U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

31–037 PDF 2006

H.R. 3206, THE CREDIT

UNION CHARTER CHOICE ACT

HEARING

BEFORE THE

SUBCOMMITTEE ON 

FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

MAY 11, 2006

Printed for the use of the Committee on Financial Services

Serial No. 109–91

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

CAMPBELL, JOHN, California 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

SPENCER BACHUS, Alabama, Chairman

WALTER B. JONES, JR., North Carolina, 

Vice Chairman 

RICHARD H. BAKER, Louisiana 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SUE W. KELLY, New York 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

JUDY BIGGERT, Illinois 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

RICK RENZI, Arizona 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

MICHAEL G. OXLEY, Ohio 

BERNARD SANDERS, Vermont 

CAROLYN B. MALONEY, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

LUIS V. GUTIERREZ, Illinois 

DENNIS MOORE, Kansas 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

AL GREEN, Texas 

GWEN MOORE, Wisconsin 

WM. LACY CLAY, Missouri 

JIM MATHESON, Utah 

BARNEY FRANK, Massachusetts 

(V)

C O N T E N T S 

Page 

Hearing held on: 

May 11, 2006 ..................................................................................................... 1

Appendix: 

May 11, 2006 ..................................................................................................... 43

WITNESSES 

THURSDAY, MAY 11, 2006

Dorety, Tom R., President, Suncoast Schools Federal Credit Union, on behalf 

of the Credit Union National Association .......................................................... 30

Johnson, JoAnn, Chairman, National Credit Union Administration .................. 8

Polakoff, Scott, Deputy Director, Office of Thrift Supervision ............................. 10

Schaefer, Marcus, President and CEO, Truliant Federal Credit Union, on 

behalf of the National Association of Federal Credit Unions ........................... 29

Stewart, Laurie, President and CEO, Sound Community Bank, on behalf 

of America’s Community Bankers ...................................................................... 27

Yingling, Edward, President, American Bankers Association ............................. 32

APPENDIX 

Prepared statements: 

Bachus, Hon. Spencer ...................................................................................... 44

Hinojosa, Hon. Ruben ....................................................................................... 46

Dorety, Tom R. .................................................................................................. 47

Johnson, JoAnn ................................................................................................ 56

Polakoff, Scott ................................................................................................... 100

Schaefer, Marcus .............................................................................................. 111

Stewart, Laurie ................................................................................................. 145

Yingling, Edward .............................................................................................. 179

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Statement of Lee Bettis, Executive Director, Coalition for Credit Union 

Charter Options ............................................................................................ 194

Statement of Camden R. Fine, President and CEO, Independent Community Bankers of America ............................................................................... 212

Statement of Alan D. Theriault, President, CU Financial Services ............. 218

Statement of National Association of Credit Union Supervisors ................. 237

Responses to Questions Submitted to Tom R. Dorety ................................... 239

Responses to Questions Submitted to JoAnn Johnson .................................. 248

Responses to Questions Submitted to Marcus Schaefer ................................ 254

Responses to Questions Submitted to Edward Yingling ............................... 257

(1)

H.R. 3206, THE CREDIT 

UNION CHARTER CHOICE ACT 

Thursday, May 11, 2006

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:07 a.m., in room 

2128, Rayburn House Office Building, Hon. Spencer Bachus [chairman of the subcommittee] presiding. 

Present: Representatives Bachus, Royce, Jones, Miller of California, Hensarling, Neugebauer, Price, McHenry, Kanjorski, Waters, Sanders, Watt, Sherman, Moore of Kansas, Baca, and Matheson. 

Chairman BACHUS. Good morning. The Subcommittee on Financial Institutions and Consumer Credit is called to order. I’m going 

to reserve my opening statement until after the first panel has 

given their testimony. But at this time, I’m going to recognize Mr. 

Sanders for an opening statement. 

Mr. SANDERS. Good morning, Mr. Chairman. Thank you for holding this important hearing, and I would like to welcome our witnesses here this morning. 

Today we will be learning more about H.R. 3206, the so-called 

Credit Union Charter Choice Act. Mr. Chairman, I have serious 

concerns about this legislation. In my opinion, we should not be 

making it easier for non-profit credit unions owned by their members to convert to for-profit banks owned by stockholders. I strongly 

believe that there should be more, not fewer, credit unions in this 

country. 

Mr. Chairman, before 1998, only six credit unions converted to 

banks. That’s mainly because during that period, the majority of 

credit union owners had to approve the conversion, and they also 

had to receive written permission to convert by the NCUA. But 

after 1998, the law was changed to make it much easier for these 

conversions to take place, and as a result, 23 credit unions have 

converted to banks since that time period. 

I think Congress made a mistake by changing the conversion law 

in 1998. That is one of the reasons why I’m a proud co-sponsor of 

the Credit Union Regulatory Improvement Act that, among other 

things, amends the Federal Credit Union Act to require a minimum of 20 percent of the members to cast a vote regarding the 

conversion of credit unions. 

2

Mr. Chairman, let us not be fooled. In many instances when 

credit unions convert to banks, a handful of senior executives can 

reap substantial monetary gains. For example, after the Community Credit Union in Plano, Texas, converted to ViewPoint Bank 

not too long ago, documents filed with the Securities and Exchange 

Commission showed that the former credit union CEO stood to 

gain roughly $1 million through a run-up in its stock prices, etc., 

etc., etc. 

So Mr. Chairman, I will give you back the gavel, but I want to 

express my concerns about this legislation. Thank you very much. 

Chairman BACHUS. Thank you, Mr. Sanders. I appreciate your 

remarks. At this time, are there any other members wishing to 

make an opening statement? Mr. McHenry? 

Mr. MCHENRY. Thank you, Mr. Chairman, and thank you for 

holding this hearing today on H.R. 3206, the Credit Union Charter 

Choice Act bill that I introduced to varying degrees of fanfare last 

year. I’d like to thank Chairman Johnson for being here today; I’ve 

enjoyed our discussions. I thank you for serving on the NCUA 

board, and thank you for serving previously in the State Senate in 

Iowa. I’d also like to thank Steve Polakoff from OTS for being here 

and being willing to testify. 

I trust that we’ll have a lively discussion with the second panel 

as well; they represent various credit union industries and the 

banking community, including my good friend Marc Schaefer from 

Truliant Credit Union in my home State of North Carolina. Marc 

and I—Marc is also part of the National Association of Federal 

Credit Unions. Marc and I have had wonderful discussions over the 

last 2 years in my service in Congress. 

Now, you’ve asked me when I became interested in the credit 

union conversion issue. Last year, I learned about the conversions 

of Community and Omni America Credit Unions in Texas, and 

found the process to be, at the time, ridiculous. Actually, to quote 

myself, I think I said, ‘‘re-freaking-diculous.’’ Again, to varying degrees of fanfare. 

As I looked at that process, I saw a need which fits into my overall philosophy of government, which is common sense regulation 

and reasonable regulatory oversight. Specifically, the conversions 

and interaction with the NCUA in later litigation drew my attention to an area of potential regulatory overreach or mismanagement. 

We can all have honest disagreements and debate about the merits of any particular conversion. However, conversions are the law 

of the land, and should be handled with integrity in a professional 

manner that does not have the appearance of any bias toward one 

particular charter or outcome. 

The basic goals of my bill are threefold. First, to provide for full 

disclosure to the members of credit unions regarding the conversion 

from the credit union charter to the mutual savings charter. Second, to limit the arbitrary decisions by the NCUA that overturn the 

will of credit unions’ members through free and fair elements. And 

third, to protect the rights of members to change the charter of 

their credit union if it is the will of the members, even if some in 

the industry disagree with the choice. 

3

The Credit Union Charter Choice Act is not anti-credit union, as 

some have claimed. Instead, it is pro-credit union member, as it 

protects them from arbitrary bureaucratic decisions that overturn 

their will. 

My bill would prevent speculatory rhetoric that discusses things 

that may or may not happen in the future, and are covered by regulations from other Federal regulators. There’s absolutely no need 

for the NCUA to require speculatory disclosure on procedures of 

conversions that have well-established rules and regulations overseen by a world class regulator such as OTS. 

I believe the ownership issue is a red herring used by credit 

union activists to prevent conversions. If a credit union converts to 

a mutual savings bank, it is simply changing the form of ownership 

of the members, not eliminating their ownership. 

Additionally, if a credit union further wishes to convert from that 

mutual savings bank, there is an additional regulator at the OTS 

that governs that process by which they can switch to a stock-letting operation, and again, still retaining a different form of ownership, but ownership nonetheless. 

On many occasions, I’ve had the opportunity to have productive 

conversations with interested parties on both sides of this issue. I’d 

like to thank the National Association of Federal Credit Unions, or 

NAFCU, for their willingness to bring forth constructive ideas, including a white paper on the conversion process, as they have continued to engage me in a productive dialogue to this day. I especially enjoyed speaking before over 500 participants at last year’s 

NAFCU conference here in Washington, D.C. In fact, I think I even 

convinced most of them that I don’t have horns and a tail. 

And I am certainly pleased to see the recent addition to the 

board of NCUA with Rodney Hood from North Carolina, and Gigi 

Hyland as well. I think they have fine experience and will be a 

wonderful addition, as well as the new director of public and government relations, John McKechnie, who’s been a fixture in the 

credit union industry for many years. 

To conclude, I hope that we have a productive hearing talking 

about the future of this conversion process, not dwelling on the 

past. And thank you, Mr. Chairman, for your indulgence. 

Chairman BACHUS. Thank you. Mr. Moore does not have an 

opening statement. Mr. Miller or Mr. Royce? 

Mr. ROYCE. Thank you, Mr. Chairman. I want to welcome all of 

the witnesses here today, and especially Chairwoman Johnson from 

the NCUA board. 

We are covering some important issues today, and I think all of 

us realize that credit unions play a very vital role in our economy 

and our financial system. And we need to ensure that they continue to receive proper supervision. 

To that end, I look forward to the hearing that this subcommittee 

is going to be holding in the near future on the bill that my colleague and I, Mr. Kanjorski and I, have introduced to modernize 

the regulatory system for credit unions, H.R. 2317, the Credit 

Union Regulatory Improvements Act, or CURIA, unlike the legislation we’re looking at today, will most importantly make long overdue revisions to the capital standards for credit unions. And I 

thank you again, Mr. Chairman, and I yield back. 

4

Chairman BACHUS. I appreciate your remarks, Mr. Royce. Mr. 

Miller? 

Mr. MILLER. Thank you, Mr. Chairman. I’ve been a supporter of 

credit unions since I was a kid. My mother was a retail clerk. So 

if we got anything, it was because a credit union lent her money 

to buy a sofa or whatever else she needed. 

And you’re unlike a stock-owned institution that exists basically 

for the enrichment of a handful of stock owners. Credit unions exist 

for the benefit of each and every member of that credit union. So 

it puts you in a different category, as far as I’m concerned, and I 

think we shouldn’t do anything to prevent conversions from taking 

place, but we must ensure that the rights of credit union members 

are protected in this process. 

And that’s the difficult process for you, to make sure that they’re 

informed, they’re aware, they understand, and that the direction 

you’re going is beneficial to the membership. Change and structure 

of credit unions should be done in a very well-informed manner to, 

basically, a well-educated membership. And education, again, is 

also the charge that you have to undertake. It’s critical that credit 

union members have information that’s prominent, accurate, and 

easy to understand, because not everybody is involved in the business sector, and specifically, not everybody’s involved in what you 

do as a credit union as lenders and such in the charge you’ve undertaken. Members deserve to know that charter change will affect 

the credit union and the rights of membership in this position in 

a positive way. And that’s important to have this hearing today, to 

hear your side of the argument. 

I know you have some opponents who think that you shouldn’t 

exist; but you exist for a good beneficial purpose. You are non-profits; you are there for the benefit of the members. And that’s why 

I think any change needs to be done in a structurally beneficial 

way to the membership, and I look forward to the testimony. I 

yield back. Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you, Mr. Miller. And Mr. Hensarling, 

I apologize. I think I probably should have gone by the order we 

arrived, and I didn’t. I recognize you at this time. 

Mr. HENSARLING. Well, thank you, Mr. Chairman. Better late 

than never. 

One, I want to thank you for holding this important hearing, and 

I want to thank the gentleman and commend the gentleman from 

North Carolina for his leadership on an issue that I think is important to our committee. I think, as a Nation, our citizens enjoy a 

multiplicity—they benefit from a multiplicity of financial institution models. 

If you’re a resident of the Fifth District of Texas, you can choose 

to keep your money with CitiBank of New York, but you can also 

choose to keep your money in City Bank of Forney, Texas—that’s 

‘‘City’’ with a ‘‘y’’—and my good friend Jim Golston will treat you 

to a cup of coffee. You can do business with City Credit Union in 

Dallas, Texas, and my good friend Mike Kelly will also provide you 

with a cup of coffee. And if memory serves me right, his coffee was 

a little better than Jim Golston’s. 

You have an opportunity to put your money in a thrift, a State 

bank, a Federal bank, one regulated by the OCC, the FDIC, the 

5

Fed. And even in our country, you are free to put your money 

under a mattress. And I think that is what benefits our Nation 

greatly. But I fear that there could be some erosion of consumer 

choice if we do have an agency that is biased in the area of conversions. 

I became involved in this issue when a nearby credit union, Community Credit Union, was involved in a charter conversion. I became convinced that a billion-dollar transaction was held up based 

on how a single piece of paper was folded. 

I had a very good dialogue with the NCUA chairman, who has 

always been very accessible, very professional, and has always provided me with the information that I needed. But I think at the 

end of our dialogue, we agreed to disagree. 

However, I would point out that the Federal Court found in this 

case that the agency had acted, I believe, ‘‘in an arbitrary and capricious manner.’’ So I think at the end of the day, they might have 

come closer to agreeing with me than with her. 

I want to ensure that, as a matter of public policy, we work together to ensure that we have full and fair disclosure, but that 

public policy ought to be neutral as to where people choose to put 

their money and what financial institutions that they choose to do 

business with. And what I hope I don’t see is an agency that is putting a Berlin Wall around their particular financial institution 

model to where there is no freedom of departure. 

And so I hope that these hearings will shed light on that issue, 

and that we can work together for a common goal. With that, Mr. 

