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110th CONGRESS, LEGISLATIVE ISSUES A - Z

CONVERSIONS OF CREDIT UNIONS

ISSUE: In January 2005 the National Credit Union Administration (NCUA) issued a final rule regarding the conversion of insured credit unions to mutual savings banks. This rule was aimed at providing members with access to clear, concise, accurate and meaningful information so that they can be fully informed when they vote on a conversion to a mutual savings bank.

Rep.’s McHenry (R-NC) and Towns (D-NY) introduced legislation, H.R. 3206, in reaction to recent attempts made by Omni American Credit Union and Community Credit Union in Plano, TX to convert to mutual savings banks (MSB’s) and the National Credit Union Administration’s (NCUA’s) invalidation of the vote by members of the credit union.

CUNA POSITION: CUNA strongly opposes House legislation H.R. 3206, as it would negatively impact the ability for the NCUA to enforce whether credit union members receive full and fair disclosure during the conversion process.

CUNA believes that the credit union charter currently provides the best vehicle for serving the financial needs of consumers however, CUNA fully accepts its responsibility to protect and advance the cooperative structure of the U.S. Credit Union movement. CUNA supports the right of member/owners to exercise their democratic control of their credit unions and encourages credit unions that are considering conversions to make their decisions based solely on the best interests of their members. Full, plain language, disclosures are essential to furthering the democratic process. Additionally Credit Union directors and managers have a fiduciary responsibility to present objective and honest information as well as reasonable business alternatives (e.g. mergers, liquidations). CUNA also supports the concept that the net worth of the credit union belongs to the members and should remain with them. There should be no unjust enrichment to Directors and senior management upon later conversion to a bank. CUNA supports NCUA and state regulators in the full use of their current authority to ensure members understand the conversion process and that fiduciary duties of credit union boards are fully enforced.

OPPOSING VIEWS: The banking industry is supportive of measures to make it easier for credit unions to convert to bank charters, and is lobbying heavily in favor of the Credit Union Charter Choice Bill, H.R. 3206.

IMPACT ON CREDIT UNIONS: The Credit Union Charter Choice Bill, H.R. 3206, would curb the ability of the NCUA to prevent credit unions from converting to mutual savings bank charters by allowing changes to Section 205 (b) (2) of the Federal Credit Union Act which seek to:

Authorize a federally insured credit union to convert to a MSB “without the prior approval of the NCUA Board
Require a majority of the credit union’s board to approve, and “Approval of the proposal for conversion shall be by the affirmative vote of a majority of the members of the insured credit union who vote on the proposal.”
Require the credit union to submit three notices to members – 90 days, 60 days and 30 days -- before the vote on the conversion.
Require the credit union to submit for NCUA’s approval a copy of the written notice, ballot and other material mailed to members in. Currently NCUA is allowed to require the credit union seeking to convert to notify NCUA of its intent to convert within 90 days of the completion of the conversion. That general language would be dropped.
Itemize three additional things the credit union has to provide to NCUA. The three things are: (1) the date of the vote and the date the ballots must be received by the independent elections inspector; (2) a “brief statement of why the directors of the converting credit unions are considering the conversion and the board’s recommendation to the members”; and (3) “a brief statement of the material effects of the conversion on the credit union, as converted, and the members of the credit union, including any differences in powers between a credit union and a MSB…that the converting credit union deems to be material to such members.”
Prohibit NCUA from requiring the credit union’s notice to members to include any information or statements that:
(i) “are speculative with respect to the future operations, governance, or form of organization of the financial institution that will result from the conversion, or may occur after the completion of the conversion. The way this is written, a credit union wouldn’t even have to tell members about the next step of conversion to a stock institution, even if the credit union board had absolutely decided that its plan is to convert to a stock bank as soon as legally allowed.
(ii) “are inaccurate with respect to a proposed conversion….”
(iii) conflict with regulations of other financial regulators, including OTS, related to the subsequent conversion from mutual to stock
(iv) “distort the impact of conversion on the members of the credit unions.”
(v) “are attributable to the [NCUA] Board or state the Board’s position on conversion.”
Assuming that the information is included in the notice to members, requires NCUA to approve the notice and balloting materials unless there is a pending safety and soundness federal or state supervisory action. NCUA will have to approve the credit union’s notice within 30 days of its delivery (or within 10 additional days if revisions are necessary to the notice).
Prohibit NCUA from having the right to review and approve any other communications involving the conversion, but NCUA would retain authority to prevent or require correction of inconsistent, misleading or false communications. NCUA could not require a new membership vote based on the contents of the notice or other communications, unless the notice or communication contains a knowingly false statement that affects the outcome of the conversion vote.
Require there be a secret ballot and an independent inspector handling and counting the ballots. The credit union’s board would certify the election results to NCUA and the appropriate banking agency (and certify that the notice and ballot approved by NCUA was used).
Prohibit NCUA from having any further review or approval authority over the conversion process after the certification in (I) “absent fraud or reckless disregard for fairness during the voting process that affects the outcome of the vote….”
Make the Federal Credit Union Act inapplicable upon conversion
Prohibit the credit union directors and senior management from receiving “any economic benefit in connection with a conversion…”After the conversion, this section doesn’t apply.
Strike the paragraph on “Oversight of member vote.” Also drop the reference to a 6-month timeframe to adopt regulations after the enactment of CUMAA. The remainder of the first paragraph is retained unchanged, which says that the NCUA Board must adopt conversion regulations that are consistent with, and no more or less restrictive than, the OTS and Comptroller’s rules.
Apply the proposed effective date to all conversions pending on or started after the date of enactment of the bill. With 60 days after enactment, NCUA would have to propose new rules in Section 708a to conform its regulations to the requirements of the bill.

STATUS/OUTLOOK: The banking industry is supportive of measures to make it easier for credit unions to convert to bank charters, and is lobbying heavily in favor of the Credit Union Charter Choice Bill, H.R. 3206.

110th CONGRESS, LEGISLATIVE ISSUES A - Z

CONVERSIONS OF CREDIT UNIONS

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