Decision Near On Turning Credit Union Into a Bank

Credit unions are exempt from federal taxes and can accept as depositors only people who come from defined groups. Credit unions say they pass on their tax savings by offering lower fees and better interest rates than banks, a claim supported in a recent report by the Government Accountability Office.

Opponents say turning Lafayette into a bank will mean rising fees and declining services because the institution will have to pay taxes, lose its free rent for branches in federal buildings and earn a profit for shareholders. They say Lafayette's 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 and sales of stock.

In the past decade, 29 of about 9,500 credit unions in the country have converted to banks. 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. Lafayette's management and board have promised in printed, mailed material that they will be able to buy shares only on the same terms as other former credit union members.

In most conversions, however, the new bank's management team ends up owning more shares and making more profit than rank-and-file members because most members can't afford or don't understand the value of the shares.

In a study of five conversions, industry trade group the Credit Union National Association found 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.

In June, the National Credit Union Administration, the federal agency that regulates credit unions, questioned Lafayette's claim it needed to become a bank to win more customers. Lafayette's own estimates show it has 900,000 potential new customers within its current market. It could make at least $18 million in additional business loans and be below the limit set by federal law.

Outside the Reagan Building branch, Brooks said the credit union gave her a loan this year to buy her first car at a rate lower than those offered by banks or the automaker. "I want others to have the same benefit," she says.

Lawan Russell, a nine-year member, said that when a family death put her behind financially, Lafayette gave her a debt-consolidation loan at a rate lower than what a bank would have charged. "I love Lafayette, it dug me out of hole. But I'll move my accounts if it converts," she said.