Chairman, I yield back. 

Chairman BACHUS. Thank you. Ms. Waters? 

Ms. WATERS. Thank you very much, Mr. Chairman. Good morning. Mr. Chairman, I’d like to thank you for holding today’s hearing 

on H.R. 3206, the Credit Union Charter Choice Act. And I want to 

categorically state my continued support for credit unions. 

Back in February of 2006, when I spoke before more than 1,500 

members of the Credit Union National Association at their annual 

conference in Washington, I emphasized my strong support for 

credit unions. There are 9,000 credit unions operating in the 

United States. In California, there are some 2,000 credit unions. 

And what I think is remarkable is that there are more than 

100,000 members of credit unions living in my district. While this 

evidence suggests that credit unions are an important financial resource to large numbers of persons in communities around the 

country, it does not show that credit unions are oftentimes the bedrock of many communities. 

Credit unions create a financial buffer in communities where low 

and moderate income, disabled elderly, and working families live, 

and where predatory lenders, payday loan shops, and the like often 

flourish. The 100,000 credit union members who live in my district 

are not without alternatives for their banking and credit needs. 

But many of them have been able to work with their credit unions 

to achieve their dreams of higher education or mortgage, home improvements, their first car, etc. 

H.R. 3206 is designed to address the charter conversion process. 

Specifically, H.R. 3206 addresses the voting process, rationale for 

the conversion, and the material effects of the conversion. Each of 

6

these individual provisions of H.R. 3206 is important since conversions of credit unions to mutual thrift institutions has occurred numerous times since 1998. 

In addition, the proposed legislation clarifies what type of information credit unions may or may not be required to disclose related to the conversion. On its face, the reporting requirement may 

not seem important, although it is directly tied to questions of 

fraud and abuse. 

The legislation is simple enough. But the real question is whether this important legislation is balanced. Does the legislation have 

the support of all the interested parties, support of the credit union 

thrift and banking industries, and support of the credit union and 

thrift regulatory authorities? Rarely do the separate industries’ 

regulators see things alike. And today, we have an opportunity to 

shed light on whether the conversion issue is controversial, or just 

one big turf battle. 

As such, I’m very anxious to hear today’s testimony about the 

conversion process and what H.R. 3206 will mean for credit unions, 

the regulatory authorities, and our financial services system. More 

important is what H.R. 3206 will mean to the members of our Nation’s 9,000 credit unions. 

I look forward to working with my colleagues on the subcommittee to answer many of these questions raised by the conversion process, and I thank you, Mr. Chairman. I yield back the balance of my time. 

Chairman BACHUS. Thank you. I recognize Mr. Kanjorski and 

Mr. Baca. And other than that, I think those are the last two members who have opening statements, and then we’ll go to our witnesses. 

Mr. KANJORSKI. Mr. Chairman, I don’t have a formal opening 

statement, although I wish to congratulate you for holding this 

hearing, because I think the issue of conversions is important. We 

haven’t had an opportunity to revisit it since 1998. And quite 

frankly, in that conference, I remember quite well that two of my 

great reservations were the opening of the door toward allowing 

conversions, and my fears have proved correct. Since 1998, 21 credit unions have left the movement and exercised their right of conversions. 

I look forward to the testimony today with a decided confession 

that I am not one of those individuals who want to encourage conversions, and certainly the weakening of what we have now, but in 

fact, would want to strengthen what we have now against conversion. 

And if we move toward a lighter, more amenable way of converting, I fear that this may be the step in the door for taxation 

of those accumulated equity positions that credit unions have, or 

some way to empower the regulator to direct that those equities 

built up over the year not contributed by the present membership 

of a credit union be transferred or converted to some existing credit 

union, so the intent of the money continues on, as opposed to enriching the immediate leadership of the credit union, particularly 

without the strong majority support of the members of the credit 

union. 

7

We should have an ability for conversion, but it should be a high 

standard, and certainly shouldn’t be something that attracts the 

speculative part of our community to encourage that as a nature 

of rating credit unions. Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you. Mr. Baca? 

Mr. BACA. Thank you very much, Mr. Chairman, for having this 

meeting this morning, along with Ranking Member Frank. I’m 

pleased to be here, and I look forward to hearing the witnesses. 

Credit unions provide an important financial option for consumers. And in my district, we provide portable service to over 

115,000 individuals. And they basically are in our communities, 

which are very important. A lot of the banking industries and others are not located in a lot of our communities. And they do a lot 

of outreach in the community, so they’re an important part. 

Unlike banks and thrifts, credit unions exist to provide service 

to their members, and not to maximize the profit outside of the investors or stockholders. All excess income is returned to their members in the form of the highest deposit rates, lower loan rates, and 

lower fees, which is important when you’re operating and dealing 

within the communities, that you give lower loan rates and lower 

fees. And that’s why they play an important part within our communities, because they do that outreach within the communities, 

with close proximities to a lot of the individuals of different diversities within our communities. 

Every credit union member is entitled to equal ownership. And 

that’s important. Equal ownership and one vote, regardless of how 

much money they have on deposit. With so much at stake, the decision to convert to mutual thrift is critical. In order for members to 

decide whether or not for conversion is in their best interest, the 

process must remain open and transparent. And that is important, 

remain open and transparent. 

Members deserve accurate and complete information about all 

aspects of conversions so that they can make an informed decision 

about the best route to take. We must move past the politics. And 

I state move past the politics and focus on the best way to provide 

full and fair disclosure to credit union members that are considering this option. It’s important for them to know their options, and 

to be fair and adequate and to disclose what could occur and how 

it will impact them. 

Any legislation that Congress considers must protect the fundamental rights of each and every one of its members and individuals. 

Again, I thank the witnesses for coming in. I look forward to 

their testimony, and I yield back the balance of my time. 

Chairman BACHUS. Thank you, Mr. Baca. We have two Floor 

votes at this time. As soon as those votes are over, we will hear 

from our first panel. And I’m going to propose to the committee—

and I don’t think it violates the law to have the second panel then 

give their testimony, and then just address questions to both panels. Would that be—would that work? 

The CLERK. I don’t think we should have them both up there at 

the same time. 

8

Chairman BACHUS. You don’t think there’s enough room? We 

won’t do that. All right. There’s too many frowns in the audience. 

I like to see happy faces. So we will keep the panels separated. 

And let me—I’ll say this. I was going to make my opening statement after the witnesses spoke. But this hearing, the title of it is 

H.R. 3206, the Credit Union Charter Choice Act, by Mr. McHenry. 

But the hearing obviously is going to cover the broader issue of 

credit unions converting. And there are obviously concerns that 

members have over the process, and I share those concerns, particularly about transparency and disclosure during those conversions. 

And in particular, one of the questions I’ll be focusing on is the 

requirement in the law before 1998 that 20 percent of the membership participate in the vote. To me, that, at least on its face, appears to be a reasonable requirement. I know it may have been 

part of a bargaining process, and that it was bargained away. I 

don’t know. I would like to know the history of why that provision 

was taken out. 

But it is important—when a credit union converts to another 

form of institution, that the credit union members are informed of 

exactly what process is going forward and how they will be affected, and how those that are leading the conversion effort, how 

they may benefit in the future going forward. 

I think that we all share—I think all of us on both sides of the 

aisle see the value of disclosure and transparency in the process, 

and the people being fully informed before they make decisions. 

And hopefully, not this year, but maybe next year, we’ll look at 

what regulations are enacted in response to our concerns, and take 

it from there. 

But at this time, we’ll recess until the conclusion of the second 

vote on the Floor, which at that point, we’ll reconvene. 

[Recess] 

Mr. NEUGEBAUER. [presiding] The chairman has asked me to fill 

in for him for a little bit. He has to go and do another event. This 

is kind of a busy day, as you probably know. And in the interest 

of time, we’re going to go ahead and hear from the panels. The 

chairman did want me to let the panel know that he will review 

your written testimony, and he’s very interested in this. And so I’m 

going to then ask for the panelists to issue their opening statements. 

And the first panel member that we’ll hear from is the Honorable 

JoAnn Johnson, chairman of the National Credit Union Administration. Ms. Johnson, welcome. 

STATEMENT OF JOANN JOHNSON, CHAIRMAN, NATIONAL 

CREDIT UNION ADMINISTRATION 

Ms. JOHNSON. Thank you, Mr. Chairman, and members of the 

committee, for the opportunity to testify today on H.R. 3206, the 

Credit Union Charter Choice Act, and on the subject of conversions 

in general. I appreciate that members of this committee, and Congressman McHenry in particular, are focusing on the issues of 

transparency in credit union conversions. 

NCUA has learned from recent experience with conversions, and 

appreciates the attention that you are giving to what is a very imVerDate 0ct 09 2002 17:46 Dec 08, 2006 Jkt 031037 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 F:\DOCS\HBA131.150 HFIN PsN: TERRIE
9

portant public policy matter. We welcome the opportunity to discuss these issues. These issues matter a great deal to federally-insured credit unions and their 84 million members. They relate to 

the fundamental concepts of ownership, and the rights of those 

owners to make informed decisions about their financial institutions. 

Credit unions, unlike other types of depositories, are not-for-profit financial cooperatives owned by their members and governed by 

a volunteer board of directors whose fiduciary responsibility is to 

act in the members’ best interest. Every member has the right to 

vote on fundamental matters related to the structure of the credit 

union, including conversion to another charter type. 

NCUA fully supports the right of credit union members to decide 

the business model that is most appropriate and beneficial for 

them. That includes voting to change their charter to a mutual or 

stock bank. If those members believe, after assessing all the pros 

and cons, that converting to a bank is a better business option for 

them, NCUA has absolutely no interest in standing in the way. 

The essential responsibility of NCUA’s regulatory oversight of 

the conversion process is to ensure that the member-owners of 

credit unions receive clear, complete, and accurate information 

about the potential conversion, which will allow them to assess the 

consequences of a conversion prior to voting. 

Members should know what will happen to their ownership 

rights. Members should know that the rates and services may 

change. Members should know if the new mutual savings bank will 

convert to a stock institution. And members should know what will 

happen to member equity. 

Recent history is a relevant guide to what happens post conversion. Among credit unions that converted more than 2 years ago, 

21 out of 24, or 87 percent, have converted to stock institutions. 

When that occurs, 25 percent or more of the equity that had been 

approved by the former members of the credit union typically is 

transferred to the directors, officers, and employees of the new institution. 

Members who own the credit union and its net worth have a 

right to know that when they vote on a proposed conversion, the 

officials who are not only recommending the conversion also stand 

to benefit personally from this kind of transfer of member equity. 

I’m not suggesting that there is anything improper about the 

management of a corporation having an interest in the company’s 

performance, nor do I believe that stock plans and other methods 

of employee and director investment are inappropriate. Rather, I do 

firmly believe that the equity in a credit union belongs to the members, and those members deserve to be fully informed when deciding to give it to others who are positioned to benefit in ways not 

available to the average member. 

NCUA is working on improvements to the regulation that will 

enhance member involvement in the process, communication, and 

disclosures. The forum you are offering today allows us to discuss 

these important matters. 

H.R. 3206, Congressman McHenry’s bill, addresses several aspects of consumer protection and disclosure in a positive way. For 

example, his legislation seeks to improve current law by requiring 

10

a secret ballot, and also an independent inspector of elections. It 

also retains the requirement to notify members 90, 60, and 30 days 

prior to a vote on conversions. These are three important components in any effort to preserve the rights of credit union members, 

and we appreciate Congressman McHenry’s work in this area. 

However, NCUA would not support any legislative change that 

inhibits the role of the agency in monitoring the disclosures or diminishes in any way the responsibility of the credit union to provide accurate and complete information about the conversion and 

the vote. 

This issue is one of consumer choice and protection. Our commitment is to ensure that members, and only members, control their 

own credit union. Information is the key; free-flowing, plain 

English, prominent information that empowers credit union members to make the decision that they believe is best. Again, if that 

decision is to convert from a credit union to another form of financial institution, that is the members’ choice. 

We will not be indifferent to any attempt to convert that obscures any of the critical details related to change in structure, 

change in ownership, and transfers of equity. You in Congress deserve nothing less, nor do America’s consumers who are credit 

union members-owners. 

Fellow NCUA board member Hyland has said, ‘‘If you believe in 

credit unions, you believe members have the right to vote to change 

the form of financial institution they want.’’ You also have to believe that members must receive clear, complete, and accurate information to make a decision as important as whether or not to 

convert. 

I would add that when members are given such an important decision, they must have faith that those who have been charged with 

overseeing these important procedures have put in place appropriate safeguards to ensure that the members have access to the 

necessary information in order to make an informed vote. 

Thank you very much. I look forward to answering your questions. 

[The prepared statement of Ms. Johnson can be found on page 

56 of the appendix.] 

Mr. NEUGEBAUER. Thank you, Ms. Johnson. And now we will 

hear from Scott Polakoff, Deputy Director, Office of Thrift Supervision. Welcome. 

STATEMENT OF SCOTT POLAKOFF, DEPUTY DIRECTOR, 

OFFICE OF THRIFT SUPERVISION 

Mr. POLAKOFF. Good morning, Chairman Bachus, Ranking Member Sanders, and members of the subcommittee. I appreciate the 

opportunity to testify for OTS on H.R. 3206, the Credit Union 

Charter Choice Act. I want to thank you, Mr. Chairman, for holding these hearings, and I want to thank Congressmen McHenry 

and Gillmor and the other sponsors of H.R. 3206 for their leadership in this area. 

Charter choice is a fundamental precept at OTS. Since the agency was created in 1989, many institutions have both left and entered the thrift charter. These so-called ‘‘charter flips’’ are a normal 

course of business at OTS and throughout the banking industry. In 

11

our view, it is the role of the regulator to minimize regulatory obstacles, reduce burden, and facilitate legitimate business decisions 

regarding charter choice made by institutions we regulate. 

While I cannot represent the views of the other Federal banking 

agencies regarding the issue of charter choice, I can tell you that 

all of the banking agencies handle charter flips similarly. Each requires an application to obtain a charter within their jurisdiction, 

but requires no application to leave their jurisdiction and oversight. 

