The NCUA has proposed streamlining the regulatory requirements for credit unions considering conversion to a mutual savings bank. The proposal removes detailed disclosure requirements, eliminates definitions of what “clear and conspicuous” means, removes the plain language requirement and trivializes the narrative context members must receive about conversions. The comment period is open until June 22.
Richard Garabedian, an attorney who helped write the original federal statute governing conversions, argues that the NCUA’s existing regulations violate the Federal Credit Union Act by being stricter than rules applied to conversions by other financial institutions. His perspective offers important context for understanding what’s changing and why.
Devil in the Details & History
Sarah takes a different perspective. She says what’s couched as routine deregulation harms members, credit unions and even the NCUA’s existence. Yet few have raised their voices against even this small segment of the NCUA’s overall dereg initiative.
Further inspection and introspection uncover that this should be a highly controversial issue for credit unions: Who owns the capital built up by member-owners over decades? These requirements were put in place 20 years ago, specifically because MSB charter conversions were not always disclosed to member-owners to assist them in understanding the transaction. We’re talking microscopic fonts, hieroglyphs, legalese and other nonsense.
Richard, of the firm of Fennimore Kay Harrison LLP, points out that banks handle comparable transactions with disclosure requirements that don’t specify font sizes or narrative structure. The question is whether credit unions need more protection than other financial institutions, or whether the current rules are simply outdated.
In the early 2000s, more than a dozen credit unions converted to MSBs, and many went on to commercial banks, taking members’ capital with them to pay out shareholders. The NCUA tightened the rules to prevent what it saw as institutional self-dealing.
Now the agency is proposing to relax those rules. The timing raises questions, particularly as credit union’s tax-exempt status faces renewed pressure.
As we covered in our previous story on the NCUA’s merger and conversion deregulation, the changes include removing specific font size and formatting requirements from member disclosure statements. The new proposal also allows credit unions greater flexibility in how they explain the rationale behind a conversion decision.
Disclaimer: This transcript was transcribed by AI. No humans were harmed in the making of this regulation discussion.
Sarah Snell Cooke: [00:00:00] Hello and welcome everyone. This is Sarah Snell Cooke, your host here at the Credit Union Connection. I’m joined today live by Richard Garabedian. he has done some of the conversions of credit unions to mutual savings banks back in the 2000s when that was happening. and he’s with us to talk about the dereg proposal that NCUA has put out regarding the disclosures on mutual savings bank conversions primarily, but also with the, mergers as well.
Talk about why this was so controversial back in the day, and it’s not now, and much, much more. So let’s connect with Richard
Hello and welcome everyone. I am Sarah Snell Cooke, your host here at The Credit Union Connection. I’m joined today by Richard Garibedian. Welcome.
Richard Garabedian: Thank you. It’s nice to join you.
Sarah Snell Cooke: Yeah. It’s great having you. Now, Richard is with the law firm of Fennimore K. Harrison LLP. Why don’t you tell us a little bit more about yourself and your [00:01:00] background?
Richard Garabedian: I’ve, been working with credit unions and banks for probably close to 45 years. And, perform, regulatory, guidance, mergers and acquisitions, capital raise, enforcement actions.
essentially just about everything that a credit union, would need from, outside counsel. I don’t do litigation. but, as I just mentioned, just about everything else that, would be of use to a credit union, both federal and state credit unions I work with around the country.
Sarah Snell Cooke: yeah.
And which is why I reached out to you, ’cause I remember from back in the day, back in the early 2000s, when it was the hot trend, not really a trend, I think it was a little more than a dozen credit unions converted to mutual savings banks.
Richard Garabedian: Correct.
Sarah Snell Cooke: and now the… Which was a huge deal back then, and we’ll get to that part, but, and maybe that’ll be the first question.
But, now the NCUA has these dereg- this dereg project it’s doing. And, [00:02:00] cutting back some of the regulations that came out of that trend that happened in the early 2000s. first, Richard, ’cause I know you were around, why do you think this seems so much less controversial a topic now than it did in s- 2005, say?
Richard Garabedian: That’s a good question, actually. I think that credit unions may have, become more accustomed to the concept, even though there’s not a lot of strong interest, and don’t look at it as a way of, being motivated by the own self-interest of the directors and the officers of the credit union, but looking at it as a, a strategic option if it ever presents itself.
so I think, the, the real concern that existed 20 years ago is mitigated and people in the credit union industry don’t look at it the same way. In fact, many credit unions have acquired banks, [00:03:00] so they’re looking for that bank expertise, in the ranks of, the management of the target and also, uh, commercial lenders.
acquiring the bank doesn’t give them any more, um, expanded, uh, s- statutory powers, but- … it’ll bring them new locations and also, um, commercial lending staff, which in many cases that’s what they’re looking for. so I don’t think it’s as perhaps controversial as it once was, but there hasn’t been a charter conversion attempted and completed probably in a dozen years.
