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Jim Flynn: Credit unions vs. banks: The war runs unabated

By: Jim Flynn
May 14, 2017 Updated: May 14, 2017 at 10:40 am
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ENT Federal Credit Union's branch at 6060 Championship View in Stetson Hills is the newest of the credit union's 21 branches. Photo by carol lawrence 11/30/06

Credit unions, as you may know, are financial institutions that don't have shareholders demanding ever-increasing dividends and higher stock prices. Instead, they operate for the benefit of, and are governed by, directors who are elected by their members.

Also, although credit unions need to earn a profit to cover expenses, build capital and avoid insolvency, they don't pay income taxes. For this and other reasons (notably, constantly expanding membership eligibility and allowed products and services), for-profit banks don't much like credit unions and regularly complain that they have been given an unfair competitive advantage by Congress.

In the past few years, the National Credit Union Administration (NCUA), the federal agency that charters and supervises federal credit unions, has further antagonized banks and other for-profit players on the financial services stage by suing them regularly. From 2011 through the end of 2016, the NCUA filed 26 complaints in federal courts in California, New York and Kansas against 32 defendants in the for-profit financial services industry.

This wave of litigation grew out of the financial crisis, which saw five large credit unions fail as a consequence of the purchase of toxic mortgage-backed securities. These securities consisted of pools of residential mortgages, and payments by the borrowers on the mortgages were supposed to repay the purchasers of the securities. Instead, however, borrowers on the mortgages defaulted in droves and the value of the securities tanked, leading to the credit union insolvencies.

Part of what the NCUA does for a living is to pick up the pieces of failed credit unions in an effort to pay back creditors, including the National Credit Union Share Insurance Fund, which insures credit union deposits, and the U.S. Treasury, which provided bailout money to the credit union industry during the financial crisis.

The claims brought by the NCUA allege all manner of wrongdoing by the parties who put these pools of mortgages together and sold them to the failed credit unions - in particular, misrepresentations as to the quality of the mortgages in the pools.

By the end of October, the NCUA had recovered more than $4.3 billion through its litigation strategy and the U.S. Treasury, at least, had been repaid in full.

In addition, two weeks ago, the NCUA announced it had recovered $445 million more through a settlement with UBS Group AG, a global financial services company based in Switzerland and active in the U.S. (As is typical of such matters, UBS did not admit wrongdoing in the settlement.) The news release issued by the NCUA in connection with the UBS settlement says the NCUA's litigation campaign isn't over yet, with claims still pending against numerous defendants.

One interesting (at least, to lawyers) aspect of the NCUA litigation strategy is that the two law firms carrying the NCUA's flag onto this battlefield are being paid on a contingent-fee basis. ("If we don't collect, you don't pay.") This arrangement has protected the NCUA from the risk of large unfunded legal bills if litigation proved unsuccessful. It has also made for a profitable few years for the law firms. Before the most recent UBS settlement, the two firms had been paid 23.2 percent of the total recoveries they helped to achieve. That comes to a tidy $1.003 billion.

The NCUA is big on transparency and many of the details of its post-financial crisis litigation activity can be found at its website, ncua.gov, along with a history of credit unions and much other interesting material.

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Jim Flynn is a private attorney with Flynn & Wright LLC in Colorado Springs. He is the author of three law-related novels. Contact him at moneylaw@jtflynn.com.

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