While an agency may forward supervisory information to a new 

regulator, there is generally not a requirement that an institution 

obtain permission from one of the banking agencies to leave its jurisdiction, except where an institution has pending enforcement or 

similar issues, or is in potentially troubled condition. 

In my written statement, I describe the charter conversion process at OTS, which is the same for any entity or group seeking a 

new thrift charter, and our mutual-to-stock and mutual holding 

company, or MHC, conversion process. I will not rehash that discussion here, but I want to clarify several misperceptions regarding 

membership rights of account holders of a mutual savings association. Similarly, I want to set the record straight on the issue of 

management benefits when a mutual savings association converts 

to a stock institution or into an MHC structure. 

Some had advanced the notion that credit union members’ rights 

are compromised when a credit union converts to a Federal mutual 

savings bank. In my view, nothing could be further from the truth. 

While there are certain differences in the rights of credit union and 

mutual thrift members, suggestions that one set is more equitable 

than the other is simply without merit. In fact, from an equity 

standpoint, a closer analysis of the differences reveals that if there 

is a judgment to be made, the rights accorded thrift mutual members are fundamentally more equitable than the rights accorded 

credit union members. 

For example, credit union voting is conducted on a one member, 

one vote basis, while the Federal mutual thrift charter provides for 

one vote per $100 on deposit, with the association being able to set, 

in its charter, the maximum number of votes per member at any 

number from 1 to 1,000. In our view, this type of voting provision, 

while different, is arguably more equitable than the one memberone vote rule, since it provides greater voting rights, up to a limit, 

to members that have made a greater contribution to the institution. And even in small institutions, a member with the maximum 

number of votes could not exercise control of the institution. 

Another issue that has been raised is the fact that members of 

Federal mutual associations may, in most matters, vote by proxy, 

while credit union members vote by mail ballot. We do not find this 

to be a meaningful distinction. Members of a mutual thrift have 

the right to exercise their vote, whether by proxy or directly. The 

fact that members have the flexibility to grant management discretionary authority with respect to their vote does not make the voting process less meaningful. And of course, mutual thrift members 

always have the right to revoke the proxy and vote their shares directly. 

Finally, the economic nature of the membership interest in mutual associations and credit unions is quite similar. When a person 

12

becomes a member of either entity, the person has the same rights 

as other members to participate in dividends or any liquidation of 

the entity. When a person ceases to be a member, they have no 

continuing interest in the institution. Membership interest in either entity cannot be transferred, and members of either entity 

cannot compel management to declare dividends. 

Although liquidations of either type of entity are extremely rare, 

liquidation rights in both entities are similar, with depositors sharing in any remaining equity after liquidation in proportion to the 

amount of their deposits. I note that this is consistent with providing greater voting rights to members with greater deposit investment in an institution. 

The other piece of misinformation that I want to dispel is the notion that management unfairly benefits in the conversion process. 

This is based on the idea that credit union management is conducting a charter flip through a mutual thrift with the intent of 

subsequently conducting a mutual-to-stock or mutual holding company conversion to enrich themselves. 

In fact, management benefits are limited in a mutual-to-stock 

and mutual holding company conversion. Most important, before 

conversion of a mutual holding company stock offering occurs, the 

members of the institution must approve the transaction. Full disclosure is provided regarding all aspects of the transaction, including management benefits. If members object to management benefits, they may vote against the transaction. 

While managers may purchase stock when the institution converts to stock form, such purchases are subject to the same terms 

applicable to other members. All purchases, including those by 

management, are subject to maximum limits so that no party acquires control in the conversion. In addition, purchases by all managers are subject to an aggregate limit. 

Converting savings associations may also establish an employee 

stock option plan in mutual-to-stock conversions. These are tax 

qualified employee benefit plans, and are subject to requirements 

regarding distribution of stock under the plans. Congress has encouraged the use of these plans, and we believe that they are no 

less appropriate for newly-converted stock associations than they 

are for any other type of entity. Again, these transactions are subject to member votes, so that if members object to the transaction, 

they may vote it down. 

Finally, an institution may establish management recognition 

and stock benefit plans after conversion. OTS rules provide that 

they may not be established until at least 6 months after the stock 

conversion, and these plans are subject to a separate shareholder 

vote. We believe these plans are appropriate, since these institutions compete on the same basis as other stock entities. And stock 

benefit plans enable institutions to retain and attract qualified 

management in the same manner as other stock entities. 

In summary, there are differences in certain aspects of the operations of a stock savings association from a mutual thrift or credit 

union, and this may be the very reason why an institution decides 

to pursue that charter strategy. All entities should be accorded the 

right, with member approval, to pursue whatever charter best 

meets their business strategy and needs. 

13

OTS supports all efforts to ensure effective communications between an institution considering a charter conversion and its members. In our view, H.R. 3206 sets forth a clear set of guidelines that 

clarify appropriate standards of conduct and communications between an institution and its members. Freedom of charter choice 

only has meaning if members are able to exercise an informed 

choice. 

OTS believes in charter choice and supports the efforts of depository institutions to organize under the charter that best supports 

their business plan and operating strategy. It is important for all 

regulators to uphold the basic right of freedom of choice. Regulatory barriers that do not protect consumers or institutions, but 

rather serve as regulatory obstacles, should be eliminated. The integrity of our financial services system requires this. 

Thank you, and I will be happy to answer your questions. 

[The prepared statement of Mr. Polakoff can be found on page 

100 of the appendix.] 

Mr. NEUGEBAUER. Thank you, Mr. Polakoff, for your testimony. 

I think we’re going to have another vote here shortly, so what I’m 

going to do is I’m going to just briefly start the questioning period 

here. 

Ms. Johnson, in 1998, Congress acted to ensure that credit union 

members were adequately informed, appropriate disclosures are 

made, voting requirements are reasonable, and that there were 

safeguards against insider abuse. In implementing the law, there 

is concern that NCUA has gone beyond the Congressional intent. 

And could you explain how you are complying with and not regulating beyond the Credit Union Membership Access Act? 

Ms. JOHNSON. Thank you, Congressman. Well, we take our responsibility very seriously. NCUA is required, as you indicated, to 

administer the vote by statute, and we believe very strongly that 

as a part of that process, the credit union members should understand, they should know why their credit union is converting. And 

our efforts have been in that regard to ensure that the members 

are fully informed prior to taking their vote, and the regulations 

that we have implemented follow those guidelines. 

Mr. NEUGEBAUER. Thank you. Mr. Polakoff, at what point does 

OTS regulatory authority begin, and does OTS have any role to 

play when the institution is still a credit union? 

Mr. POLAKOFF. Thank you, Congressman. The OTS has a role in 

a conversion from a credit union to a mutual savings bank in inspecting the voting process. It’s only after the conversion is completed that the OTS has a regulatory role in the oversight of the 

new institution. 

Mr. NEUGEBAUER. Thank you. In the interest of time, I’m going 

to yield back the balance of my time and call on the gentleman 

from North Dakota, Mr. McHenry. I said North Dakota. North 

Carolina. 

Mr. MCHENRY. Slightly different accent, Mr. Chairman. 

Mr. NEUGEBAUER. Yes. Well, geography relocation. 

Mr. MCHENRY. A lot like Texas. 

Mr. NEUGEBAUER. Yes. 

Mr. MCHENRY. Thank you, Mr. Chairman. If I may begin with 

Mr. Polakoff. In a typical conversion to the stock form of ownerVerDate 0ct 09 2002 17:46 Dec 08, 2006 Jkt 031037 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 F:\DOCS\HBA131.150 HFIN PsN: TERRIE
14

ship, do the executives of the institution profit by obtaining stock 

far in excess of that available to the institution’s members? 

Mr. POLAKOFF. Thank you, Congressman. The answer to that 

question is no, that there is a prescribed priority list for the opportunity to purchase stock. And that prescribed priority list starts 

with eligible account holders. And in fact, while there are five different categories, three of the five categories are account holders, 

one is the employee stock ownership plan, and the very last is the 

community. So indeed, it’s quite possible that eligible account holders could purchase the entire stock offering. 

Mr. MCHENRY. It’s possible that all those groups could purchase 

100 percent of the stock before management could purchase stock? 

Mr. POLAKOFF. Congressman, management can only purchase 

stock in any of the four priority categories if they are account holders. So the only category upon which an insider, or management, 

could purchase stock if they’re not an account holder is in the very 

last group, which is the community group. 

Mr. MCHENRY. Thank you. Ms. Johnson, to that same end, I read 

from your disclosure statement from Omni America Credit Union 

that that previous conversion, which is something—number 3 in 

your disclosure form. Let me say about your disclosure form with 

NCUA, there are two things that are good about it. 

First of all, the disclosure is clear. It’s in plain English. Which 

for a government agency— 

Ms. JOHNSON. We did pretty well there, didn’t we? 

Mr. MCHENRY.—is pretty good. Second, it’s on one page, which, 

as we’ve discussed, and I’ve discussed a number of times here in 

this committee, that we’ve mandated so much disclosure that in the 

end, the consumer, the owner, the member, gets no disclosure, because there’s so much of it. So I do want to commend you on having 

one page and it being in clear English. 

However, Mr. Polakoff just explained in the conversion process 

that what you’ve included here is materially false. And, you know, 

to that effort that you said clear, concise—clear, complete, and accurate information, it appears that this number three conversion is 

materially false. 

Ms. JOHNSON. Congressman, I would respectfully disagree. We’re 

talking about the opportunities that are available to management 

and the employees that is not available to the regular members. 

There are management retention plans, there are employee stock 

option plans, and there are stock benefit plans that the average 

member does not participate in. 

Mr. MCHENRY. Do all institutions offer that? Do all stock—forms 

of institutions offer those benefits? 

Ms. JOHNSON. I would have to say I don’t know on that. However, I would think that the equity that is transferred, we have 

seen in this portion just the management, the employees can receive anywhere from 20 to 40 percent of the equity that has been 

built up by the members. 

Mr. MCHENRY. Okay. Mr. Polakoff, is there a limitation on 

which—in the event that the mutual savings bank then goes to 

stock institution, which is a possibility of which OTS regulates, not 

NCUA, is there a limitation on which management can purchase 

stock? 

15

Mr. POLAKOFF. Thank you, Congressman. 

Mr. MCHENRY. Just yes or no. 

Mr. POLAKOFF. Yes. 

Mr. MCHENRY. Yes. Is it 40 percent? 

Mr. POLAKOFF. No. 

Mr. MCHENRY. Okay. So it appears to me that, you know, number three, part of disclosure, which is part of the regs here, is materially false. And, you know, certainly as you go forward with the 

regulatory process, that would be something that I would regard as 

speculative in nature, which is what my legislation addresses. So 

Ms. Johnson, if you could consider that going forward, I would be 

much—I think it would be good for public policy. 

Follow up for you, Ms. Johnson. In your testimony, your written 

testimony, you impressed upon us that the NCUA rules should not 

be required to be identical to those of other regulators such as 

OTS. However, CUMAA specifically directs NCUA to write conversion rules that are ‘‘consistent with rules promulgated by other financial regulators,’’ and ‘‘shall be no more or less restrictive than 

that applicable to charter conversions by other financial institutions.’’ 

Your position seems to be in direct conflict with the standards 

set in law by CUMAA. How do you reconcile this disparity? 

Ms. JOHNSON. Congressman, the statute does require that the 

rules be no more or less restrictive than the other financial regulators. However, it does not say that they are to be identical. And 

I would just say that the transactions may differ, but the principles 

remain the same among the Federal regulators, and that is to provide consumer protection and adequate disclosure. I think we both 

have that goal in mind. And because the transactions differ, there 

needs to be different information available. 

Mr. MCHENRY. And if I may close— 

Mr. NEUGEBAUER. The gentleman’s time has expired. In order to 

get to—and I thank the gentleman from North Carolina, by the 

way, for that, and I’m going to go to the gentleman from Texas, Mr. 

Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. First I’d like to 

state again for the record that I could not be more passionately 

neutral as to the relative merits of doing business with a credit 

union and community bank, a thrift. And I certainly understand 

the zeal of those who believe that their particular model is a superior model. I, frankly, reserve my zeal for a competitive marketplace and freedom of choice. 

Ms. Johnson, in your testimony, I think you stated early on that 

the—I don’t want to put words in your mouth—that the reason for 

being or the charter of the institution, that the NCUA is to provide 

for the safety and soundness, that that is your mission with respect 

to credit unions. And if that is true, what is the safety and soundness issue involved in charter choice? 

Ms. JOHNSON. The role of the regulator, especially that of a financial regulator, includes that consumer protection element. We 

work together in truth in lending, truth in savings. The regulator 

is that cop on the beat, so to speak, to look out for the consumer. 

And this regulation is all about consumer protection, making sure 

16

that the member has the information that they need prior to voting 

in order to make an informed vote. 

And so I would say that the role of regulator is to do exactly that. 

That is the safety and soundness of the whole financial institutions, that the consumer can go into the institution and know not 

only are their deposits safe and sound, but that the regulator and 

the institution is looking at the best interests of the consumer. 

Mr. HENSARLING. In conversations that I’ve had with you and 

with members of your staff—and again, I do not wish to put words 

in your mouth—but I’ve left with the impression that you consider 

the ownership rights of a member of a credit union to be analogous 

to those of one who may hold stock equity in a public company. Is 

that a fair representation of the position? Is that an analogy that 

has been used before? 

Ms. JOHNSON. What I have said is that the member-owner of a 

credit union is indeed an owner. One member, one vote. And 

there’s a difference between having ownership in a credit union 

and being a customer of a bank. I mean, there are risks and rewards to ownership. And so— 

Mr. HENSARLING. Okay. If I’m a member of a credit union, and 

I decide to leave that credit union, and I cash out my account, what 

happens to my equity interest? 

Ms. JOHNSON. Let me explain a little bit about what the ownership of a credit union is and how it differs. The Federal Credit 

Union Act says that a member’s shares are equity, and equity in 

that regard does mean ownership. 

A member receives—by being an owner in a not-for-profit cooperative, the member receives benefits through better rates, lower 

fees. And if the credit union does well, they receive dividends. If 

there is a voluntary liquidation, all the equity is returned. 

However, there are also risks to being a member of a credit 

union and having ownership in that institution. Because if the 

credit union doesn’t do well, there is no return of dividends, contrary to that of a bank, where a customer has a contract with the 

bank, a percent of interest on their deposits, etc. 

