By Patrick OConnor - 07/06/05 12:00 AM EDT
A piece of paper — or rather the manner in which that piece of paper was folded — has inflamed the political struggle over regulating credit unions.
The fight over part of a mailing from one of the biggest credit unions in Texas could increase congressional oversight of the National Credit Union Administration (NCUA), the regulatory body charged with monitoring the conversion of credit unions into savings banks.
It has also sparked bipartisan congressional criticism of the NCUA as part of an ongoing battle to limit federal oversight of financial institutions.
The paper in question is a disclosure to Community Credit Union’s 220,000 members whom the management is asking to approve conversion to a savings bank. The paper listed conversion costs and three potential consequences of converting.
NCUA officials say the disclosure was improperly folded and thus undermined the petition to members. The credit union’s supporters, including Texas senators and a bipartisan collection of House members, counter that the NCUA is being hypertechnical and guilty of “regulatory nitpicking.”
With $1.4 billion in assets, Community Credit Union is America’s biggest credit union to seek conversion. Its success or failure is thus being watched by credit unions nationwide.
Its management and lawyers held extensive negotiations with NCUA to establish rules and procedures for the disclosure.
NCUA insisted on three mailings to members, each to include a disclosure form listing costs and three potential consequences for current account holders:
•Larger account holders would have “more votes and, thus, greater control” in a mutual savings bank.
• Account holders could receive lower savings rates and higher loan rates because savings banks pay federal and state taxes that credit unions avoid.
• This is “the first step in a two-step process” to issuing stock.
The disclosure warned members that officers of the company would receive far more of that stock than smaller account holders.
This so-called “boxed disclosure” was supposed to be on the front side of the second page in the mailing, with the credit union’s rebuttals on the reverse side. As the paper was folded in many of the mailings, the rebuttal was on the front and the boxed disclosure on the back. The NCUA therefore invalidated the mailing before votes were tallied, stalling the conversion and potentially forcing the cooperative to start again at square one.
Texas Sens. John Cornyn (R) and Kay Bailey Hutchison (R) and 24 members of the Texas House delegation sent letters to NCUA Chairwoman JoAnn Johnson to complain and asking that the ruling be rescinded.
During of the House Financial Services Committee on June 9, members criticized the Johnson. Rep. Jeb Hensarling (R-Texas) asked her to “explain to me and other members of this committee why we should not conclude that your agency is simply trying to make conversions more difficult and more burdensome and more costly.”
Banking lobbyists have put their weight behind the conversion. The American Bankers Association (ABA) and America’s Community Bankers (ACB) have both written letters to members of the House Financial Services Committee protesting the NCUA’s regulatory actions and asking for congressional oversight of the conversion process.
Credit unions are nonprofit, cooperative savings institutions that offer low-interest loans to their members. They usually offer lower loan rates and higher interest on personal savings accounts than banks because they are largely exempt from federal and state taxes.
Credit unions were not allowed to become savings banks without NCUA approval until 1998, when Congress relaxed those restrictions and allowed them to change charters if members of the credit union voted to approve the conversion.
So far, only 26 institutions have switched, but activity has picked up in the past two years, with some of the larger credit unions hoping to capitalize on the looser lending restrictions imposed on savings banks. Credit unions have a hard cap on business lending and are required to hold a larger percentage of overall assets than savings banks.
For their part, NCUA officials are concerned that the conversions are just the first step for managers of credit unions who want to issue stock and become publicly traded companies, which could make the managers rich. Johnson said 19 of the first 26 credit unions to convert have sold stock or “expressed intent” to issue shares soon.
In a letter to Rep. Spencer Bachus (R-Ala.), chairman of the Financial Services Subcommittee on Financial Institutions and Consumer Credit, sent one day after the hearing, Johnson wrote, “NCUA’s regulatory disclosure requirements are directed only at ensuring that members have an opportunity to consider both sides of the conversion issue so they may cast an informed vote.”
“If Congress further restricts NCUA’s already limited authority over these conversion votes, the only disclosures members receive … will be the disclosures from the individuals who have the most to gain,” Johnson continued.
But even Rep. Barney Frank (D-Mass.), ranking member on Financial Services, who is generally supportive of such oversight, said the NCUA’s ruling on the Community Credit Union mailing was excessive.
“This seems to me a hyper-technical interpretation of your agency’s conversion regulations, and that strikes me as an inappropriate basis to invalidate these elections,” Frank wrote Johnson after the hearing.
Warning of a future oversight battle, Frank continued: “This serves to increase the costs of these conversions and encourage those who seek to place further restraints on NCUA’s authority”