Board approves new rule on CU-to-bank switches

ALEXANDRIA, Va. (12/15/06)--The Credit Union National Association (CUNA) said a rule on credit union-to-mutual savings bank conversions adopted by the National Credit Union Administration (NCUA) is the result of careful work and looks out for the interests of credit union members above all else.

NCUA Chairman JoAnn Johnson said the new rule on credit union conversions will be an improvement over the existing one. "The provisions for advance public notice and member input to the directors are important because the members own the credit union," said Johnson. Click on the audio control panel to hear Johnson's comment. (Photo provided by CUNA)

At an open board meeting Thursday, the NCUA unanimously approved the new conversion rules, as well as expanded the authority for federal credit unions to invest in certain mortgage note repurchase transactions. The agency also acknowledged a possible National Credit Union Share Insurance Fund (NCUSIF) dividend for 2006. (See related story above.)

Regarding the conversions rule, CUNA President/CEO Dan Mica said, "We commend the agency for its work and foresight on this rule, and look forward to credit union members being fully informed when the option of a conversion is presented to them. CUNA is conducting a full analysis of the rule."

The final rule revises the disclosure and voting processes, as well as procedures to facilitate communications among members and for members to provide their comments to directors before their credit union board votes on a conversion plan.

The NCUA action is intended, in part, to make it clear that the agency supports and encourages communications to members and between members, according to agency staff.

The new rule requires a credit union's board that is considering conversion to give advance notice to members that it intends to vote on such a proposal. It also establishes procedures for members to share their views with directors before those directors adopt a proposal.

The new rule spells out clearly that under their fiduciary obligations to members, credit union directors may vote in favor of a conversion proposal only if they have determined it is in the best interests of the members. Board members must certify in writing to the NCUA that they have met their duty to members in supporting the conversion.

In a presentation of the final rule, NCUA staff noted that 52 comments were submitted after changes were proposed in June, and said that "significant" adjustments to the proposal were made in light of those comments.

For instance, the final rule dropped a proposed provision that would have required a credit union to post conversion-related communications from members on its website.

Also, while the current rule requires boxed disclosures in all related mailings, the new regulation provides that boxed disclosures regarding a credit union conversion only must be included in associated mailings distributed 30, 60, and 90 days prior to a membership vote.

The boxed disclosures, under the new rule, must clarify the following:

• Specifically what a "yes" vote or a "no" vote means in terms of the wording on the ballots; and

• The effect of a conversion on the credit union member in terms of the loss of beneficial savings and loan rates and charges for services when average credit union products and services are compared with those of other financial institutions.

"It is neither speculative nor misleading," he assured the three-member NCUA board, and said that credit union pricing is better than that of other institutions almost 90% of the time.

The final rule will go into effect 30 days after publication in the Federal Register.

Regarding new permissible investments, the NCUA voted to expand the authority federal credit unions now have to enter into investment repurchase transactions in which the instruments consists of first-lien mortgage notes. Investment repurchase transactions using mortgage loans are typically short-term transactions with a counterparty for purposes of facilitating the securitization of the loan before it is sold to the secondary market.

The final rule, also effective 30 days after publication in the Federal Register expands current NCUA policy by permitting federal credit unions to purchase mortgage notes without membership restrictions.

Resource Links

NCUA Board meeting summaries (affiliated CUs only)

CUNA principles on CU-to-bank conversions

RELATED STORY: 2006 NCUSIF dividend possible