Magistrate Calls NCUA To Task On Conversion Move

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A federal magistrate last week recommended that NCUA's refusal to certify a vote by members of Community Credit Union to convert to a mutual savings bank be overturned, and that the credit union giant be allowed to shed its credit union charter.

"Community Credit Union complied with the applicable regulations," said U.S. Magistrate Don Bush, whose recommendation is expected to be adopted formally by the U.S. District Court in nearby Dallas. The court's decision throws additional turmoil into the conversion issue, which is also a brewing controversy on Capitol Hill. The House Financial Services Committee has already thumbed its nose at NCUA over its actions by refusing to include the agency's pet priority, enactment of a risk-based capital system for credit unions, in its regulatory relief bill, and angry committee members will press their case in the coming weeks for legislation to rein in the agency's power over credit union conversions.

"This doesn't help things," said one credit union lobbyist about the court ruling.

The hearing, held in an adjunct U.S. District courthouse 60 miles north of Dallas, took on the patina of the national battle that has emerged over the conversion issue, with representatives of the major credit union and bank lobbying groups flying in from Washington. The American Bankers Association and its 42 state affiliates, as well as the Independent Community Bankers Association and America's Community Bankers, all filed briefs supporting Community CU's efforts to shed its credit union charter. CUNA, NAFCU and a group of Community CU members financed by Self-Help CU, all argued in support of NCUA.

In a rare acknowledgement of the national interest, Magistrate Bush agreed to issue his ruling the same day as the hearing.

'Arbitrary & Capricious'

In ruling against NCUA, the U.S. Magistrate found that the federal regulator acted in an arbitrary and capricious manner when it refused to certify Community CU's member ballot, in which 72% of voting members approved the switch to bank, based on how the $1.4-billion Plano-based credit union presented certain disclosures to its members.

The ruling is expected to be applied to OmniAmerican CU, a $1.3-billion credit union in nearby Forth Worth, which faces the same questions on its vote, after 76% of members who cast votes voted in favor.

Magistrate Bush said he will reserve judgement on that case because NCUA has yet to render a ruling on the vote, even though it has indicated it will not certify OmniAmerican CU's vote for the same reason as it denied Community CU.

During the hearing, NCUA insisted that attorneys for Community CU had agreed to present the agency's required "boxed disclosures," explaining first the impact of the conversion on a member's voting and ownership rights and the potential to sell the credit union to the public in a stock offering, but instead the mail ballots presented the credit union's rebuttal to the required disclosures first. Renee Orleans, a Department of Justice attorney representing NCUA, told Magistrate Bush this tainted the balloting. The Justice Department lawyer told the Magistrate the credit union's lawyers had agreed verbally that NCUA's 'boxed disclosures' would be presented first to members, then the credit union's responses to those disclosures would be presented. NCUA only agreed to allow the credit unions to print its responses on the back-side of the same sheet of paper in order to be flexible and to make it easier for the credit union, insisted Orleans.

But Cass Weiland, a Texas attorney representing Community CU, said there was no such agreement and the structure of the mailings were subject to vague instructions by NCUA.

Since NCUA's lawyer was unable to produce any evidence of such an agreement, Bush concluded there wasn't any agreement and that the case boiled down to how Community CU folded the two-side disclosures in the envelopes sent to members. "I see this as a very narrow issue in this case," he said.

Magistrate Questions NCUA

The Justice Department's Orleans told the Magistrate that because the average member would unfold the two-sided disclosures to read Community CU's arguments favoring the conversion first, it violated the agency's newly passed regulation requiring that NCUA's required disclosures be read first.

But the Magistrate disagreed. "How does an average reader unfold a letter-is there any evidence of this?" he asked while demonstrating by folding a piece of paper into thirds. Community CU's lawyer Weiland said the regulation was so ambiguous as to invite disagreement. He noted that NCUA gave its preliminary approval to the required three mailings-90 days, 60 days and 30 days in advance of the member vote-but never specified how the ballots were to be presented to members.

"I cannot resist thinking about Joseph Heller in 'Catch 22,'" said Weiland, Dallas-based partner in the Washington firm of Patton, Boggs. "They tell us, 'we don't care how you fold the letter, but we're not going to tell you how to fold it. But if you do it wrong, we're going to tell you to go back and do it again.'" Magistrate Bush agreed with the Community CU lawyers. "There's nothing in the record that shows the order of disclosures," he said.

'Go About Their Business'

Community CU representatives were guarded after the ruling.

"We'll wait to see what happens," said James McCarley, chairman of the CCU board.

NCUA representatives would not comment after the hearing. But Community CU's lawyer Weiland said he hoped that once the District Court renders its opinion it will end the case. He said he hopes NCUA will not appeal the ruling. "That means more delay and more expenses for my client," he said. "This has been a difficult time for CCU. They just want to go about their business."

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