NCUA Wants Members to be Given Concise Disclosures on Why Their CU Wants to Convert to a Bank

ALEXANDRIA, Va.-Proposed regulations regarding mutual charter and private insurance conversions were the highlight of the NCUA Board’s July meeting. While the issue of credit unions converting to mutual thrift institutions has been a hot one among credit unions, the proposed disclosures NCUA may impose have reached beyond the borders of the credit union community. The banking trade associations are throwing their two cents in on the idea as well. In February, NCUA issued a final rule requiring disclosures in mutual thrift conversions to state whether the institution plans to convert to a stock held institution; how the conversion could affect voting rights; and disclose any income to senior staff and board members as a result of the conversion. Last week’s proposal goes further in requiring credit unions seeking to convert to a mutual savings bank to include a short and concise disclosure prepared by NCUA on the subject to the members. NCUA Chairman JoAnn Johnson said that she was concerned that credit unions had already begun their marketing campaign in favor of the conversion long before any disclosures went out. The purpose of having a brief disclosure-to include information regarding ownership and control of the credit unions, operating expenses and their effect on rates and services, the effect of a subsequent conversion to a stock institution, and the costs of the conversion-is so members are not overwhelmed with extra information. The proposed regulation would also require voting by secret ballot using an independent third party. NCUA also proposed guidelines on understanding the relationship between federal and state law, determining voter eligibility, conducting the vote and properly tabulating the ballots, third party tellers, and holding a special meeting. Additionally, state chartered credit unions would have to provide NCUA with their state laws so the agency can determine if they are following its state’s laws as well. Commenters on the previously approved rule also suggested that converting credit unions be required to share the opinions of dissenting board members and officers with the membership. NCUA is not suggesting this requirement at this time, but has requested public comment on it. American Bankers Association Senior Economist Keith Leggett, who attended the July 22 board meeting, commented on the disclosures, “It will raise substantial burden.” A conspicuous disclosure in bold print is like yelling `fire’ in a crowded theater, he explained. If NCUA is truly concerned about the credit union members, he added, regarding financial benefits, the agency could simply request an Internal Revenue Service Form 990 be filed. Many conversions occur because the credit unions want to be able to raise additional capital, according to Leggett. If these credit unions are deterred from converting, they will simply have to raise their loan rates and fees, he said. However, ABA is still opposed to credit unions gaining access to secondary capital because of the shift in ownership. The banking lobby group also opposes the risk-based capital system in the Credit Union Regulatory Improvements Act (H.R. 3579), because it eliminates all leverage ratios except for the 2% undercapitalized one, Leggett said, which is not safe and sound. America’s Community Bankers CEO Diane Casey-Landry issued a statement reading, “The NCUA’s proposal to prevent credit unions from converting to a more flexible charter is an example of a government agency that has lost sight of its true mission. Safety and soundness does not include preempting management and members on charter choice. Depriving credit unions of charter choice is un-American, and unfairly deprives credit union management of the ability to choose the charter that will best allow them to serve their customers and communities.” Both CUNA and NAFCU said they still needed to look at and analyze the proposal and share it with their members. In general though, CUNA Associate General Counsel Mary Dunn said, “CUNA thinks members should be fully informed.” The proposal was issued for a 60-day comment period. The two-member NCUA Board approved a proposed rule on private insurance disclosures as. In addition, the proposal addresses insurance protection for members in mergers and Hart-Scott-Rodino Act pre-merger documentation requirements. The proposal would require a credit union seeking to convert to private insurance to notify members in the very first communication with members on the subject that the federal government would no longer be backing their deposits. The formal notice has to be approved by NCUA. Under the proposed regulation, members would be permitted to cash in their term savings accounts without penalty if done before the date of the official conversion from federal insurance. Disclosure language included in the proposal that would have to be sent with all share insurance communications