UNITED STATES OF AMERICA
BEFORE THE NATIONAL CREDIT UNION ADMINISTRATION
In the Matter of
Appeal from determination by the XXXX Region
Docket No. BD-01-21
Decision and Order on Appeal
This matter comes before the National Credit Union Administration Board (Board) under 12 C.F.R. Part 746, Subpart B, as an administrative appeal of XXXX (Petitioner)1 of the determination by the Regional Director for the XXXX Region (Region) denying his application to serve on the board of directors for XXXX (the FCU), a credit union in troubled condition.2
Petitioner is appealing the determination by the Region to deny his change-in-official application to serve as a member of the board of directors of the FCU. The FCU has been in troubled condition since June 2019. According to the Region, the FCU was assigned a composite CAMEL 4 rating after its June 30, 2019 examination and was transferred to the Region’s Division of Special Actions on October 24, 2019. The Region issued a Letter of Understanding and Agreement (LUA) to the credit union on October 23, 2019 as a result of deficiencies noted at the June 2019 examination. The LUA noted significant recordkeeping discrepancies, noncompliance with the secondary capital regulations, weak oversight, inadequate controls of the business lending program, and weak strategic planning. Petitioner held the position of Chief Executive Officer (CEO) leading up to the Region’s Division of Special Actions involvement with the credit union. According to the Region, “[Petitioner’s] oversight led to numerous operational deficiencies at the credit union, most notably internal control weaknesses, recordkeeping deficiencies leading to out-of-balance conditions, and loan administration weaknesses.”
Pursuant to Section 212 of the Federal Credit Union (FCU) Act and §701.14 of the NCUA’s regulations, a credit union in troubled condition must notify the NCUA in writing of any proposed changes in its board of directors, committee members or senior executive staff.3 The NCUA may disapprove an individual’s service if it finds that the competence, experience, character, or integrity of the individual indicates that it would not be in the best interests of the members of the credit union or of the public to permit the individual to be employed by, or associated with, the credit union.4
Procedures for giving notice and the issuance of a determination on an application for a change in official are found in §701.14 and in the National Supervision Policy Manual (NSPM).5 The NSPM provides that a Regional Director should weigh various factors when evaluating an application and issue a denial where “given the specific circumstances surrounding the potentially disqualifying factor, it has a sufficient nexus to the competence, experience, character, or integrity necessary for the particular position so as to be disqualifying.”6 Factors which may support denial include, but are not limited to, unsatisfactory work performance in the financial sector and poor personal financial condition or credit history.7
Petitioner was nominated from the floor and elected to a board position at the FCU’s XXXX annual meeting. On November 16, 2020, Petitioner filed an Individual Application for Approval of Official or Senior Executive Officer (NCUA Form 4063a) to serve as an official at the credit union. On December 3, 2020, the Chair, on behalf of the FCU’s board of directors, filed a Notice of Change in Official or Senior Executive Officer (NCUA Form 4063) and supplemental statement informing the NCUA of Petitioner’s election.
In accordance with standard procedures described in the NSPM, upon receipt of Petitioner’s application, the Region initiated a preliminary review by obtaining Petitioner’s credit report. On December 11, 2020, the Region sent Petitioner a Pre-Adverse Action Letter indicating certain credit deficiencies were not fully explained in his application, to which Petitioner responded by letter of January 8, 2021, with supporting documentation explaining a credit union internal error caused those deficiencies. The Region reviewed Petitioner’s response and explanation about his credit report, confirmed that an error occurred, and concluded his credit history was not a concern. The Region also conducted a background check on Petitioner, which revealed no derogatory information.
On January 28, 2021, the Region denied Petitioner’s application based on concerns about his competence, character, or integrity, primarily stemming from his conduct while serving as CEO of the FCU until XXXX. Petitioner subsequently requested reconsideration on February 12, 2021, and the Region upheld its initial decision and issued a determination on March 15, 2021, again denying Petitioner’s application due to concerns about his competence, character, or integrity based on past performance during his tenure as CEO.
Petitioner timely appealed the Region’s determination by letter to the Secretary of the NCUA Board on March 30, 2021. Petitioner did not request an oral hearing in the matter. Petitioner’s appeal chiefly argues that the Region erred in its determination to deny his application because “falsifications of records have been entered into an Examiners Report,” the Region relied on credit report information that was proven erroneous as a basis for its denial, and he “received two denial letters with different rationales.” In addition, Petitioner’s appeal asserts the Region’s denial of his application may have been motivated by racial animus or political reprisal.
