The NCUA Board approved a new rule shifting to members some of the powers over credit union conversions to banks from boards and management who allegedly have tended to manipulate the process in recent charter switches.
The new rule will require the credit union to notify members of a proposal to switch to a mutual savings bank before the board votes on the proposals; require credit unions to share internal records with members on the deliberations over a conversion, at the member's expense; shorten the voting from a 90-day to a 30-day ballot; and set new standard, or boxed, disclosures making clear that credit unions on average provide better pricing on loans and deposits.
Passage of the rule comes as credit union boards and management are increasing their efforts to manipulate the conversion process as opposition grows within the membership.
Last month, Columbia CU in Vancouver, Wash., enlisted paid employees and their friends and family to campaign to oust directors who had waged a long fight over that credit union's ill-fated conversion to bank.
In Kensington, Md., management of Lafayette FCU refused last week to share with members a running tally of the 90-day vote on conversion, even as the management used the tally to target certain groups that needed additional prodding to vote in favor of the conversion.
And in Dearborn, Mich., last week DFCU Financial announced it will pay a huge dividend - $17.5 million to members - just weeks before members are scheduled to vote whether to retain the board that voted for the failed conversion at that $2 billion CU (see related story, page 1).
NCUA Chairman JoAnn Johnson said the new rule will allow CU members much greater input in the conversion process. "Members own their credit union and this will give members a chance to express their opinions-before the board votes," said Johnson. "The charter change to a bank is a fundamental change and it ought to be done in an open and transparent way, with all points of view considered."
The new rule-the third time NCUA has changed the process over conversions in the past three years-comes as ever larger credit unions are converting to banks, with four billion-dollar institutions seeking a bank charter over the past two years. Two of them, Community CU (now ViewPoint Bank) and OmniAmerican FCU (now OmniAmerican Bank) have completed the switch. DFCU abandoned the conversion. And Think FCU is in the process of seeking member approval.
The main provisions of the new rule are:
* advanced notice to members, at least 30 days before a board vote on the conversion;
* reduction of the balloting from a 90-day vote to a 30-day ballot;
* requirement of a CU to set a voting record date to 120 days before notification to members;
* requirement of boards to share information with members, at the members' expenses;
* requirement of the CU to complete the conversion within a year after the vote;
* modification of rules over incentives, like raffles, requiring the credit union to plainly state that winning of the raffle does not require a "yes" vote on the conversion.
* requirement of each director to certify that under the fiduciary duty they believe the switch to a bank is in the best interests of CU members - and not just the institution, itself.
Johnson insisted this provision is important, in that many boards have cited the CU's need to grow and expand, instead of delivering better or cheaper services to members, as their main reason for seeking a bank charter.
What will probably invite the most criticism over the new rule is the reconfiguration of the boxed language. Under the new rule, a CU will only be required to include the boxed language in the three member disclosures, 90 days, 60 days and 30 days before the vote, and not in all member communication about the conversions, as is required now.
But the boxed language must now clearly state a "yes" vote will change the institution from a credit union to a mutual savings bank. It must also state that credit unions generally offer better rates on both loans and savings, than banks. In addition, a boxed language disclosure must state that conversion to a mutual savings bank is often the first step to conversion to a publicly owned bank and managers and directors may profit in excess of what most members stand to gain.
The new rule, particularly the boxed language, is expected to be challenged in court by the various companies and banking groups that are working to convert CUs to banks, especially the boxed language requirements. They have said in the past that discussions of rates and insider profits are speculative and should not be part of the required disclosures.
