Rep. Ann Wagner is seeking more information from the agency regarding the agreement with the two law firms — Korein Tillery and Kellogg, Huber, Hansen, Todd, Evans & Figel. GOP lawmakers probe $1B payment from regulator to two law firms

The National Credit Union Administration is seeking to renegotiate the terms of a 2009 agreement with two outside law firms under which the agency has paid more than $1 billion to the attorneys, a sum that is raising alarms among House GOP lawmakers.

That eye-popping figure was paid to the law firms as part of 26 cases they brought on behalf of NCUA, an independent regulator that oversees thousands of federal credit unions.


The agency acted as the liquidating agent for five corporate credit unions that failed during the financial crisis.

The lawyers, retained on a contingency fee basis, have helped NCUA recoup more than $5 billion from banks that sold faulty securities to the failed credit unions. Their cut is roughly a quarter, according to NCUA’s website.

That arrangement is too generous to the attorneys, one key lawmaker said.

“The payment of over one billion dollars in legal fees to private counsel raises serious questions about the propriety of the NCUA’s legal fee arrangements, including whether the arrangements were in the best interest of the NCUA,” Rep. Ann Wagner (R-Mo.) said in a letter to the agency’s chairman, Mark McWatters. Wagner chairs the House Financial Services subcommittee on oversight.

She is seeking more information from the agency regarding the agreement with the two law firms — Korein Tillery and Kellogg, Huber, Hansen, Todd, Evans & Figel, according to the March 1 letter obtained by POLITICO.

Another agency, the Federal Housing Finance Agency, had its own deal with two other law firms to recoup money on behalf of mortgage giants Fannie Mae and Freddie Mac. FHFA has recovered more than $25 billion, and those law firms, based on an hourly fee basis, have received more than $400 million.

There is a long history of conflict between members of the Republican Party and trial lawyers, who tend to support Democrats. One of the biggest current political fights surrounding financial regulation involves GOP lawmakers trying to overturn a class-action suit regulation from the CFPB that they say will be a boon to lawyers.

It is unclear what the House Financial Services Committee probe might ultimately yield. Future agreements between the credit union agency and outside law firms could be in the crosshairs.

But the situation also raises questions about the best way for regulators to pursue these types of cases, with some arguing that the agency should use in-house lawyers.

“As a general matter, if a regulator lacks the internal capability to pursue their mandate, they ought to enhance their internal capability," said Aaron Klein, a fellow at the Brookings Institution.

In a statement to POLITICO on Monday, McWatters indicated that the agency had met at least once with the law firms in an attempt to renegotiate the terms of the agreement, which was executed on Sept. 1, 2009. NCUA is funded by assessments from the credit unions it regulates, rather than by taxpayers.

“Neither my fellow NCUA board member Rick Metsger nor I were involved in either vetting outside counsel or negotiating the terms of the corporate credit union-related legal services agreements,” said McWatters, a former aide to House Financial Services Chairman Jeb Hensarling (R-Texas).

“The agency should continue its efforts to negotiate a fair and transparent modification of these legal services agreements, where outside counsel has received, to date, over $1.1 billion in fees,” he added. “In my view, these fees are regrettably excessive, yet our good-faith efforts to reach an equitable accord with the recipient law firms have not succeeded.”

Korein Tillery declined to comment. Kellogg Huber did not respond to a request for comment.

“We have gotten responses from the NCUA, but I can’t comment any further at this time because it is an ongoing investigation," House Financial Services spokesman Jeff Emerson said.

Bill Hampel, the Credit Union National Association's chief policy officer, stressed that credit unions have gotten back roughly $4 billion to refund losses they paid at the time.

“Whether or not the terms were the best they could’ve been, we’re not privy to that," said Hampel, whose association represents credit unions of all sizes. “There has been some concern among credit unions as to the amount of the legal fees involved, but that’s sort of been taken as what was available at the time these were negotiated."

"Back when these were set up, I don’t think anyone was expecting us to get much back out of these," he added. "We were in the fog of the financial crisis."

The law firms are still representing NCUA in four pending cases against Deutsche Bank, U.S. Bank and Bank of America, Wells Fargo, and HSBC for alleged failures by those banks to perform their duties as trustees for mortgage-backed securities. NCUA also has outstanding litigation against one securities firm, NovaStar.

This isn't the first time NCUA's legal services agreement has come under scrutiny from Congress.

In 2012, Rep. Darrell Issa (R-Calif.), then chairman of the House Oversight Committee, asked the agency's inspector general at the time, William DeSarno, to examine the arrangement "in light of the potential negative impact of contingency fee arrangements on the interests of member credit unions."

DeSarno responded that it was "the most cost effective and efficient way to proceed," given that the agency did not have the money to pay the firms upfront on a billable-hours basis.

The inspector general also found the agreement was not prohibited by a 2007 executive order that prevents most government agencies from hiring law firms on a contingency fee basis because the agency was acting as a conservator for the failed credit unions.

In a statement on the NCUA's website, former agency Chairman Michael Fryzel defended the arrangement.

“In a suit for damages, attorneys earn a percentage of what they recover," he said. "The more they get for a client, the more they earn for themselves. It is an incentive-based system that encourages a greater effort. Had they charged an hourly rate or the recovery was minimal, many would complain that NCUA wasted credit union funds."

In her March letter, Wagner requested documents related to NCUA’s legal services agreement with the firms, including all records related to the selection of the law firms and all communications between the agency and the firms.

Nine days after her letter, Hensarling wrote to McWatters to seek assurances that he would not release communications between his committee and the agency “in connection with various legislative, oversight, and investigative matters.”

Hensarling sent similar letters to other financial agencies, but not until three weeks later.

Both the NCUA and its inspector general's office declined requests from POLITICO under the Freedom of Information Act to produce communications with Congress regarding the legal recoveries.