NCUA Declares Community Charter Change Disclosure Violates Regs

ALEXANDRIA, Va. – A fight began to brew last week between NCUA and the $1.4 billion Community Credit Union after the agency slammed the brakes on the credit union’s attempt to become a mutual bank by declaring the disclosures it sent to members to be in violation of its regulations. “NCUA has determined that CCU has failed to provide members with required disclosure materials in compliance with Section 708a.4(e) of NCUA’s regulations,” the agency wrote the credit union in a May 13 letter from NCUA Regional Director Jane Walters. “If this violation is left uncorrected, NCUA will disapprove the methods and procedures applicable to the member vote under Section 708a.7 of NCUA’s regulations and will direct a new vote be taken.” Section 708a.7 allows an NCUA regional director to disapprove the methods and disclosures of a charter conversion vote. The agency also said that, since the ballots which have been cast thus far are “the product of improper disclosures,” it has invalidated them. NCUA also declared that if the credit union wishes to continue the charter change effort it will have to re-issue disclosure packages and conduct balloting again. Based on the costs the credit union enumerated in its previous disclosures, a second round of disclosures and balloting could cost upwards of $650,000. NCUA also directed that should Community choose to accept its rulings and to continue the charter change effort, the second round of disclosures will have to carry information about why the agency disapproved of the first round, according to the agency. “Additionally, to avoid member confusion and promote a fair and legal vote, the new disclosure materials must explain to members why they are receiving additional mailings and that the vote date has been changed,” the agency’s letter to the credit union said. “It is especially important that CCU inform members that any ballots previously cast do not count and any member who wishes to have his or her vote counted must cast another ballot by mail or vote in person at the special meeting on conversion.” The agency also noted that it would “be happy” to review this explanation to members before the credit union mailed it. For its part the credit union has said that it is continuing the vote and appeared to hang its hopes on the phrase “if this violation is left uncorrected..” It sent a letter to NCUA offering some other way of addressing the agency’s concerns and maintained that it has done nothing wrong. The credit union believes it honored what NCUA required in its disclosures and that it will be able to resolve the matter with the agency, explained Mark Hord, Community CU’s General Counsel. But as of press time NCUA said that it has received the credit union’s response to its May 13 letter and that it stands behind its previous statements which laid out the path Community must take to correct the situation and continue its charter change effort. The credit union has not yet responded to calls about what its next move might be. What’s In A Fold? At its core, the dispute centers on how the second page in Community’s charter change disclosure packet that was presented to members. According to NCUA’s regulations, the disclosure language that the agency mandated be included in each of the three required charter change disclosure packages that a converting credit union must send to its members should be in a prominent place in the package and conspicuous to members, the agency said. According to the agency, prior to Community sending its disclosure packages, lawyers from Silver, Freedman and Taff, the Washington D.C. law firm which is handling the conversion for Community, approached the regulator with requests about the mandated language. They asked the agency’s permission to both place the mandated language immediately behind a cover or introductory letter from the credit union and to place a rebuttal statement to the mandated language under the headline “YOUR CREDIT UNION WANTS YOU TO KNOW THE FACTS” on the reverse side. NCUA says it agreed, in writing, to both requests but stipulated that in order to be in compliance with 708a.4(e) the credit union must be sure that the mandated language appear on the front of the page, where it would be the first thing the member saw after the introductory letter and, the agency says, this is what the credit union did not do. “NCUA investigated member complaints that the rebuttal was enclosed as the front side and the Boxed Disclosures on the back,” the agency wrote. “NCUA’s investigation confirms these complaints for both the first and second mailings sent by CCU.” Backers of Community’s conversion effort reacted with frustration and a measure of anger at NCUA’s rules. “Isn’t this petty? Isn’t it?” asked Alan Theriault, consultant with CU Financial Services, a firm which promotes charter conversions and helps credit unions, including Community, thread their way through the charter change process. “It’s about the way a page was folded. The credit union did everything the agency asked properly and NCUA still found a way to call them on something,” Theriault fumed. But he also expressed confidence that the credit union would eventually make the switch to a bank charter. “This isn’t the first time NCUA has objected to the way a credit union has voted and demanded a second vote,” he noted, “and the members voted the second time in favor of the conversion. Members should have this decision, not the agency or industry insiders,” he said. Lee Bettis, executive director of the Coalition for Credit Union Charter Options, a banker-advised group which advocates credit unions being able to convert charters, decried the decision, arguing that Congress had meant this process to be “relatively simple” and not as complicated or expensive as NCUA has made it. But John Garabedian, a partner in the Washington, D.C. law firm of Luse Gorman Pomerenk & Schick who has counseled credit unions through the conversion process to mutual banks noted that while the immediate circumstances might not seem important, honoring the agreement with the agency was significant. “I would think that it is debatable as to whether the format of the disclosures should require an additional vote,” Garabedian said. “However, if the credit union agreed to provide the disclosures in a certain manner and then failed to do so, it would appear to be an open and shut case. It is certainly a tough lesson to learn in how important planning is in these transactions.” He also wondered whether the credit union had any recourse but to comply with the agency if it wanted to continue the charter conversion effort. “I doubt that the credit union would prevail in any challenge to the NCUA,” he added. “It also clearly raises the stakes to a new level and gives the dissident members more time to marshal their opposition movement.” Meanwhile, those opponents of the conversion predictably applauded the agency’s decision. The Coalition for Member Trust, the group of Community members of the $1.4 billion credit union that opposes the charter change move, approved NCUA’s recent decision and pledged that the member group will continue organizing and raising funds to fight the conversion effort until the credit union abandons the conversion plan, according to Mark Arnold, Coalition spokesman. “We are pleased NCUA ruled Community Credit Union’s disclosures were in violation of NCUA’s regulation,” Arnold said. “One of our coalition’s primary concerns about the conversion was the way CCU communicated the disclosure information to its members. We hope the credit union’s management and board will now stop the conversion process entirely and choose to remain a credit union.” Other sources also challenged the notion that NCUA was only addressing a trivial matter. In its May 25 complaint to the Texas Department of Credit Unions about Community’s disclosure the Member Trust group noted previous court decisions which have invalidated disclosures in other areas, such as a those dealing with credit card or other loans, which have put mandated language on the back of other pages. “It really isn’t a trivial matter,” said Arnold. “Would you consider it a trivial matter if a credit union mailed 220,000 members loan applications which put the APR on the wrong side? Do you think the regulator would consider that trivial?” What Happens Next? As of press time, it is unclear what will happen next but it is possible that Community and NCUA could wind up in court. Garabedian doubted that possibility, pointing out that the courts normally give such great deference to the regulator in similar disputes that it seemed very unlikely that Community could win a case. “Essentially, I think they would pour even more money down a rat hole with legal action,” Garabedian said. “Even with the amount of money they would have to spend to send the disclosures again.” The question that is closer to the bone is whether Community will keep going on its effort or abandon it. Every day that goes by in which this is still up in the air, some observers say, hurts the credit union’s effort because it gives members opposed to the change more time to raise questions about the charter change in members’ minds. It is also unclear how this affects OmniAmerican’s effort since their disclosures are almost word for word the same as those sent out by Community. But it is unclear that the slightly smaller credit union put the disclosure packages together in the same way or that, most significantly, any of its members are particularly complaining about the front/back discrepancy. Finally, should Community drop the effort, or even if it does not, it is unclear who will pay the possibly more than $650,000 price tag for the situation. Horn and Theriault both maintained that the credit union had done nothing wrong, even though NCUA maintained just as firmly that the credit violated its previous agreement. -