If the credit union would become insolvent, the members in a 

credit union get theirs after the creditors in regards to uninsured 

shares. Where— 

Mr. HENSARLING. Let me ask you this question, though. I somehow think that the case might be a little bit more persuasive if a 

credit union in a certain city might represent the last of the Mohicans. I live in Dallas. There are a lot of credit unions there, a lot 

of good credit unions there. If one credit union decides to have a 

conversion at the advice of management, if one wishes to stay a 

member of a credit union, again, in a competitive marketplace as 

of today, there are a whole lot of choices. 

So I’m still trying to figure out if the member didn’t invest on 

the front end, what is he losing if he has the opportunity to vote, 

and there are still a number of credit unions throughout our land 

with which he can do business? 

Ms. JOHNSON. You’re correct. That member should have the right 

to vote to convert that credit union to another charter of choice, if 

that’s in their best interest. If they have the information and they 

17

agree that that is best for them, they should have that opportunity 

to vote. 

As you know, credit unions are restricted by fields of membership. And when you say whether a member then can just go to another credit union, that may or may not be the opportunity. They 

may not qualify as a member of another local credit union. 

Mr. NEUGEBAUER. I’m going to have to kind of interrupt here. We 

have a vote, and we’re down to 2 minutes. We’re going to recess 

until after this vote. We’re going to ask this panel to hold over. We 

do have some members that have some additional questions before 

we bring the next panel on. So we’re recessed for about 15 minutes 

here until the end of this vote. 

[Brief Recess] 

Mr. PRICE. [presiding] The committee will be in order. I want to 

thank the panel for your patience. We apologize for the interruption. I appreciate your forbearance with the processes here. 

We’ll return to questioning for this first panel. And Mr. Sherman, are you— 

Mr. SHERMAN. I’ll yield to anyone else who has questions first. 

But if I’m the last question of this panel, I’ll go forward. 

Mr. PRICE. I’ll take the prerogative of the Chair and ask a few 

questions, then, if I may. And I apologize for not being here for 

your testimony. I’ve read portions of your statements, and I appreciate that. 

Ms. Johnson, I have a couple of questions. There seems to be 

some discrepancy in the number of conversions that folks cite. 

Some conversion opponents say that 21 converted credit unions 

have become stock-owned, and others say that seven—that that 

number is seven, or closer to seven. Do you have any thoughts 

about that discrepancy, or can you provide me with any clarification on that? 

Ms. JOHNSON. Congressman, I’m not sure where the discrepancy 

lies. But I’m confident in our data, and I would be more than 

happy to provide that to you if you’d like. 

Mr. PRICE. If you would, that would be helpful. 

Ms. JOHNSON. I’d be glad to. 

Mr. PRICE. I have a question about regulatory consistency. The 

rules—apparently, your position, or NCUA’s position, is that when 

conversions occur, these rules cannot and should not be identical 

to those of other regulators. My reading of the rule seems to state 

that it doesn’t require that the rules be identical. It requires that 

they are no more or no less restrictive. Do either of you have any 

comments on that apparent discrepancy? 

Ms. JOHNSON. Congressman, from my standpoint, you’re right, no 

more or less restrictive. The transactions are different, and so 

therefore, they certainly can’t be identical. If we look closely, there 

are some things, I’m sure, between the two where OTS may be 

more restrictive and we’re less restrictive, you know, in a very marginal way. 

But I think on the whole, the rules are very comparable. We both 

have the consumers’ best interest at heart, hopefully. That’s what 

our goal is. And that is the full intent of our rules, is to provide 

that consumer protection. 

18

Mr. PRICE. But you would agree that the rule is that it be—that 

the rules be no more or no less restrictive. 

Ms. JOHNSON. That’s right. But it’s very hard to get them the 

same. Because, well, for instance, on notification, credit unions are 

required to send mailings out to all of their members, because it’s 

a restricted field of membership, where a mutual is open to anyone. 

So as part of their regulation, they post the information in the 

lobby. 

So, you know, do you consider that more or less restrictive? It’s 

just that they’re different. 

Mr. PRICE. Mr. Polakoff, do you have any comment on those? 

Mr. POLAKOFF. Well, Congressman, thank you. If we think of a 

credit union as a mutual institution, and if we compare that to a 

mutual savings bank as a mutual institution, a mutual savings 

bank can be two different charters. It could be a Federal charter 

or a State charter, and it can go back and forth between the two. 

When a Federal mutual savings bank converts to a State charter, 

it simply provides a notice to OTS, and it is the responsibility of 

its new regulator to approve the transaction. 

Mr. PRICE. Thank you. Ms. Johnson, I also would appreciate your 

clarifying or helping me understand the differences between the 

rules for credit unions and mutual banks in terms of the membership or the members of both. Are there, for example, voting rights, 

the right to request special meetings, the right to nominate directors, amend bylaws, etc.? Would you help me in understanding the 

differences between those two? 

Ms. JOHNSON. I’d be glad to at least try, Congressman. There is 

a difference in the voting rights of the credit union members and 

those who belong to a mutual bank. In a credit union, it’s one 

member, one vote. No proxy voting is allowed. In a mutual savings 

bank, they may allow proxy voting. And as my colleague stated earlier, that could mean $100 equals one vote, $100 deposited in the 

institution, up to a thousand votes. 

So very simply, if a person has $100,000 in a mutual savings 

bank, they would be allotted a thousand votes. So if you have 10 

people, there’s 10,000 votes. If I, as a member of a credit union, if 

that were the case—or if I were a member of the mutual and I only 

had $100 on deposit, if I were a single mom or a college student 

with $100, I would have one vote. 

So I would not say that we have never indicated or tried to insinuate that anyone would have a majority of votes in a mutual 

savings institution. However, I would have to round up 10,000 of 

my closest friends with $100 on deposit in order to equal the votes 

of those 10 people. 

So it’s a dilution, or it can be a dilution. It’s a different type of 

voting representation. And I think bottom line, that’s the beauty of 

the credit union system. The little guy counts. 

Mr. PRICE. Thank you. I have some other questions that I’d like 

to be able to submit to you and receive responses. 

Ms. JOHNSON. Be glad to. 

Mr. PRICE. Thank you. Mr. Sherman, are you ready? 

Mr. SHERMAN. Yes. 

Mr. PRICE. You’re recognized for 5 minutes. 

19

Mr. SHERMAN. Well, thank you. This seems to be a hearing about 

a solution looking for a problem. I’ve spent a lot of time in my district over the last 10 years, and no one has ever said, ‘‘My life 

would be made better if only some particular credit union converted to a different structure.’’ 

I’m also quite concerned that I’ve seen non-profit health organizations convert to for-profit, particularly hospitals, and I’ve never 

seen a community celebration when a non-profit hospital converts 

to for-profit status. 

From a consumer standpoint, I don’t see what the benefit is from 

such a conversion of a credit union. We also need to be concerned 

about risks to the taxpayer. Chairman Johnson, when was the last 

time a credit union failure cost the insurance fund a penny, and 

when was the last time that lack of money in the insurance fund 

forced the taxpayers to bail out the credit unions? 

Ms. JOHNSON. Congressman, the credit union insurance fund and 

those deposits have taken care of any credit union failures. There 

has never been— 

Mr. SHERMAN. So the taxpayers never had to come up with a 

penny. 

Ms. JOHNSON. Taxpayers have never bailed out the credit unions. 

Mr. SHERMAN. When was the last time there was a credit union 

failure that cost the insurance fund money? Or is that something 

that tends to happen somewhere in the country every few months? 

Ms. JOHNSON. There can be costs associated with involuntary 

mergers, and the insurance fund is there for that purpose. 

Mr. SHERMAN. Now, if a credit union converts and it has capital—I’m more familiar with this from non-profit health organizations. They convert, and the value of their assets tends to go—well, 

it tends to stay in the health field. When a credit union converts, 

who owns the assets? 

Ms. JOHNSON. We contend that the member-owners of the credit 

union own the assets, own that equity. The members have contributed their deposits to the institution, and then, of course, that’s— 

Mr. SHERMAN. Is that ownership per capita, or per dollar invested, or per dollar invested over a period of time? 

Ms. JOHNSON. Ownership in a credit union is one member, one 

vote. 

Mr. SHERMAN. So a credit union could be charging less to its 

members for loans or paying higher interest rates, and then it 

wouldn’t accumulate quite as much value inside the organization. 

Or if it accumulates that, it could have a—you know, change its 

policies and charge less interest and pay more to depositors. So 

that if a credit union stays as a credit union, the beneficiaries of 

all that accumulated capital are supposed to be the members, 

right? 

Ms. JOHNSON. Right. The members benefit by lower fees, better 

interest rates, so that equity that is sitting there at the time of a 

conversion could possibly have been returned to the members in 

the form of lower fees or interest rates. That is the members’ equity sitting there. 

Mr. SHERMAN. So if a credit union stays a credit union, it’s supposed to use its capital to benefit its members through lower fees 

and better interest rates. 

20

Ms. JOHNSON. Products and services, yes. 

Mr. SHERMAN. Is there a counter argument that somehow a credit union could convert to another status and its capital could belong 

to anyone other than the members on a per capita basis? You said 

you contended that it belongs to the members. Is there somebody 

out there not wise enough to agree with your contention? 

Ms. JOHNSON. We understand the credit union structure very 

well, Congressman, and it is the members’ equity. Perhaps others 

would disagree. But that is the role of the credit union and their 

structure. 

Mr. SHERMAN. Has there been a credit union conversion where 

someone other than the members reaped any benefit from that conversion? 

Ms. JOHNSON. From the data that we have seen, it’s clear that 

a portion of that equity does have a possibility of being transferred 

in particular to those who have recommended the conversion process. Now, it’s legal, and all we’re saying is that the members 

should be aware that this is available. 

Mr. SHERMAN. When you say, ‘‘those who have recommended,’’ do 

you mean outside consultants? Do you mean management? Do you 

mean board members? How can I get in on this gravy train? You 

know, send out a hundred letters to a hundred credit unions recommending conversion? I could somehow benefit from this? 

Ms. JOHNSON. It’s the board of the credit union that makes the 

decision. It has to be a majority of the board making the decision 

to do the conversion. 

Mr. SHERMAN. How could the board member benefit from making 

that conversion? 

Ms. JOHNSON. Again, Congressman, there are particular options 

that are available to management and employees that are just not 

available to the average member. The average member can purchase stock. There’s no question. But there are options available 

that aren’t available to each and every member. Again, we’re not 

opposed to that, other than the members should have the opportunity to know that exists. 

Mr. PRICE. The gentleman’s time has expired. 

Mr. SHERMAN. Thank you. 

Mr. PRICE. Mr. Kanjorski? The gentleman is recognized for 5 

minutes. 

Mr. KANJORSKI. Thank you, Mr. Chairman. Chairman Johnson, 

I’ve heard a lot of the debate about the efforts of the Dearborn Federal Credit Union to convert. Could you describe that situation for 

me, and what NCUA’s role was? 

Ms. JOHNSON. Gladly, Congressman. I think a lot of the information out there has been misinformation, unfortunately. And I’d like 

to clarify a little bit on the steps that have been taken. 

According to their Web site, the board members have been working on or studying the idea of a conversion for the last 4 years. 

They have had the opportunity to communicate with their members 

prior to the board taking a vote on whether to convert, but chose 

not to do so. The allegation is that the credit union has been prevented by NCUA from communicating with their members, and I 

would very strongly disagree with that. That’s not the instance. 

21

Dearborn submitted their application, and then submitted their 

notices to be sent to their members. They sent them in, and 

through the process, were required to get back within 30 days to 

give them, you know, if everything is according to Hoyle, and we 

did that. They sent their communication to their members. In no 

part of the process did NCUA restrict their ability to communicate 

with their members. 

Mr. KANJORSKI. I have some very strong predilections against 

conversion. I’ve laid that on the table. Because I look at it as a 

form of rating of assets. And I have a great deal of high respect 

for the built-up equity of long-existing credit unions that present 

members have nothing to do with building up. So for purposes of our discussion, assume that I see this $1 bil- lion or $5 billion credit union out there, and I concoct a way that 

I could go and have an element when only three members show up, 

and myself and my friend will vote for conversion. And therefore, 

I will become the recipient of the largesse of the prior constructed 

equity when I wasn’t a member, didn’t participate in the credit 

union movement, or wasn’t a member of that specific credit union. 

Isn’t there some—a vehicle that should be put into place to basically say that credit unions are rather unique institutions insofar 

as what equity they have is built up in multiple generational development, as opposed to the single member? And this whole idea of 

converting to a mutual bank, or eventually a stock company, is a 

method of rating the assets of generational building of equity. 

And if people are tired of running the credit union, we have to 

find a way. Now, they can either, under your office, be merged into 

another credit union to perform the same function, or if we have 

too many credit unions in the company and too many assets in 

credit unions, we could find a trust vehicle or empower the court 

to act as a trustee to take equity and commit it to like purposes. 

But we have in this country today, not only in the credit union 

movement but in the non-profit corporation movement, a lot of very 

sophisticated raters that see these pigeons out there with massive 

amounts of assets that by legal conversion can tap into those assets 

for their own advertisement or for the, as you had mentioned, the 

benefit of the managers and the board of the credit union. And the 

temptation to sell out your fiduciary relationship probably becomes 

high. 

I’ve seen situations even in non-profit health conditions where a 

for-profit comes in to buy out a not-for-profit that has a great deal 

of assets. And generally, when you study the proposition of the 

president, the general counsel, and those people who have a fiduciary relationship to the public tend to walk away with golden 

parachutes of incredible amounts, millions and millions of dollars. 

I had one general counsel who sold a non-profit health entity out, 

and his golden parachute was $16 million. Quite a temptation for 

a lawyer, even though he’s general counsel, and even though he 

has a fiduciary relationship. And I would imagine that the temptation exists at the credit union movement, particularly in an evolving, growing area where there’s less association and identification 

with the credit union. 

What can we do, or what can you do as a regulator, I should ask 

first, to prevent this concept of rating? And two, of course, I’m part 

22

of a bill with Mr. Royce to move it up to 20 percent, and to provide 

for a lot of transparency. If I had my way, I’d go to 50 percent back 

at the overall, and I just wouldn’t allow this, what I call, unconscionable rating to occur. 

