A federal magistrate's ruling that the National Credit Union Administration lacked the grounds to stop a Plano, Tex., credit union from becoming a mutual thrift could open the door to more conversion attempts, banking and credit union officials say.
Bankers and conversion advocates have argued for the past two years that the NCUA was intimidating credit unions that might otherwise consider adopting a thrift charter.
But in the wake of Magistrate Don Bush's decision, banking and credit union trade groups - which rarely agree on anything - say that the NCUA will have to be more cautious in how it handles the conversion issue.
The decision "opens up a new chapter in this thing," said Pat Keefe, a spokesman for the Credit Union National Association. Mr. Keefe added that he expects to see a "full-court press" from banking groups trying to get credit unions to become banks.
Indeed, Diane Casey-Landry, the president and chief executive officer of America's Community Bankers, said ACB plans to send letters to large credit unions urging them to consider whether conversion fits with their business plans.
"We're interested in starting a dialogue," she said. "If a credit union is going to continue to grow, it might be better off as a mutual savings bank."
Mr. Bush, of the U.S. District Court for the Eastern District of Texas in Sherman, handed down his decision late Wednesday after a six-hour hearing. Mr. Bush found that the NCUA's action disallowing a conversion vote by members of the $1.4 billion-asset Community Credit Union was "arbitrary and capricious."
The NCUA rejected the vote because a two-sided document containing disclosures that the agency required Community to mail to its members along with their ballots was folded differently than credit union officials had told the regulator it would be. In essence, the disclosures appeared as the third page in the packet instead of the second, which is what NCUA officials had expected.
Mr. Bush found that the agency's rules made no mention of how documents converting credit unions send to members should be ordered, and that regulators made no record of the agreement they had with Community covering the issue.
The decision is not official until it is reviewed and approved by a federal judge, but attorneys said magistrates' findings are almost always accepted. At that point the NCUA would have to decide whether it wanted to appeal.
The NCUA referred inquiries to the Department of Justice, which is representing the agency. A Justice Department spokesman said Thursday that officials there were still reviewing Wednesday's decision.
S. Cass Weiland, Community's attorney, said he expected the decision to be ratified within 10 days, clearing the way for his client to complete its conversion.
"This is good news for Community Credit Union," said Mr. Weiland, a partner at Patton Boggs LLP in Dallas. "We just wanted to get out of the trap."
Community is the largest credit union ever to seek to become a mutual thrift. More than 70% of the members who voted in its conversion election approved the change.
Another large Texas credit union, the $1.1 billion-asset OmniAmerican in Forth Worth, is also seeking to become a thrift. It received the support of 76% of the members who voted in its conversion election, but the NCUA has raised questions about its balloting. As with Community, the agency objected to the way OmniAmerican folded the disclosure document it mailed to members.
OmniAmerican has also sued the NCUA; a hearing on its case is scheduled for Aug. 31.
Since the first conversion in 1995, about two dozen credit unions have become banks. Since 2003, however, the number of institutions seeking conversions has slowed as the NCUA has tightened its regulations.
In a statement, American Bankers Association president and CEO Edward L. Yingling called the Texas ruling "a win for all credit union members, since it reaffirms their right to choose the charter that best suits their needs."
Like America's Community Bankers, the ABA will probably do aggressive lobbying to get credit unions to convert. But though the other group says conversion should be left up to individual credit unions, ABA officials say their group might try to force some large credit unions that have expanded their fields of membership to convert.
"It is something we're thinking about," said Keith Leggett, an economist who follows credit union issues for the ABA. He did not say how the group would go about forcing conversions, however.
