LANSING, Mich. - There's always a first time, as the saying goes and these days as far as the Michigan Bureau of Financial Institutions is concerned, that first time is Community Schools Credit Union's unprecedented application to convert from a state-chartered credit union to a state thrift. With no language in the state credit union charter that spells out the conversion process, state regulators are in a quandary over how best to handle the conversion application. Gary Mielock, acting chief deputy commissioner, Michigan Financial Institutions Bureau-the regulator for both state-chartered credit unions and state-chartered savings banks-confirmed that CSCU filed an application with his office in late 1999. He described the application as "extraordinary" because it is the first time a state-chartered credit union in Michigan has applied to convert to become a state-chartered thrift. "The issue never came up before, so that's why the credit union act which was written in the 1920's doesn't address this type of conversion," he said. While there is no provision in the state credit union act that authorizes a state-chartered credit union to convert to another state-chartered savings institution, "there is also no specific language or statutory guidelines that prohibits it," Mielock stressed. "We are trying to proceed with a rational interpretation of the credit union statute," added Roger Little, deputy commissioner for the credit union division. Our struggle isn't with Community Schools (CU), this is their business decision. We're trying to make our statutory and regulatory schematics fit." Brian Ashley, president/CEO, Community Schools CU in Rochester Hills told Credit Union Times that the credit union had no idea there was no language in the credit union act addressing state CU-to-thrift conversion. "It wasn't until we actually applied to the Financial Institutions Bureau and explained to them the direction we wanted to go in, that they told us," he explained. He defended the credit union's decision to convert its charter as "doing what's best for the community we serve. We don't have a crystal ball to know what the future holds, we have to look at this strictly as a strategic business decision that will make us the most viable in the future." Community Schools CU serves employees and families affiliated with the Rochester Hills school system. About 6,000 of its 12,500 members are children under age 18 years who have savings accounts with the credit union. CSCU also has offices in two local high schools and Ashley said the credit union intends to continue to operate them as thrifts when the conversion is approved. "The thrift charter opens us up to better serve the community," he said. That includes being able to offer a wider range of commercial and business lending. Over the past five years, the $35 million credit union's assets have increased about $6 million. Its loan portfolio, once primarily comprised of consumer loans and some home equity loans, is now more than half made up of first mortgages. Ashley attributed the growth to the increase in new home construction in the upper middle class community CSCU serves. The credit union also has increased its advertising efforts promoting first mortgages to take up the slack in some areas of consumer lending CSCU has experienced. "Our loan activity now mirrors what a mutual savings bank does," Ashley remarked. In the absence of state CU-to-thrift conversion language in the state credit union act, Ashley said CSCU is following the conversion format of a federal credit union-to-federal thrift. If the conversion is approved, the name of the new thrift will be Michigan Community Savings Bank. Community Schools CU is actually faced with dealing with three different statutory venues: the state credit union act; NCUA regulatory authority concerning conversions of federally insured credit unions; and the state's savings bank act. "There are conflicting provisions between these three venues that have to be worked out and we are dealing with them," said Mielock. For example, Mielock continued, when the savings bank act was passed a couple of years ago, it included provisions allowing for the conversion of any state-chartered financial to a state-chartered savings bank, including a cooperatively run savings institutions like a credit union. Those provisions are bumping up against NCUA regulations concerning the conversion of a federally insured credit union to a thrift charter. These are regulations the agency was put in the position to adopt as a result of H.R. 1151. The savings bank act also includes language requiring two-thirds of the membership of a credit union to vote for conversion. The Michigan League of Community Banks is trying to change that legislatively. The group has submitted a proposal to Rep. Alan Sanborn (R-32), chair of the Michigan House Banking Committee, that would let state-chartered credit unions become thrifts with a simple majority of members participating in the election voting for the conversion. But it isn't just its members that CSCU has to convince about the benefits of become a state-chartered thrift, there's also the Federal Deposit Insurance Corporation, which would be the insurer of the new state-chartered savings bank. "I don't want to imply that Community Schools doesn't meet the safety and soundness test or that there's any impropriety with their investments and other activities, but traditionally no regulator will approve the conversion of a financial from one charter to another if there's any question on any of these issues," Mielock said. "Even if the voting requirement by the state credit union act and the savings bank act were the same, the conversion still has to have the insurer's approval." There are ways for CSCU to get around these various statutory limitations, such as voluntary liquidation and the subsequent reorganization of itself as a state-chartered thrift. Mielock doubts CSCU would take that route. Dave Adams, president/CEO, Michigan Credit Union League said he believed the pending conversion application from Community Schools Credit Union "is an isolated case" and that "based on what he's heard" he doesn't get the sense that "this is the case of a conversion that is moving quickly." There are still a lot of unresolved issues that have to be worked out, Adams offered. "As things stand now, the Financial institutions Bureau does not have the authority to approve the conversion," said Adams. If conditions were to change, Adams said "the (Michigan Credit Union) league would not block any state-chartered credit union that wants to convert to another charter. At the same time, though, we will not encourage conversions because it is not our place to do so." -
ekingoff@cutimes.com
