NCUA delivered a major blow last week to efforts by two Texas credit union giants to convert to mutual savings banks when the federal regulator ruled that hundreds of thousands of ballots Community CU and OmniAmerican CU mailed to members were invalid because they violated the agency's new rules on required disclosures for conversions.
In separate letters to the two billion-dollar credit unions, NCUA said the mail disclosures, which included ballots to vote on the conversions, were tainted because they presented each credit union's position favoring the charter switch before they presented the required regulatory disclosures enacted by NCUA earlier this year.
While both credit unions, Community CU, a $1.4-billion credit union based in the Dallas suburb of Plano, and $1.2 billion OmniAmerican CU, in Fort Worth, are regulated by the state of Texas because they are state charters, they are required to abide by NCUA's rules and regulations on conversions because of their federal insurance with NCUA.
This is the second and third times NCUA has invalidated a vote on converting to mutual savings bank, finding in 2004 that the successful vote by Columbia CU in Vancouver, Wash., was tainted by broad manipulation of the vote by management, thus ending the $620-million credit union's plans to switch charters and precipitating a revolt among members.
That controversy prompted NCUA to tighten up its regulations covering conversions with new restrictions on the voting process and on what a credit union must disclose to members about the impact the conversion to mutual savings bank will have on them.
The disclosures required by NCUA under the new regulations must explain how conversion to a mutual savings bank changes ownership and control of the credit union; how the loss of the credit union tax exemption may affect rates and services; that the credit union may convert to a stock form of ownership after conversion to a mutual savings bank and how management and directors may profit from the stock sale; and what the costs of the conversion will be.
While NCUA says both credit unions agreed to present these disclosures before the credit unions' arguments explaining the benefits of the conversion, they failed to do so. "We believe this tainted the process," said Nicholas Owens, spokesman for NCUA.
But representatives of the two credit unions say the dispute revolves around the way a single, two-sided sheet containing both arguments on opposite sides was folded, allowing the member to unfold it a certain way when they opened the envelope containing the voter disclosures. "This is about how you fold a piece of paper," said one of the lawyers who represents both credit unions.
But NCUA said it was about more than that and that the Community CU and OmniAmerican CU lawyers agreed to present the documents in a mutually acceptable way, then violated that agreement.
The discrepancies were first brought to NCUA's attention by a group formed to stop the precedent-setting credit union conversions, the Coalition for Member Trust (it also calls itself the Texas Coalition for Credit Union Members), which filed a complaint with NCUA over the mail ballots.
Because the disclosures were mailed in a way NCUA found objectionable in the first two of three mailings required of each credit union, the regulator ordered that the first two mailings be thrown out and done over, thereby invalidating tens of thousands of conversion votes conducted on ballots included in the mailings. To do the mailings over again could cost each credit union more than $500,000 and months of delay.
Representatives of Community CU said they are still moving ahead with the member ballot while they are working with NCUA in hopes of resolving the dispute, short of redoing the ballot. "We really believe we've complied with, not only the rules and regulations as they were written, but the directions given by NCUA," said Mark Hord, general counsel for the $1.4- billion credit union, the biggest ever to seek a bank charter.
Since the voting process is into its second month and is scheduled to culminate at a special members' meeting June 21, Hord said it would be impractical to start all over again, as NCUA suggested in a letter spelling out a technical infraction on the ballots, so credit union officials plan to proceed with the balloting. "Given our position," he said, "we think it's appropriate do so."
Officials of OmniAmerican CU did not return phone calls seeking comment.
NCUA officials, who have taken a hard line opposing credit union conversions, say the agency's position is steadfast and there is no appeal process. "This is a final decision," said Owens.
Lawyers for both credit unions said last week they were reviewing their options, one of which is to file suit against NCUA to have their decision overturned.
But no decisions had been made as of late last week.
