WASHINGTON -- In a somewhat unexpected move, the Coalition forCredit Union Charter Options, the banker-led organization thatseeks to facilitate credit unions changing their charters to thoseof mutual banks, has filed suit in federal court to reverse theagency's regulation surrounding credit union-to-bank charterconversions.

Lawyers familiar with the ongoing dispute over NCUA regulationaround the charter change issue expected that a lawsuit, if itcame, would originate with one of the credit unions actuallydealing with the regulations. But instead the case was filed by thecoalition; a relatively new group that has never said how manycredit unions it has as members and which is advised and led bybankers.

The lawsuit, filed in the District Court for the EasternDistrict of Virginia, seeks to have the court roll back NCUA'sregulations around credit union-to-bank charter conversions goingback to 2004 and to bar the agency from "all references tomutual-to-stock conversions of savings institutions in its futureregulatory initiatives."

"We believe the NCUA has flagrantly overstepped the statutoryauthority granted it by Congress in the Credit Union MembershipAccess Act to administer the membership vote on a creditunion-to-mutual savings bank charter conversion," explained LeeBettis, the coalition's executive director. "Clearly, its rulesfail to meet Congress' explicit test of being consistent with andno more or less restrictive than rules applicable to other charterconversions governed by the other federal banking regulators."

The coalition is using noted Washington, D.C. law firm Buteraand Andrews, the same law firm used by the American Bankers'Association, to bring the suit.

The coalition sought to roll back the agency's regulationsmandating disclosures and procedures for charter change votes to2004 because it argued that the all the agency's regulations sincethen have violated the intent of Congress in the Credit UnionMembership Access Act.

"Beginning in 2004, as larger credit unions were choosing toconvert, NCUA began to encumber the conversion process with moreregulatory constraints. Every year since, it has strayed fartherand farther from the law," Bettis argued in a prepared statement,adding: "The conversion regulations of the Office of ThriftSupervision (OTS) and the Office of the Comptroller of the Currency(OCC) each run a single page. NCUA's credit union conversions nowrun almost 20 pages and are replete with restrictions andimpediments which are nowhere to be found in the comparableregulations of the OTS and OCC for institutions exiting theirregulatory jurisdiction."

The motive for NCUA actions, Bettis said, was an attempt to keepthe interest income from deposits in the National Credit UnionShare Insurance Fund and Bettis claimed that conversions of largecredit unions had cost the agency the annual earnings from theirdeposits, some $30 million.

"The larger the credit union, the bigger the problem for theirbudget" said Bettis. "It's no wonder NCUA is trying to build a wallaround the industry by manipulating the conversion process tosubvert federal law. They say they're trying to protect theconsumer but what they're really protecting is themselves."

Since the suit has been brought under the AdministrativeProcedures Act, Bettis was careful to claim that the court actionwas the last choice the Coalition had. He noted the coalition hascommented during the regulatory period, met with NCUA staff andprovided testimony to Congress.

"The only voice that seems to get NCUA's attention," Bettisconcluded, "is that of the federal judiciary. It was a Texas courtthat called NCUA's behavior in a 2005 conversion case 'arbitrary,''capricious' and 'silly', thus reversing NCUA's order to derail twoconversions in that state. Therefore, the courts appear to be theonly route left available to us to stop NCUA's relentless attack onthe legal right to convert charters."

Judges evaluating claims under the APA generally require thatall administrative remedies have been exhausted before a complaintis made to the courts.

Although no credit union legal authority was available tocomment on the suit before press time, the suit tends to restatethe coalition's previous arguments and attacks the agency's basisfor its regulatory actions. The brief contends, for example, therewas no factual basis in 2004 for the agency's contention that ahigh percentage of credit unions that change to mutual banks go onto covert further to stock-issuing banks.

It also argued that the studies the agency cited asjustification for its claim of different loan and savings ratesbetween banks and credit unions were flawed:

"The proposal for the 2006 changes cites two research studies asthe evidentiary basis for the purported differences in the loan andsavings rates between credit unions and banks as utilized tojustify the boxed disclosure language, but in the one instance thestudy was commissioned by the NCUA itself while the other study wascommissioned and paid for by a national trade association for thecredit union industry," the brief contended.

Other arguments appeared weaker. For example, the brief did notreally address the agency's claims that its actions were meant tosupport consumers and members of credit unions who complained aboutbeing blind-sided by conversion votes. Nor did it note that theagency had made a detailed comparison within its regulations andbetween its regulations and similar rules from other financialregulators.

Since the case was filed at press time, the court has not yetscheduled dates for arguments or hearings.

For its part the NCUA reacted quickly to the news. NCUA BoardChairman JoAnn Johnson said she was disappointed, but not surprisedby the suit.

"It attempts to curtail reasonable and basic consumerprotections and represents an unfortunate step in the wrongdirection with regard to the rights of credit union members," shesaid, adding:

"The new NCUA conversion rule, which became effective January22, 2007, enhances the ability of the members of credit unions tomake informed decisions about their ownership of the institution,and how that ownership would change if a conversion to another formof financial institution would occur. Consumers deserve more, notless, transparency and openness as they consider their choices.NCUA stands firmly behind the credit union members, and looksforward to the Court's review of this fundamental issue."

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