Charter Conversions Remain A Heated Disagreement

WASHINGTON - It has been getting harder over the past several years for a credit union to pursue another option other than a merger–a conversion to a mutual savings bank.

That small statement of fact is about the only point of agreement between two camps embroiled in the often-bitter debate over conversions.

One side, happy to see the pace slowing, says switching charters has become more difficult, because CU members are simply more educated on what a conversion entails.

Since 2004 NCUA has required the managers of a credit union considering conversion to be much more explicit about their intentions in communications with members and to make clear that the credit union would become a for-profit institution–potentially enriching top executives and board members.

"The more disclosure there is, the more people seem to be against conversion," said Eric Richard, EVP-general counsel for CUNA. "I really believe that the system was stacked in favor of management. It's less so now than it was before."

The other side, which advocates "charter choice," says the NCUA's disclosure rules are simply roadblocks thrown up by a regulator that is desperate to preserve its fiefdom, abetted by trade groups fearful of losing members–and their funding base. Facing the possibility of mass defections to the mutual savings bank charter, advocates claim, the NCUA began promulgating rules designed to block conversions.

The flames have only been fanned further as Congress has delayed any action on the Credit Union Regulatory Improvement Act (CURIA).

"The only realistic hope for hundreds of credit unions which need expanded operating powers is to convert to the mutual savings bank charter," Lee Bettis, the executive director of the Coalition for Credit Union Charter Options, said in a press release issued a day after the bill was yanked off the House floor. "Yet the NCUA, as well…credit union trade associations, are holding to a strategy which traps credit unions into a charter that is increasingly obsolete in today's financial marketplace."

Bettis was the head of a Georgia CU when it converted to thrift in 2001. After retiring from banking in 2003, he established the Washington coalition to promote charter choice.

Opposing View: They're Cashing In

His counterpart on the other side of the debate is Bucky Sebastian, CEO of the $2.1 billion-asset GTE FCU in Tampa and the head of the National Center for Member Trust in Raleigh. The center, founded by Sebastian and two other credit union executives opposed to charter conversions, provides both advice and financial support to member groups fighting proposed conversions.

Sebastian and others on his side of the divide dismiss Bettis' contention that credit unions convert so they can better compete, saying the real motivation behind most conversions is greed. They say that converting CUs often become stock companies, and that when they do, it is the top executives and directors–not the average credit union members–who cash in.

The battle is not necessarily new, but conversion advocates say resolving it has taken a new urgency of late as the competition in financial services has intensified. Hamstrung by capital constraints and limits on business lending, many credit unions say they are at risk of becoming irrelevant unless they switch to thrift charters.

The other side of the argument is that credit unions would not need to think about converting if Congress passed proposed legislation that would ease capital restrictions and raise the cap on business lending from 12.25% to 20% of a credit union's assets. But Bettis said that is little more than "wishful thinking," since similar proposals have been stirring on Capitol Hill for a decade and Congress has yet to act on them.

It was not always like this.

From 1995–the year of the first credit union-to-thrift conversion–to 2003, credit unions that wanted to become mutual thrifts typically did so with little industry resistance.

Conversions started to become more controversial around five years ago, "when larger credit unions began to look at the conversion process," said Alan D. Theriault, the president of CU Financial Services, a Portland, Maine, consulting firm that advises credit unions on switching charters.

"The NCUA and the credit union trade associations became concerned that this was going to be a sweeping trend, and they implemented a coordinated program to stop conversions by using regulation and intimidation," Theriault said.

CUNA's Richard has a different take on the agency's rules. He says they created a "more even-handed" dialogue between the two sides in a conversion battle. "Until recently, if you were a dissident member of a credit union, you had no way of being heard," he said. "The new rules make it analogous to a proxy fight at a public company. They allow opponents to get comments on the ballot."

Since early 2004 five credit unions that announced plans to switch to mutual savings bank charters have later withdrawn their applications in the face of member opposition, according to data compiled by Theriault. Eight conversions have been completed in that time.

‘In The Pocket of NCUA'

Bettis said that unlike other financial services sectors, where institutions can count on the support of influential trade groups in battles with their regulators, credit union executives are on their own when it comes to a conversion fight. "The trade groups' interest is the same as the NCUA's–they are in the pocket of the NCUA and continue to fight the conversion process," Bettis said.

He and others on his side of the argument constantly hammer home the claim that the agency ought not to be seen as an impartial referee in the conversion battle.

Bettis pointed out that because it manages the National Credit Union Share Insurance Fund – which would be reduced if a large credit union were to withdraw capital–the NCUA has a vested interest in preventing conversions. "They run that insurance fund as well as regulate the institutions, and portions of that fund are used to fund the NCUA," he said. "It is an enormous conflict of interest."

"What the world does not need today is another bank," Sebastian said. "A bank exists for only one reason, and that is to take as much money as possible from their customers and pass it through to their stockholders."

In his view, consumers suffer when a credit union converts.

"Your business model changes when you operate genuinely as a not-for-profit, and I think the American public deserves the option, " Sebastian said. "They can deny until doomsday that there is not a profit motive, but if you took the profit motive out, there wouldn't be one conversion."