Calling Congress Out

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Congress appeared headed last week towards legislating new standards over credit union conversions to mutual savings banks as lawmakers expressed growing concerns over the increasing numbers and size of the charter switches.

But lawmakers won't vote a bill proposed this year known as the Credit Union Charter Choice Act, instead waiting to see how NCUA amends its regulations over conversions in the next few months before taking up the issue in the next Congress, according to one congressional leader. "Not this year, but hopefully next year, we'll look at what regulations have been enacted and we'll take it from there," said Alabama Rep. Spencer Bachus, chairman of the House Financial Services Financial Institutions Subcommittee, during hearings last week.

Lawmkers on the panel expressed concern over the increasing number of credit union managers and directors growing rich by converting their credit unions first to mutual savings bank, then to publicly owned stock corporation.

But others worried that the process enacted by NCUA is too strict and discourages legitimate efforts to enhance member/depositor services through a switch to savings bank.

U.S. Rep. Paul Kanjorski (D-PA), co-sponsor of HR 1151, lamented a provision added to the landmark 1998 bill known as the CU Membership Access Act, that made it easier to convert by no longer requiring at least 20% of members to vote on a switch to bank. "I had quite a few reservations," said the Pennsylvania Democrat, "and my greatest fears have been realized."

Kanjorski, whose role in HR 1151 made him a champion of credit union interests on Capitol Hill, worried about what he called the increasing move towards the "raiding of assets" of credit unions and other non-profits by outsiders. "The reality is, any smart lawyer in this town can get in on the gravy train," said Kanjorski.

CEO Shares Story Of Riches Offered

Later Suncoast Schools FCU President Tom Dorety, testifying on behalf of CUNA, said he was approached by consultants who tried to convince him to convert his $4-billion credit union by telling him he could earn as much as $35 million in stock over five years. "The ability of insiders to 'game' these conversions for their own financial benefit is frequently emphasized by the consultants who have handled most of the recent credit union conversions," said Dorety.

But Republican U.S. Rep. Patrick McHenry of North Carolina, who introduced the bill to ease the way to credit union conversions, said the Office of Thrift Supervision has adequate regulations in place to limit insider enrichment and to make financial gains earned during the stock sale process available to all member/depositors of the institution after it converts to mutual savings bank.

McHenry's bill would prevent NCUA from requiring disclosures that he says speculate about the future plans of management, such as the sale of stock or the grants of stock, options and other remuneration. The bill would also limit NCUA's oversight over disclosures and ballots sent to members during a conversion unless there is inaccurate or fraudulent information included in them.

As a backdrop to the hearing was the controversy over DFCU Financial and the failed conversion of the $1.8-billion credit union in Dearborn, Mich. (see related story, page 1).

Representatives from the American Bankers Association and America's Community Bankers, which represents mutual savings banks, insisted to the committee that NCUA's regulations intentionally discourage conversions and harshly restrict communications with members during the process.

But NCUA Chairman JoAnn Johnson insisted there are no regulations that restrict management's ability to communicate and NCUA did not try to discourage DFCU management from explaining its position to members. "They have had opportunity to communicate with other members prior to a vote but have chosen not to do so. There are allegations that NCUA is preventing them (from communicating). I would strongly disagree with that," said Johnson. "In no point of the process did NCUA restrict their ability to present communications with members."

Laura Stewart, president of Sound Community Bank, a Seattle savings bank known until three years ago as Sound CU, said NCUA has intentionally acted to impede conversions.

"Let me be clear," said Stewart, who was representing the thrift group that helped draft the McHenry bill, "nowhere is there an explicit prohibition on credit unions communicating with their members. However, the NCUA has made it known that they will treat communications with credit union members that are not approved by the NCUA as violations of the proper methods and procedures for a conversion vote, and therefore grounds to overturn a vote in favor of conversion.

"This was seen most recently in the attempted conversion of DFCU in Detroit, Michigan. Because of NCUA's position on communication during a conversion, a credit union is left with both hands tied behind its back," said Stewart.

"The NCUA's system creates a one-sided debate where conversion opponents are free to attack the credit union, its management and directors, while the credit union is unable to respond," she asserted.

NAFCU Suggests New Provisions

Marcus Schaefer, CEO of Truliant FCU, who was testifying on behalf of NAFCU, said NAFCU opposes the McHenry bill, but if Congress does decide to legislate conversions, the credit union group favors several provisions. They would:

* Require a credit union to hold a meeting of its members before mailing the ballots to discuss the conversion;

* Allow members opposed to the conversion a forum to voice their concerns;

* Require clear, plain and concise language on ballots and disclosures;

* Prohibit directors and managers from benefiting financially from a conversion for a period of 10 years;

* And require a minimum vote of 20% of all members to participate.

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