UNITED STATES OF AMERICA
BEFORE THE NATIONAL CREDIT UNION ADMINISTRATION
In the Matter of
XXXX
FEDERAL CREDIT UNION
Charter Appeal
Docket No. BD-01-24
Decision and Order on Appeal
Decision
This matter comes before the National Credit Union Administration Board (Board) as an administrative appeal under 12 C.F.R. Part 746, Subpart B. The appeal concerns the determination by the Director of the Office of Credit Union Resources and Expansion (CURE) to deny the application for a federal charter for proposed XXXX Federal Credit Union (XXXX).
Background
XXXX, organizer for XXXX (Petitioner), is appealing the decision by CURE to deny his application for a federal charter for XXXX to serve a community field of membership (FOM) composed of the cities of XXX, XXX, and XXX, all three of which are located within XXXX, XXXX. The proposed FOM has a population of approximately XXXX people. XXXX’s proposed FOM was preliminarily approved on July 27, 2022.
On March 13, 2023, Petitioner submitted a charter application for XXXX to serve “persons who live, work, worship, attend school, and businesses and other legal entities located in the cities of XXXX, XXXX, or XXXX, XXXX.” Petitioner’s application identified XXXX (XXXX), and XXXX (XXXX) as XXXX’s funding sources, with donations of $XXXX and $XXXX, respectively.
After a review of Petitioner’s charter application, business plan, goals, planned services to the proposed field of membership, the sufficiency of the startup capital, including the funding sources, results of background investigations, and other publicly available information regarding the proposed sponsors and officials and related individuals and entities, CURE denied the application in a letter dated October 30, 2023 (Denial Letter).
The Denial Letter noted that “[w]hile [XXXX’s] charter application does not address it, based on our investigation we believe XXXX is inextricably connected to the XXXX (XXXX), which is also known as XXXX, XXXX, XXXX, XXXX, among other names.” The Denial Letter noted that pervasive negative news coverage about allegations of illegal activities involving XXXX or its members “have been widely publicized and impose a cloud of notoriety over the parties alleged to have been involved.” CURE determined that “the connection between these entities poses several risks to the success of XXXX, and the failure of the application package to anticipate and address these risks raises a question about the skills and abilities of the organizers, proposed management and officials.”
CURE cited three primary reasons for its denial:
- XXXX’s association with sponsor XXXX. and other associated entities poses reputation risks that threaten its economic advisability, and
- XXXX has not shown it has reliable future sponsor support, which calls into question its economic advisability and increases the risk that it will fall into an unsafe and unsound condition, and
- The failure of XXXX’s application and related materials to address the above risks, calls into question the fitness of the proposed sponsors and management of XXXX.
CURE concluded that, “[a]ltogether, these conditions involve undue risk to the NCUSIF,” and denied the application for a federal charter for XXXX.
Petitioner requested reconsideration of CURE’s initial denial in a letter dated November 28, 2023. In support of the request, Petitioner argued that CURE’s denial made findings “based on poor or false information,” and that it is illegal and unconstitutional to “assume future guilt of other parties because of their association with a particular group or ethnicity.” After reviewing the reconsideration request, CURE “found no basis or evidence to support a reversal of the decision to deny [Petitioner’s] application.” Therefore, in a letter dated December 14, 2023 (Reconsideration Decision), CURE affirmed its initial denial.
Pursuant to Subpart B of Part 746 of the NCUA’s regulations, Petitioner is seeking the Board’s administrative review of CURE’s determination. Petitioner did not request an oral hearing on the matter; thus, the Board has reviewed and determined the appeal based on the written record.1
In support of the appeal, Petitioner alleges two primary errors in CURE’s denial. First, Petitioner argues that there is no reputation risk and CURE’s decision is arbitrary and capricious because it was based on impermissible hearsay and an imposition of guilt by association. Second, Petitioner argues that CURE’s determination was based on impermissible inference stacking without due consideration of the reasonableness of those inferences.
Issue on Appeal
The issue before the Board in this appeal is whether CURE’s decision to deny XXXX’s charter application is adequately reasoned and supported.
