DFCU Financial Withdraws Bid To Convert To Bank

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Last week's reversal on a banking charter by DFCU Financial is bringing the debate over credit union conversions back before Congress.

America's Community Bankers, the trade association for mutual savings banks, said the DFCU controversy was strong evidence that the system needs to be reformed to make it easier for credit unions to convert to mutual savings banks. The thrift group used the CU community's own pet description, arguing that credit union trade interests working to discourage conversions to banks are trying to frustrate the "choice" of credit union members (CUs had called the fight for HR 1151 the Campaign for Consumer Choice)

Diane Casey-Landry, president of the thrift group, called the DFCU decision to pull its bank application "a victory for the small-minded detractors who fear change, who inhibit new ideas and who attack freedom of choice." The ACB, which helped write the bill, also convinced Congress to call the bill, The Credit Union Charter Choice Act. Casey-Landry called on Congress to take up a bill introduced last year that would ease NCUA's powers to monitor the conversion process, moving some of it to the mutual savings bank regulator, the Office of Thrift Supervision.

"All DFCU ever asked was a fair chance to tell both sides of the conversion story and let an informed membership vote on the outcome. Instead the NCUA erected actual and perceived roadblocks, while its allies launched an inflammatory political campaign to discredit DFCU management and the conversion process," said Landry.

The American Bankers Association also put the onus on NCUA for the failed conversion attempt, the biggest ever for a credit union. "It was the clear intent of Congress that credit unions have a straight-forward process to convert to mutual savings banks," said Edward Yingling, president of the ABA. "We agree with the management of Dearborn Federal Credit Union that this process has been completely skewed by the NCUA and some in the credit union industry, both of which have a clear and public bias against conversions.

U.S. Rep. Patrick McHenry (R-NC), who introduced the conversion reform bill, said last week the DFCU controversy has brought the issue back before Congress. McHenry introduced his bill last year after clashing with NCUA Chairman JoAnn Johnson for the agency's attempts to stop the conversion of two giant Texas credit unions (see related item, below left). Those attempts later were overturned by a federal court.

McHenry said last week the House Financial Services Committee will hold a hearing on his bill next month. McHenry's bill would remove NCUA from much of the voting process, unless one party engaged in misleading or fraudulent behavior. According to McHenry, this would ensure that NCUA is restricted to the role of a referee. The North Carolina freshman said he is convinced that NCUA's process, which he said requires the federal regulator to approve all communications to members during and before the 90-day ballot, hindered the process in the DFCU case.

But NCUA regulations do not, in fact, require that the agency review and approve of communications with the membership, according to NCUA Staff Attorney Frank Kressman. Rather, the regulations call for all written communications to include the so-called "box disclosures" that are designed to ensure members understand all the ramifications of a conversion, such as the potential eventual loss of equal voting rights.

But McHenry said he has been watching the controversy over DFCU Financial closely and believes much of the acrimony could have been avoided by a greater ability of DFCU to freely explain their plans to members.

In fact, NCUA is putting together amendments to its conversion rule, the third time the rule has been written over the past three years, which would ease the way to discussions between management and members, as well as facilitate communications and organizing between members who may organize to opose the conversion. NCUA is not expected to have the new rule available until mid-year.

Seeking Amendments To Rules

McHenry conceded his bill is unlikely to be passed this Congress, but he said he hopes next month's hearings will encourage NCUA to amend its conversion rules to, among other things, allow greater communication between management and members prior to the vote. "I'm hopeful with a full (NCUA) Board they will be able to deal with this in a regulatory manner," McHenry told The Credit Union Journal, referring to last year's clash with NCUA while it had only one sitting member, NCUA's Johnson. "Otherwise, it may require a legislative remedy."

The lawmaker insisted his bill is not intended to harm credit unions. "It is neither anti-credit union or pro-banker," he said. He also dismissed talk that the credit union lobby, which supported his opponent in the last elections, might target his reelection this fall. "That's their right. But I'm going to be here a long time," he added.

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