Discussion and Analysis
Upon a full review of the administrative record, the Board is affirming the Region’s denial of Petitioner’s application to serve as an official and denying Petitioner’s appeal. There is a clear nexus between Petitioner’s past performance as CEO at the FCU and the competence, character, or integrity necessary for a board position. The Board finds that the Region’s denial was reasonable and is well supported by the record.
Competence, Character, or Integrity. In his appeal, Petitioner contends that certain findings contained in the examination report that the Region cited as a basis for its denial were falsified. In support of these assertions, Petitioner provides narrative information to explain and challenge the Region’s examination findings concerning insider abuse and preferential treatment. However, some of Petitioner’s explanations appear inconsistent with well documented examiner’s findings and DORs in the examination report, the LUA, and representations by the board of directors made to the NCUA in its certified statement. Further, the findings contested by Petitioner in his notice of appeal are only some, but not all, of the factors that constituted the basis for the Region’s denial.
Based on the Board’s review of the record, there are no reasonable indications of falsifications or other misconduct on the part of the Region. The Region’s denial was reasonably based on well documented concerns about Petitioner’s competence, character, or integrity as demonstrated by his conduct during his tenure as CEO at the FCU. As noted in its reconsideration determination, the Region relied on several factors in denying Petitioner’s application, summarized as follows:
- Petitioner’s actions as former CEO led to the significant supervisory deficiencies that resulted in the credit union’s troubled condition status and NCUA issuing the LUA.
- These deficiencies include, but are not limited to, significant recordkeeping concerns, secondary capital violations, insider abuse, lending deficiencies, HELOC statement disclosure concerns, Regulation B (ECOA) adverse action notices noncompliance, and insufficient budget and strategic planning.
- The June 30, 2019 examination, including the DORs, noted the identified accounting adjustments, losses due to insider abuse, and noncompliance with secondary capital agreement that could negatively impact the credit union’s net worth position.
- Petitioner was the CEO during the June 30, 2019 onsite examination and as such, was notified of the DORs which mirrored the items in the LUA that led to the credit union being downgraded to a composite CAMEL 4. The level of problems and risk exposure identified at the examination were excessive.
- As CEO, Petitioner was ultimately responsible for the safety and soundness of the credit union. Under Petitioner’s leadership, the credit union’s status deteriorated to troubled condition as defined by 12 C.F.R. § 701.14.
- Based on Petitioner’s management record, it is not in the best interests of the members of the credit union or the general public for Petitioner to serve as a board director of this troubled institution.
Further, the record reflects that Petitioner’s term as CEO led to severe operational deficiencies and necessitated replacing Petitioner with the current CEO on short notice. Reasonable concerns about Petitioner’s competence, character, or integrity are well-founded in the record:
- Petitioner was directly involved in the deficiencies identified in the June 30, 2019 examination, leading to a downgrade to a composite CAMEL 4 rating and issuance of the LUA.
- According to the FCU’s board of directors, due to severe deficiencies including secondary capital violations, recordkeeping deficiencies, commercial lending weaknesses and the appearance of insider abuse and preferential treatment, the board severed the credit union’s relationship with Petitioner as of XXXX. However, in Petitioner’s application he states he was not severed from the CEO position until XXXX.
- The FCU board voted unanimously to terminate Petitioner in XXXX.
- During the Nomination Committee’s review process prior to the XXXX annual meeting, Petitioner’s application to serve on the board was rejected due to his involvement with the credit union’s prior deficiencies.
- Petitioner engaged in a secondary capital “swap” with another credit union whereby the FCU effectively traded $300,000 of secondary capital at 2 percent to negate any interest payments, without presenting the board with appropriate facts and consideration of regulatory compliance.
- Petitioner engaged in unauthorized CEO payroll changes without board approval.
- Under Petitioner’s leadership, the credit union maintained highly deficient internal control practices leading to the appearance of insider abuse, including recordkeeping deficiencies, advancement of expenses outside any board approved policy or procedure, and weaknesses in commercial lending documentation including ongoing oversight of the portfolio.
Credit Report. Petitioner’s appeal asserts the Region erred in its denial because he “receive[d] a disqualification based on [his] credit report,” which was proven to be incorrect, and he “received two denial letters with different rationales.”
These assertions are misguided and seem to reflect Petitioner’s misunderstanding that the Region’s Pre-Adverse Action Letter was a denial of his application. In fact, the Region’s Pre-Adverse Action Letter was a standardized form letter8 to Petitioner to notify him of adverse credit information that appeared on his credit report and encouraging him to provide an explanation, as required under the procedures described in the NSPM. This letter did not constitute a denial and the record reflects that the Region did not rely on Petitioner’s credit information as a basis to deny his application.
