Credit Union Conversion Plan Draws Opposition From Members

Lafayette member Scott Stiens said he does not think members will benefit from the proposal. (By Susan Biddle -- The Washington Post)

The nine-member board of directors of the Lafayette Federal Credit Union has been working for months on a plan to convert the 76-year-old not-for-profit institution into a for-profit bank, a process that could give the directors and other top executives a multimillion-dollar windfall.

But they have not formally informed the Kensington-based credit union's 16,000 stakeholders, who include workers in several federal agencies and residents in the District and Maryland.

Opponents of the conversion express concern that these credit union members will not be prepared to watch out for their own interests when the proposal comes to a vote by the end of the year. The federal regulator overseeing the proposal warned the board of directors last month that the information packet it then planned to send out was "misleading," but approved an amended version yesterday.

The problem, the opponents say, is that turning Lafayette into a bank could mean rising fees and declining services because the board's priority would shift to earning a profit for shareholders. Under law, a credit union's board must instead serve the best interest of the people who own it -- the depositors.

They also point out that in most credit-union-to-bank conversions, members of the new bank's management team have ended up owning more shares and making more profit than rank-and-file members.

"I have rarely seen a situation with such a lack of transparency, even in the developing world," said Tom Carter, a member of the credit union, who promotes the creation of cooperative businesses around the world in his job at the U.S. Agency for International Development. "And I'm outraged because it's a betrayal of trust by individuals elected to represent and protect the interest of the 16,000 member-owners."

Five of Lafayette's directors did not return telephone calls seeking comment. Four others referred questions to Lafayette chief executive Michael Hearne, who did not return telephone calls. In a statement released last night, Hearne said he thought the proposal was in the members' best interests and was "intended to allow us to continue to provide the type of affordably priced financial services that we have provided for many years."

Carter and other members who heard about the plan by word of mouth and plan to fight the proposal say they are angry that rank-and-file members have not been informed about the plan along the way -- especially because the directors have used members' money to pay a lawyer, Richard S. Garabedian, dubbed by the banking trade press as the "Credit Union Conversion Guru," to guide them through the process. Garabedian declined to comment for this story.

And they are concerned that directors, who are unpaid volunteers, and top executives have a conflict of interest in recommending the conversion because of the financial benefits they could reap through higher salaries, stock awards and other compensation.

In the statement released last night, Hearne said, "We may institute a stock ownership plan for all our employees." He said all members "will have the opportunity to invest on the same basis."

Credit unions evolved about a century ago to provide reasonably priced loans to consumers who could not get them from banks. As not-for-profit institutions owned and controlled by the people who use them, they are exempt from federal taxes and face limits on what products they can sell. And they can accept as depositors only people who come from defined groups who share something in common, such as where they work or live.

But in the past several decades, reduced profit margins at banks and credit unions alike has intensified competition as both institutions vie for many of the same customers. Because of their tax-exempt status, credit unions have offered on average lower fees and better interest rates than banks.