Credit Union Conversions: When 6 Turned Out To Be 9
What prompted this reminder of my college years was a letter sent by NAFCU to the House Financial Services Committee, which is drafting the credit union bill. In it, NAFCU reiterated several universally agreed-upon principles such as full and easily understandable disclosure. NAFCU also was the first entity to come out in favor of a ban on insider enrichment, coming as Credit Union Journal was revealing in a daily series the millions of dollars being earned by managers and directors of credit union converts. NAFCU's proposal would ban insiders from profiting from the conversion for a period of 10 years. If the riches offered by the conversions are the main motive for such charter switches this will surely kill all subsequent conversions.
NAFCU told the Committee its supports a provision to require a minimum of 20% of all members vote on any conversion. That 20% threshold contrasts with the minimum 30% threshold currently in the bill, which NAFCU also said it supports. NAFCU said it is not being inconsistent in its position.
NAFCU President Fred Becker told the Credit Union Journal his group does support the 30% threshold, as well as the 20%. The 20% was actually a figure endorsed in a "White Paper" on conversions NAFCU's board endorsed two years ago. So, said Becker, it should be no surprise that NAFCU supports a minimum vote of 20% of all members on conversion. But the trade group also supports the 30% figure inserted in the bill by its chief sponsor, Pennsylvania Rep. Paul Kanjorski, an ardent critic of credit union conversion to banks.
There is a significant difference in the two figures. The difference is that almost every credit union that has converted to bank until now has achieved the 20% member-vote threshold, or come close to it. That means a 20% legal requirement will likely have little impact on credit unions seeking to convert.
But few of the converts have actually succeeded in getting 30% of its members to vote, making that legal threshold much more of an impediment to conversion. Becker noted that some NAFCU-member credit union executives don't want to set the bar too high because they want to keep their options open.
The current draft of CURIA would require credit unions to notify members about a potential conversion to bank before the board votes on it and to facilitate member discussion on the matter. It also has the 30% minimum for member participation in the vote.
Few participants expect the issue of insider enrichment to be addressed in the bill, despite NAFCU's recommendation.
CU Journal Report Is Highlighted
Staffers of the Financial Services Committee held a closed-door meeting with lobbyists to discuss credit union conversions in pending legislation, with the public and press barred form the meeting, but lobbyists allowed in.
Among the participants were representatives form CUNA, NAFCU, NCUA, the National Federation of CDCUs, and Silver Freedman & Taff, the Washington law firm that specializes in credit union conversions. The meeting was moderated by Todd Harper, chief legislative aide to Kanjorski, who wrote CURIA.
A banking expert told the staffers that credit unions converting to mutual savings bank are increasing the risk to the FDIC deposit insurance fund, and thus to taxpayers. Consequently, said Dr. Haluk Unal, professor of finance at the University of Maryland and an FDIC consultant, credit unions should not be able to convert to bank charters.
Bucky Sebastian, president of GTE FCU in Tampa and head of the National Center for Member Trust, showed the staffers a series of articles published by the Credit Union Journal last week illustrating the increasing compensation among managers and directors of converted credit unions. "There is absolutely no reason for credit unions to convert other than insider greed and profit," said Sebastian.
Alan Theriault, the long-time credit union consultant who has been instrumental in a number of CU conversions to mutual savings bank, told the staffers that credit unions ought to have the option to convert if they find the bank charter more suitable. The conversion to members and allowing them to discuss it before the board votes.
At the end of last week, 83 House members had signed on as co-sponsors of CURIA, which has yet to be scheduled for a hearing.