My friend from California asked how he can get in on the gravy 

train. And the reality is almost any smart lawyer in this town, and 

consultant, can get in on the gravy train. And it’s about to happen. 

And it’s happening not only in the credit union movement, but in 

the non-profit corporation movement where accumulated assets 

over generations intended to be done for good purposes are now 

being diverted to the selfish interest of those people who put the 

movement on to change the structure. What can we do and what 

can you do to disabuse what I consider that abuse, or what can we 

do to change the law? 

Mr. PRICE. The gentleman’s time has expired. You’re certainly 

welcome to answer the question. 

Ms. JOHNSON. Congressman, I think that’s where the role of the 

regulator comes into play. Consumer protection. The best way to 

protect the consumer is to give them the information that they 

need. Complete transparency in the process. I have confidence in 

the credit union member to make the appropriate decision if they 

only know what they’re voting on. 

Mr. PRICE. The gentleman’s time has expired. I’d ask unanimous 

consent that Mr. McHenry be allowed to ask one more question. 

[No response] 

Mr. PRICE. Without objection, Mr. McHenry is recognized. 

Mr. MCHENRY. Thank you, Mr. Chairman. It’s a simple line of 

questioning to OTS, and follow-up with Ms. Johnson, just so you’re 

prepared, so we can click through this pretty quickly. 

How much litigation has OTS faced in the conversion process 

over the last year? 

Mr. POLAKOFF. Congressman, I’m not aware of any successful 

litigation against OTS. 

Mr. MCHENRY. Okay. Speculation. Do you allow speculation on 

future operations that may or may not occur in a converted institution? 

Mr. POLAKOFF. Congressman, we do not. 

Mr. MCHENRY. Okay. Who is allowed to vote in a conversion 

process from mutual bank to a stock-letting institution? 

Mr. POLAKOFF. For a mutual savings bank that converts to a 

stock savings bank, all the eligible voters, which is a defined term, 

can vote on that. 

Mr. MCHENRY. How is that defined? 

Mr. POLAKOFF. It is set, I believe, at 60 days before the vote, up 

to 20 days before the vote. 

Mr. MCHENRY. Ms. Johnson, who’s allowed to vote in a credit 

union conversion? 

Ms. JOHNSON. Pardon me? 

Mr. MCHENRY. Ms. Johnson, who is allowed to vote in a credit 

union conversion? 

Ms. JOHNSON. All the members are allowed to vote on that conversion. 

Mr. MCHENRY. And what is the amount of time they have to be 

members? 

23

Ms. JOHNSON. The board of directors sets that time line of when 

that— 

Mr. MCHENRY. The board of directors. Okay. OTS sets when the 

members are allowed—60 days before the conversion? 

Mr. POLAKOFF. Congressman, I believe it’s no more than 60, no 

less than 20 days before. 

Mr. MCHENRY. Okay. Additionally, how many years has OTS 

had conversion regs on the books? 

Mr. POLAKOFF. We’ve had credit union conversions starting in 

19— 

Mr. MCHENRY. No, no. Your conversions which you oversee. 

Mr. POLAKOFF. Congressman, since, we believe, the late 1970’s or 

early 1980’s, sir. 

Mr. MCHENRY. Okay. Ms. Johnson, how long have you had conversion regulations on the books? 

Ms. JOHNSON. Just a minute. Let me check. I’ve been here for 4 

years, and I know it’s— 

Mr. MCHENRY. The answer is since— 

Ms. JOHNSON. 1995. 

Mr. MCHENRY. Okay. Additionally, Ms. Johnson, the conversion 

from a mutual savings bank to a stock-letting institution, do you 

oversee that process at NCUA? 

Ms. JOHNSON. No. 

Mr. MCHENRY. No. Okay. Then I would simply ask that your disclosures to that end detailing—specifically number three disclosure 

in your regs, subsequent conversion to stock institution, is not 

under your regulatory purview. And therefore, your speculation 

about that is creeping into the area that OTS oversees. 

Additionally, what I would add is—off the NCUA regulations on 

conversions; double-spaced, 12-point font, seven pages. I don’t know 

how small this font is, but certainly a magnifying glass would help. 

Double columns from OTS, 27 pages of regulation. 

I would say, if I could just end this way, Ms. Johnson, meet Mr. 

Polakoff. Mr. Polakoff, meet Ms. Johnson. Perhaps NCUA could 

learn something from OTS’s regs on the books. As I’ve said repeatedly in our conversations and to other board members at NCUA, 

the preferable routes for addressing this conversion process would 

be through regulation that is clear and concise, where you don’t 

have two attorneys sitting around the table and making a verbal 

agreement about something that goes on to be litigated. 

And as I laughed to a room full of attorneys yesterday, I thought 

it was humorous that two attorneys sat down and said, ‘‘Take my 

word for it. We’re going to have a verbal agreement here,’’ nod, nod, 

wink, wink, and not expect litigation out of it. 

And so I would ask that going forward, perhaps you can speak 

for a moment or two about the direction that you will be going at 

NCUA to clarify these regs. And is there anything that you could 

learn from OTS in their regs? 

Ms. JOHNSON. Congressman, we’ve certainly learned from the 

process. I wouldn’t say learning from OTS, necessarily, because the 

regs are different. But we’ve learned through the conversion process, correct. 

24

Mr. MCHENRY. But CUMAA actually says that you should have 

like kinds, similar regs, as other financial institutions have in their 

conversion process. That’s why you both are on this panel. 

Ms. JOHNSON. Correct. The transactions differ, however, but the 

intent of the regulator is very much the same for ensuring that 

there’s clear and concise information to that person as they make 

their vote. 

The length of the regulations is immaterial, in my mind, if you 

want short and clarified. I think our disclosure is very much along 

that line. 

Mr. MCHENRY. In closing, just to add one further thing, Mr. 

Chairman, the plans to convert, OTS says that a stock-letting institution to avoid corporate raters is not allowed—the board of directors is not allowed to talk about a stock offering, and that’s strictly 

prohibited. NCUA details in their offering to members the disclosure on whether or not they will go to a stock-letting institution. 

Perhaps NCUA regs are leading to further speculation and what 

Mr. Kanjorski referred to as corporate raters. So perhaps that’s 

something you could address as well, beyond just the speculation 

in your regs. 

Thank you for—and you can answer that question. Thank you, 

Mr. Chairman. 

Mr. PRICE. The gentleman’s time has expired. Would you like to 

comment on that? 

Ms. JOHNSON. I would like to make one comment. We do require 

the credit union to tell the members why they are making this conversion. And in many cases, they indicate that capital—the need 

for additional capital. In order to acquire additional capital, they 

have to have moved to a stock institution. So it’s not speculative 

that that’s where they’re going. 

So they indicate up front that capital is an additional need. In 

order to raise capital, the stock—a move to a stock-held institution. 

Mr. PRICE. Thank you. As that was a few more than one question, the final questioner for this panel will be Mr. Kanjorski. And 

you’re recognized for 5 minutes, sir. 

Mr. KANJORSKI. Thank you, Mr. Chairman. Mr. Polakoff, do you 

have any regulations—if I were in a mutual savings entity and I 

wanted to get out of it, do I have to comply with any regulations, 

rules, or conditions? 

Mr. POLAKOFF. You would simply notify us that you were moving 

to another sort of mutual form of ownership so it could go to a 

State charter organization or to a credit union. 

Mr. KANJORSKI. Or we could move to a bank. 

Mr. POLAKOFF. Well, to move to a—it could be a State chartered 

mutual bank. Yes, sir. 

Mr. KANJORSKI. Well, as I understand it, with credit unions, we 

haven’t taxed them. We give them a special condition because they 

are an accumulation of equity. But if a set of credit unions want 

to move out of the credit union situation into a mutual savings, 

and then move to a mutual bank with stock, which is a for-profit 

entity, why shouldn’t we say well, then, these untaxed assets that 

aren’t being distributed to the creators of the credit union, the past 

generations, because most of them are dead, and they aren’t being 

distributed to the present membership, why shouldn’t we start taxVerDate 0ct 09 2002 17:46 Dec 08, 2006 Jkt 031037 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 F:\DOCS\HBA131.150 HFIN PsN: TERRIE
25

ing a portion or the whole amount at a corporate rate so that we 

capture back untaxed funds before they get in a for-profit organization? 

Mr. POLAKOFF. The conversion, Congressman, that I believe we 

were talking about initially is the conversion from a mutual to a 

mutual institution. 

Mr. KANJORSKI. Right. And it’s a step. Let’s face it. It’s an 

unspoken step. What they’re really doing is going to a for-profit. 

That’s where the consultants, the developers, and the inner core 

are going to make their money, when they go to the stock. So why 

should we allow them to avoid taxation in every regard? 

My friends in the banking industry are always on my back about 

the special protection the credit unions get in that they don’t pay 

taxes. And I happen to favor that they don’t pay taxes. But now 

if they’re going to move to a for-profit organization, let’s recoup 

back all our unpaid taxes to the Federal Government. 

My other alternative would be to put it in a trust and distribute 

it to a like entity that would carry on the conditions of a credit 

union. But we don’t have that condition in the law yet. I hope we 

move toward putting that condition in the law. But if we don’t have 

that to protect that acquired equity in past generations, why 

should we allow them to avoid taxation on those profits and growth 

of equity? 

Mr. POLAKOFF. I would defer to Congress, Congressman, on 

whether there should be taxation of credit unions or not. 

Mr. KANJORSKI. I’m not talking about the taxation of credit 

unions, now. I’m talking about taxation to recover back assets that 

are now being converted to stock companies for profit that have 

never paid any taxes on the conversion. And it’s obviously being 

done for the purpose of somebody making a profit. So if we’re going 

to allow them to make a profit, why shouldn’t we tax the assets 

that they’re moving over from the credit union to the mutual savings bank to the bank, the stock bank? 

Mr. POLAKOFF. Congressman, I believe the answer to that question resides in the fact that the very first priority of people who can 

purchase stock in a mutual-to-stock conversion indeed are the 

shareholders. And I think that may address your concern, sir. 

Mr. KANJORSKI. Well, no. I mean, you know, there are a lot of 

people who are members of a credit union who will never be able 

to avail themselves. Most people in my district who belong to credit 

unions are not capable of investing and buying huge blocks of stock 

to protect their equity. They just couldn’t do it. You know, the credit union movement is basically a grassroots, by-your-bootstrap protection of people in need. 

In my area, I saw it when we had a recession, people were able 

to get relocation money from their local credit union, not from the 

bank, because they didn’t have the assets. They didn’t make the 

conditions of the bank loan. But a credit union was able to give a 

character loan so that people could sustain their family and relocate. 

When you’re moving out of the credit union movement, and now 

you’re moving toward the mutual savings, and eventually to the 

mutual bank, now you’re moving toward making profit. And I just 

26

can’t understand why you aren’t up here advocating that boy, this 

is a chance to start getting back the government’s money. 

We gave a lot of leniency here to the credit union movement, because it supports something special. But when they voluntarily 

want to leave that special activity, and they don’t want to put those 

funds into another credit union that would carry on that public 

purpose, then why shouldn’t we at least capture back the tax benefits from that? I know I’m being argumentative here, but can you 

make an argument of why we shouldn’t do it? 

Mr. PRICE. The gentleman’s time has expired, but you’re welcome 

to answer that question. 

Mr. POLAKOFF. Congressman, I certainly don’t want to offer an 

argument to your position. There is an account called a liquidation 

account, sir. And when an institution goes from a mutual to a stock 

institution, a liquidation account is established. And down the 

road, if that stock institution ever is liquidated, the account holders 

at the institution do take advantage and reap the benefit of that 

liquidation account, sir. 

Mr. KANJORSKI. The present living members. 

Mr. POLAKOFF. Yes, sir. 

Mr. PRICE. Thank you. The gentleman’s time has expired. We 

want to thank Mr. Polakoff and Ms. Johnson for your testimony 

and for your patience. There will be some members, I think, who 

will have questions to submit to you, and we would appreciate 

prompt responses to those questions. Thank you very much. We appreciate you coming. 

I ask unanimous consent to submit the following written testimony into the record: statement of Mr. Alan Theriault, president 

of CU Financial Services; statement of Mr. Lee Bettis, executive director of the Coalition for Credit Union Charter Operations; statement of Mr. Camden Fine, president and CEO of the Independent 

Community Bankers of America; and statement of the National Association of State Credit Union Supervisors, without objection. 

We want to welcome the panel members on Panel II. We appreciate again your patience this morning and your tolerance of our 

schedule, and we look forward to your testimony. 

Ms. Laurie Stewart, president and CEO of Sound Community 

Bank, representing America’s Community Bankers, welcome; Mr. 

Tom Dorety, president of Suncoast Schools Federal Credit Union, 

representing the Credit Union National Association; and Mr. Edward Yingling, president and CEO, representing the American 

Bankers Association. We welcome you. And for introduction of Mr. 

Schaefer, I ask Mr. McHenry. 

Mr. MCHENRY. Thank you, Mr. Chairman. My good friend Marc 

Schaefer is president and CEO of Truliant Federal Credit Union, 

formerly AT&T Family Credit Union, in Winston-Salem, just right 

outside of my district. He’s been CEO and president for 11 years. 

And he’s at the very forefront of the banker lawsuits against 

NCUA and credit unions, as he would say. 

Marc has addressed hundreds of credit unions, and has been active on the Hill for a number of years, as well as across the country, and in emerging democracies in Central and South America, 

as well as around the world, to discuss credit unions and financial 

literacy, which is very important. 

27

Marc is currently serving as the chairman of NAFCU’s Credit 

Union Committee, and is chairman of the NAFCU roundtable as 

well, as well as a part of CUMAA and a vice chair of one of their 

subcommittees as well. He lives in Forsyth County, and is very involved in the business community there. 

We’ve had a number of interesting discussions. Again, as I referenced in my opening statement, perhaps he now believes that I 

do not have a horn or tail, at least not horns. And he’s been wellpublished throughout the credit union industry, as well as in the 

banking industry, interestingly enough. And we’re very happy to 

have Marc here. 

Mr. PRICE. Mr. Schaefer, we welcome you and all panel members. 

