WASHINGTON -- In a somewhat unexpected move, the Coalition for Credit Union Charter Options, the banker-led organization that seeks to facilitate credit unions changing their charters to those of mutual banks, has filed suit in federal court to reverse the agency's regulation surrounding credit union-to-bank charter conversions.

Lawyers familiar with the ongoing dispute over NCUA regulation around the charter change issue expected that a lawsuit, if it came, would originate with one of the credit unions actually dealing with the regulations. But instead the case was filed by the coalition; a relatively new group that has never said how many credit unions it has as members and which is advised and led by bankers.

The lawsuit, filed in the District Court for the Eastern District of Virginia, seeks to have the court roll back NCUA's regulations around credit union-to-bank charter conversions going back to 2004 and to bar the agency from "all references to mutual-to-stock conversions of savings institutions in its future regulatory initiatives."

"We believe the NCUA has flagrantly overstepped the statutory authority granted it by Congress in the Credit Union Membership Access Act to administer the membership vote on a credit union-to-mutual savings bank charter conversion," explained Lee Bettis, the coalition's executive director. "Clearly, its rules fail to meet Congress' explicit test of being consistent with and no more or less restrictive than rules applicable to other charter conversions governed by the other federal banking regulators."

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

The coalition sought to roll back the agency's regulations mandating disclosures and procedures for charter change votes to 2004 because it argued that the all the agency's regulations since then have violated the intent of Congress in the Credit Union Membership Access Act.

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

The motive for NCUA actions, Bettis said, was an attempt to keep the interest income from deposits in the National Credit Union Share Insurance Fund and Bettis claimed that conversions of large credit unions had cost the agency the annual earnings from their deposits, some $30 million.

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

Since the suit has been brought under the Administrative Procedures Act, Bettis was careful to claim that the court action was the last choice the Coalition had. He noted the coalition has commented during the regulatory period, met with NCUA staff and provided testimony to Congress.

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

Judges evaluating claims under the APA generally require that all administrative remedies have been exhausted before a complaint is made to the courts.

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

It also argued that the studies the agency cited as justification for its claim of different loan and savings rates between banks and credit unions were flawed:

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

Other arguments appeared weaker. For example, the brief did not really address the agency's claims that its actions were meant to support consumers and members of credit unions who complained about being blind-sided by conversion votes. Nor did it note that the agency had made a detailed comparison within its regulations and between its regulations and similar rules from other financial regulators.

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

For its part the NCUA reacted quickly to the news. NCUA Board Chairman JoAnn Johnson said she was disappointed, but not surprised by the suit.

"It attempts to curtail reasonable and basic consumer protections and represents an unfortunate step in the wrong direction with regard to the rights of credit union members," she said, adding:

"The new NCUA conversion rule, which became effective January 22, 2007, enhances the ability of the members of credit unions to make informed decisions about their ownership of the institution, and how that ownership would change if a conversion to another form of financial institution would occur. Consumers deserve more, not less, transparency and openness as they consider their choices. NCUA stands firmly behind the credit union members, and looks forward to the Court's review of this fundamental issue."

--dmorrison@cutimes.com

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Coalition Files Suit Against NCUA; Legal Brief Restates Previous Arguments

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