And I believe that was Harbor One in Boston, who was ultimately acquired by Eastern Savings Bank about a year ago.
Sarah Snell Cooke: And that, and Eastern Savings Bank is a commercial bank, correct, not a mutual savings bank?
Richard Garabedian: it’s a… I believe it’s a s- it might be a Massachusetts chartered savings bank, yes, but I don’t think it’s a commercial bank.
But it might be. Oh. But that really doesn’t make much of a difference, with regard to its [00:04:00]powers.
Sarah Snell Cooke: it makes a difference in how the executives and/or board members of that former credit union are compensated, correct?
Richard Garabedian: yeah, that’s because you’re, if you’re comparing a credit union with a bank.
Cr- federal credit union directors don’t get paid board fees. there’s about a dozen states that allow state-chartered credit unions to pay board fees. but if you’re on the savings bank side or commercial bank side, board members can get paid board fees.
Sarah Snell Cooke: The executives often get a package for that, acquisition too, correct?
Richard Garabedian: The… when you say the acquisition, you mean?
Sarah Snell Cooke: The former credit union executives.
Richard Garabedian: I always advise my credit unions when they were converting not to, propose anything that made it appear that it was being done for insider benefits.
Sarah Snell Cooke: So
Richard Garabedian: credit union directors and officers didn’t realize any personal benefit from the conversion itself.
They never did. [00:05:00]
Sarah Snell Cooke: There are, there were certainly some back then that were and we talked about this a little bit earlier, were more about making it money and a little less, less conscientious, about it, about the conversion.
Richard Garabedian: I can’t speak personally to that, ’cause I really didn’t encounter that in connection with my clients.
But there could’ve been a few out there that, recognized that if they became a mutual savings bank, they could convert to a stock savings bank at some period of time, and get the benefits of being a stock savings bank in the form of stock options, restricted stock, and, an employee stock ownership plan.
So that’s true.
Sarah Snell Cooke: And beyond that, I’m just curious too, y- ’cause you did mention earlier about the being able to increase business lending, things like that credit unions- Yeah … have difficulty doing. What are some of the benefits of converting, if you go a little more detail about a credit union versus a mutual savings bank [00:06:00] versus a commercial bank?
Richard Garabedian: you have, a greater commercial lending powers. you have the ability to access the capital markets.
You have the ability to form a holding company to diversify. and, you may not be subject to the same restrictions in establishing branches because a credit union can only really go, in essence, where, the membership, can be generated, whereas with a bank, whether it’s a commercial bank or savings bank, you don’t have that same, limitation.
Sarah Snell Cooke: Right.
Richard Garabedian: But, being able to raise, real capital, as I will call it, is something you can do as a, savings bank, whether it’s mutual or the stock form. Whereas with a credit union, you have to be a low-income credit union, to raise secondary capital, which is authorized by the, Federal Credit Union Act, but it’s not equity capital, it’s debt.
But it counts as capital under the, Federal Credit Union Act. So there is an [00:07:00] obligation, obviously, to repay it. there were many, credit unions that were issuing secondary capital before interest rates went up. It’s less attractive now because of the increase in rates. but if rates drop, which is anybody’s guess-
in the next few years, you may see more credit unions trying to, access secondary capital, which, has its own set of restrictions about being repaid in five years or so, et cetera. And it is, of course, debt, so you’ve got to, satisfy the debt service requirement. If you’re raising capital by issuing stock- There’s no obligation to pay dividends, but many banks do, just like many, companies do.
So it’s, it, so there’s not really a cost to it per se there is with, the subordinated debt that, credit unions issue. and it’s only for low-income credit unions, but there’s probably a couple thousand low-income credit unions. It’s not that- … difficult to k- qualify as [00:08:00] such.
Sarah Snell Cooke: so the a- access to capital is a real advantage.
Absolutely, and that capital is, of course, used for new technology, more services, more whatever the members- Correct … or customers want.
Richard Garabedian: That’s correct. Yeah. But-
Sarah Snell Cooke: It helps …
Richard Garabedian: there’s only a few that are doing it now per year. I don’t keep a running tab, but because of the interest rate, changes, it’s not as attractive as it once was.
