Conversion Bid Could Head to Capitol Hill

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The controversy over credit union conversions was rekindled anew last week and appeared headed once again for Capitol Hill, where Congress will be asked to pose as a referee.

The issue came to a boil when NCUA rejected proposed member ballots for credit union giant DFCU Financial, which is vying to become the largest credit union yet to convert to mutual savings bank. In a game of ever-rising stakes, the Dearborn, Mich., credit union, once known as Dearborn FCU, holds almost $2- billion in assets, more than the $1.5 billion and $1.4 billion held by Texas' Community CU and OmniAmerican CU, previously the largest credit union converts.

After NCUA rejected the proposed member ballots, DFCU hired super lobbyist Jim Butera, who helped turn Congress against NCUA last summer during the Community CU controversy. Butera is a long-time thrift lobbyist who has represented several Federal Home Loan Banks; FM Watch, the group fighting to rein in Fannie Mae and Freddie Mac; and even failed hedge fund Long Term Capital Management. After NCUA rejected member ballots for Community CU, Butera helped raise the ire of several Texas lawmakers with jurisdiction over the Plano, Texas credit union and assisted in the drafting of a bill, still pending, that would restrict NCUA's powers over credit union conversions to banks.

In an unusual 12-page letter to DFCU, NCUA Regional Director Mark Treichel cited numerous flaws in the proposed ballot. The letter was unusual because it was addressed to senior management and lawyers for the Michigan credit union, as well as each individual director, something never done for a conversion. Lawyers for the credit unions suggested NCUA addressed the letter to the directors in an effort to intimidate them. NCUA denied that.

No Mention of the 'B' Word

The NCUA director said the agency found fault with the ballots because they mentioned that DFCU Financial plans to convert to a mutual savings institution but never mentions the "B" word, that is, bank, something many credit union members may find objectionable.

The regulator also found fault with proposals by DFCU to stage a raffle for 10 cash prizes of up to $5,000 each to help induce members to vote.

While such raffles have become commonplace among credit unions-both Community CU and OmniAmerican CU gave out $15,000 in prizes during their conversion voting-NCUA said the DFCU ballot implies that members must vote in favor of the conversion in order to be eligible.

In addition, NCUA suggested that the credit union present the so-called box disclosures-standard explanations on the effects of the conversion on voting and ownership rights-on a separate sheet from their answers to the boxed disclosures. It was Community CU's and OmniAmerican CU's presentation of the disclosures and the credit unions' answers on the back that originally caused NCUA to reject those credit unions' ballots. Those rulings were eventually overturned by a federal court, paving the way for the two Texas credit unions to complete their charter switches.

Also, for the first time, NCUA suggested that DFCU's board consider returning some of the credit union's capital to members as part of the conversion.

Representatives of DFCU Financial said they were baffled by NCUA's ruling, noting the proposed ballots are identical to those they designed and proposed for both Community CU and OmniAmerican CU.

"They're exactly the same, except for the names, the wording is the same," said Bob Freedman, a Washington attorney for Silver Freedman & Taff, who has handled most of the 35 credit union conversions to banks.

"They're just looking for a fold," said Alan Theriault, the well-known consultant who has pioneered the credit union-to-bank switch, referring to last year's controversy over the Community CU case in which the way in which the conversion documents were folded became an issue.

An NCUA official acknowledged the agency acted differently on the latest conversion but said they were trying to avoid a situation that came out in last summer's court case when NCUA insisted that several matters agreed to verbally were never finalized and thus, violated by Community CU. This time, said the NCUA official, they are seeking to put everything in writing. The main motive, insisted the official, is to provide thorough and understandable disclosures to members voting on the biggest credit union conversion ever.

By last week, DFCU had responded to NCUA's letter. The credit union officials said they did not agree to all of NCUA's comments, so couldn't satisfy all of the regulator's concerns. NCUA has 30 days to make a ruling on DFCU's response.

(c) 2006 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved.

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