NCUA Board OKs Tougher Rules For Conversion Attempts

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Fueled by concerns over the ever-larger size of credit union conversions, the NCUA Board last week approved new rules requiring broader disclosures to members when converting to a mutual savings bank.

The new rules will require potential converts to tell their members whether the conversion plans include the eventual sale of the institution in a stock offering; how much the conversion process is expected to cost; and the effects the switch will have on the ownership and voting rights of the current members/owners.

The new rules will also require that conversion votes be conducted and counted by independent third-parties.

The main impetus for the new rules was the controversy surrounding the failed conversion of Columbia Credit Union, in Vancouver, Wash., last year when NCUA invalidated the successful conversion vote after discovering widespread irregularities amidst allegations of vote-rigging. Among other things, the federal regulator found the ballots had been counted by credit union employees behind closed doors.

NCUA Chairman JoAnn Johnson said the aim of the new rule is to increase and clarify disclosures for member/owners of converting credit unions. "NCUA believes it is of paramount importance for credit union members to be fully informed about the conversion so they may cast educated and meaningful votes. NCUA recognizes a credit union's right to convert its charter, so long as the members who vote on that decision have access to sufficient information to make an informed choice," said Johnson.

Requiring the vote to be by secret ballot and conducted by an independent entity, said Johnson, will enhance the integrity of the voting process and "give comfort to members that their votes are being treated confidentially."

The new rules come just weeks after the $1-billion Lake Michigan CU, Grand Rapids, Mich., failed to obtain the necessary member vote that would have made it the largest credit union to convert to a bank. Since then, Plano, Texas-based Community CU, at $1.7-billion in assets the nation's largest community charter, has applied to convert to a mutual savings bank and sell stock to the public.

The NCUA board also approved expanded disclosure requirements for credit unions converting to private deposit insurance. Among the new requirements are that members are clearly informed that the National CU Share Insurance Fund operated by NCUA enjoys the full backing (full faith and credit) of the U.S. government, and that they be given the right to withdraw their funds without penalty if they disagree with the conversion to private insurance.

The rules will also require that members be informed that after conversion to private insurance if their credit union eventually fails, the federal government does not guarantee that they will get their money back. "Members should have access to this information prior to voting on such a conversion, not just after the fact," said Johnson.

The board also voted to renew the interest rate ceiling on credit unions at 18%.

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