Credit unions won a hard-fought victory last summer when Congress made it easier to expand their membership. But for two Southern California institutions, the new law is not enough.

Pacific Trust Federal Credit Union in Chula Vista and Kaiser Permanente Federal Credit Union in Pasadena are seeking to shed their credit union charters and become federal mutual savings banks.

In applications submitted Dec. 31 to the Office of Thrift Supervision, both credit unions cited a desire to increase mortgage lending as a chief reason for converting.

Though a new law lifts a major limit on credit union growth, it does not "provide the tools to ensure a successful future," according to the applications.

Federal credit unions have no limitation on the number of residential loans they may make, but terms of the loans are restricted.

In addition, credit unions may not charge penalties on loan prepayments, said Alan D. Theriault, president of CU Financial Services, a Portland, Maine, consulting firm. This hurts their chances of getting a higher premium when the loans are sold to investors in the secondary market, he noted.

Kay M. Loveland, president of $180 million-asset Kaiser Permanente Federal, said the biggest challenge for credit unions is remaining attractive to customers. "Today's members are seeking the best value for their financial interests rather than relying on historical relationships alone," she said.

Hans R. Ganz, president of Pacific Trust, declined to discuss his credit union's application until it is released to members.

"If you have the profile of a thrift, why not be one?" asked Richard Garabedian, a lawyer at Silver Freedman & Taff LLP in Washington.

At Sept. 30, Pacific Trust-which is run by two former thrift executives- had $116 million of mortgage loans outstanding, or 52% of its total assets.

Such figures can draw scrutiny from the National Credit Union Administration. Bill Hampel, chief economist at the Credit Union National Association, a trade group, said the regulatory agency is especially concerned about interest rate risk on fixed-rate mortgages. "If you have more than 25% of your balance sheet in mortgages, you will attract the attention of the NCUA," he said.

Kaiser Permanente and Pacific Trust would not be the first credit unions to convert to thrift charters, though they would be the first in California. Seven credit unions have converted to mutual savings banks since 1993, according to the OTS. Four applications, including the two from California, are pending.

And others may follow, now that conversion no longer requires NCUA approval. The credit union law enacted last August also removed that barrier. The credit union and banking industries feuded for years over membership limits, taking their dispute to the Supreme Court, which ruled that the law required members to share a single, common bond. Congress quickly changed the law.

If the charter applications are approved by the OTS, Kaiser Permanente and Pacific Trust said they expect to hold membership votes by summer.

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