Sarah Snell Cooke: Yeah.
Richard Garabedian: you can’t really issue it at 3.5%.
Sarah Snell Cooke: And then hold onto it for 5 to 10 years and you can’t- … possibly take it out? Yeah.
Richard Garabedian: Yes.
Sarah Snell Cooke: Yeah, definitely certain advantages, to the conversion, and especially, I think, the, one of the, I think it was a big response, at least to have a plan in your back pocket, if not actually convert, when the tax exemption becomes under, gets under pressure.
Because then why not? you have all the authorities, additional authorities- Yeah,
Richard Garabedian: yeah … you’re
Sarah Snell Cooke: still gonna pay taxes anyway.
Richard Garabedian: And I think, I think that pressure [00:09:00] will, ramp up in the, coming years. I can’t tell exactly when, but, what the, Congress would look at is, these very large credit unions, let’s say those over 500 million, and, not paying any federal income tax or state tax, and questioning whether, it’s a level playing field with community-sized banks.
and why shouldn’t they pay taxes, just many other companies? so I think it’ll continue to be, uh, looked at, but I think it’s a tough row to hoe to try to, uh, implement anything, um, in the next maybe couple years. Interesting to note that back in the early 1950s, mutual savings banks were not subject to federal income tax.
Yes.
Sarah Snell Cooke: True.
Richard Garabedian: And I think the Korean War, and the, economic pressure that put on, Congress looked around to, see what might be, additional sources of, revenue for [00:10:00] the, federal government. with the kind of deficit we have now-
Sarah Snell Cooke: Yeah …
Richard Garabedian: see people thinking about, additional sources of revenue for the Treasury Department.
Yeah.
Sarah Snell Cooke: And, I think that’s a different tax level, for the mutual saving- savings banks. is it different than a commercial bank, if I remember correctly? Like a sub chapter T, I wanna say? I don’t know.
Richard Garabedian: I don’t know off the top of my head, but I, in general, I think banks are, are taxed at the same rate as ordinary corporations.
Sarah Snell Cooke: Right.
And, y- you, you make a good point about, the mutual savings banks and the S&Ls back in the day that were, regulated by the Office of Thrift Supervision. And, with the controversy going on around the NCUA board as far as, having one member or, the relieving of the other two board members from their positions, and should it be a directorship versus a board, and should it be its own agency at all?
Because the OTS also went away. so it’s a little … to me, it’s a little eerily similar situation. [00:11:00]Yeah,
Richard Garabedian: no, you’re exactly right, and there’s one- There’s only one board member now, and that’s Kyle Hauptman, and he’s the, chairman, and he’s moving over to Peekaboo- Yeah … which is the organization that oversees, accounting firms, which I thought was a very interesting, transition.
Although I did note he does have an MBA, and he did spend time up on the Hill- … I think on the banking committees. the new, uh, proposed chairman, his name escapes me at the moment,
Sarah Snell Cooke: Crew, I want to say …
Richard Garabedian: what was that?
Sarah Snell Cooke: I think his name is, Crew. Last name’s Crew, I want to say. I have to look that up.
Shoot. Anyway, go on.
Richard Garabedian: Yeah. No, it might be. So the two of the, board members that were dismissed have, I think, filed s- a suit to get back on the board. do you really need a three-member board? Not necessarily. The Controller of the Currency is, one, the controller of the currency. But the interesting thing, not to stretch this point too long, but, the old Office of Super- Office of [00:12:00] Thrift Supervision reported to the Controller of the Currency.
And the Controller of the Currency is a, a division, so to speak, of the Treasury Department, whereas the NCUA has no oversight other than Congress. Which basically means there is no oversight, because trying to corral Congress to do anything is a Her- Herculean task. we’ll have to see how it plays out in the future.
But, I don’t see a problem with having one board member, personally. Now, the FDIC has five. but, depending on who that board member is, it could be good or bad for the industry.
Sarah Snell Cooke: Exactly.
Richard Garabedian: We’re lucky, we’re lucky over the last 25 years ag- five y- years or so, beginning with Dennis Dollar, that the NCUA has, gained more respect, and recognition, I think.
now how that will fare going forward, I don’t know. I’m not sure what [00:13:00] triggered the, regulatory relief initiatives that the, NCUA has put out with regards to conversions to savings banks or dealing with mergers. but when you look at it, it really doesn’t do a lot. I think it’s more just, a PR move, so to speak, on the part of the agency to say, “Hey, we’re trying to, reduce regulatory burden.”
but the interesting aspect about the regulation that currently exists- Is that, i- in my opinion, and I have quite substantial support for this, that regulation violates the Federal Credit Union Act.
