WASHINGTON – NCUA Board Chairman JoAnn Johnson spent much of her question and answer time before the House Financial Services Committee's Subcommittee on Financial Institutions and Consumer Credit on the defensive. On the one hand she defended CUs from the suggestion that they needed to be put under the Community Reinvestment Act and, on the other, she attempted to shield her agency from criticism on how it has handled the applications to convert from the $1.4 billion Community Credit Union and, by extension, the $1.1 billion OmniAmerican Credit Union. Both Dallas-area credit unions have applied to convert to mutual bank charters and have run into trouble from the NCUA. The agency has invalidated each of the credit union's mandated balloting on the grounds that they each violated agreements with the agency concerning how the disclosure packages were meant to be put together. The credit unions have maintained that they have done nothing wrong and that they will continue to proceed with the balloting even though NCUA has promised not to certify the votes. According to its regulations, both NCUA and the agency which would become the credit unions' next regulator, in this case the Office of Thrift Supervision, must certify the voting, and while NCUA has said it would not do so based on the alleged faulty disclosure packages, Richard Riccabono, acting head of the OTS, said that his agency would. The dispute between the two regulators was the topic of a private meeting between Johnson and Riccabono earlier in June and, while each has gone out of their way to deny they are fighting, the differing opinions that came out at the very end of the hearing had an energy which felt a lot a lot like a fight. Responding to Representative Patrick McHenry's (R-N.C.) observation, from the Subcommittee chair which he temporarily occupied, that it was "re-freaking-diculous" that a credit union would have to undergo another round of disclosures and balloting because "a piece of paper was folded wrong," Riccobono, said that he disagreed with the NCUA about the dispute. "This procedure is incredibly expensive," Riccabono said, "and it's unbelievable that an institution would have to pay upwards of half a million dollars over something like this." For her part Johnson disputed the notion that the dispute was over the folding of the paper and said instead it involved credit union members being given the prominent disclosures NCUA had mandated, as well as whether the credit union lived up to an agreement it had made with the agency. Johnson did find an ally on the Subcommittee for her concerns over disclosures, if not specifically for her approach. Representative Brad Sherman (D-Calif.) asked in detail about the percentage of members required under regulation to participate in a charter change conversion vote. When informed that all that is required is that a majority of members voting approve the proposed charter change, Sherman seemed incredulous and suggested that such voting parameters made the disclosures more important not less. "I hate to have to tell you this," Sherman said, "but everything that I get from my bank that is not a statement of accounts, I throw away," adding later, "when the numbers of members participating in an election can be as low as 5% or less, that's when it becomes more important to discuss how pages are folded." Johnson followed up her defense with a letter to the Subcommittee's Chairman Spencer Bachus (R-Ala.), and the other Committee members that the high money stakes involved in credit union-to-bank conversions signaled the need for more care, not less, in the conversion process. Without mandatory disclosed information, Johnson pointed out, the only information that a credit union's members will receive will be that from individuals who stand to benefit the most from the conversion. "Of 26 completed or pending credit union to savings bank conversions," Johnson wrote in her June 10 letter, "19 have engaged in the sale of stock or have taken, or expressed intent to take, the mutual holding company form facilitating the future sale of stock," she wrote. "Based on information taken from the Web site of a conversion expert, a conversion to a mutual bank and then onto a stock bank, by a credit union with 50 million dollars in member capital could result in a "recognition and retention" award of stock with a value over 5 years of more than 10 million dollars to the CEO and an additional 10 million dollars to be shared among the directors," she added. "This is in addition to directors receiving other forms of compensation." Johnson suggested that if Congress was really interested in protecting credit union members' interests in such conversions that it should consider requiring that converting credit unions return the members' equity in the credit union to the members as is done when mutual insurance companies convert to stock owned insurance companies. Gary Base In Town? One reason Johnson faced the round of questions she did on Community may have been because Gary Base, a long-time credit union executive and CEO of Community had been in town for a few days leading up to the hearing making his case to lawmakers he considered sympathetic to his cause. Representative McHenry's office confirmed that a meeting took place between Base and the representative, and other offices confirmed similar meetings had been on their member's schedules as well though they emphasized that this fact alone would