Legal Standards
Administrative review of an initial agency determination
Subpart B of Part 746 provides that within 60 calendar days of the date of an initial agency determination or, as applicable, a determination by the program office on any request for reconsideration, a petitioner may file an appeal seeking review of the determination by the Board.2 After receipt of a timely appeal, the Special Counsel will conduct a de novo review of all pertinent materials and records from the relevant NCUA program office having a bearing on the initial agency determination being appealed. The Special Counsel will conduct an independent review of these materials, along with all materials submitted by the petitioner in support of the appeal and make a recommendation to the Board as to the appropriate disposition of the appeal.3 Within 90 calendar days from the date of receipt of an appeal, or within any extension of time as established by the Chairman, the Board must issue a decision stating its reasons for allowing, in whole or in part, or disallowing the petitioner's appeal. The Board’s written decision constitutes a final agency action4 for purposes of judicial review under the Administrative Procedure Act (APA).5 The burden of proof to lead the Board to modify or reverse an initial agency determination rests solely upon the petitioner.6
Federal Credit Union Act
Section 104 of the Federal Credit Union Act (FCU Act) requires that “[b]efore any organization certificate is approved, an appropriate investigation shall be made for the purpose of determining: (1) whether the organization certificate conforms to the provisions of this chapter; (2) the general character and fitness of the subscribers thereto; and (3) the economic advisability of establishing the proposed Federal credit union.”7
Section 201 of the FCU Act requires that before approving the application of any credit union for insurance of its member accounts, the Board must consider: (1) the history, financial condition, and management policies of the applicant; (2) the economic advisability of insuring the applicant without undue risk of the National Credit Union Share Insurance Fund (Fund); (3) the general character and fitness of the applicant's management; (4) the convenience and needs of the members to be served by the applicant; and (5) whether the applicant is a cooperative association organized for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes.8
Section 201 further requires that the “Board shall disapprove the application of any credit union for insurance of its member accounts if it finds that its reserves are inadequate, that its financial condition and policies are unsafe or unsound, that its management is unfit, that insurance of its member accounts would otherwise involve undue risk to the Fund, or that its powers and purposes are inconsistent with the promotion of thrift among its members and the creation of a source of credit for provident or productive purposes.”9
Appendix B to Part 701 – Chartering and Field of Membership Manual
The NCUA’s rules concerning chartering, field of membership modifications, and conversions, also known as the Chartering and Field of Membership Manual, are set forth in Appendix B to Part 701 of the NCUA’s regulations (Chartering Manual).10 The Chartering Manual requires that in order to qualify for a federal credit union charter the potential credit union must be economically advisable: “Before chartering a federal credit union, NCUA must be satisfied that the institution will be viable and that it will provide needed services to its members. Economic advisability, which is a key factor in determining whether a potential charter will have a reasonable opportunity to succeed, is essential in order to qualify for a credit union charter.”11 The Chartering Manual stresses that “the success of any credit union depends on: (a) the character and fitness of management; (b) the depth of the members’ support; and (c) present and projected market conditions.”12
Discussion
Based on the Board’s independent review of this case, CURE’s concerns about the economic advisability of XXXX and its potential risk to the Fund are reasonable and supported by the record. A detailed analysis follows.
Reputation risk
CURE explained in the Denial Letter, and again in the Reconsideration Decision, that its denial of Petitioner’s charter application was based largely on XXXX’s heightened reputation risk exposure and the failure of Petitioner to recognize and present a plan or strategy to mitigate this risk exposure.
In his appeal, however, Petitioner argues that there is no reputation risk and CURE’s assessment of XXXX’s risk profile was based on impermissible hearsay and an illegal stacking of inferences that amounts to an unconstitutional imposition of guilt by association.
Petitioner’s characterization of CURE’s finding of reputation risk is not persuasive. In arguing that CURE’s decision was based on an illegal “stacking of irrational inferences,” Petitioner attributes to CURE a series of possible inferences that were nowhere suggested in the Denial Letter. In fact, CURE took particular care to emphasize that its concerns about XXXX’s reputation risk exposure stem from the significant extent of the negative media coverage readily available in the public domain about XXXX’s sponsor, XXXX, and its close association with XXXX and its members, some of whom have gained public notoriety for engaging in alleged illegal fraudulent activities. The Reconsideration Decision succinctly states, “To be clear, our concerns are based on the reputational risks and resulting risks to the NCUSIF posed by the pervasiveness of the negative media coverage cited in the denial letter . . .” (emphasis added).
Petitioner appears to understand that CURE’s fundamental concern is the “pervasiveness” of the adverse media coverage as opposed to any specific facts or allegations underlying that coverage. Petitioner’s own appeal acknowledges that “[i]n large part NCUA does not . . . cite the [news] websites for the truth of the matters they publish, but rather cite[s] the websites for the mere fact of their existence with the inference that it is their bare existence rather than the truth of the matters published that endangers XXXX’s reputation.” (emphasis added). This distinction bears emphasis. Indeed, reputation risk does not stem merely from publicity surrounding proven or corroborated facts, but also from “the potential that negative publicity regarding a credit union’s business practices, whether true or not, will cause a decline in the member base, costly litigation, or revenue reductions.”13
Petitioner seems to recognize the distinction between the “bare existence” of pervasive published news and the truth of the matters published. Yet, he fails in his burden to meaningfully refute the notion that XXXX would face reputation risk exposure due to that existence of pervasive negative news coverage in the public domain.