Political Reprisal or Racial Animus. In his notice of appeal, Petitioner alleges the Region’s denial of his application may have been motivated by racial animus or reprisal due to his political views, historical links to XXXX, or his potential whistleblowing. As a basis for his retaliation allegations, Petitioner points to a XXXX news article that the Region’s examiner purportedly brought to the FCU’s examination, which reported on Petitioner’s appointment to the XXXX and detailed Petitioner’s political affiliations.
However, upon review of the record, there is no evidence to reasonably support Petitioner’s allegations of retaliation or reprisal. The Region strongly denied those allegations as “categorically false” in its March 15 denial letter, noting the Region was “not aware of your political views or affiliations and they are wholly irrelevant to [its] analysis,” and “political views or affiliation [play] absolutely no role in the decision to approve, or disapprove, an applicant for board membership or any position in a credit union.” The Region further noted that “neither the regional office nor the field staff have any record of you filing a whistleblower complaint or an examination complaint.” There is no indication in the record that the XXXX news article factored into the Region’s decision on the application.
Petitioner’s appeal also notes that “the XXXX election was the most representative election,” with four people of color (three women and one man) elected in addition to two white women and Petitioner, but “only one white and one Black woman of this group have been allowed to be seated on the Board by the NCUA.” Petitioner asserts that these minority board-elects received “similar NCUA denials based on misinterpretation of their credit reports and have reported that they were discouraged from appealing by NCUA personnel because they ‘would just be denied again.’”
Upon review, however, there is no evidence in the record to reasonably support Petitioner’s allegations of racial animus or discrimination. The record reflects that, in addition to Petitioner, several other board-elects received pre-adverse action notices from the Region, in accordance with the procedures outlined in the NSPM. Because several of those board-elects did not respond to the notices within the required 30-day timeframe with an explanation for the adverse credit information appearing on their credit reports, per NSPM procedures, the Region ultimately issued those individuals a standardized denial letter.9 The record reflects the Region gave consistent treatment to all of the board-elects from the XXXX election in the processing of their change-in-official applications.
Based on a full review of the administrative record, the Board finds that the Region’s denial of Petitioner’s application is well supported by the record. The Region reasonably determined that Petitioner lacks the competence, character, or integrity necessary to serve as a member of the FCU’s board of directors after finding Petitioner’s conduct during his tenure as CEO of the credit union led to the significant supervisory deficiencies that resulted in its troubled condition status. There is a clear nexus between Petitioner’s poor performance as CEO to the competence, character, or integrity necessary for a board position so as to be disqualifying.
Further, there is no evidence in the record to reasonably substantiate Petitioner’s allegations that information in the examination report was falsified, that the denial was based on incorrect derogatory credit information, or that the denial was motivated by racial animus or political reprisal.
For the reasons set forth above, it is ORDERED as follows:
The determination by the Regional Director for the XXXX Region denying XXXX’s application to serve on the board of directors for XXXX is AFFIRMED and the appeal of XXXX 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 8th day of July 2021, by the National Credit Union Administration Board.
Secretary of the Board
1 Also known as XXXX.
2 In the case of an insured natural person credit union, “troubled condition” means: (1) A federal credit union that has been assigned a 4 or 5 CAMEL composite rating by NCUA; or (2) A federally insured, state-chartered credit union that has been assigned a 4 or 5 CAMEL composite rating by either NCUA, after an on-site contact, or its state supervisor; or (3) A federal credit union or a federally insured, state-chartered credit union that has been granted assistance under section 208 of the FCU Act, 12 U.S.C. 1788, that remains outstanding and unextinguished. See 12 C.F.R. §701.14(b)(3).
3 See 12 U.S.C. §1790a; 12 C.F.R. §701.14.
4 See 12 C.F.R. §701.14(e).
5 See National Supervision Policy Manual Version 13.0.
8 See NSPM; template for Pre-Adverse Action Disclosure Letter.
9 See NSPM; templates. The NSPM provides that poor personal financial condition or credit history is a factor which may support denial. Within ten calendar days after receiving an application for a change in official, the Regional Director will acknowledge the application (if it is complete) or request that the credit union submit specific additional information within 30 calendar days. If additional information is not submitted within 30 calendar days of the Regional Director’s request, he or she may either deny the proposed individual or review and take action on the notice based on the information provided.