Reform urged of trade group ties to corporates.

It's time industry trade groups let go of corporate credit unions. That's the message the National Credit Union Administration is getting in comment letters that favor a proposed regulation weakening corporate credit unions' ties to state credit union leagues and U.S. Central Credit Union's ties to the Credit Union National Association.

Of the nearly 60 letters the agency has received, a handful defend the status quo, but most cite potential conflicts of interest and public scrutiny as reasons for reform.

"With your proposed change, the same group of good old boys will not be able to control everything," wrote Ervin E. Mund, president of Bismarck, N.D.based St. Alexius Credit Union, in urging the changes. The 60-day comment period expires June 12.

Board Ties Common

About half of the 44 corporate credit unions have either interlocking boards of directors, common management, or both, with state leagues, which are affiliated with CUNA. Six of U.S. Central's nine board seats are allotted to the Madison, Wis.based trade group and its affiliates. CUNA president Ralph Swoboda has hiring and firing authority over U.S. Central president Jim Bell.

Potential conflicts of interest lurk when interlocks exist between corporate credit unions and state leagues, wrote James M. Bright, president of Scott Credit Union, Scott Air Force Base, Ill., and credit committee chairman of Mid-States Corporate Federal Credit Union.

Mid-States lends to the Illinois league and its affiliates, he wrote. During these transactions he said he depends on an attorney who represents the league and other league employees.

Although he knows of no wrongdoing, he wrote, "I have already lost considerable confidence in the objectivity of the support staff upon whom my committee must depend for the detailed financial and legal analysis necessary to make a good credit decision." Don W. Finn, chief operating officer of MidStates Corporate, declined to comment on the letter.

Wide-Ranging Probe

The appropriateness of the interlocks has been studied by the agency and Congress since January, when a wide-ranging probe was triggered by disclosures that U.S. Central had invested $255 million in Banco Espanol de Credito, or Banesto, a troubled Spanish bank.

David J. Wright, chief executive of Services Center Federal Credit Union, Yankton, S.D., wrote that U.S. Central "represents the biggest risk to credit unions that has ever existed.

"As the recent Banesto episode points out, even the appearance of a poor investment can cause great harm," he wrote. "What would a real loss do? A material loss at U.S. Central would mean the end of credit unions as we know them today."

'A Time Bomb'

"Without significant change, the interlocks at U.S. Central are a 'perception risk' time-bomb waiting only for the appropriate circumstances to explode," wrote Kevin Foster-Keddie, president of El Segundo, Califbased Xerox Federal Credit Union and a director of WesCorp Federal Credit Union.

"The resulting fallout would be a nightmare from which the credit union industry would be hard pressed to recover."

Several commenters complained of the Texas Credit Union League's sale of its check processing operation to Southwest Corporate Federal Credit Union. The corporate's board is controlled by the league.

The league did not seek other bidders and did not obtain an appraisal of the operation before selling it for $11 million.

"Without other bids or appraisals, there are serious questions whether this was an 'Arm's Length Deal,'" wrote an anonymous commenter.

Framing Possible Reforms

The agency's proposals would require a corporate's board to be independently elected by member credit unions instead of appointed by the league. And at least a majority of directors' positions would have to be held by credit union officials.

Another proposal would require corporate managers to report solely to their directors and not to trade group officials.

The Credit Union National Association opposes the proposed regulations on the principle that board structures should be determined by the corporates, not the regulator. The trade group hasn't yet filed a comment letter.

About 10 credit union officials have sent letters opposing proposed changes.

"It is my feeling that each state system should make its own determination and that NCUA should not promulgate any further regulations in this area," wrote Wayne A. Harubin, president of the Credit Union of Denver.

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