Cease & Desist Orders - 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 issue cease and desist orders as outlined in its enforcement manual.

The following is an audio version of that portion of the manual. 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 cease and desist orders.

Cease and Desist Order

1. What is a Cease and Desist Order?

A Cease and Desist (C AND D) Order normally requires the credit union to stop illegal or unsafe or unsound activities which caused or is likely to cause more than a minimal financial loss to, or have a significant adverse effect on, the insured credit union. A document called Notice of Charges and Hearing sets out the specific charges and statement of facts supporting the charges. The Notice also arranges for an administrative hearing. The C AND D contains the required corrective actions. The C AND D action is designed to address only actions necessary to correct the most significant items.

A C AND D Order can be issued against an insured credit union or an institution-affiliated party. The term institution-affiliated party means any of the following:

► Any committee member, director, officer, or employee of, or agent for, an insured credit union.

► Any consultant, joint venture partner, and any other person as determined by the N C U A Board who participates in the conduct of the affairs of an insured credit union.

► Any independent contractor who knowingly or recklessly participates in any violation of any law or regulation, any breach of fiduciary duty, or any unsafe or unsound practice.

The types of violations most likely to be remedied by a C AND D Order include:

► Failure to maintain adequate books and records.

► Deficient appraisal reports.

► Transactions involving conflicts of interest.

► Inadequate due diligence.

► Inadequate control and oversight of operations.

There is a great deal of flexibility in what actions N C U A may require. In addition to ordering a cessation of certain activities, a C AND D Order may require affirmative corrective action, including:

► Making restitution or provide reimbursement, indemnification, or guarantee against loss under specific conditions.

► Restricting growth.

► Rescinding an agreement or contract.

► Disposing of any loan or asset.

► Employing qualified officers or employees.

► Taking such other action N C U A determines to be appropriate.

Orders to Cease and Desist are issued pursuant to the FCU Act section206(e), 12 U.S.C.

section1786(e). The provisions for the C AND D Order are set out in article-by-article form and prescribe those restrictions and corrective and remedial measures necessary to correct deficiencies or violations in the credit union and return it to a safe and sound condition. Violations of a C AND D Order can provide the legal basis for assessing civil money penalties (CMPs) against directors, officers, and other institution-affiliated parties. A C AND D Order may also be enforced through application to a U.S. district court. Moreover, a willful violation of a Final C AND D Order is itself grounds for conservatorship under the FCU Act section206(h)(1)(D), 12 U.S.C. section1786(h)(1)(D).

There are three types of cease and desist orders available to N C U A:

a. Consent Order

A Consent Order is an Order to Cease and Desist that is entered into and becomes final through the board of directors' execution of a Stipulation and Consent document on behalf of the credit union. This type of order also requires the issuance of a Notice of Charges. The N C U A Board issues the Consent Order without the need for an administrative hearing. The Consent Order becomes effective at the time specified in the Order.

b. Final (Permanent) Cease and Desist Order

Aside from its title, a Final C AND D Order is identical in form and legal effect to a Consent Order. However, a Final C AND D Order is imposed on an involuntary basis after issuance of a Notice of Charges, a hearing before an administrative law judge,

and a final decision and order issued by the N C U A Board. A Final C AND D Order is effective 30 days after service upon the credit union. Any Final C AND D Order is subject to review by a U.S. Court of Appeals.

c. Temporary Cease and Desist Order

A Temporary C AND D Order is an interim order issued by the N C U A pursuant to its authority under the FCU Act section206(f), 12 U.S.C. section1786(f), and is used to impose measures immediately pending resolution of a Final C AND D Order. Such orders are typically used only when immediately necessary to protect the credit union against ongoing or expected harm. A Temporary C AND D Order may be challenged in U.S. District Court within 10 days of issuance, but it is effective upon issuance and remains in effect unless overturned by the court or until a final order is in place.

To issue a temporary order, N C U A must also issue a Notice of Charges initiating a proceeding to obtain a Final C AND D Order. In order to issue a Temporary C AND D Order, N C U A must determine that the violation or threatened violation or the unsafe or unsound practice(s) is likely to either:

► Cause insolvency or significant dissipation of assets or earnings.

► Weaken the condition of the credit union or otherwise prejudice the interest of the credit union's members.

The FCU Act section206(f)(3), 12 U.S.C. section1786(f)(3), provides for the issuance of a Temporary C AND D Order when an insured credit union's books and records are so incomplete or inaccurate that the financial condition of the credit union or details or the purpose of any material transaction can not be determined. This section also applies when a credit union does not provide adequate access to the books and records.

2. What are the grounds for issuance of a Cease and Desist Order?

The grounds for a cease and desist action are set forth in the FCU Act section206(e)(1), 12

U.S.C. section1786(e)(1). A C AND D Order can be issued if any insured credit union or institution-affiliated party is either:

► Engaging in or has engag...