Credit Union Conversion Plan Draws Opposition From Members

In 1998, Congress passed a law making it easier for credit union directors to convert their institutions to banks, in part by removing the requirement that a majority of members had to approve the conversion. Instead, they need only a majority of those members who vote.

In the past decade, 29 of the approximately 9,500 credit unions in the country have converted to for-profit, shareholder-owned banks. In each case, industry officials say, the board of directors and top executives have cited the need to attract a wider customer base and sell a broader array of financial services for the institution to remain viable long-term.

And in most cases the directors and top managers, but few other members, have profited from the conversion, mostly from stock sales, according to government and industry officials. In a study of five conversions, the Credit Union National Association, the industry's trade group, says that stock and other awards averaged $742,000 for each director and more than $1.2 million each for the chief executive and other top executives.

The Lafayette board's lawyer, Garabedian, was a lead lawyer on many of the conversions.

Last month, the National Credit Union Administration, the federal agency that regulates the institutions, rejected Lafayette's request to send out ballots on the conversion plan. The regulator said the proposed information packet accompanying the ballots was, in several specific ways, "inaccurate," "misleading" and "insufficient" to enable members to make a fully informed decision.

The NCUA's letter cites Lafayette's May board minutes as saying "the decision to proceed with a charter conversion was based on the board's opinion that the conversion is in the best interests of the members and not because the board of management has any desire of self-enrichment." But, the NCUA said, the information the board was planning to give members included no discussion of whether the change would benefit members, and instead focused on the difference in projected financial performance between a bank and a credit union.

The regulator also said the board's argument that the institution needed to become a bank to win more customers did not make sense, because Lafayette's own estimates say the credit union has 900,000 potential new customers within its current market.

Garabedian resubmitted the request with changes to address the regulators' concerns. Yesterday evening, Lafayette announced it had won NCUA approval to send out a revised information packet and the ballots. Garabedian declined to release a copy of the revised application.

Every member of a credit union that converts must be given a chance to buy stock in the resulting banking company before it is sold to the public, up to an amount set by the board and bank regulators. In theory, that means they have the same chance to profit once the initial stock sale ends, when share values typically jump. In practice, however, industry and government officials say few members understand how to participate or have the money to do so.

"It ends up that the people with money take advantage of the opportunity and the poorer guy won't be able to," said Russell Kashian, an associate professor of economics at the University of Wisconsin's Whitewater campus who studies credit unions.

Scott Stiens, another Lafayette member who also works for the Agency for International Development, said he planned to fight the proposal because he thinks members will not benefit.

"A conversion leads to losing tax-exempt status, and that translates into a business cost that has to be passed along to customers in the form of higher fees and charges or lower service," he said.

Lafayette has assets of $331 million, with $30 million in reserves that now belong to its members. Under the terms of the deal, the $30 million will transfer to the new bank.

Lafayette members will have 90 days after receiving the ballot to vote.