NCUA Settles With Community, OmniAmerican; Their Path to Becoming Banks is Clear

ALEXANDRIA, Va. – The financial prospects for the leaderships of the $1.4 Community Credit Union and the $1.2 billion OmniAmerican Credit Union improved substantially last week when the NCUA agreed to validate their charter change balloting and to withdraw its requirements that the credit unions conduct their votes again. The agency had withheld its approval of Community CU’s vote citing its failure, from the agency’s perspective, to follow procedures in its disclosure documents that the agency believed it would. The refusal to validate the vote prompted a lawsuit from the credit unions and the Court sided with them, finding that NCUA had acted in an arbitrary and capricious manner. In their settlement, each side agreed to pay its own court costs and within 20 days after the effective dates of conversion, both credit unions will receive their deposits in the National Credit Union Insurance Fund. These returned deposits may be at least partially financial windfalls since the former credit unions will only be required to make an initial deposit into the Federal Deposit Insurance Corporation and that is calculated on the basis of deposits, according to Americas’ Community Bankers. In addition, the Court has agreed to withdraw the Aug. 24 written recommendation which many see as helping precipitate the settlement, according to the settlement document that each side signed. Both sides issued statements looking forward from the controversy. “Community Credit Union can now move forward with the wishes of our membership, who voted overwhelmingly in favor of conversion to a mutual savings institution,” said Gary Base, CEO of Community, declining to mention that a significant majority of Community members did not vote at all. “We’re very excited about the opportunities possible through our new charter. We are poised to bring a fresh approach to banking with the benefits of expanded products, services and locations to better suit the needs of our members.” “This lawsuit has served to bring into clear focus several issues regarding our regulatory procedures, particularly the need for full and fair disclosures to members,” NCUA Chairman Johnson said. She added that “NCUA will continue to evaluate our regulations and processes to make certain that we satisfy our Congressional mandate to administer the member vote properly when a credit union seeks to convert to a mutual savings bank.” Dick Ensweiler and CUNA took similar stances toward the news of the settlement. “I am glad it’s over,” Ensweiler said. “Now I think we can put that behind us and focus on the issue of how we should approach the question of credit union charter conversions.” Ensweiler noted in particular that the American Association of Credit Union Leagues is wrapping up a study and recommendations for different approaches to the issue. “I think it’s good that we can move forward now without having that lawsuit hanging over the discussion.” Eric Richard, CUNA’s general counsel, took a similar approach. “With this development, we can now put this case behind us and focus on the most critical issue – protecting in the future the interests of consumer/members of credit unions. Importantly, NCUA’s regulations remain in effect and we look forward to working with the agency to address any outstanding issues and to protect credit union members.” Robert P. Schmermund, executive vice president with Americas’ Community Bankers praised the settlement as a “victory” for charter choice. “The case was about charter choice – the right of credit union members to choose the charter that will best serve their needs and their local communities,” Schmermund said. “We hope this lawsuit serves as a wake-up call to the NCUA that it needs to follow the law and give credit unions the freedom to choose their charter,” he said. He also pointed to one of the lingering impacts that the case might have, noting that freshman Republican Patrick McHenry (R-N.C.) has introduced legislation that would strip NCUA of some of its authority to regulate conversions in reaction to this case. “No doubt, their bill contributed to the congressional backlash against the NCUA’s blatant disregard for the law and its own regulations,” he added. “ACB will continue to advocate passage of the McHenry-Towns bill to make it crystal clear to the NCUA that it cannot arbitrarily block future credit union conversions.” McHenry’s office has been reported to have been looking to place a hearing date for his proposed legislation on the House Financial Services Committee Calendar. How It Happened Sources familiar with the case speculated that NCUA and the Justice Department may have been influenced not to appeal Magistrate Judge’s Don Bush written recommendation to the U.S. District Court for Eastern Texas on the case. Although the written recommendation closely followed the disposition the Judge showed from the bench during the August 17 hearing on Community’s case, sources who were there and who later saw the written recommendation said that it was much more sharply written than Bush has spoken. “It was just a much sharper tone,” explained NAFCU general counsel Bill Donovan, explaining the difference between the written recommendation and Bush’s demeanor during the hearing. “At the hearing the Judge was careful to be balanced in his questions and apparently his approach,” Donovan said. “And I certainly don’t recall him calling the NCUA `silly’ from the bench,” Donovan said. On page 13 of his recommendation, Bush wrote that “[s]ince the actual documents were sent, any other construction or objection by the NCUA is simply erroneous and silly.” Neither NCUA nor the Justice Department have commented on how they came to the decision not to appeal the Magistrate Judge’s decision. What the Settlement Means Since both credit unions have indicated their intention to issue stock as mutual banks under a mutual holding company structure, the settlement means that their leadership stands to reap millions of dollars in a financial windfall from the offering. The move to become banks will also mean that roughly 7% of Texas’ seven million members will become bank customers overnight and that the NCUSIF will become roughly $17 million poorer once the credit unions’ deposits are returned. -