A decision by the industry's federal regulator to quash conversion votes at two Texas credit unions could have a chilling effect on credit unions interested in becoming banks, lawyers and consultants say.
In a span of two weeks last month the National Credit Union Administration invalidated the balloting at $1.4 billion-asset Community Credit Union in Plano and $1.1 billion-asset OmniAmerican Credit Union in Fort Worth. The decision essentially blocked the credit unions' plans to convert to mutual savings banks.
Conversion advocates say the NCUA voided the votes largely on a technicality - specifically, the way the disclosure form was folded. The advocates, who have long argued that the NCUA has tried to discourage conversions, say its actions last month are further evidence of that.
They further pointed out that the Texas Credit Union Department investigated the same claims that prompted the NCUA's decision and found no problems with the credit unions' documents.
The NCUA, though, says it was forced to act after the two credit unions failed to comply with regulations requiring them to include an NCUA-mandated disclosure statement "in a prominent place" in all mailings to members.
"NCUA remains steadfast that full disclosure must be a paramount priority in the process," Nicholas Owens, its director of external affairs, wrote in an e-mail to American Banker. "This is about clarity and NCUA being agreeable in regard to the credit union providing materials it deemed important for member consideration in an appropriate manner."
Mr. Owens also wrote that the "NCUA believes unequivocally" that a credit union "has the absolute right to convert."
The agency's critics say nothing could be further from the truth.
One lawyer who has worked closely with a number of credit unions that have pursued conversions said the regulator has made credit union executives who might otherwise consider a conversion nervous about taking such a step. Other conversion supporters suggested that the agency's actions might end up boomeranging, because the NCUA's anti-conversion bias has become so pronounced that it risks triggering inquiries by lawmakers.
Over the past two years the agency has enacted two regulations mandating converting credit unions to disclose harmful outcomes that could follow a conversion, including the possible loss of voting rights if the credit union later becomes a stock-owned institution.
Last winter the NCUA invalidated a conversion vote by members of Columbia Credit Union in Vancouver, Wash., after some members complained that the management did not adequately inform them of all the consequences of converting to a mutual savings bank.
"It's almost like they're searching for a reason to reject votes," Robert R. Davis, the managing director of government relations of America's Community Bankers, said Friday. "That's disturbing to us. It's illustrative of an abuse of power, and if that's the case, I think Congress will take an increasing interest. … At some point agencies that are unchecked overstep their bounds, and then they draw the attention of Congress."
Community and OmniAmerican would have been the largest to convert since credit unions began switching charters nine years ago. Instead, they became the second and third credit unions to have their votes invalidated in the past two years.
According to the regulator, both institutions - which were represented by the same law firm - failed to comply with an agreement to put a disclosure statement required by the agency immediately after a cover letter in the voting packets each sent to members.
Lawyers at the credit unions' law firm, Silver, Freedman & Taff LLP in Washington, said that they followed the agreement to the letter, and that the NCUA's real objection is to the way the disclosure document was folded.
In both cases, the statement was printed on one side of a page; the other side contained a point-by-point response drafted by the credit unions.
The way the document was folded, the credit unions' response was on the outside. Members had to unfold the page and turn it over to view the NCUA-mandated disclosure statement.
Silver, Freedman & Taff maintained in a May 20 letter to the NCUA that the document was folded the way any standard business letter would be, and that the issue was not important enough to invalidate the balloting.
"We do not believe the NCUA's position to invalidate the credit union's vote simply because the way a single piece of paper with print on two sides is folded is supportable, legally or factually," the letter said.
NCUA officials said they made it clear to the credit unions and Silver, Freedman & Taff that the disclosure statement had to be the first thing members saw after an introductory cover letter. Mr. Owens said the credit unions "agreed to a particular methodology to comply with the regulation," then failed to follow it in their mailings.
"This is more than a folding issue," he said.
To the NCUA's critics, though, the episode demonstrates the extraordinary lengths to which it will go to stop conversions.
"That's been the case for some time," said Lee Bettis, the chairman of the Coalition for Credit Union Charter Options and a former credit union chief executive. "It's becoming more and more difficult for credit unions to convert, because the regulator is trying to apply the brakes. It goes way beyond their role. Their job is to regulate for safety and soundness."
Keith Leggett, an economist with the American Bankers Association, said the NCUA has adopted a zero-tolerance policy toward conversions.
"If there is a technical violation, or even the appearance of one, they'll use that to invalidate the vote," he said. "People looking at this are going to say, 'Yes, disclosure is good, but you have to be even-handed.' This doesn't strike me as even-handed. It sounds kind of picky."
But former NCUA Chairman Dennis Dollar, now the principal partner of Dollar Associates LLC, a consulting firm that advises credit unions, said it would have been easy for Community and OmniAmerican to arrange their documents in a way that left no question as to whether they were complying with regulations.
"They should have erred on the side of caution," he said. "I don't know why any credit union would run a risk of having their votes invalidated."
Mr. Dollar, who ran the NCUA from 2001 to 2004, said charges that it was seeking to eliminate conversions were unfounded. He noted that 21 have taken place, including two last year.
"The record does not bear out the critics," he said. "I don't think NCUA has any history of overreaching. If it wanted to be draconian, there are much more effective ways of closing down conversions."
Representatives for the Texas credit unions say they plan to continue the balloting, which is being conducted by mail, and present the vote to the NCUA as soon as it is tabulated, despite the agency's already having ruled that the votes would be thrown out. The representatives said they would consider their options, including the possibility of a court challenge, when and if the NCUA officially rejects the results.
Dwight C. Smith 3rd, a partner at Alston & Bird LLC in Washington, said chances of a judge overruling the agency's decision are slim. At the same time, concerns about the way a document was folded "appear to elevate form over substance," Mr. Smith said.
"There's an argument they might have gone too far on this one," he said.
"Certainly it's a very strict reading of the rules. It's not making it any easier for institutions that are interested in converting."