We appreciate you coming today, and look forward to your testimony. I would just remind you of the light system. Five minutes 

of testimony. The yellow light comes on at 1 minute. And when you 

see the red light, if you would wrap up, that would be appreciated. 

We thank you again very much, and Ms. Stewart, we look forward to your testimony. We recognize you. 

STATEMENT OF LAURIE STEWART, PRESIDENT AND CEO, 

SOUND COMMUNITY BANK, ON BEHALF OF AMERICA’S COMMUNITY BANKERS 

Ms. STEWART. Mr. Chairman and members of the subcommittee, 

I am Laurie Stewart, president and CEO of Sound Community 

Bank in the Puget Sound area of Washington State. Sound Community Bank is a $214 million community bank created by the conversion of Credit Union of the Pacific in 2003. 

I am testifying on behalf of America’s Community Bankers in 

strong support of H.R. 3206, the Credit Union Charter Choice Act. 

H.R. 3206 is critical to ensuring that the NCUA adheres to the law 

and follows the intent of Congress. 

In the 1998 Credit Union Membership Access Act, Congress attempted to put a stop to NCUA’s obstruction of credit union conversions by declaring that credit unions have the right to convert, and 

by limiting the authority of the NCUA in a conversion process. 

Congress was so concerned by the NCUA’s behavior that it required the NCUA to write rules governing the conversion process 

that, ‘‘are consistent with rules promulgated by other financial regulators.’’ Congress also declared that rules governing conversion 

votes, ‘‘shall be no more or less restrictive than that applicable to 

charter conversions by other financial institutions.’’ 

The NCUA has essentially ignored this mandate and put a de 

facto end to credit union conversions. The McHenry-Towns bill resolves these problems while still allowing the NCUA to ensure that 

the methods and procedures of conversion votes are properly followed. 

In summary, H.R. 3206 would, number one, force the NCUA to 

revise its current regulations to eliminate the rules that are speculative, inaccurate, or that conflict with the rules of other financial 

regulators. 

Number two, eliminate regulatory foot dragging that has made 

the conversion process unnecessarily long and costly. H.R. 3206 requires a reasonable 30 days for the NCUA to approve conversion 

disclosures. 

28

Number three, this bill eliminates the de facto NCUA gag order 

that exists for converting credit unions. Under the current system, 

a credit union is not allowed to communicate with its members 

during the conversion process without NCUA approval. This prohibits the credit union from explaining its reasons for converting, 

while allowing conversion opponents to attack it. This creates a 

one-sided debate, much like a political candidate who must wait for 

FEC approval to speak while his opponent runs non-stop attack 

ads. 

Number four, the bill restores certainty to the conversion process. When a credit union has a successful conversion vote, the 

NCUA finds hyper-technical reasons to invalidate the vote. This 

happened in Texas last year when the NCUA overturned two conversion votes based solely on how a piece of paper was folded. Fortunately, their decision was rejected. But the NCUA’s behavior 

adds uncertainty to the conversion process that frightens away 

credit unions whose members want to convert. 

Mr. Chairman, I want to take a moment to highlight why charter 

choice is critical to the strength of our Nation’s financial system. 

Over time, an institution will grow and change. The charter with 

which it started may no longer be the best fit for it now. My credit 

union is a good example. We found that the credit union charter 

prevented us from growing in a manner that best served our members and our community. By converting to a mutual savings association charter, Sound Community Bank was able to retain a mutual structure similar to a credit union. We were able to offer new 

products and make more loans to help our community grow. Since 

our conversion in 2003, Sound’s loan portfolio has increased by 80 

percent. That’s 80 percent more loans that are helping the people 

and businesses of the Puget Sound area. 

For some credit unions, converting charters may be an economic 

necessity. For example, DFCU attempted to convert charters earlier this year because of changing economic conditions in Michigan. 

Because of the NCUA’s hostile actions, DFCU was forced to withdraw its application. As a result, DFCU is unable to diversify its 

membership and strengthen the institution. 

Let me say a word about offering competitive rates. Converting 

charters has not caused Sound Community Bank to lower deposit 

rates. In 2004, Sound had the highest money market rate in the 

Nation, according to BankRate.com. In addition, we now offer a 

high yield checking account. Contrary to NCUA’s mandated disclosures, this is the experience of many converted credit unions. 

Mr. Chairman, thank you for inviting ACB to testify. I will gladly answer any questions the committee may have. 

[The prepared statement of Ms. Stewart can be found on page 

145 of the appendix.] 

Mr. PRICE. Thank you, Ms. Stewart. I appreciate your testimony. 

I now recognize Mr. Marcus Schaefer, president and CEO of 

Truliant Federal Credit Union, representing the National Association of Federal Credit Unions. 

Mr. Schaefer, you’re recognized. 

29

STATEMENT OF MARCUS SCHAEFER, PRESIDENT AND CEO, 

TRULIANT FEDERAL CREDIT UNION, ON BEHALF OF THE 

NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS 

Mr. SCHAEFER. Good afternoon, Mr. Chairman, Ranking Member 

Sanders, Representative McHenry, and members of the subcommittee. My name is Marc Schaefer, and I’m president and CEO 

of Truliant Federal Credit Union, located in Winston-Salem, North 

Carolina. I’m here today on behalf of the National Association of 

Federal Credit Unions to express our views on the process for credit unions to convert to mutual savings banks, and H.R. 3206, the 

Credit Union Charter Choice Act. 

As with all credit unions, Truliant is a not-for-profit financial cooperative governed by a volunteer board of directors who are elected by our member-owners. Truliant is a multi-occupational credit 

union serving over 170,000 member-owners, and representing more 

than $1 billion in member assets. More importantly, Truliant provides affordable and attainable products and services to our members. Over 16 percent of our members joined through employment 

in the furniture and textile industries, and over 45 percent through 

manufacturing jobs. I have personally been involved in the credit 

union movement for more than 24 years, and have previously 

served for 9 years on NAFCU’s board of directors. 

While NAFCU opposes H.R. 3206 as introduced, we would like 

to thank Representative McHenry and the co-sponsors of the legislation, Representatives Towns, Johnson, King, and Gillmor, for 

their leadership in the conversion debate, and their openness in 

considering the concerns of NAFCU regarding the legislation and 

conversion process. 

In 2005, NAFCU formed a task force to study the issue of conversions, and recommended policy changes that should be made in the 

conversion process to better protect consumers. The work of that 

task force led NAFCU to outline principles that we believe are important in the conversion process. 

NAFCU believes that credit unions should have the ability to 

convert their charters should it be in the best interest of the members. NAFCU also believes that the only way to ensure that the 

conversion process is fair is to make sure that the process is transparent so that members are adequately informed of all of the potential benefits and detriments that a conversion may have on the 

interests of the membership. 

NAFCU also supports the ability of NCUA to use all of its powers, as granted by Congress, to effectively regulate Federal credit 

unions, including ensuring that conversions take place in a fair and 

consistent manner. In order to achieve these principles, NAFCU believes that the following elements are key to any policy governing 

credit union conversions. 

First, transparency is paramount. As such, a credit union should 

be required to hold a meeting of its membership prior to the mailing of ballots to announce a credit union’s intent to convert. Also, 

resources should be allocated and/or an opportunity should be provided for members opposed to the conversion to express their concerns. Additionally, clear plain language disclosures should be used 

to inform credit union members of the vote to convert. 

30

Second, directors and senior management of a converted credit 

union should not be able to benefit financially from the transaction 

until at least 10 years after the initial conversion has taken place. 

Furthermore, there should be full disclosure of the potential maximum benefit a director or senior management could receive if the 

converting credit union were to then convert to a stock bank after 

the 10-year period has passed. 

Third, a minimum of 20 percent of a credit union’s membership 

who are eligible to vote should cast a ballot, and the majority of 

those credit union members must then vote in favor of the conversion. This minimum requirement will serve as a quorum of the 

membership for the conversion vote, much the way that Members 

of Congress cannot decide an issue without a quorum. 

Of the 29 credit unions that have converted to mutual savings 

banks, 19 have gone on to become for-profit stock-issuing institutions. Unfortunately, this scenario often benefits insiders who receive stock benefits and options to buy additional stock, along with 

others wealthy enough to purchase stock. 

Many members of the credit union may not have the funds to 

purchase stock, and end up losing their ownership interest in the 

institution they were once member-owners of when it was a credit 

union. 

In conclusion, while we oppose H.R. 3206 as introduced, we welcome the opportunity to continue the debate on the conversion 

process in an effort to serve the interest of credit union members. 

We look forward to working with you, Mr. Chairman, Congressman 

McHenry, and members of the subcommittee and NCUA on this 

issue. 

At the end of the day, we all want sound public policy on credit 

union conversions. And I welcome your questions and discussions 

on this matter. Thank you. 

[The prepared statement of Mr. Schaefer can be found on page 

111 of the appendix.] 

Mr. PRICE. Thank you for your testimony. The Chair now recognizes Mr. Tom Dorety, who is the president of Suncoast Schools 

Federal Credit Union, representing the Credit Union National Association. 

Mr. Dorety. 

STATEMENT OF TOM R. DORETY, PRESIDENT, SUNCOAST 

SCHOOLS FEDERAL CREDIT UNION, ON BEHALF OF THE 

CREDIT UNION NATIONAL ASSOCIATION 

Mr. DORETY. Thank you, Representative Price, and members of 

the committee. I’m Tom Dorety, president and CEO of Suncoast 

Schools Federal Credit Union, Tampa, Florida. I also serve on the 

board of directors and as treasurer of the Credit Union National 

Association, and I certainly appreciate the opportunity to appear 

before the subcommittee today on behalf of CUNA to address the 

issues of credit union conversions to mutual savings banks. 

CUNA represents more than 8,800 Federal and State chartered 

credit unions and their 88 million members. Suncoast Schools is located in Tampa, Florida, and has over $5 billion in assets and 

400,000 members. 

31

CUNA believes that the credit union charter currently provides 

the best vehicle for serving the financial needs of consumers, and 

that members have a unique ownership right in their credit unions. 

At the same time, we do firmly support the right of informed credit 

union members to exercise their full democratic control of the 

structure and operation of their credit union. However, we do not 

believe the Credit Union Charter Choice Act, as drafted, adds any 

value to the process of a credit union conversion to a mutual thrift 

charter. 

As outlined in my written testimony, CUNA believes there are 

some important principles that should govern all conversions of 

credit unions to mutual charters. In particular, we cite the fiduciary responsibility of the credit union board of directors to present 

objective and honest information to the members, the need for full, 

plain language disclosure, and that the net worth of the credit 

union belongs to the members. No unjust enrichment should be realized by directors and senior management upon a conversion to a 

mutual thrift or subsequent conversion to a stock institution. 

Credit unions are unique. We are not-for-profit cooperatives, and 

appropriately have been granted an exemption from Federal and 

State income tax. As a result, we provide a tangible economic benefit to our members. Through higher deposit rates, lower loan 

rates, and lower service fees than comparable bank products, credit 

union members saved $6 billion in 2002, or roughly $160 per member household. Given this clear member value, it’s difficult to imagine a scenario where a credit union that converts to a bank would 

provide a better value to its member-owners than a for-profit bank. 

Despite some statements to the contrary, there are significant 

differences between the credit union structure and that of a mutual 

thrift. However, today this is not really significant due to the minimal use of the mutual structure by thrifts. 

Between 1975 and 2004, mutual thrift assets, as a percentage of 

all depositories, declined from over 23 percent to 1.4 percent. Over 

the past 2 years, two credit unions with over 1 billion in assets 

have converted to mutual thrifts, and each one has already taken 

steps to convert to a stock thrift. 

Two other credit unions with over a billion in assets attempted 

to convert, and both indicated that they had plans to issue stock. 

In fact, as Chairman Johnson and Mr. Schaefer have suggested, almost all credit unions that converted to mutuals have flipped. 

There are about three exceptions, and of course, Sound Community 

Bank happens to be one of those. 

This brings me to the issue of insider enrichment as a motive for 

credit union conversions. I’m not implying that all conversions have 

been motivated by hopes of private gain. But the ability of insiders 

to profit from conversions is constantly emphasized by consultants 

who specialize in this effort. As do many of my peers who manage 

large credit unions, I receive regular mailings from these consultants. It’s very similar to the number of credit card applications you 

receive in your household. 

At Suncoast, we engaged a reputable law firm that specializes in 

many different types of conversions to analyze what would result 

from a conversion to a mutual, followed by a conversion to a stockowned thrift. They determined that we would have an $850 million 

32

stock offering, based on acceptable OTS guidelines, and a conservative increase in stock price. I, as CEO, would realize a personal 

gain of approximately $35 million, and that does not include any 

annual compensation. 

In conclusion, the concept of converting a not-for-profit credit 

union to a for-profit bank is something that has not been given sufficient attention or deliberation by lawmakers. The fundamental 

nature of the institution is altered, and ownership rights and economic benefits are at risk. 

NCUA is doing all it can under less than ideal guidelines to protect member rights. If this subcommittee is really interested in ensuring a fair and objective conversion process, we would suggest 

you look at ways to help NCUA, rather than stripping them of 

their already limited ability to protect members, which this bill 

does. Work with them to improve member understanding of the 

issues so an intelligent, objective decision is made when a conversion is being considered. 

I appreciate the opportunity to appear here today, and look forward to your questions. 

[The prepared statement of Mr. Dorety can be found on page 47 

of the appendix.] 

Mr. PRICE. Thank you, Mr. Dorety. I appreciate your testimony. 

We again thank you all for your patience and for understanding 

the chaos of Capitol Hill. We’ve been called for another vote. What 

we’d like to do is to complete the prepared statements, and then 

return at about 1:00 p.m. for questions. And we would ask for your 

forbearance for that. 

Mr. Edward Yingling, we welcome you, president and CEO, representing American Bankers Association. Thank you. 

STATEMENT OF EDWARD YINGLING, PRESIDENT, AMERICAN 

BANKERS ASSOCIATION 

Mr. YINGLING. Mr. Chairman, members of the subcommittee, I’m 

Ed Yingling, and I am president and CEO of the ABA. I am substituting today for Harris Simmons, who is ABA’s chairman. Unfortunately, his father passed away Tuesday night, so he cannot be 

here. 

