OnPath FCU Appeals Court Ruling Over CDFI $12 Million Repayment Dispute

The $497 million OnPath Federal Credit Union is appealing a recent federal court ruling that dismissed its lawsuit to stop the U.S. Treasury Department’s demand that the Harahan, La.-based credit union repay more than $12 million it received from the Community Development Financial Institutions (CDFI) fund.

The appeal, filed Tuesday, will be heard by the U.S. Court of Appeals for the Fifth Circuit in New Orleans.

An audit by the Office of Inspector General for the U.S. Department of Treasury claimed OnPath’s former executives allegedly submitted invalid information when they applied for CDFI certification in 2005 and were awarded millions of dollars from 2006 to 2012. Based on that report, the CDFI fund demanded that OnPath repay $12,298,806.

That prompted OnPath to file a complaint against the U.S. Treasury arguing the OIG’s findings were unsupported by evidence and based on faulty analysis.

OnPath said it is disappointed in the ruling, and the New York, N.Y.-based Inclusiv, an organization for community development credit unions that was not a party to this lawsuit, said it is “shocked and saddened” by the ruling, adding that it is deeply concerned about the potential impact of this case on low-income communities in Louisiana and the chilling effect it will have on CDFIs across the country.

Read Inclusiv’s comment letter here.

“We were disappointed in the ruling because we believe it failed to address the most important substantive issue in the case – whether OnPath was in fact eligible for certification,” Phil Buffington, one of OnPath’s lawyers, said. “OnPath sought the advice of an industry expert to determine whether it was eligible for certification as a CDFI at the relevant times. That industry expert found that OnPath was eligible for certification as a CDFI during all the relevant times. This report was submitted (and) available to OIG and CDFI and yet they seemed to ignore this information.”

Buffington said OnPath continues to be certified as a CDFI institution, and noted as part of the OIG audit, the CDFI was required to determine if OnPath was eligible to be certified as a CDFI for the years 2011 and 2012.

“After an audit by the CDFI, it was determined that OnPath was eligible to be a CDFI in those years,” he said. “We believe that shows the inconsistency of the determination by OIG and CDFI in this matter.”

But in her ruling issued in late January, U.S. District Court Judge Sarah S. Vance in New Orleans said there were unexplained and troubling aspects in OnPath’s original CDFI certification application.

“The record makes clear that the OIG attempted to understand certain unexplained and troubling aspects of OnPath’s methodology, and, as a result of the investigation, found that OnPath’s original application for CDFI certification in 2005 was deficient in multiple ways,” she wrote in a 28-page ruling. “Based on those problems, the OIG recommended that the CDFI Fund decide whether to seek recoupment of the awards received pursuant to that certification. The CDFI Fund decided to do so. The administrative record contains ample support for that decision.”

Judge Vance explained that the OIG applied the methodology that purportedly supported OnPath’s 2005 certification application and identified three specific problems. Though the ruling essentially requires OnPath to repay the $12 million, it is on hold until OnPath’s appeal is heard and decided.

The first problem that the OIG found was OnPath’s geographic categorization of its members and financial products was unsupportable. For example, the credit union submitted in its application that it had 157,381 member accounts in the non-metro portions of Louisiana, but OIG’s analysis of OnPath’s records revealed that it only had 5,380 such accounts. The OIG found that this and other discrepancies owed largely to the fact that OnPath improperly categorized 67 zip codes in the New Orleans-Metairie-Kenner MSA as falling into the non-metro area.

“The OIG explained that this improper categorization impacted the calculation of the low-income targeted population percentages because low-income thresholds vary depending on the geographic location of a member. Accordingly, the geographic location has to be accurate,” the judge wrote.

Second, the OIG report revealed OnPath improperly categorized certain members and their associated products as low income, according to the judge’s ruling.

The report identified 22,863 of 78,229 members (approximately 30%) with deposit accounts and 4,801 of 23,832 members (approximately 20%) with loan accounts who lacked income classification. The absence of income classifications indicated that members tried to access credit less than three times in their lifetime.

“OnPath assumed that those members’ thin credit file meant that all of those members were low-income,” the judge wrote. “But the OIG found that this assumption was not supported and not disclosed to the CDFI Fund in OnPath’s certification application. As to the substance of the assumption, in October of 2005, OnPath asked the Market Customer Information File vendor whether the assumption was supportable. The vendor responded that it was not, because income data could be missing for a variety of reasons, and not just because the individual may be low income. The OIG found that OnPath’s assumption was unreasonable and its nondisclosure significant.”

Third, the OIG determined that OnPath manually adjusted the income of certain members to place them below the low-income targeted populations (LITP) threshold. Specifically, OnPath compared Market Customer Information File (MCIF) income data with its internal income data. If a member had an MCIF income above the LITP threshold, and an internally recorded income below the LITP threshold, OnPath relied on the lower value and categorized the member as low-income.

“OnPath estimated that its former management manually lowered the income classifications of approximately 35% of members with incomes above the 2005 LITP cutoff,” Judge Vance wrote. “And members were only adjusted downward; no members were adjusted upward, to above the LITP threshold. OnPath was unable to explain why the adjustments occurred in only one direction. The OIG further found that OnPath did not disclose this methodology to the CDFI Fund in its certification application.”

Inclusiv said it believes that the court’s ruling allows the CDFI Fund to ignore all evidence of OnPath’s actual eligibility for CDFI certification from 2005 to 2012 and instead focuses on the absence of complete administrative records to back up a certification application submitted in December 2005, during the aftermath of Hurricane Katrina.

“The CDFI Fund is not seeking recovery because of OnPath’s quality and performance as a CDFI, but rather based on the quality of their historic record keeping,” Inclusiv said in a prepared statement. “The audit report used by the CDFI Fund did not find that OnPath misused or misappropriated any federal funds, nor did it find OnPath to be ineligible for CDFI certification – in fact, they never asked the question. The CDFI Fund continues to fight a legal battle to prevent any consideration of evidence of OnPath’s eligibility. A recent CDFI Fund audit of OnPath’s 2013 certification and funding applications conducted by the CDFI Fund itself found the credit union to be fully eligible and compliant in all respects.”