A proposal restricting interlocks between corporate credit unions and trade groups has split the federal regulator's board and raised threats of litigation by the Credit Union National Association.

NCUA board member Ralph Swan last week voted against putting out for comment a proposed regulation that would alter corporate governance. He lost, 21.

In an interview, Mr. Swan said interlocks don't pose a threat and criticized the other two board members for trying to reform corporates in a "piecemeal" fashion.

"As long as there's a democratic process to elect corporate boards, I don't have a problem," he said. "If an interlock occurs, so be it."

CUNA President Ralph Swoboda blasted the proposal and said the industry's largest trade group might sue the agency unless the regulation is diluted.

"If the regulation is passed, the credit union movement as we know it will begin to lose control of its own destiny," Mr. Swoboda said in a statement. "A precedent will be set. NCUA will begin to regulate credit union governance even where there is no risk to safety and soundness."

NCUA Chairman Norman E. D'Amours shrugged off the trade association's threat of a lawsuit.

"I don't know what they would base it on," he said.

Mr. D'Amours and NCUA Vice Chairman Shirlee Bowne voted to issue the proposal at last week's board meeting in Park City, Utah.

There are 43 corporates, about half of which share management with state leagues, which are affiliates of CUNA.

The proposed regulation would ban trade group officials from holding a majority of seats on a corporate board. It also would:

* Prohibit a corporate from employing trade group employees.

* Require a corporate's management to report only to its board, not the league.

* Require corporates be open to all credit unions, not just trade group members.

The proposal will be open for comment 30 days after publication in the Federal Register.

Mr. D'Amours insists that cutting'-the ties between corporates and the trade groups is necessary.

"I believe that a system that permits conflicts of interests is as dangerous as conflicts of interest themselves," he said. "There have been conflicts of interest, things have happened that shouldn't have happened. We're not acting on an entirely theoretical basis here."

Mr. D'Amours said he couldn't comment on specific incidents. But the NCUA is investigating the propriety of the Texas Credit Union League's sale of its check-processing service to Southwest Corporate Federal Credit Union.

'The two organizations share board members.

Mr. Swan said he expects the board to try to adopt the regulation shortly after that. He said he didn't know whether he would oppose the final regulation.

Congress has investigated corporate credit unions and interlocks probably will be discussed during a heating next week.

The board is hurrying and should hold off on making proposals until it gets briefed next month by the five experts it hired to study corporates, Mr. Swan said. The panel submitted its report in July.

"I think we should wait rather than be off and running," Mr. Swan said.

Mr. Swan said the board's real goal - and the reason it's moving so quickly - is to alter the board of U.S. Central Credit Union, which acts as a liquidity center for corporates.

The proposal is "a move totally-directed against U.S. Central," Mr. Swan said. "Their board structure is the one we're the most critical of."

The nine-member board of U.S. Central is reserved for six officials of CUNA or related organizations and three corporate officials. Mr. Swan said lack of democratic process in the setup is questionable.

The NCUA board issued an advance notice for proposed rulemaking on the interlocks question in April. It received 400 comment letters, with 278 of them opposing the proposal to restrict trade group presence in corporates.

Mr. Swoboda blasted the agency for sticking to its hard line.

"We're very disappointed that NCUA ignored the comments it received from credit unions," he said.

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