Transparency at the Heart of NAFCU's Conversions Policy

Perhaps no issue in recent years has galvanized the credit union community as much as the recent debate over credit union conversions. The well-publicized court battle between Community Credit Union of Plano, Texas, and NCUA has brought that debate front-and-center. Given that backdrop, I think it is appropriate that I write about where NAFCU stands on this important subject. As has been widely reported, NAFCU was intimately involved in the Community CU lawsuit. We filed a friend-of-the-court brief supporting the agency’s disclosure requirements because we’ve always felt strongly that credit union members deserve to be fully informed about how a conversion will affect them. Transparency is paramount, and credit union members need to know–before they cast their vote–that if a credit union converts to a mutual savings bank: * they will lose control and say over their financial institution; * senior executives and directors could potentially reap large financial rewards if the bank subsequently converts to a stock-owned institution, which often happens; * their credit union will forfeit its tax-exempt status, which will likely lead to lower rates on savings and higher rates on loans as well as higher prices on other services and products; and * the conversion process itself can be costly and lengthy. Simply stated, the member-owners of a credit union need to be fully informed that when they vote for a conversion they may literally be casting their last vote in a truly democratic process at their financial institution. Once the conversion takes place, they may never again have an equal say-or stake-in their institution. The potential for self-dealing and insider gains that conversion advocates are so quick to dismiss are very real when a mutual savings bank converts to a stock-held form. Such abuses led Congress to impose a moratorium on all mutual-to-stock conversions from 1963 to 1976. When they resumed, they were under a new set of regulations; and when they again became popular in the 1990s, the Office of Thrift Supervision placed further restrictions on conversions. Though current OTS rules place some restrictions on self-dealing, they still allow for significant personal gains on the part of the institution’s insiders. Having said this, I would like to point out that NAFCU is not opposed to choice or to conversions in principle. If a majority of credit union members feels that a mutual savings bank would be a more suitable model to conduct business, NAFCU would not object– provided there is transparency in the process so that members are fully informed. However, there remains considerable confusion about how the process works, and so NAFCU has prepared a policy paper on the subject, outlining its recommendations. The paper-which we plan to release during our Congressional Caucus in Washington-provides a historical and legal perspective on conversions and notes how legislative actions have shaped the debate. NAFCU’s recommendations were created after carefully considering how credit union members may best be served. Our recommendations are as follows: * Transparency must be at the core of the conversion process. New rules should be instituted that require a credit union to hold a meeting of its membership, prior to the ballot mailing, to announce its intent to convert. This will give all parties an open forum for discussion and provide a means for members to ask questions, gather additional information and participate in discussions. * Resources should be allocated, and an opportunity should be provided, for members who are opposed to the conversion to express their opinions. This creates an equitable situation among credit union members and furthers the “every member has a voice” concept that has become synonymous with the credit union community. * Transparency must also be extended to the voting ballot itself through the use of clear and plain language disclosures. Ballots must allow those opposed to the conversion an equal voice. * In order for the conversion vote to be valid, at least 20% of a credit union’s members eligible to vote must cast a ballot, and a majority of those must vote in favor of conversion. This requirement, which is already contained in the Credit Union Regulatory Improvements Act, would ensure that such an important decision is not determined by a small minority of members. * Directors and senior executives in a position to financially benefit from a conversion should not be allowed to do so until 10 years after the initial conversion takes place. Further, a converting credit union must provide full disclosure of the potential maximum benefit a director or senior manager could receive if the institution were to become stock-owned after the 10-year period has passed. This would include an approximate amount in dollars that directors or management could potentially receive based on the size of the institution. While the Federal Credit Union Act prevents directors from receiving a benefit from the conversion to a mutual savings bank, there are no regulations in place for a subsequent conversion to a stock-owned institution. In addition to receiving a salary that is set by the board of directors, the CEO oftentimes is eligible to receive payment in the form of stock-related bonuses. NAFCU feels that members’ assets should not be used for the excessive personal gain of those in senior management positions. Credit unions have always been defined by their service-based philosophy–an approach made all the more apparent with board of directors who serve as volunteers. Indeed, this unique philosophy has allowed credit unions to meet the financial needs of numerous communities in underserved areas and has been a constant reminder of the significant difference between credit unions and for-profit institutions. NAFCU strongly believes that all credit union members have something very precious at stake when an institution votes to convert and that transparency is mandatory to the process. NAFCU will continue to be an advocate of choice, full disclosure and member participation. Anything less would be a grave disservice to our members and the member-owners they serve.