NCUA's Proposed Disclosure Regulations Unlikely to Scare Converting CUs, But Might Change Members' Minds

ARLINGTON, Va. – NCUA’s proposed rule on conversion disclosures is unlikely to stop many interested credit unions from trying to change their charters, but it might make getting their members’ approvals more difficult, according to various sources familiar with the current conversion process. At its July 22 meeting, the two-person NCUA Board put the proposed changes in the agency’s conversion regulations out for comment from the industry. The new regulations mandate the agency take a stronger, more active roll in the process a credit union must follow if it decides to change its charter to that of a mutual bank. The changed regulation would mandate additional disclosures which credit unions would have to display prominently on communications with their members about their conversions. It would also require converting credit unions to contract with an independent third-party to count members’ secret ballots. The regulations would also require a converting credit union submit to NCUA language it intends to include on its Web site about the conversion and state-chartered credit unions as well would also be required to submit a legal citation of their authority under their state’s credit union act to convert, if they have that authority. The mandatory disclosure statement (see sidebar) is shaping up to the most important aspect of the new disclosure regulations, both because of its blunter language and prominent placement. “Most converting credit unions choose to provide a great deal more information [than they have to],” NCUA wrote in an explanation why the new disclosures must be prominent, “while NCUA recognizes this is a way to educate members, NCUA is concerned that members may be overwhelmed by the volume of information and choose to ignore some or all of the information rather than reading through all of it.” But not everyone saw the proposed changes in the same light. “The regulation is another tool to preserve the NCUA and CUNA empire,” said Alan Theriault, CEO of CU Financial Services, a leading consultant for credit unions seeking to change to mutual bank charters. “It is not about disclosure or fairness. It is self-serving and out of step with the interests of the vast majority of credit unions. In fact NCUA’s February disclosure regulation garnered very little credit union support and a fair amount of opposition,” Theriault added. He also added that most of the other proposed changes, for example the independent third-party counting votes, are already being put into place. Richard Garabedian, a partner with the Washington D.C. law firm of Luse Gorman Pomerenk & Schick who also works with credit unions seeking to change charters, adopted milder language than Theriault’s but nonetheless thought it would have been better had the disclosure statement not been as specific or mandated. “Yes, it would probably have been better not to have had such specifically mandated disclosure language,” Garabedian said, “but I don’t believe any credit union which is seriously considering conversion would change its plan because of this regulation.” Early reactions from some, most notably America’s Community Bankers, suggested that the new regulations would prevent credit unions from converting charters. Garabedian also suggested that many parts of the proposed regulations arose from the agency’s frustration with the failed Columbia Community Credit Union controversy late last year. The Columbia controversy arose after the $619 million Columbia Community Credit Union, headquartered in Vancouver, Washington, tried to change its charter and had members challenge its voting and meeting procedures in the effort. In the end NCUA wound up invalidating the conversion ballot after a lengthy investigation. “In many ways it seems clear that that the agency is reacting to what it found in its investigation of the Columbia situation,” Garabedian said. “If Columbia hadn’t happened, we might have still had the regulation, but it would have likely looked very different.” Tony Ward Smith, a credit union consultant headquartered in the Vancouver, Washington area and an organizer of the Save CCU member group which fought Columbia’s conversion, agreed that the regulations might find their roots in the Columbia fight and that they would have helped had they been in place. “Sure, the regulations would have helped,” said Ward-Smith. “The specific `changes’ listed regarding CU conversions came specifically and directly from the CCU experience.” But he also said he marked the new regulations as a sad day for the credit union industry. “Isn’t it totally ironic that NCUA is willing to accept the fact that full and fair disclosure will not be the base intention of the credit union or its directors, and therefore sees the need to require the additional disclosures,” Ward-Smith added. “Apparently we’ve reached the point wherein the official assumption is that- with regard to conversion attempts – credit union directors are likely to be devious and deceptive as a matter of course, and therefore the agency must itself directly intervene in their actions. Ain’t that a sorry state of affairs!” Where these proposed regulations are headed is not clear. Credit unions will have 60 days from the date the proposed regulation is published in the Federal Register in which to comment upon it. Last time the agency put out any conversion regulations for comments, it received a high percentage of comments from credit unions which argued NCUA had no place taking up the issue. Theriault predicted that the regulations might draw Congressional attention. “The repeated attack on the HR-1151 conversion provision is also likely to capture some Congressional attention, supporting the belief by some that NCUA has taken its regulatory privilege too far and is in contempt of Congress on it application of HR-1151,” he speculated. “Remember, Congress reversed punitive NCUA conversion regulations and instructed NCUA to facilitate conversions not impede them.” But Garabedian doubted that the matter would go that far. “This is definitely not a calamity,” he said. “I don’t think NCUA has done anything really radical here.” [email protected]