Sarah Snell Cooke: Explain.
Richard Garabedian: Because the Federal Credit Union Act says that the, the conversion process shall, and I’m quoting here, “shall be subject to regulation that is no more or less restrictive than is applicable to [00:14:00] charter conversions by other financial institutions.”
And the NCUA regulation goes way beyond that, way beyond that. And you could say, Mr. Garabedian, how do you know that?” It’s because I helped write the statute Okay? And there is no written legislative history behind Section 1785B2, where the conversion rules, reside. There is no written legislative history.
I wish there was. So the only legislative history resides in the mind of Richard Garabedian.
Sarah Snell Cooke: That is a high-priced commodity right there.
Richard Garabedian: There you go. I think the NCUA, God bless it, put in the regulation to try to do what they thought was [00:15:00] best for credit unions, and I think some of it smacks of just trying to prevent conversions, because there’s a number of provisions that clearly are beyond what would appl- apply to a state bank trying to convert to a national bank or vice versa.
It goes way beyond that. I don’t know exactly whether that was enough in there to, Prevent credit unions from thinking about it because of the, requirements contained in the reg, and, the, manner in which the NC- which w- would review a proposal. Because Har- Harbor One was the last one that went through the process and w- 12 years ago.
Probably.
Sarah Snell Cooke: Yeah. No, it’s definitely died down.
Richard Garabedian: Yeah.
Sarah Snell Cooke: but I think during that time period, too, when it was a little more popular and controversial, it was, The reason those regs were put in place, and I’ll, just to cite a couple of the changes that are, as you said, small, I agree.
But they’re also- can be [00:16:00] significant. I think, one of the changes is to ensure the disclosures are clear, quote, “clear and conspicuous,” but removes the definition of what clear and conspicuous is.
And if you’re looking, it should be clear and conspicuous what clear and conspicuous is, I think.
because having that guideline in there, and I know some of the things you’re talking about, there’s literally font sizes and things like that, but that’s because- Yeah … people were writing in three print, three-point font or hieroglyphics back then. and it having a definition assures a safe harbor, I feel like, if you’re going to be looking at this.
and- I
Richard Garabedian: would agree.
Sarah Snell Cooke: Yeah. And, there are a couple things that, peeved me, so just Because I feel too, there, the, one of the other big ones is to, remove the prescriptive require- requirements for mem- member disclosure statements. and also to provide context. y- you had to provide a narrative around how you came to that, conclusion that [00:17:00] it, how you found the bank that you were gonna…
or how you decided to convert, excuse me, to a bank. and all those things, the context around it, disclosed to the members as well. again- Yeah … trying to prevent people from taking advantage of that,
Richard Garabedian: A- and that’s the, the-
Sarah Snell Cooke: Taking the member money, basically, with them in their pockets, literally.
Richard Garabedian: it… we can chat about that, in a second.
Sarah Snell Cooke: But the important- That would take another half hour, at least.
Richard Garabedian: uh, being someone who’s written, many prospectuses, and, merger, proxy statements for banks over the years, you wanna have good disclosure.
And in any kind of bank merger document, y- you’re going to find a dis- as to why the board considered a particular transaction to be in the best interest of- shareholders in that case.
But good disclosure requires that the document tell the owners, whether they be members, whether they be shareholders, why the board is proposing the [00:18:00] particular transaction. There’s no question that ought to be done. and of course, the numerable ones that I worked on, they said that. But- you, you’re correct. There might be some cases where the management, doesn’t want to emphasize that and tries to, cloud the picture, so to speak, with regard to, the ownership, whether they be members or whether they be shareholders. you wanna have good disclosure. With the SEC, you’ve got that agency overlooking the proxy statements, the prospectus, et cetera.
With the, credit unions, you’ve got the NCUA looking at it, who I would argue would have that authority, so to speak, even without something in the regulation to that effect. But that’s good disclosure, to tell the reader what they’re voting on and what- … for the transaction. A- absolutely. Yes, absolutely.
Sarah Snell Cooke: And yeah, that’s what bothers me about this change too, because, eliminating the plain language [00:19:00] requirement, it’s i- it’s, that’s not re- reg- to me, it’s, it’s in part, yes, reg relief, but it’s also majority part not disclo- not good disclosure, basically, if you’re not speaking plain language.