The negative news coverage is, indeed, pervasive. The Denial Letter references a multitude of news reports about serious allegations of criminal activity involving individuals and entities associated with XXXX’s sponsor groups, including financial fraud, corruption, tax evasion and more. Published over the course of several decades, negative media stories on XXXX and XXXX are readily and widely available in the public domain. Indeed, a quick internet search returns numerous adverse results. Though Petitioner dismisses these ubiquitous reports as “tabloid,” the Denial Letter cites well-researched articles from a diverse variety of reputable media sources including both locally and nationally recognizable media outlets (e.g., XXXX Tribune, Associated Press, XXXX Times, Rolling Stone, The Guardian, U.S. News & World Report, Axios XXXX, Fox XXXX News (XXXX), CBS Mornings, CBS News, XXXX (a XXXX-based CBS Television affiliate), and XXXX). Additionally, the Southern Poverty Law Center designated XXXX as a hate group under the category of “general hate,” a negative label which further enhances the group’s public notoriety.14 This litany of long-standing negative coverage from numerous recognizable, well-established, or popular media outlets with wide distribution, readership or viewership can reasonably be considered “pervasive.” This pervasiveness lends significant credence to the notion that XXXX suffers heightened reputation risk. Petitioner’s failure to meaningfully address CURE’s reasonable concerns about XXXX’s reputation risk exposure demonstrates a reluctance to fully understand, anticipate, and prepare for these risks.
In fact, Petitioner takes the opposite approach and argues that “There Is No Reputational Risk.” Rather, “an association between XXXX and XXXX would virtually assure that XXXX WOULD be an economic success.” In support of this contention, Petitioner cites anecdotal evidence to show that “XXXX’s members have collectively grown dozens of highly successful businesses,” thus, “an association with XXXX not only is not a reputational risk, but rather is a substantial positive factor in the success of a business.” Petitioner explains that “[p]art but not all of the reason for this is that members of XXXX tend to patronize businesses owned and controlled by other XXX members” because XXXX is itself a cooperative and its members are “predisposed to patronize those businesses.” In effect, Petitioner argues there is no reputation risk at all because not only will XXXX’s association with XXXX not deter its membership pool from joining the credit union, but the association will, in fact, encourage membership and aid in XXXX’s success.
While there may be a degree of merit to Petitioner’s argument that XXXX’s widely publicized affiliation with XXXX and XXXX may somewhat benefit its economic viability in one respect, Petitioner overstates this point in claiming there is no reputation risk at all.
XXXX’s FOM comprises the cities of XXXX, XXXX, and XXXX, which encompasses a community with a population of approximately XXXX people. It is a reasonable assumption that at least a subset of potential members in this broad community FOM are not affiliated with XXXX and might be deterred from joining the credit union because of the pervasive negative media coverage of XXXX and XXXX’s association with the group.
Petitioner also fails to acknowledge that reputation risk encompasses more than just potential membership decline. The NCUA Examiner's Guide provides a description of reputation risk:
Reputation risk is the current and prospective risk to earnings or net worth arising from negative public opinion or perception. Reputation risk affects the credit union’s ability to establish new relationships or services, or to continue servicing existing relationships. This risk, which occurs in activities such as asset management decisions and transactions, can expose the credit union to litigation, financial loss, or a decline in membership base. Reputation risk exposure appears throughout the credit union organization. The officials, management, and staff must accept responsibility to exercise an abundance of caution in dealing with members and the community.15
In short, while it may be reasonable to anticipate that XXXX’s publicized affiliation with XXXX may to some degree benefit XXXX’s economic viability by increasing member support among its XXXX membership base, it is equally reasonable to anticipate that the affiliation may deter others within the community based FOM from XXXX membership or otherwise limit XXXX’s membership support. It may also result in litigation and difficulty in procuring services needed to run a viable financial institution. Negative public opinion or perception of XXXX, whether based in truth or not, could adversely affect XXXX’s ability to establish or continue relationships or services with parties outside the FOM or within the broader industry. For instance, third-party vendors, other credit unions, banks or financial institutions, CUSOs, and other businesses and entities providing goods and services vital to credit union operations may be reluctant to do business with XXXX, thereby threatening its economic advisability. For these reasons, CURE’s rational and informed predictive judgment that XXXX faces heightened reputation risk is reasonable and supportable.16
Future sponsor support
The Chartering Manual requires that before the NCUA will issue a new charter, a proposed federal credit union must provide its source of funds to pay expenses during the initial months of operation, including subsidies, assistance, and terms and conditions of such resources.17 It must also provide evidence of sponsor commitment to subsidies that may be critical to the future success of the FCU.18
CURE found that the only transactions showing on the account statements Petitioner submitted for each sponsor were single deposits in the amount of the pledged donations. There was no explanation given as to the sources of the funds deposited to the accounts nor evidence provided to substantiate either XXXX ability to provide critical subsidies to XXXX, if needed. Based on XXXX’s public IRS Form 990, XXXX reported negative net assets in 2020.19
Petitioner’s appeal provides additional information addressing the reliability of XXXX’s financial support from its sponsors, including the respective incorporation dates of XXXX and XXXX, and a general pledge that its sponsors are willing to place the current capital donations into an escrow account that would be available to XXXX immediately upon charter approval.
