Members Group Weighs In On What New Community Disclosures Should Contain

DALLAS – Last week the ongoing fight between NCUA and the two Dallas area credit unions that are trying to change their charters to those of mutual banks, the $1.4 billion Community Credit Union and the $1.1 OmniAmerican Credit Union, slipped into a quieter phase. Both sides retreated to their side of the battlefield. NCUA has stated that it intends to stand on its judgment that the current round of balloting on the CUs charter change effort is invalid because of errors in the CUs’ disclosures and the credit unions maintain that they are going to continue the balloting through each of their special meetings. Community CU’s meeting is scheduled for June 21 and OmniAmerican’s July 11. But should the $1.4 billion Community Credit Union decide to push forward with its bid to become a mutual bank and repeat the disclosure and voting process, as NCUA has said it must to continue, members opposed to the conversion have written the NCUA with a request for what the new disclosures should be sure to include. Among the items the Coalition for Credit Union Members, formerly the Coalition for Member Trust, wants to see included are the “present” cost of conversion a figure which will include all the additional costs for printing, mailing, consultancy and legal fees should they arise, as well as a clearer disclosure of whether board members will receive stock related benefits after the conversion and clearer explanation of how the conversion will water down most members’ voting rights. In its June 1 letter, the Coalition led off with an observation that NCUA had merely offered in its May 13 letter to Community to review the notice the agency expects the credit union to send members to explain the additional disclosures and balloting. The Coalition said the agency should demand to review that part of any additional disclosure the credit union might send. Citing NCUA’s regulations, the group said that “such a regulation seems to clearly necessitate further approval by the NCUA prior to distribution of any additional written material to the members,” adding: “As such, we request that NCUA amend its May 13 letter to require CCU to submit all written material to NCUA before such materials are distributed.” Next the group went after Community’s next round of expense disclosures, seeking to have not only the money already spent in the disclosure and balloting effort be included in the disclosures, but also any new money. Such additional costs will “surely” include additional printing, postage and mailing costs, the group wrote, and will likely included additional legal and consultant fees. The Coalition wants all these costs disclosed to members in any future round of disclosures. “Permitting CCU to merely repackage and resend outdated and inaccurate disclosures regarding the cost of conversion would completely undermine the purpose of the regulation,” the group noted. The Coalition then asked the agency to make sure that Community’s Board of Directors disclose fully whether they intend to receive stock benefits from the conversion. The letter pointed out that in one place the Board of Directors had openly said that they will participate in the stock offering on the same terms as those available to all the other members. But then in another place the Board had said only that they might receive additional stock benefits not available to other members. “NCUA’s regulation does not require the disclosure of what directors `usually’ receive in this type of conversion.” the group wrote, but to “affirmatively disclose whether or not they intend to receive such benefits.” But the group reserved most of its scorn for the “rebuttal” that the agency had allowed the credit union to include on the back side of the mandated boxed statement. The rebuttal only served to confuse members and make it appear that NCUA’s disclosures are “inaccurate, and are to be distrusted and ignored.” As an example, the group pointed to the NCUA’s statement that in a mutual bank “account holders with larger balances have more votes and thus more control” was countered by Community’s statement that “we do not believe that this change will give any member or group of members substantially greater control than credit union members currently enjoy.” These two statements cannot be reconciled and do not square with the facts, the organization argued, noting that after the proposed conversion: “[M]embers having minimal deposits with the institution will suffer a reduction in their voting power of up to 97.5%,” the Coalition wrote, “while members with the largest deposits may see their voting power increase by as much as 2500%. This represents a 1000 fold disparity in voting power and control between the richest and poorest members.” The letter then went on to provide several examples from case law in which the courts had held that disclosures with additions similar to those Community had made in its rebuttal statements had been found to have invalidated the disclosures. In one, Dixey v. Idaho First National Bank, the lending institution had provided disclosures required by law but with printed materials on the other side in the same typeface as the mandated disclosures. The result, the group noted, was the court found that the federal disclosures were “not more conspicuous than other items” and “would not particularly catch the borrower’s attention.” These lacks invalidated the disclosures, the Court found. The courts have found that disclosures must make sense from the point of view of the average consumer, the group wrote, “not the perspective of a Federal Reserve Board member, federal judge, or English professor.” What is the average member to make of the conflicting NCUA and credit union statements, the group asked. The issue is taking on more importance because, from a practical standpoint, many sources consider the possibility Community will mount a legal challenge to the NCUA steadily less likely. While attention has been widely focused on whether the $1.4 billion Community CU and $1.1 billon OmniAmerican CU would be able to contest the NCUA’s invalidation of their disclosures and balloting in courts, legal sources familiar with financial institution regulation and law doubt, as a practical matter, they would do so. Even those sympathetic to the credit unions whose balloting and disclosures NCUA declared invalid in May noted that even though the credit unions might eventually prevail in court, the amount of time and money they would have to spend to do so might make the court fight the more expensive and exhausting option. “It seems to me that they would be looking at a year, at a minimum, for an initial decision in this matter,” said Richard Garabedian, a partner in the Washington, D.C. law firm of Luse Gorman Pomerenk & Schick. And Garabedian’s is the minimal estimate. Other legal sources forecast a two or three year fight should the credit unions decide to take that route. Rather, what sources say is more likely option is for the credit union to see how the voting goes and make a decision at the end. If the vote is heavily in favor of the conversion, the credit union will likely swallow hard and go through the process again, the sources said. But should the credit union lose the vote, or if it is close, they may not bother to try again. The spokesmen of both institutions have remained steadily silent on what their institutions plans might be. -