With some industry observers predicting a wave of credit unions choosing to convert to bank charters in the coming months, the question has become: what can-and should-be done to keep these credit unions in the cooperative fold?
The Wisconsin CU League, for example, took an active role in helping to put the kibosh on at least one would-be bank. And the Massachusetts Department of Banking will argue that the conversion of a state-chartered CU to a mutual savings bank is prohibited by state law in an attempt to keep Postal Community CU from converting despite its membership having overwhelmingly voted for the charter change (see related story page 1).
But not everyone believes in taking such an active role in a move that is, after all, supposed to be up to a credit union's membership.
"Our board has had a long discussion about this. It's an important issue to the Washington Credit Union League, particularly since we've had a number of conversions in our state," said John Annaloro, president of the league. "We have a policy of self determination. It is not the league's role to step in between a credit union and its board. At a well-run credit union, such decision making should be kept in the boardroom. It's not up to the league. It's not up to the courts or Congress or the competition or the credit union down the street to determine what another credit union should do."
That's not to say that the WCUL has washed its hands of the conversion issue. The league is working on crafting standard language for a so-called "poison pill" amendment that CUs could voluntarily adopt to make it more difficult for a future CU board to convert to a bank charter. The league is also supporting efforts to enhance the credit union charter-at both the state and federal level.
Sweeping Regulatory Relief
"What we really need is sweeping regulatory relief," Annaloro suggested. "It's nearly impossible to charter a new credit union today, and it takes decades for a credit union to grow to the size of Columbia [CU, whose charter conversion is being challenged by a group of its members]. We need sweeping regulatory relief so that small credit unions can grow and new credit unions can be started."
CUNA and NAFCU have similar positions on this topic to that of the Washington league.
"A credit union is its members, and its members elect the board, so the board-and management, for that matter-is acting for the benefit of the members who elected them," said CUNA's Bill Hampel, explaining why CUNA generally wouldn't get involved in a conversion controversy. "If the members came to us, that would make it more complicated. Credit unions and their trade associations don't need to close down the conversion option, we need to work to enhance the credit union charter so that no one can make the argument that a credit union's members would be better off as bank customers." AFCU's Gwendolyn Baker agreed, noting, "our current strategy is to focus on enhancing the federal charter. Our board has not supported a move that would send us down a road where we would get involved in a conversion.
But there are some in credit union land who suggest that trade associations can and appropriately should get more directly and actively involved when a CU announces its intent to convert.
"The state leagues and CUNA should do anything and everything to keep credit unions from converting," said Wayne Langei, CEO of Whatcom Educational CU, Bellingham, Wash. "One of the responsibilities of a credit union league has is to do things that will help to continue the credit union movement. It used to be one of their primary jobs was to start new credit unions. Today, I believe it is the responsibility of the leagues to take a leading role in opposing bank conversions."
Langei suggested leagues should be putting ads in newspapers in the same areas served by a CU that is trying to convert in an effort to educate the membership about what such a conversion could mean.
"They can buy ads in the paper about why members should vote against it, they can get on talk radio shows to explain what credit unions and what the detriments are if a credit union converts."
And other credit unions can and should get involved, too, Langei asserted. "I don't think we're dealing with this on a peer level. We should be dealing with credit unions that are leaning toward this abberrant behavior and do what we can to bring them into the fold," he commented. "If you had someone in your family who was doing something you thought they shouldn't, wouldn't you talk with them about it? Well, credit unions are different from banks, and one of those differences is that we're a family. When a credit union in your neighborhood says it wants to convert, then you should go and talk to them about it."
The problem, Langei suggested, is that not enough credit union members are educated about the benefits of being a credit union member and what members lose when a credit union converts. "And let's face it, credit unions that want to convert aren't going to educate their members about this," he noted. "That's why it takes an outside force."
"Members are going to lose out when a credit union converts, so they need to be informed about what is happening," Hampel offered. "So the question is, how do we encourage a situation where a sufficient number of members are informed about what is taking place and ensure a sufficient number of members are involved in an election."
The first step may be requiring greater disclosures, as NCUA is proposing, he observed, but added that there is a danger in creating disclosure statements that are so thick and full of "legalese" that members won't bother to slog through reading them. CUA Chair Dennis Dollar said the agency should have a final rule on conversion disclosures this year. In the meantime, there are bills pending before Congress that seek changes to the credit union statutes, including a provision to roll back the relaxed voting requirements established in HR 1151.
"Prior to 1998 the statute did not speak to voting requirements, and it was NCUA's call to determine those standards, and NCUA's call was that a majority of the membership must vote in favor of a conversion. But as part of the give and take that is part of getting anything through Congress, banks wanted to make it easier for credit unions to convert, and Congress determined that a simple majority of members voting, instead of the full membership, was all that was required. That left NCUA with the role of validating the vote, election procedures and disclosures."
While Dollar said he would like to see the voting standards put back to a simple majority of a credit union's entire membership, he said that some of the quorum requirements that are being discussed might be a good compromise.
Looking For Compromise
"The legislation sponsored by [Republican U.S. Rep. Ed] Royce, and [Democrat U.S. Rep. Paul] Kanjorski includes a provision that would require that at least 20% of a credit union's members would have to vote for a conversion. I don't think that is the most appropriate number, but it would certainly be an improvement," he commented. "The key is that it's healthy that such a provision has been included so Congress can debate this issue. The compromise I've heard about that I would be open to would be requiring that 50% of the membership must vote in the election for the election to be valid, and then a simple majority of those voting must favor the conversion, so at least 25% of your membership would have to favor the conversion."
Dollar noted that he's heard from some credit unionists who would like to go even further and require that a credit union that seeks to convert to a bank to return to its members some of the capital that it has acquired over the years. "And that is a valid point, since credit unions have only one source of capital-its members," he offered. "Members sacrifice for years so a credit union can build its net worth. Don't they deserve some of that back when a credit union converts? Of course, we don't have the legal authority to require an institution to remove its net worth like that."
Like the trade associations, NCUA has worked to enhance the CU charter, Dollar said, but he noted that there's only so much NCUA can do and for some credit unions, it may never be enough.
"If a credit union really wants to be a bank, then they will convert no matter what we do to enhance the charter. So what it really comes down to is the heartbeat of the credit union movement," he said. "We have done some very progressive things here and the states have, too. So, for the credit unions that still want to convert, I question their heartbeat. Not everyone shares the heartbeat of the credit union movement. I just think their members, many of whom do, indeed, share in that heartbeat, need to understand exactly what they're about to lose."