ABA appreciates the opportunity to be here. We believe that 

credit unions should have the ability to choose the charter most appropriate to their current and future lines of business. Many credit 

unions today have determined that it is in their members’ interest 

to branch out into banking activities and exercise broader banking 

powers, yet the current conversion process is totally out of balance, 

tilted to those groups that oppose any conversion from a credit 

union for any reason. 

The Credit Union Charter Choice Act takes important steps to 

restore the necessary balance that Congress sought to achieve 

when it enacted the conversion provisions in the 1998 Credit Union 

Membership Act. It is unfortunate that this bill is needed, because 

actually, Congress has already spoken on this issue. 

In 1998, Congress very specifically acted to ensure that credit 

union members are adequately informed, that appropriate disclosures are made, and that safeguards against insider abuse are in 

place. Congress clearly stated that conversions were appropriate. 

33

In spite of these statutory standards, and in clear disregard of Congressional intent, NCUA’s rules and procedures continue to impede 

the process and add confusion instead of clarity. The NCUA has 

substituted its judgment about conversions for that of Congress. 

The NCUA’s actions last year regarding the fold in a letter were 

called silly by a Texas magistrate, and similar terms were used by 

many Members of Congress. 

But things have not really changed. Today, Mr. Chairman, it’s no 

longer a fold; it’s a hold. There are delays holding communications 

hostage. The NCUA has set up a process that makes it nearly impossible for credit unions to convert. 

Yet the existence of charter options is particularly important 

now, as some credit unions have strayed from the central purpose 

of their charter, and are pursuing lines of business identical to mutual savings banks and commercial banks. We must never forget 

that credit unions have a legal mandate to serve people of modest 

means. That is why credit unions have their special privileges. 

With these privileges, there also come limitations, including restrictions on business lending and fields of membership. 

Distinct from traditional credit unions, a new breed of credit 

unions has emerged that wants to serve a broad customer base, to 

do complex business lending, and offer asset management services 

targeted at wealthier customers. 

Fortunately, there are other charters that provide greater flexibility, with effective supervision by banking regulators, while preserving the mutual member focus. 

Nearly 30 credit unions have converted over the last 10 years to 

a mutual savings bank charter, continuing to serve their existing 

markets and seeking new ones, while remaining member-focused. 

Moreover, these former credit unions are thriving. 

Unfortunately, the current skewed process is making it almost 

impossible for other credit unions to follow the same path, denying 

their credit union customers the expanded products and services 

that would be available under a mutual bank charter. 

The ABA believes that balance once again needs to be restored 

to the credit union conversion process. We commend Congressman 

McHenry and support the goals and objectives of his bill. For one 

thing, it will make the process fair by limiting the NCUA’s practice 

of stifling the ability of elected credit union officials to communicate with their members. In fact, it basically tries to make clear 

that NCUA should do what Congress said and clearly intended in 

1998. Whether by fold or by hold, NCUA should not substitute its 

philosophical bias for the law. 

I appreciate the opportunity to present the ABA’s views. 

[The prepared statement of Mr. Yingling can be found on page 

179 of the appendix.] 

Mr. PRICE. Thank you, Mr. Yingling. We appreciate all of your 

prepared statements. And again, thank you for your patience. We 

will resume this hearing with the question period at 1:00 p.m. This 

committee stands in recess. 

[Recess] 

Mr. PRICE. [presiding] The hearing will come to order. We appreciate again your tolerance and patience of this schedule today. I 

know everybody is busy, and we will move forward as expeditiously 

34

as possible. My sense is that we will be done here prior to 2:00 

p.m., so just for folks’ planning purposes. 

The Chair recognizes himself for a couple of questions. Mr. 

Dorety, in your testimony, you stated that the credit union members have enjoyed a collective savings of over $6 billion in 2002 

from services provided by credit unions. Help me understand and 

appreciate where that number comes from, what kind of plays into 

that, how you arrive at that. 

Mr. DORETY. Certainly. That comes from our economists, who did 

a comparison using bank rate monitor and other surveys for the 

year 2002. Approximately—that’s divided almost three equal ways, 

in fact—$2 billion comes from savings on additional amount paid 

on deposits, about $2 billion comes from lower loan rates, and 

about $2 billion comes from lower service fees. And we would be 

happy to provide that information to you at the appropriate time. 

Mr. PRICE. I think that would be helpful. I appreciate that. Just 

to follow up about the number of conversions, do you have a sense 

that the number of conversions will continue to increase? And if 

you would comment on the impact, if that were to occur, of that 

on the credit union’s system as a whole. 

Mr. DORETY. My sense is that the number of conversions will not 

increase. I think what we’ve seen is when members have an opportunity to get a sense of what is going on with a conversion, as 

we’ve seen in a couple of recent examples, that I think members 

are smart enough to figure this out. And so I don’t think that you 

would see excessive changes, unless there is regulation that alters 

the conversion process as we see it. 

As far as an impact on the credit union system, there has been 

minimal impact on the credit union system with conversions. And 

to be honest with you, that’s not something that we’re concerned 

about. We’re concerned about the members’ rights, and not really 

the impact on the credit union system. 

Mr. PRICE. Thank you. Mr. Schaefer, do you have a comment on 

that question? 

Mr. SCHAEFER. Yes, I would agree with Mr. Dorety. Our focus 

would be on the member interest. We don’t believe that the scale 

certainly has not reached an area in which we would be concerned 

about the National Credit Union Share Insurance Fund or anything of that nature. And I also agree with Mr. Dorety that I think 

members are going to step forward and protect their form of member ownership, and so I wouldn’t expect to see a lot of additional 

conversions. 

Mr. PRICE. Mr. Yingling, do you have any comment about the 

trends? 

Ms. STEWART. I do. Thank you. I believe that both gentlemen are 

correct. We will see fewer credit union conversions. But I believe 

the reason for that is the nature of the process. And I believe most 

credit union executives who may have considered conversion are reconsidering because of the costs and the fear of hyper-technical 

criticisms that will invalidate their votes, even if they are positive. 

Mr. YINGLING. I agree with that. I think the door, frankly, is almost closing on conversions, and I think it will be interesting to 

watch what happens if the process isn’t changed. 

35

You’re in a situation now where, if you’re the management and 

the board of a credit union, you know when you go for a conversion 

that there is going to be a well-funded group outside your credit 

union that’s going to come in with legal help, public relations help, 

and organizing help to organize people to oppose it. And there are 

no limitations whatsoever, maybe except the libel laws, on what 

that group can say and do. 

And yet you’re in a position where, if you want to respond, you 

have one of two choices. You can go ahead and respond, although 

you do have to include the warning that Mr. McHenry has, I think, 

correctly characterized as misleading. You have to do that. 

But if you go ahead without prior approval from the NCUA and 

respond, you run the risk, if not the almost certainty, that the response will be used after the fact to invalidate the vote. 

Your other choice is to go to the NCUA and have the response 

cleared in advance, which may take a good deal of time, and which 

may subject it to highly-technical criticisms. And by the time you 

have responded, it’s too late. 

And the credit union people we talked to, many of whom were—

we talked to a certain group—were looking at conversions, think 

the door is almost being closed on them. 

Mr. PRICE. I’m going to end my question at this point and recognize Mr. McHenry for 5 minutes. 

Mr. MCHENRY. Thank you, Mr. Chairman. I appreciate my colleague from Georgia giving me a moment to ask questions. 

Ms. Stewart, why did you convert? As Mr. Dorety explained, in 

his view, the credit union charter is the best charter. As for me as 

a public policy maker, I think it’s for a marketplace to decide, your 

members to decide, or shareholders to decide, or account holders to 

decide. It’s for the marketplace of ideas. But why did you convert? 

Or why did your organization convert? 

Ms. STEWART. Thank you. There are probably four major reasons 

for the conversion of Credit Union Pacific to Sound Community 

Bank. And I believe the members who voted in favor of the conversion understood those reasons and had a vision of an organization 

that would serve them better. 

First of all, our organization was predominantly, and atypical for 

a credit union, a real estate lender. We had a large book of business, long-term real estate loans on our books, and it was a product 

line that the regulator at the time took a fairly dim view of. And 

it was a product that our members demanded of us. So we needed 

to be able to expand and enhance that product line, and the conversion to a mutual savings bank and a thrift charter allowed that. 

Mr. MCHENRY. That’s one reason. What are the other three, very 

quickly? 

Ms. STEWART. The other reasons related to products and services, 

increasing products and services, to the ability to leverage the infrastructure that we already had. Because of restrictions on field 

of membership, we needed more clients to support the expense that 

we were operating. 

And finally, as a credit union, there’s no way to build capital except with earnings. We talk a lot about not-for-profit organizations, 

but in a credit union, if you want to build capital so you can grow, 

you have to make money. As a mutual savings bank, we have an 

36

opportunity to raise capital without offering stock through the formation of a mutual holding company and by doing a trust-preferred 

security. So accessing capital— 

Mr. MCHENRY. What’s a trust-preferred security? 

Ms. STEWART. It’s similar to, if I can describe it as a debt issue. 

Mr. MCHENRY. Would that be members losing equity, or would 

that be members leveraging equity? 

Ms. STEWART. No. It’s an opportunity to go to the investment 

market and literally borrow money that becomes capital. And we 

pay a price for it. We pay an interest rate for it. It’s like a debt. 

Mr. MCHENRY. Do your owner-members lose equity because of 

that? 

Ms. STEWART. Absolutely not. 

Mr. MCHENRY. Do they lose ownership because of that? 

Ms. STEWART. Absolutely not. It does not dilute their ownership. 

And they have to vote to form the holding company. 

Mr. MCHENRY. Are you currently a stock-offering institution? 

Ms. STEWART. Absolutely not. 

Mr. MCHENRY. Okay. Simple question for the whole panel. Yes 

or no. I love these questions, because we can click through them 

pretty quickly. And I’m going to be mindful of everyone’s time and 

their hunger. 

For everyone here, is it possible, even probable, that a credit 

union which converts to a mutual savings bank and then separate 

conversion to a stock-offering institution, is it possible, or even 

probable, that members could actually improve their net worth in 

financial security? Just yes or no, across the panel. We’ll start left 

to right. Ms. Stewart. 

Ms. STEWART. Yes. 

Mr. MCHENRY. Mr. Schaefer. 

Mr. SCHAEFER. Yes, it’s possible. 

Mr. MCHENRY. Mr. Dorety. 

Mr. DORETY. Technically possible, highly impossible. Implausible. 

Excuse me. 

Mr. MCHENRY. Implausible. Okay. I was going to say that’s 

Washington-speak. And I know Mr. Dorety is actually from North 

Carolina, and I know we don’t engage in that. And then Mr. 

Yingling? 

Mr. YINGLING. Yes. 

Mr. MCHENRY. Yes. All right. Well, the’s wonderful. I’m glad we 

have unanimity here. This is a wonderful, maybe rare, thing. 

Additionally, as I said with my interaction with the previous 

panel, the NCUA, we’re not going to debate a fold today, thankfully. But their disclosure says, ‘‘Subsequent conversion to stock institutions, conversions to a mutual savings bank is often the first 

step in a two-step process to convert a stock-issuing bank or holding company. In a typical conversion to the stock form of ownership, the executives of the institution profit by obtaining stock far 

in excess of that available to the institution’s members.’’ Ms. Stewart, have you done that? 

Ms. STEWART. No. 

Mr. MCHENRY. Okay. Well, it’s very different from the disclosure. 

Did you have to put out a disclosure like this? 

37

Ms. STEWART. Fortunately, I did not have to provide such speculative information to my members. 

Mr. MCHENRY. Okay. Would the rest of the panel just briefly 

comment? Is that speculative on future operations or not? 

Mr. SCHAEFER. Congressman McHenry, with 19 of the 23 credit 

unions that have converted in the period under study, having 

moved to stock ownership, we don’t believe that is speculative. 

With 95 percent of the assets that OTS supervises in stock-owning 

banks, we don’t believe that’s speculative. 

Mr. MCHENRY. Two final questions. And if the chairman will indulge for a moment. 

Mr. YINGLING. Can I say something? It’s not only speculative—

and I’m a lawyer. It’s not only speculative; it’s grossly misleading. 

Mr. MCHENRY. Well, as OTS previously testified, the answer is 

that it’s purely false. 

Mr. PRICE. The gentleman’s time has expired. But if you would— 

Mr. MCHENRY. But if I could summarize with a few final questions. 

Mr. PRICE. Quickly. 

Mr. MCHENRY. How long did it take you to convert, Ms. Stewart? 

Ms. STEWART. I believe that the process, beginning to end, was 

in excess of 2 years. It was a slow process for us. 

Mr. MCHENRY. Okay. Mr. Dorety, walk through this process with 

me. You said you would stand to net $35 million in a conversion 

of your credit union. Would you be able to determine that you received $35 million? 

Mr. DORETY. Would I be able to determine? Absolutely, once I—

after 5 years lapsed, and I realized that $35 million gain? Sure, I 

would. 

Mr. MCHENRY. Really? So you have the ability to vote yourself 

a pay raise and options in a future form of ownership. 

Mr. DORETY. No. As I stated, if we went through the conversion 

to a mutual and then followed it with a stock conversion, the result 

of that, the amount of stock that I would be enabled to under the 

various options that OTS allows under their regulations, the value 

of that stock would equal $35 million. 

Mr. MCHENRY. Who sets your salary? 

Mr. DORETY. My board of directors. 

Mr. MCHENRY. Who sets options for stock-offering institutions? 

Mr. DORETY. I assume the board of directors. 

Mr. MCHENRY. Who elects the board of directors? 

Mr. DORETY. The stock owners of the entity. 

Mr. MCHENRY. Who elects the board of directors on your institution? 

Mr. DORETY. Our members. 

Mr. MCHENRY. Do you see that members have final say over 

whether or not stocks would be offered to any future leaders of any 

future institution? 

Mr. DORETY. Members have no value in stock. There are no 

stocks for members to vote in a credit union entity. 

Mr. MCHENRY. In a conversion, which is the mutual form, they 

have complete power of that conversion process, as OTS previously 

testified. Okay. 

38

Mr. DORETY. And with the voting changes on the rights per vote 

and the ability for them to use—what’s the term I’m looking for—

proxies, clearly it is far easier for a mutual to have a vote than it 

is for a credit union. 