After a review of the record and the additional information provided in Petitioner’s appeal, it is reasonable to conclude that ongoing sponsor support for XXXX may be unreliable. In his appeal Petitioner provides several abstract assurances that XXXX’s sponsors are strong and have shown continued growth. No documented evidence was submitted to substantiate these testimonial assurances, however. While the current pledged donations may be adequate for start-up, without greater transparency as to the sources of donor funds and the sponsors’ current financial positions, it is difficult to predict the strength of future and ongoing sponsor support for XXXX. Thus, CURE’s concerns regarding unreliable sponsor support are well-founded and supported by the record.
Fitness of the proposed sponsors and management
To grant a federal charter and share insurance to a prospective credit union, the NCUA must ensure that a proposed credit union’s subscribers and leadership are competent, experienced, and of good general character and fitness. The agency must also have reasonable assurance that the management team will have the requisite skills, commitment, and abilities to effectively handle financial matters.20 Additionally, the NCUA’s examination policies focus on a credit union’s ability to effectively manage risks such as strategic risk (i.e., the risk of adverse business decisions through management’s actions or inactions) and reputation risk (i.e., the risk of negative public opinion or perception leading to a loss of confidence and/or severance of relationships).21 Credit union leadership is expected to competently identify, measure, monitor, and control risk.22
Petitioner argues in his appeal that “[n]one of the subscribers were directly involved in any act [CURE] refers to in support of [its] decision.” He asserts the “so-called risks” cited as part of the basis for the denial are “imaginary, nonexistent” and “rank speculation.” Thus, he suggests it is unreasonable for the agency to infer that a failure to address this issue calls into question the skills and abilities of XXXX’s subscribers and leadership team.
Petitioner’s argument is unpersuasive. As discussed above, negative media coverage tied to XXXX in the public mind is indeed pervasive and therefore significantly heightens XXXX’s reputation risk exposure. Petitioner vigorously disputes the veracity of the substance of the negative coverage and repeatedly rejects outright the notion that XXXX faces any reputation risk at all. Petitioner’s continued refusal to acknowledge XXXX’s reputation risk exposure demonstrates an inability or unwillingness to fully understand, anticipate, and prepare for these risks. Without a suitable plan or strategy from XXXX’s management to competently identify, measure, monitor, and control XXXX’s heightened risk exposure, the NCUA does not have “reasonable assurance” that XXXX’s proposed leadership team has the requisite ability and fitness to make the proposed FCU a success.
Conclusion
Pursuant to the FCU Act, Part 701, and the Chartering Manual, to qualify for a federal charter, a proposed credit union must satisfactorily demonstrate to the NCUA that it can be viable. Economic advisability is also necessary for obtaining share insurance to avoid undue risk to the Fund.
Based on the Board’s independent review of this case, CURE’s concerns about the economic advisability of XXXX and its potential risk to the Fund are reasonable and supported by the record.
CURE’s finding that XXXX’s affiliation with its sponsor, XXXX, and other associated entities poses reputation risks that threaten its economic advisability is well-founded. Irrespective of the veracity of its content, negative media coverage linked to XXXX is well-documented, pervasive, and easily accessible in the public domain. The existence and extent of this media coverage, in and of itself, is likely to create a negative public perception that significantly heightens XXXX’s reputation risk exposure, posing an undue risk to the Fund.
While the Board acknowledges it may be reasonable to anticipate that XXXX’s publicized association with XXXX may to some extent increase member support among the XXXX-affiliated segment of its membership base, it is equally reasonable to anticipate that the association may deter others within the FOM—a broad community with a population of approximately XXXX—from XXXX membership or otherwise limit XXXX’s membership support.
