Dollar: Credit Union Members Might Not Know What They're Getting Into With Thrift Conversion

LAS VEGAS-Speaking during the 26th Annual National Credit Union Director’s Conference, NCUA Chairman Dennis Dollar told a group of credit union volunteers that the NCUA Board was working on strengthening member disclosure requirements when considering a thrift conversion. According to Dollar, “demutualization of many credit unions could occur unwittingly by members who are not fully informed that they could be losing their member-ownership status in just two years if the thrift were to become a stockholder-owned bank.” He emphasized that he supported the right of credit union members to change the institution’s structure and charter. “However, all member-owners should be fully and completely informed through an effective disclosure process that their ownership interest is subject to loss in as little as two years if their credit union moves to thrift and then to stockholder-owned bank,” Dollar said. “Credit union to thrift to stockholder-ownership in just a matter of years has happened a number of times in the recent past, and NCUA has heard from countless former credit union member-owners who said they wish they had known earlier the possible ramifications of abandoning their credit union charter. The member-owner status is important to credit union members, Dollar explained in a subsequent interview. “I think that members are very committed to their member-owner role at their credit union,” he said. The chairman added that while mutuals also have members, those with more funds in the institution have more power over it and they are best positioned to be able to buy stocks if the members vote to convert to stock form. CU Financial Services President Alan Theriault, who facilitates credit union to thrift mergers and conversions, was in attendance of Dollar’s speech. His reaction was, “This effort that he’s initiating is really just a delay to slow down the conversion process.” The yield credit unions have been able to pay in the past are dwindling, and, according to Theriault, with the threats of taxation and a potential insurance premium becoming more real, a thrift charter is becoming more appealing. The exodus from the credit union charter could have a devastating effect on the National Credit Union Share Insurance Fund, he said. Though just one credit union converted to a thrift in 2002, 2001 saw four conversions and five mergers; the overall trend is upward, he said. So far one credit union has completed a conversion in 2003, in addition to a merger, with three conversions in the pipeline: @tlantec Financial Federal Credit Union (Virginia Beach), Columbia Credit Union (Washington State), and Washington Credit Union. “Let me put it this way,” Theriault said. “I have been very busy.” Of the credit unions he has worked with, all the conversion attempts have been successful. The lowest approval rating by members for a conversion, he said, has been about 66% in favor. He contends that credit union members are well educated and intelligent enough to make the decision. Dollar explained that the regulation was up for review this year under NCUA’s initiative to review one-third of its rules every year and that he has been working with the Office of General Counsel to bolster the disclosures. He pointed out that the agency’s current regulations do not require the disclosure that after a credit union converts to a thrift institution, that it can be converted to a stock-holder held bank. It also does not explain that the couple extra points credit union members have paid on car loans or other items, have gone into the credit union’s net worth (currently averaging over 10%), which becomes capital for the bank in a conversion and drives up the value of the institution’s stock prices. “I would not call demutualization a trend, but it has gained enough momentum to cause concern. And if there are not adequate disclosures, it becomes even more of a concern,” Dollar stated. During his comments before the Director’s Conference, Dollar remarked, “Losing ownership of a credit union to which a member has belonged for 50 years should not happen simply because the disclosure language was too small for the member to read without his bifocals or in too much legalese to be understood without contacting an attorney.” Theriault said he believes NCUA is again attempting to slow credit union-to-thrift conversions as it did in 1995. He explained that at that time, NCUA put “onerous” requirements on credit unions looking to convert, including approval of the majority of the membership eligible to vote within 30 days. When H.R. 1151 was passed, Congress streamlined the process, taking much of the power associated with these conversions away from NCUA, in light of other restrictions placed on credit unions under H.R. 1151. Theriault said. Now only the majority of those voting are required and the time period is 90 days. NCUA does retain oversight over the member disclosures. Theriault said he believes NCUA is also laying the groundwork for potential legislation for credit union trade associations to push next Congress to limit or prohibit credit union conversions. Since 1995, 27 credit unions have converted or are in the process of converting to thrifts. Six of those have demutualized, according to Theriault. NAFCU Senior Vice President and General Counsel Bill Donovan commented, “If, as suggested by NCUA Chairman Dennis Dollar, stronger disclosures will result in better informed credit union members, it is clearly worth while to look at.” Dollar said that he realizes that this move may not be popular among credit unions that are considering converting to mutual thrifts in the near future. However, he stated, “I don’t judge the benefit of a regulation by whether it will be popular or not.” [email protected]