not necessarily guarantee the meeting took place. The topic of conversion has been cropping up in member's mailboxes more lately, as Americas' Community Bankers also weighed in on the matter, writing a letter to the Chairman of the House Financial Services Committee, Michael Oxley (R-Ohio). The ACB asked Congress to look into NCUA regulations governing credit union charter changes, alleging that the NCUA has adopted and "extremist" position. "Although Congress has clearly granted credit unions the freedom to choose the form of organization that best meets their strategic and market objectives, the NCUA seems incapable of applying an evenhanded approach to conversion matters," the ACB wrote. "For example, the agency recently invalidated the conversion attempts of Community Credit Union and Omni American Credit Union in Texas before the member votes were even tabulated. The NCUA said that the credit unions violated the agency's conversion regulations because required disclosure documents that were mailed to all credit union members were not properly folded." "It is unreasonable for any regulator to interfere with an entity's strategic, business decision based on how a piece of paper is folded," the banker group said That letter insured that members of the House Financial Services Committee and Senate Banking Committee got a memo from CUNA seeking to reverse what CUNA CEO Dan Mica characterized as "incomplete or misleading information about credit union conversions to mutual savings bank charters." The memo comes one day after the ACB's letter to Oxely and several days after Base visited Capitol Hill to lobby against the NCUA's conversion disclosure regulations as applied to Community's case. "Conversion decisions are significant because they diminish and ultimately may extinguish credit union members' ownership rights in their institution. Mutual thrifts are not just credit unions by another name," Mica wrote. "Credit unions are not-for-profit cooperatives, which are operated for the benefit of their member-owners. Mutual thrifts are for-profit businesses and when a credit union converts to a bank, the character of the institution materially changes." Mica also suggested, a little indelicately, that Riccabono's interest in conversions had less to do with protecting and serving credit union members and more to do with preserving the role of the OTS as regulator of a steadily shrinking industry. NCUA ensures the interests of the member-owners are protected in the conversion process. The Office of Thrift Supervision's conversion rules do not protect the fiduciary interests of credit union members in the ownership of their institutions and their capital. "Issues have been raised about the roles of NCUA and OTS as both regulators of institutions and supervisors of the conversion process," Mica wrote. "Importantly, as of year-end 2004, OTS regulated 886 institutions, down from about 4,000 in 1980, and it is fair to note that converted credit unions help support the need for a separate thrift regulator." CRA Raised As Well Meanwhile CRA also came up as an issue. Although Chairman Bachus cut short his line of questioning, Representative Al Green (D-Texas), raised the specter of credit unions not adequately serving their low- and medium-income members and needing to be under CRA. After walking all the testifying regulators through a series of statements asserting the goodness and efficacy of CRA, Green asked why CRA should not be strengthened and, when Johnson objected that Congress had not seen fit to place credit unions under CRA, he drew upon the most recent National Community Reinvestment Coalition report for his questions about credit union performance, although he did not name the report. Largely lost in all this has been NCUA's proposal to reform the way that capital is treated under Prompt Corrective Action to allow the agency to build a more risk-based approach into its capital calculations and thus take some pressure off of credit unions. Johnson fielded only one series of questions, from Sherman, on the PCA reform proposal. Sherman's questions were aimed at drawing out the regulator on the fact that credit union assets were on the line in the case of widespread default because of capital standards before taxpayer assets might be. If credit unions can live with additional risk that PCA reform might bring, Sherman opined, the taxpayers should be able to do so as well. Meanwhile, the preoccupation with conversions during the hearing drew some crocodile tears from the Coalition for Credit Union Charter Options, the pro-conversion group which is advised by a board of former credit union executives which have become bankers. "Tragically," said Lee Bettis, a former credit union executive turned banker and executive director of the pro-conversion Coalition, "NCUA's antics are undermining CURIA's prospects. Conversions, apparently, became the topic de jour, instead of CURIA. Regrettably, the agency is spending valuable political capital to stop a couple of charter conversions and preserve its monopoly, instead of focusing on the true issues for credit unions – the tax exemption and capital reform." Bettis neglected to mention the role the lobbying of Base might have played in insuring the conversion topic had a prominent place at the hearing. The Coalition is on record as supporting such lobbying as long as they are not involved directly in it. -

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