Heightened reputation risk may also expose XXXX to litigation and potential financial loss. Whether based in truth or not, negative public opinion or perception of XXXX could adversely affect XXXX’s ability to procure necessary services and to establish or continue relationships or services with parties outside its FOM or within the broader industry. For example, third-party vendors, other credit unions, banks or financial institutions, CUSOs, and other businesses and entities providing goods and services vital to successful credit union operations may be reluctant to do business with XXXX, threatening its economic advisability.
Additionally, the information Petitioner provided regarding XXXX’s sponsor support lacked the transparency and documentary support necessary to substantiate their financial positions. While current capital donations may be adequate for start-up costs, Petitioner did not adequately demonstrate that XXXX’s sponsors can provide reliable ongoing future support, if necessary.
Finally, Petitioner’s repeated refusal to acknowledge XXXX’s reputation risk exposure demonstrates an inability or unwillingness to fully understand, anticipate, and prepare for these risks. Without a strategy to competently identify, measure, monitor, and control XXXX’s risk exposure, Petitioner has failed to meet his burden of providing the NCUA with reasonable assurance that XXXX’s proposed leadership team has the requisite ability and fitness to help XXXX succeed.
The Board concludes that the record supports that CURE’s decision to deny Petitioner’s application for a federal charter for XXXX complied with the APA and all applicable legal standards.
Order
For the reasons set forth above, it is ORDERED as follows:
The determination by the Director of the Office of Credit Union Resources and Expansion to deny the application for a federal charter for proposed XXXX Federal Credit Union is AFFIRMED, and the appeal of proposed XXXX Federal Credit Union is DENIED.
The Board’s decision constitutes a final agency determination and is subject to judicial review in accordance with Chapter 7 of Title 5 of the United States Code.
So ORDERED this 16th day of May 2024, by the National Credit Union Administration Board.
/s/
Melane Conyers-Ausbrooks
Secretary of the Board
1 See 12 C.F.R. §746.207(c).
2 12 C.F.R. §746.204(a).
3 12 C.F.R. §746.206(a).
4 12 C.F.R. §746.206(b).
5 See 5 U.S.C. §§701 – 706.
6 12 C.F.R. §746.204(e).
7 12 U.S.C. §1754.
8 See 12 U.S.C. §1781(c)(1).
9 12 U.S.C. §1781(c)(2).
10 See 12 C.F.R. §701.1.
11 12 C.F.R. §701, Appendix B, IV.A.
12 Id.
13 NCUA Examiner’s Guide (last updated June 5, 2023) (emphasis added) (available online at https://publishedguides.ncua.gov/examiner/Content/ExaminersGuide/AllowanceCreditLoss/PrimaryRisks.htm#Reputati). See also Board of Governors of the Federal Reserve System, SR 95-51 (SUP), Rating the Adequacy of Risk Management Processes and Internal Controls at State Member Banks and Bank Holding Companies (November 14, 1995; revised February 26, 2021).
14 XXXX.
15 NCUA Examiner’s Guide (last updated October 11, 2016) (available online at https://publishedguides.ncua.gov/examiner/Content/ExaminersGuide/Examination&SupervisionContacts/Risk-Focused_Exam/Risk%20Categories.htm).
16 Courts have uniformly recognized that certain types of agency judgments are not susceptible to strict “proof” because they involve the exercise of discretion, technical expertise and informed prediction about the likely course of future events. Judicial deference is accorded to such agency judgments because those “predictive judgments” are the “kind of agency function that the Supreme Court has recognized to be primarily a question of probabilities, and thus peculiarly subject to the expert experience, discretion, and judgment of the [agency].” Further, “in making a predictive judgment, the expertise of the [agency] supplements, and may supplant, the projections placed in the record by the parties. . . . To hold otherwise would paralyze agencies merely because the future is not subject to proof.” Sunshine State Bank v. F.D.I.C., 783 F.2d 1580, 1582 (11th Cir.1986) (citing Missouri-Kansas-Texas Railroad Co. v. United States, 632 F.2d 392, 406 (5th Cir.1980)).
17 12 C.F.R. Part 701, Appendix B, Ch. 1, §IV.D.I.
18 Id.
19 Id.
20 12 C.F.R. Part 701, Appendix B, Ch. 1, §IV.
21 NCUA Letter to Federal Credit Unions 02-FCU-09, Risk-Focused Examination Program, Risk Indicators List (May 2002) (available online at www.ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/risk-focused-examination-program).
22 Id.