NORTHVILLE, Mich. – It’s happened again. Add Michigan to the growing list of states that have enacted legislation providing a mechanism for state-chartered credit unions to convert to mutual thrifts. Less than two weeks after the Rhode Island state legislature passed similar legislation (CU Times, July 25), the Michigan House unanimously approved a bill-S.B. 464-that modifies the Michigan Credit Union Act to ensure that credit union members are well-informed of any plans to convert a credit union charter to a mutual savings bank. The bill was earlier approved by the Michigan Senate. Gov. Engler had 14 days to sign the bill after enrollment, so it has an official Public Act number as of July 25. Among the key provisions of S.B. 464, it requires: * a two-thirds affirmative vote of the entire credit union board of directors to approve a plan of conversion; * a three-step notification process within 90, 60 and 30 days of the board’s decision of the credit union’s intent to convert; * two-thirds of voting members to vote in the affirmative for a CU to convert to a thrift charter. The bill also mandates that credit unions offer members mail-in ballots on a conversion vote, and it allows credit unions to accept votes by other alternative means such as by phone, fax or the Internet, at the discretion of the commissioner of the Office of Financial and Insurance Services (OFIS). The drafting and eventual passage of legislation that provides a mechanism for credit unions to convert to other financial institutions has been on the Michigan Credit Union League’s agenda since 1996 when the state legislature passed the state’s Savings Bank Act, said MCUL Director of Governmental Affairs Patrick La Pine. The act, explained La Pine, included a provision for credit unions that wanted to convert to a thrift charter, but the state’s credit union act didn’t include a similar provision. “There was an entrance mechanism, but no exit mechanism,” said La Pine. “From a statutory standpoint, it was clear to us that we needed to have corresponding language in the credit union act, otherwise a credit union that wanted to convert to a thrift charter would be in a state of limbo.” Despite the league’s recognition of the need to craft conversion language into the state’s credit union act, La Pine said there was “no real urgency” to do so because no credit union had expressed an interest in converting. That scenario changed in mid-1999 when Community Schools Credit Union in Rochester Hills approached the state regulator with its conversion plan. The $36.8 million in asset CSCU cited its inability to expand its field-of-membership as its reason for wanting to convert, Julie Smith of OFIS reported. “Now it was a priority for the league to help craft legislation. We needed to do something because the commissioner didn’t have it within his powers to grant a conversion,” said La Pine. “Our primary goal was to make sure Community School’s membership was properly notified of the credit union’s plans, that they would be notified in ample time and that they clearly understood the ramifications of the conversion, both the positives and the negatives,” La Pine said. He emphasized that, “The Michigan Credit Union League does not want credit unions to convert to bank charters. But credit unions are democratic institutions, and if the membership chooses to convert then so be it. We just want to be sure members are thoroughly aware of what’s at stake and involved. That’s why we worked closely with the state regulator on crafting the language of the bill. We want to be sure members have ample opportunity to make an informed decision.” As much as the credit union industry doesn’t like to see a credit union convert to a non-credit union charter, NASCUS President/CEO Doug Duerr says the introduction and passage of legislation that provides the mechanism for credit unions to convert to non-credit union charters “is the type of action that’s an indication of the thinking that’s going on in the credit union movement because of the limited alternative sources credit unions have to raise capital.” Duerr said NASCUS did an analysis about a year ago to ascertain how many states had provisions for credit unions to convert to another type of financial institution. The analysis showed that 40 states would require a state chartered credit union to liquidate its assets if it wanted to change to a non-credit union type of charter. Because of CUs’ cooperative structure, there was no mechanism in place that allowed for the equitable redistribution of the equity. That’s why, Duerr explained, state-chartered credit unions in most states that have wanted to convert to a thrift charter, have had to first convert to a federal credit union charter. “The problem is inherent in the complexity of cooperatives,” said Duerr. “Because members are investors/owners of the credit union, it can start to get complicated when the credit union is thinking about fairly redistributing the accumulated equity of the credit union. “There has to be some way to assure credit unions that they will be able to create capital in order to expand services for their members and still be able to meet the net worth requirements that are statutorily required,” Duerr continued. “Now, it’s a Catch-22 situation because credit unions can only generate net worth through undivided earnings, and that’s a very slow process.” La Pine agrees with Duerr’s assessment. The Michigan Credit Union League is in the process of working to update the state’s credit union act. It was last updated in 1986, and “it’s outdated and lagging behind the state savings banking act. That bill was passed in 1996 and was already updated this year,” La Pine said. He noted that the Michigan Bank Act was also updated in the last legislative session in the wake of Gramm-Leach-Bliley. “Credit unions’ ability to turn to alternative ways to raise capital is a federal issue affecting credit unions on a national level that needs to be addressed,” said La Pine. “Unless we can change that in Michigan and nationwide, credit union boards and CEOs will have to make tough decisions on whether to convert to a non-credit union charter. “A credit union member wants to be a credit union member, that’s why they joined a credit union to start with,” La Pine added. He said a number of Community School’s select employee groups have approached other area credit unions and inquired about becoming SEGs of those CUs. “From a league perspective, we’re not going to try to stop Community School’s conversion to a thrift. It’s not something the league would do. We could have sat on the sidelines or chosen to work cooperatively with the commissioner to make sure the legislation included member notification safeguards so members could make informed decisions about conversions. We chose the latter.” At press time, Community School’s conversion application had been approved by the OFIS and the FDIC. Three notices for a special meeting were mailed to CSCU’s approximately 12,000 members, as required, within 90, 60 and 30 days of the meeting date. That should take place in September. Although S.B. 464 applies to any conversion applications filed after the bill was signed into law, La Pine said CSCU’s board is not being required to vote again on the conversion. – [email protected]

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