Administrative Order: In the Matter of the Cease-and-Desist Order of Defense Logistics Federal Credit Union

STIPULATION AND CONSENT TO CEASE AND DESIST ORDER

The National Credit Union Administration (“NCUA”) Board, by and through its undersigned Regional Director, and Defense Logistics Federal Credit Union ("the Credit Union" or "Defense Logistics") hereby stipulate and agree as follows:

1. Consideration.  The NCUA Board is of the opinion grounds exist to initiate an administrative cease and desist action against the Credit Union pursuant to Section 206 of the Federal Credit Union Act, 12 U.S.C. § 1786.  The Credit Union, without admitting said grounds exist (except those set forth as to jurisdiction in paragraph 2), desires to avoid the time, cost and expense of administrative litigation.  Accordingly, the Credit Union desires to enter into this Stipulation and Consent to Cease and Desist Order ("Stipulation") and consents to the subsequent issuance by the NCUA Board of a Cease and Desist Order ("Order").
2. Jurisdiction.
   1. The Credit Union is an "insured credit union" as that term is defined in the Federal Credit Union Act, 12 U.S.C. §§ 1751-1795k.
   2. Pursuant to Section 206 of the Federal Credit Union Act, 12 U.S.C. § 1786, and Part 747 of the NCUA Rules and Regulations, 12 C.F.R. § 747, the NCUA Board is the appropriate Federal regulator to maintain enforcement proceedings against such an insured credit union.  Therefore, the Credit Union is subject to the authority of the NCUA Board to initiate and maintain proceedings against it.
3. Consent.  The Credit Union consents to the issuance by the NCUA Board of the accompanying Cease and Desist Order.  The Credit Union consents to the following terms and conditions:
   