with members reads: “IF YOU ARE A MEMBER OF THIS CREDIT UNION, YOUR ACCOUNTS ARE CURRENTLY INSURED BY THE NATIONAL CREDIT UNION ADMINISTRATION, A FEDERAL AGENCY. THIS INSURANCE IS BACKED BY THE FULL FAITH AND CREDIT OF THE UNITED STATES GOVERNMENT. IF THE CREDIT UNION (CONVERTS TO PRIVATE INSURANCE) (TERMINATES ITS FEDERAL INSURANCE), AND THE CREDIT UNION FAILS, THE FEDERAL GOVERNMENT DOES NOT GUARANTEE THAT YOU WILL GET YOUR MONEY BACK.” The vote here, too, must also be by secret ballot. American Share Insurance President and CEO Dennis Adams said he is “baffled but not surprised” by the agency’s action. While he said it is too early to say how ASI will be commenting on the proposal, Adams said, “I don’t understand why they’re so concerned.” It is just a few credit unions a year, he pointed out. Adams said it is not only burdening credit unions but that it is also raising the issue of states’ rights. The proposed rule would also require the surviving credit union in a merger to notify members they could lose some of their insurance coverage if they have funds in both credit unions exceeding $100,000. According to a rule passed late last year, members have six months to make adjustments to ensure full coverage. The credit union can either notify all its members of the possibility or just members in that situation. The proposed regulation would also require merging credit unions to inform NCUA in its merger proposal if the credit union will file pre-merger documentation under the Hart-Scott-Rodino Act and if not, why not. Johnson explained that the proposal is to protect credit unions, who may not have known they had to file, from hefty fines “so that step isn’t missed.” CUNA General Counsel Eric Richard remarked, “If the purpose is to let credit unions know when they have to file, it can be very constructive.” However, in CURIA and the Financial Services Regulatory Relief Act (H.R. 1375), credit unions are working to get an exemption from Hart-Scott-Rodino requirements. Donovan explained, “Having NCUA in custody of that information may give reassurances to lawmakers in eliminating that [Federal Trade Commission] filing.” Under Hart-Scott-Rodino, generally merging entities over $50 million have to file pre-merger documents with the FTC and pay high fees from $45,000 to $280,000. NCUA shared some good news on the budgetary front. The agency’s mid-year budget was down 3.09% from $149,927,592 to $145,299,398. It was the largest decrease at least since 2000. Much of this came from a large number of vacancies at the agency following a high number of retirements and employees leaving during the regional realignment. In fact, NCUA Board Member Debbie Matz expressed great concern over the 59 openings at the agency. “I am very concerned that we’re not balancing our budget at the expense of our staff,” she said. NCUA needs to monitor the situation more closely and establish a plan for filling these vacancies, Matz stated. During the presentation of the quarterly insurance fund report, NCUA Chief Financial Officer Dennis Winans told the two board members that the agency is considering changing its methods for determining a reserve level for the National Credit Union Share Insurance Fund from a five-year history to a two-year historical look, as the Federal Deposit Insurance Corporation has recently done. This would likely shift the pool of reserves down from its current $62 million. Matz asked whether this was a wise move considering the 16% increase in the number of problem credit unions (those with CAMEL 4s and 5s). Winans pointed out that while there were 13 credit union failures in the first six months of this year, as opposed to 13 for all of last year, the asset size is down significantly. Last year, the credit unions’ assets totaled $9.7 million, whereas this year’s are only at $5.9 million. According to data from the insurance fund report, over the last five years the number of troubled credit unions has increased from 202 in 2000, 205 in 2001, 211 in 2002, 217 in 2003, with 251 so far this year. These figures are still lower than the previous five-year period. The agency also issued three final rules at NCUA’s July board meeting. * A rule providing student-run credit unions access to the Community Development Revolving Loan Program was given final approval. It had stirred up some controversy after the National Federation of Community Development Credit Unions came out against it because, NFCDCU said, these credit unions are not true community development credit unions. * A final rule permitting credit unions to serve as trustees for Health Savings Accounts. It also modified the incidental powers rule to include trustee or custodial services for HSAs as pre-approved activities for credit unions. * Finally, NCUA approved a final rule of an interim final rule that conforms to the FDIC’s rule regarding insurance coverage rule for living trusts that are subject to defeating contingencies. All decisions were unanimous. [email protected]