By DAVID MORRISON Credit Union Times Staff Reporter
ALEXANDRIA, Va. -- The NCUA Board approved the final form of its latest revision to its rules governing the conversion of credit union to bank charters at its Dec. 14 meeting, after making relatively few changes from the language the agency proposed in June.
"We want it to be perfectly clear that the NCUA wants to foster communication between a credit union and its members in the conversion process," said Board Chairman JoAnn Johnson, after reporting that the agency had been stung by criticism from credit union members and converting credit unions that its regulations precluded those credit unions from communicating with their members without prior NCUA approval.
The final rule makes changes to the existing rule in five areas, the agency said.
First, it mandates that credit union boards considering conversions notify the CU's members at least 30 days prior to voting on whether or not to convert by putting an advertisement in "a general circulation newspaper" that it is considering such a move and invite comments on it. The credit union board must then collect and review any member comments about the possible move before taking their vote.
This requirement was included in the proposed rule as well, but the agency dropped a requirement that the CU post any members' comments to the idea to its Web site and provide for a way for the members to access those comments. Some of the commentators to the proposed rule had questioned whether such a requirement would square with privacy and other restrictions and the agency had agreed it would have been unduly burdensome and so it was dropped, according to Paul Peterson, an NCUA staff attorney who worked on the final rule and presented it to the board.
Second, the final rule simplified and shortened the boxed disclosures that the agency requires credit unions seeking to convert to include on the three mandatory disclosures it sends to its members. The three statements in the new boxed disclosures make it clear that a vote for the conversion means the member will want their credit union to become a mutual bank and a vote against will indicate a desire it remain a credit union.
They also state that, "historic data indicates that, for most loan products, credit unions on average charge lower rates than banks. For most savings products, credit unions on average pay higher rates than banks."
The third statement says that the conversion to a savings bank is often the "the first step in a two step process to convert to stock issuing bank" and that some officers and directors "often profit by obtaining stock in excess of that available to other members."
The agency has taken a fair amount of heat since the first boxed statement appeared from conversion proponents. But Peterson, along with Moisette (Tanya) Green, defended them, pointing out that the statement on loan rates had come from a study conducted using data gathered by the DATATRAC corporation, a source used by other regulators as well as by the American Bankers Association.
They also defended the statement on profits by noting that 90% of the recent credit unions that have converted to banks have followed up with initial public offerings of stock and that the directors and officers of those credit unions have profited from those transactions in ways not available to members through mechanisms like stock sharing plans.
The final rule mandates that the converting credit union forward communications from members to other members if the members, or group of members, ask that it do so, do not forward improper communications, and pay for it themselves. The agency tinkered a little bit with this requirement from the proposed rule, striking the requirement that a converting credit union forward the communication in less than seven days after commentators argued the time frame was too short for large credit unions.
NCUA retained the requirement that the credit union forward the communications so that it arrived on or before the 30-day notice and it also developed a formula that credit unions and members can use to determine how much the reimbursement for mailing costs should be.
Next, the agency left in place the requirement that only the last of the communications to members, those sent 30 days before the voting deadline, be the one that actually includes a ballot, though the previous notices can tell members that a ballot will be included with the 30-day notice. NCUA also continued to allow converting credit unions to use raffles and other incentives to get members to vote. but required CUs to make clear that whether the members voted for or against the conversion they were still eligible to win.
Finally, the agency retained the requirement that the board members of converting credit unions certify to the agency that their actions seeking the conversion were taken for the best interests of the credit union's members and thus in accord with their fiduciary duty.
This was a controversial requirement in the comments to the proposed rule. Peterson responded to a question from Board Member Gigi Hyland asking why the agency required such a certification with the observation that this decision was unique in that it was a one-time only decision and because it is in which the personal interests of the board members might be at variance with the collective interests of the credit union's members.
While much of the discussion revolved around different specifics in the rule, the question of NCUA underlying authority to craft the rule underpinned the whole proceeding. NCUA has taken a lot of criticism in the past from conversion proponents for creating rules that go beyond the Federal Credit Union Act's requirements that they be "no more or less restrictive" than similar rules promulgated by other financial regulations regulating similar charter changes.
Peterson and Green took pains during the presentation to not only describe their process of evaluating the proposed rule in light of other regulators' rules but also of pointing out where they had looked to other regulators' rules for guidance and where the NCUA's rule was actually less restrictive than other regulators.
For example, Peterson pointedly replied in response to a question from the board that the language for what would constitute an "improper" communication for a member to ask a CU to forward to other members came from the Office of the Thrift Supervision. He added as well that the NCUA's rule is less restrictive to that of the OTS because while both rules mandate banks or credit unions forward the proper communication of members, the OTS rule actually requires the agency to prior approve the communications while the NCUA does not.
In order to further their discussion, Peterson and Green included a chart in the preamble to the final rule, which compares the NCUA rule to charter conversion rules of the Office of Comptroller of the Currency (which regulates national banks) and the OTS.
What happens next remains uncertain. Sources close to at least one banking association predicted a lawsuit to prevent the regulation from being put into effect in 30 days, but none have confirmed their determination for the record. One lawyer familiar with the NCUA and the issue praised the effort and thought the agency had crafted the rule very carefully.
The rule should go into effect 30 days after publication in the Federal Register.