   Effective December 10, 2019 the Credit Union will:
   1. Engage an independent qualified third party, acceptable to NCUA's Eastern Regional Director, to complete a review of the entire membership and form a reasonable belief of each member’s identity and verify membership eligibility for those members whose eligibility is not documented in accordance with the requirements of 31 C.F.R. § 1020.220(a)(3). The results of the review must be documented and completed by February 28, 2020. This review must include, but is not limited to, a tiered approach beginning with non-documentary methods as described below:
      1. Non-documentary methods may include contacting a customer; independently verifying the member's identity through the comparison of information provided by the member with information obtained from a consumer reporting agency, public database, or other source;
      2. For those members whose identity cannot be verified through non-documentary methods, contact them directly and obtain a reasonable belief of their identity consistent with your CIP policy.
      3. If the member has a loan, have them confirm the loan balance in writing (positive verification);
      4. Close the accounts for those members whose identity cannot be verified; and
      5. Notify the bonding company of all accounts closed as a result of this review.
   2. Develop and implement written Bank Secrecy Act (“BSA”) policies and procedures ensuring the Credit Union complies with the BSA provisions of 12 C.F.R. § 748.2, by December 31, 2019.
   3. Engage an independent qualified third party, acceptable to the NCUA's Eastern Regional Director, to complete an independent BSA audit in accordance with 12 C.F.R. § 748.2(c)(2) for the eighteen-month period ending December 31, 2019.  A BSA audit report must be completed and presented to the board by March 31, 2020.
   4. Engage an independent qualified third party, acceptable to the NCUA's Eastern Regional Director, to complete a verification of Credit Union member accounts as required by 12 C.F.R. § 715.8 by December 31, 2019.  The member account verification must be a 100 percent positive verification, include accounts closed after June 30, 2018, follow-up on returned statements, and reconcile any differences between the loan and share trial balance and general ledger.  A completed report must be issued to the board by March 31, 2020.
   5. Engage an independent qualified professional, acceptable to NCUA's Eastern Regional Director, to complete an agreed upon procedures audit of the Credit Union's records in accordance with 12 C.F.R. § 715.12(a), covering July 1, 2018 through September 30, 2019, by December 31, 2019.  The audit must be completed and delivered to the supervisory committee by January 31, 2020.  This constitutes a waiver of the 120 day timeframe required by 12 C.F.R. § 715.9(c)(6).
   6. Engage an independent qualified professional, acceptable to the NCUA's Eastern Regional Director, to perform periodic internal control procedures on behalf of the Supervisory Committee at least quarterly by December 31, 2019.
   7. Provide the Credit Union’s NCUA District Examiner with a written determination of the Supervisory Committee’s independence by December 31, 2019.  This determination should address the fact the Chairperson’s shares secure a loan to the manager.
   8. Obtain a final BSA audit report from your outside auditing firm of Fontanella & Associates, LLC for the twelve-month period ending June 30, 2018, in accordance with 12 C.F.R. § 748.2(c)(2).  The audit report must be presented to the board by December 31, 2019.  A draft independent BSA audit report was issued by Fontanella & Associates, LLC on June 7, 2019 for the twelve-month period ending June 30, 2018.
   9. Obtain a final Supervisory Committee Audit report from your outside accounting firm of Fontanella Associates, LLC for the twelve-month period ending June 30, 2018, in accordance with 12 C.F.R. § 715.12(a).  The audit report must be presented to the board by December 31, 2019.  A draft report was issued by Fontanella & Associates, LLC on June 6, 2019, for the twelve month period ending June 30, 2018.
   10. Review all dormant accounts and comply with state escheatment laws based upon the last known address on file for each member.  For dormant accounts in the State of New Jersey, follow the due diligence procedures outlined in the New Jersey Unclaimed Property Administration Holder Reporting Packet¹ and escheat applicable accounts by December 31, 2019 in accordance with New Jersey escheat law N.J.S.A. 46:30B‐1 et seq.
   11. Revise your concentration risk policy by establishing concentration limits for each loan category to net worth, by December 31, 2019.  Monitor and report the total amount of unsecured loan specials, total unsecured loans and total auto loans to net worth monthly.
   12. Maintain and report a list of loan extensions including member’s name, date of loan extension, terms, original loan balance, date of charge off (if applicable), and outstanding balance by December 31, 2019 and monthly thereafter.
   13. Revise your “Loan Charge-Off Methodologies and Documentation Policy” to comply with guidelines outlined in NCUA Letter to Credit Unions 03-CU-01 by December 31, 2019.
   14. Submit an earnings waiver request to NCUA’s Regional Director to pay quarterly dividends if your net worth remains below 7.00 percent in accordance with 12 C.F.R. § 702.201.  Send the request at least 14 days before quarter end if earnings requirements are not fulfilled.
   15. Provide the Credit Union's NCUA District Examiner with the Credit Union's monthly financial statements, to include monthly balance sheets, income statements, delinquency, charge-off reports, and monthly board meeting minutes for each month by the 20th of the following month, starting with the November 2019 statements, and each month thereafter.
4. Modification.  The Credit Union and the NCUA Board agree the above items in the preceding paragraph will remain in effect unless modified in writing by the NCUA Eastern Regional Director.  The Credit Union agrees any such modification shall constitute an amendment to the Order and shall be fully enforceable by the NCUA.
5. Waivers.  The Credit Union waives its right to an administrative hearing to determine whether the Cease and Desist Order should issue, as provided for in Section 206(e) of the Federal Credit Union Act, 12 U.S.C. § 1786(e).  It further waives its right to seek judicial review of the Cease and Desist Order or to otherwise challenge the validity or legality of the Order.
6. Finality. The Cease and Desist Order will be issued pursuant to Section 206(e) of Federal Credit Union Act, 12 U.S.C. § 1786(e). Upon its issuance by the NCUA Board, it shall be a final Order, effective and fully enforceable by the NCUA Board.

WHEREFORE, in consideration of the foregoing, the undersigned, on behalf of the NCUA Board and the Credit Union, execute this Stipulation and Consent to Cease and Desist Order.

FOR THE CREDIT UNION:

FOR THE NATIONAL CREDIT UNION ADMINISTRATION BOARD

¹ Available at https://www.unclaimedproperty.nj.gov/pdf/UPAHolderPacket.pdf.