Mr. MCHENRY. Final question to Mr. Schaefer, my good friend 

from North Carolina. We’ve had hours of discussion on this. And 

I appreciate NAFCU being willing to offer a white paper on this. 

You say 20 percent, at least, should vote in a conversion process. 

Did you vote in the primary election last week in North Carolina, 

along with 10 percent of the total registered voters in North Carolina? 

Mr. SCHAEFER. If I might say that in a membership organization, 

there probably should be a quorum. If you’re in a homeowners’ association and a group wants to charge you $10,000, there probably 

should be a minimum group that participates in that vote. But I 

understand the analogy. I don’t think— 

Mr. MCHENRY. And finally, can you comment on NAFCU’s white 

paper and the overall—the one idea that I do like that I think 

should be added to the regs is a member meeting to explain the 

conversion. Can you comment on that? 

Mr. PRICE. The gentleman’s time has expired, but you’re welcome 

to answer that question. 

Mr. SCHAEFER. Thank you for your support of that. We feel that 

that would certainly give the members a heads-up of what was intended and give them an opportunity to response. Thank you for 

your support. 

Mr. PRICE. Thank you. Mr. Kanjorski. 

Mr. KANJORSKI. Thank you, Mr. Chairman. Ms. Stewart, I’m not 

familiar with the circumstances of your conversion. But just for the 

record, I assume that none of the board of directors or the management were offered stock options or any other benefits as a result 

of a conversion; is that correct? 

Ms. STEWART. Congressman, that is correct. We are not a stock 

organization. We are a mutual savings bank. 

Mr. KANJORSKI. And have no intention of going to a stock operation. 

Ms. STEWART. No intention of going to a stock organization. I believe we will form a mutual holding company, but we won’t issue 

stock. 

Mr. KANJORSKI. Why in a democracy—would you be very comfortable if everything in our system required a vote, a majority vote 

of only those that are present in a change of any circumstance, including elections? Do you have some difficulty with understanding 

the need to have a basic quorum to perform functions? 

Ms. STEWART. I believe you asked me if I believe things should 

be subject to a vote. I’m a strong believer in democracy, and I think 

people should exercise their right to vote, in a credit union or— 

Mr. KANJORSKI. But I’m asking you the question whether or not 

that vote should be thought to be legitimate only when some base 

number, whatever it may be—20 percent, 30 percent, 50 percent, 

as the case may be—as opposed to just those people who show up 

at the meeting. 

Ms. STEWART. Well, I think it’s very difficult to regulate what an 

equitable base number is. 

39

Mr. KANJORSKI. How many voted in your conversion? 

Ms. STEWART. Seventy-seven percent voted in favor, and slightly 

less than 20 percent voted. 

Mr. KANJORSKI. Okay. So that if we maintained a change, that 

wouldn’t have prevented your conversion. 

Ms. STEWART. If it was 20 percent, it would have. 

Mr. KANJORSKI. Even if it were 50 percent, you could have converted. 

Ms. STEWART. I could have converted? 

Mr. KANJORSKI. Did you have a 50 percent quorum or a 70 percent quorum? 

Ms. STEWART. No. Seventy-seven percent of the members that 

voted voted in favor— 

Mr. KANJORSKI. I’m interested in what the count—what the people voting constituted as relative to the total membership. 

Ms. STEWART. Less than 20 percent of the membership. 

Mr. KANJORSKI. Oh, less than 20 percent. So you wouldn’t have 

been able to convert— 

Ms. STEWART. That’s what I just said. 

Mr. KANJORSKI. And you don’t feel that the people who didn’t 

show up, do you consider they cast a vote by not showing up? 

Ms. STEWART. I believe, if you are asking for my opinion in my 

credit union, that I mailed information about the conversion to my 

members three times. I also had that information available in the 

branches. I also had education of my staff. They had an opportunity to vote. 

Mr. KANJORSKI. How long had your credit union been in existence? 

Ms. STEWART. Our credit union was formed in 1953. 

Mr. KANJORSKI. So about 52 years, 53 years. 

Ms. STEWART. Approximately. 

Mr. KANJORSKI. And all of the people who formed the credit 

union originally are still living, I assume. 

Ms. STEWART. Well, I don’t know about that. That would be a 

pretty difficult assumption to make, wouldn’t it? 

Mr. KANJORSKI. Well, do you think any of those folks who belonged in 1953 put in their money. They got advantages. But also, 

the credit union built up their equity by virtue of not turning back 

all of the profits. They kept it and grew. What do you think should 

happen to that money? We should hand it over to somebody who 

possibly could convert from a mutual savings to a stock company 

and reap the benefits. Do you think that should happen? 

Ms. STEWART. Well, if I could respectfully disagree with you, I 

don’t think the money gets handed over to anyone. The idea of 

doing a stock issuance, even if you go all the way to stock, creates 

additional capital for your organization. 

Mr. KANJORSKI. Well, somebody gets the distribution of the existing assets. The people buy the new stock. 

Ms. STEWART. Do they? Does somebody in a credit union who is 

a member get a distribution of the current assets? Does somebody 

in my mutual savings bank— 

Mr. KANJORSKI. No. That’s the problem I’m suggesting, they 

don’t. 

Ms. STEWART. Right. 

40

Mr. KANJORSKI. And that’s why— 

Ms. STEWART. They don’t in a mutual savings bank. 

Mr. KANJORSKI. So we have to find a protective mechanism so 

that generationally-accumulated equity doesn’t get disbursed either 

for people who want an advantage, or want to cash in, or want—

I mean, how do you look at this as your money? The present membership’s money. This isn’t the present membership; it’s the accumulated membership of 53 years. 

Ms. STEWART. And let’s use that example. 

Mr. KANJORSKI. Yeah. 

Ms. STEWART. The first member of our credit union, the first 

member, the first membership-owning member, voted in favor of 

our conversion. So my point is that the assumption that someone 

who was a member in 1953 was giving up equity clearly wasn’t the 

case in our credit union. 

Mr. KANJORSKI. Well, because the first member doing it—I mean, 

you know, for all intents and purposes, under the existing law, 

three members could show up, and out of how many hundreds of 

thousands, did you have, members? 

Ms. STEWART. How many hundreds of thousands I have? 

Mr. KANJORSKI. Members. 

Ms. STEWART. Ten thousand members, approximately, at the 

time of conversion. 

Mr. KANJORSKI. Only 10,000 members. And less than 1,500 

showed up. 

Ms. STEWART. I believe it’s in the record. The total positive votes 

was 1,600 and something. 

Mr. KANJORSKI. And you don’t think that we should ask the regulator to be certain that there’s transparency, that there’s disclosure, that there’s understanding. If I had my way, every member 

of the board of directors signs an affidavit that they will receive no 

benefits or whatever. And if they do, of course, that should be prosecutable. 

Ms. STEWART. I absolutely think that there should be transparency. It is not transparent to disclose to consumers that this is 

the first part of a two-step operation. That’s speculative. And it’s 

not in the fiduciary responsibility of the directors to provide speculative information to the membership base. 

Mr. PRICE. The gentleman’s time has expired. 

Mr. KANJORSKI. If I may, just to— 

Mr. PRICE. You may. 

Mr. KANJORSKI. Since we’re lonely here. You know, I was particularly interested, Mr. Dorety, you had 36 million reasons to support conversion. And quite frankly, I may take a second to compliment you. I’m not sure I know that many people who have 36 

million reasons to vote for a conversion who would have showed the 

dedication and commitment to the credit union movement to turn 

that down. So you should be complimented. But would that have 

an effect, do you think, on other credit union members if they had 

36 million reasons to convert? 

Mr. DORETY. First of all, I don’t want to exaggerate. The number 

was 35 million. 

Mr. KANJORSKI. Thirty-five million. Okay. 

41

Mr. DORETY. I just don’t want to be on record with that. And the 

reason I turned it down was that I called my predecessor, who was 

the second CEO of my credit union. I mentioned to him the fact 

that I may have that number. And he said, ‘‘Yes. But if you did 

it, you’re not going to go to heaven.’’ So I had reasons for not doing 

it. 

I can’t answer for others. I know that by the inquiries we get and 

the mailings that we get that there are folks out there who truly 

believe that they will find interested parties in the credit union 

world who will be interested in getting some enrichment from this 

process, without question. 

Mr. KANJORSKI. Yeah. If I could just take a few moment, Mr. 

Chairman. I wanted the record to reflect that I was very much involved with H.R. 1151, both in the creation of the legislation and 

the marshaling it through the Congress, and in the conference. And 

I remember very well. And I want to disabuse some of the testimony that was here earlier by some of the panel. 

The decision to go from 50 percent to zero on the dissolution was 

made at 11:30 at night, when we were faced with the proposition 

that if H.R. 1151 hadn’t passed, it would literally destroy the credit 

union movement and destroy their capacity to exist. And many of 

us who were in support of that legislation or participated in the 

drafting of it felt very strongly that it was the survival of the credit 

union movement that was most important that night. And we all 

recognized that this was a dangerous situation that was in the bill, 

and hoped in the future to make that correction and change that 

circumstance. 

But hardly was it a discussed issue at the conference or by the 

sponsors and drafters of the legislation. It was a quirk thrown in 

at 11:30 at night. I remember it very well, because I was one of 

those who would have said drop the bill, let it lose on this, because 

I thought it was onerous to put that in. But it went in, and we 

were able to pass the amendment. 

But the record should not reflect that was a considered issue in 

conference. That is nonsense. That was a special provision put in 

by some position, some people in leadership at the time. As a matter of fact, it was sort of based on, if I remember, Utah organizations that wanted to make these conversions. And many of us 

thought well, if that’s Utah wanting to do that, that’s their problem. But we didn’t think it would be spreading across the country 

as it has since 1998. But I wanted the record to reflect that. 

Mr. PRICE. Thank you very much. I appreciate that. And the 

Chair is pleased to learn that things happened at 11:30 at night 

in previous Congresses as well. So we thank you. 

I want to thank the panel. The Chair notes that some members 

may have additional questions for this panel which they may wish 

to submit in writing. And without objection, the hearing record will 

remain open for 30 days for members to submit written questions 

to these witnesses and place their responses in the record. 

I want to thank you all very, very much for your patience and 

tolerance today, and for your testimony. It’s been very enlightening. Thank you. This hearing is adjourned. 

[Whereupon, at 1:28 p.m., the subcommittee was adjourned.] 

(43)

A P P E N D I X

May 11, 2006

44


31037.001
45


31037.002
46


31037.003
47


31037.004
48


31037.005
49


31037.006
50


31037.007
51


31037.008
52


31037.009
53


31037.010
54


31037.011
55


31037.012
56


31037.013
57


31037.014
58


31037.015
59


31037.016
60


31037.017
61


31037.018
62


31037.019
63


31037.020
64


31037.021
65


31037.022
66


31037.023
67


31037.024
68


31037.025
69


31037.026
70


31037.027
71


31037.028
72


31037.029
73


31037.030
74


31037.031
75


31037.032
76


31037.033
77


31037.034
78


31037.035
79


31037.036
80


31037.037
81


31037.038
82


31037.039
83


31037.040
84


31037.041
85


31037.042
86


31037.043
87


31037.044
88


31037.045
89


31037.046
90


31037.047
91


31037.048
92


31037.049
93


31037.050
94


31037.051
95


31037.052
96


31037.053
97


31037.054
98


31037.055
99


31037.056
100


31037.057
101


31037.058
102


31037.059
103


31037.060
104


31037.061
105


31037.062
106


31037.063
107


31037.064
108


31037.065
109


31037.066
110


31037.067
111


31037.068
112


31037.069
113


31037.070
114


31037.071
115


31037.072
116


31037.073
117


31037.074
118


31037.075
119


31037.076
120


31037.077
121


31037.078
122


31037.079
123


31037.080
124


31037.081
125


31037.082
126


31037.083
127


31037.084
128


31037.085
129


31037.086
130


31037.087
131


31037.088
132


31037.089
133


31037.090
134


31037.091
135


31037.092
136


31037.093
137


31037.094
138


31037.095
139


31037.096
140


31037.097
141


31037.098
142


31037.099
143


31037.100
144


31037.101
145


31037.102
146


31037.103
147


31037.104
148


31037.105
149


31037.106
150


31037.107
151


31037.108
152


31037.109
153


31037.110
154


31037.111
155


31037.112
156


31037.113
157


31037.114
158


31037.115
159


31037.116
160


31037.117
161


31037.118
162


31037.119
163


31037.120
164


31037.121
165


31037.122
166


31037.123
167


31037.124
168


31037.125
169


31037.126
170


31037.127
171


31037.128
172


31037.129
173


31037.130
174


31037.131
175


31037.132
176


31037.133
177


31037.134
178


31037.135
179


31037.136
180


31037.137
181


31037.138
182


31037.139
183


31037.140
184


31037.141
185


31037.142
186


31037.143
187


31037.144
188


31037.145
189


31037.146
190


31037.147
191


31037.148
192


31037.149
193


31037.150
194


31037.151
195


31037.152
196


31037.153
197


31037.154
198


31037.155
199


31037.156
200


31037.157
201


31037.158
202


31037.159
203


31037.160
204


31037.161
205


31037.162
206


31037.163
207


31037.164
208


31037.165
209


31037.166
210


31037.167
211


31037.168
212


31037.169
213


31037.170
214


31037.171
215


31037.172
216


31037.173
217


31037.174
218


31037.175
219


31037.176
220


31037.177
221


31037.178
222


31037.179
223


31037.180
224


31037.181
225


31037.182
226


31037.183
227


31037.184
228


31037.185
229


31037.186
230


31037.187
231


31037.188
232


31037.189
233


31037.190
234


31037.191
235


31037.192
236


31037.193
237


31037.194
238


31037.195
239


31037.196
240


31037.197
241


31037.198
242


31037.199
243


31037.200
244


31037.201
245


31037.202
246


31037.203
247


31037.204
248


31037.205
249


31037.206
250


31037.207
251


31037.208
252


31037.209
253


31037.210
254


31037.211
255


31037.212
256


31037.213
257


31037.214
258


31037.215
259


31037.216
260


31037.217
261


31037.218