NEW BRUNSWICK, N.J.—After less than three years of operation, the $2.6-million Internet Archive FCU is apparently preparing to log off.
According to a New York Times report, the credit union with the somewhat odd name that was founded by Brewster Kahle—who put up his own money to form the credit union to serve the underbanked and unbanked in New Brunswick and Highland Park, N.J., is shopping the co-operative.
Kahle said hopes to give the credit union charter to another CU in New Jersey.
The decision, the Times said, follows what Kahle described as over-the-top regulatory pressure from NCUA, including some concerns centered around the CU temporarily serving Bitcoin companies. The Times reported that NCUA has lowered the CU’s CAMEL rating.
While the Times report addressed alleged regulatory pressure impacting the CU, the problems of Internet Archive also reflect a trend established in 2015 of small CUs struggling with revenue turning to money service businesses (MSBs) and Bitcoin companies as new sources of income.
MSB relationships ended up leading to the demise of the former $3-million North Dade Community Development Federal Credit Union in Miami Gardens, Fla., which NCUA liquidated in March. MSB accounts were allegedly behind NCUA conserving the $13-million Bethex CU in Bronx, N.Y., in September. The following month the agency conserved the $290,927 Helping Other People Excel FCU of Jackson, N.J., after it became involved with a Bitcoin company.
Internet Archive has lost money every year since it opened in 2012, dropping $2,874 that year, $48,185 in 2013, $1,559 in 2014 and $52,791 through September of this year. IAFCU, flush with capital (89%) in 2012, has seen net worth plummet each year, falling to 13.5% through the latest Call Report data.
All of the regulatory scrutiny is nothing new for the CU, which reported it made “4,756 changes” to its application during the 18-month application process.
“The original vision of this thing — of helping nonprofit workers, or helping the poor — they will not allow it,” Kahle told the Times, which noted that Internet Archive has faced a steady stream of exams since expanding to serve Bitcoin businesses—11 in 14 months. In August, the credit union, by its own count, spent 187 hours dealing with regulators and only 61 hours dealing with customers.
“I think we could really use some new ideas in the banking world — and the credit union offers a nice structure,” Kahle told the Times. “But they just won’t allow it.”
Kahle referred to not only regulatory pressure for the CU’s struggles but also the agency’s limitations on what products the small credit union could offer. IAFCU has been limited to loans of $5,000 or less, and it could generally serve only people in a small area around New Brunswick, N.J., where the credit union was located. The CU is also not allowed to offer “basic banking products,” such as debit cards and online banking, the Times reported.
The Times reported that IAFCU contests the accuracy of the issues cited in exams.
“None of the compliance issues listed in the report were correct,” the credit union wrote in an appeal sent to the NCUA in May, after the agency lowered the credit union’s regulatory rating.
However, the Times shared that NCUA Chairman Debbie Matz, in a general statement after the agency said it would not comment on Kahle’s complaints said: “if a credit union thinks it’s going to be cited for breaking the law, sometimes a CEO will push back and blame the regulator. It’s our job to protect depositors.”
The CU’s CEO, Jordan Modell, told the Times that NCUA had never given him any indication that the credit union would be cited for breaking the law.
Modell and Kahle told the newspaper that the red flags raised by NCUA examiners had been over small discrepancies and record-keeping issues — and often turned out to be factually wrong.
Modell told the Times that the CU was assured by NCUA that the restrictions on its offering would last only months, and when they were not lifted the credit “began looking at opening basic accounts for companies using the Bitcoin currency,” the Times said.