether a credit union is complex and therefore should be subject to the enhanced RBC framework. I’ve always been frustrated that the industry throws around terms such as systemic risk without actually trying to define what that means in the context of the credit union industry. In her speech last night, Federal Reserve Board Chair Janet Yellen provided an overview of the Fed’s efforts to regulate the truly systemically important financial institutions. She defined large institutions for regulatory purposes very simply as “those firms whose distress would pose significant risk to financial stability.”

Why do I like this definition? Because NCUA has implicitly decided to define financial risk as any risk that could cause a loss to the Share Insurance Fund. In contrast, if it only concentrated on the relative handful of credit unions whose downfall could materially impact the entire industry, an RBC framework could be devised with a much higher compliance threshold, a much more sophisticated RBC framework, and potentially greater flexibility for the credit unions subject to its oversight. I know this won’t happen, but hey, I can dream.

Sign Up Time for the J. Mark McWatters Show

For those of you who want to take advantage of NCUA’s decision to enter the 21st Century and simulcast its board meetings over the Internet, NCUA has posted a sign up link for the March Board Meeting to its website. Given the combative stance taken by newest board member McWatters, this might actually be entertaining. I’m actually considering pitching a Cross-Fire like show to CSPAN that would feature the arch-conservative McWatters debating financial regulation with everyone favorite bank-bashing liberal, Massachusetts Senator Elizabeth Warren or maybe a “Big Brother” show in which the two have to live in the same house with each other and debate the morning news over breakfast. For the political geek set, this could be reality TV at its best.

Enjoy your day, they tell me that the weather is supposed to get nice any day now.

Entry filed under: Compliance, Legal Watch, Regulatory. Tags: , , , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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