In a rapid retreat last week, NCUA agreed to drop its objections to the charter conversions of Community CU and OmniAmerican CU, clearing the way for the two largest credit union-to-bank shifts ever.
The deal, struck just hours before a U.S. Magistrate was scheduled to review the OmniAmerican case and a week after the Magistrate recommended the overturning of NCUA's denial of Community CU's conversion, lowers the risk a federal court will strike down NCUA's rules on conversions to mutual savings banks, as the magistrate had recommended. It could also ease some of the tensions on Capitol Hill, where numerous members of Congress had criticized NCUA's actions rejecting the two giant credit union conversions.
"Community Credit union can now move forward with the wishes of our membership, who voted overwhelmingly in favor of conversion to a mutual savings bank," said Gary Base, president of the $1.4-billion credit union-the largest ever to shed the credit union charter. "We're very excited about the opportunities possible through our new charter. We are poised to bring a fresh approach to banking with the benefits of expanded products, services and locations to better suit the needs of our members."
Community CU is based in Plano, Texas, a suburb of Dallas, and OmniAmerican CU is based in nearby Forth Worth.
Under the settlement, the U.S. Magistrate will withdraw an Aug. 30 recommendation to the U.S. District Court to overturn NCUA's ruling rejecting the June vote by Community CU members to approve the charter switch. "Even though we believe there are valid objections that could be raised in response to the (magistrate's report), we also believe settlement of this lawsuit is the best way to quickly resolve this matter," said NCUA Chairman JoAnn Johnson, in a carefully worded statement.
The deal also eliminates NCUA's objections to the vote at OmniAmerican CU, approved by 76% of voting members, which will clear the way for the $1.3-billion credit union to become the second-largest CU convert.
"This lawsuit has served to bring into clear focus several issues regarding our regulatory procedures, particularly the need for full and fair disclosures to our members," said Johnson.
NCUA had objected to the balloting at both credit union giants based on how the agency's required "boxed disclosures" explaining the ramifications were displayed to voting members in mailed ballots. NCUA claimed that the fact that members opening their envelopes first saw the credit unions' rebuttals to NCUA's required disclosures tainted the voting process and the agency refused to certify the voting.
Court Expected To Follow Suit
But U.S. Magistrate Don Bush quickly rejected NCUA's position and ruled the way the disclosures were presented were a result of how the two-sided disclosures were folded and did not qualify as a violation of NCUA's rules, which require plain and conspicuous display of the boxed disclosures. The magistrate, who also suggested several provisions in NCUA's rules governing disclosures were illegal, sent his ruling to the U.S. District Court in Dallas, which was expected to adopt it as a formal decision. The removal of the magistrate's recommendation to the court eliminates the immediate threat that the court could strike down the agency's regulation at further embarrassment to the NCUA.
In his recommendation, Magistrate Bush said that parts of NCUA's regulation, adopted earlier this year after the two Texas credit unions applied to change charters, went beyond the authority of NCUA to regulate conversions from credit unions. The required disclosures on the potential for going public after converting to mutual savings banks and for enrichment of insiders should be governed by thrift regulators, and not NCUA, said the magistrate.
It was unclear last week what impact NCUA's retreat on the controversy will have on Congress. Rep. Patrick McHenry (R-NC), who called NCUA's actions in the conversions "re-freaking-diculous," during congressional hearings, is expected to push ahead with his bill to strip NCUA of some of its powers over conversions to mutual savings banks. Officials in McHenry's office were unavailable for comment last week.