We don’t need a degree like yours and a history like yours to be able to read it,
Richard Garabedian: no, a- and I would agree. And I’m not sure what prompted the NCUA to propose these changes or the ones dealing with mergers. I don’t know what, what triggered it. I’ve tried to find out through my sources, but I’ve never been able to find an answer to that.
I don’t know- Yeah,
Sarah Snell Cooke: same here …
Richard Garabedian: yeah, I don’t know what triggered it. I don’t know- And I t- … whether the agency is feeling pressure from some place to, Streamline and, provide less burdensome, regulation. I don’t know. I just-
Sarah Snell Cooke: obviously there’s the executive order requiring, regulatory relief basically where you can find it.
Sure … uh, obviously this has, there’s, what, I don’t know, a dozen packages at this point [00:20:00] of reg relief in the initiative, which is great. Most of it I think is great. there are new- Yeah … there are comment letters on this particular change that in- that saying, “We supported overall, but not this.”
… and, in the past, I think, and this is where, the politics and the, and the executive order kind of part comes in, is in the past the agency, as you I think you may have alluded to earlier, it was about self-preservation too.
Richard Garabedian: Yes. Yeah.
Sarah Snell Cooke: The NCUA wanted to continue existing.
and credit unions want it to continue existing. … but, given the talk of consolidating agencies, given the talk of, deregulation, cutting down costs, streamlining, the government-
Richard Garabedian: Yeah …
Sarah Snell Cooke: seems like this NCUA doesn’t care to continue to exist. And because you brought the, what flagged it in my mind, you brought the merger to, dereg, which is also similar to this one- Yeah
which will save us money. yeah. Very similar. it’s like, “Here, let’s make it easier to get out of the [00:21:00] credit union charter,” versus, “We wanna keep you in.”
Richard Garabedian: typically a credit union merger involves another credit union. There have been very few mergers of credit unions, into banks.
The NCUA, under its plenary, plenary authority a- adopted a reg dealing with mergers into banks, and could, exercise broad, rule writing with regard to that, unlike the conversion to a savings bank, which has standards built into the federal law.
There aren’t any standards necessarily built into the- The, Credit Union Act when it deals with mergers into banks.
And the merger into bank regulation raises a number of questions as to how it would actually work, when you read the regulation because mergers of financial institutions don’t follow the kind of concepts that are in the [00:22:00] NCUA regulation.
Sarah Snell Cooke: Yeah.
Richard Garabedian: Number one, announcing you’re gonna do it. You don’t see that.
Banks never announce they’re gonna do it until they sign a definitive agreement. Because otherwise, you’d have a complete donnybrook of offers coming in from all over the place with regard to the target institution. And, I’ll give you an example, but I gotta go back 25, 30 years. Y- back, that far back, quite often, the target or the, the banks in a merger, announced they a letter of which is not a binding merger agreement. And that caused all sorts of disclosure issues with the SEC, et cetera. So now, the institutions go directly to a definitive agreement, and that’s what’s announced in the press.
Sarah Snell Cooke: Okay. The
Richard Garabedian: NCUA is ignoring that and saying, you either have to hold an auction for the target credit union, or you have to make this [00:23:00] announcement that you’re gonna do it.”
Not good practice. It’s never been challenged, and it’s never really been implemented in any meaningful way to flush out the issues it would cause. It’s im- it’s not, in my opinion, thought out.
Sarah Snell Cooke: I totally get what you’re saying. I think just in, uh, it’s inherent in the ownership structure, though, that you would have to announce it so that your members would know, ’cause they’re the members- your members- I mean-
Richard Garabedian: your members would know once a definitive agreement is signed. It’s not that the members need to know that you’re thinking about it, because with other important material matters, the institution doesn’t announce, “Hey, we’re gonna do X, Y, and Z,” because they don’t want the word to get out and s- have it scuttle their intentions.
Sarah Snell Cooke: Right.
Richard Garabedian: the fact that the members need to know doesn’t mean you have to tell them before you sign a binding agreement. [00:24:00]
Sarah Snell Cooke: Okay, interesting. Yeah,
Richard Garabedian: absolutely.
Sarah Snell Cooke: No, this has been a really great discussion. I appreciate, y- you coming on here, Richard. and so I always allow my guests to have a final thought.
What would you like to leave our credit union audience with today?
Richard Garabedian: it’s interesting. I did, have a conversation with a former board member, I’m not gonna disclose the name, who did a really, good job, in his position as such, and he was not a proponent of having a, rule that exists like currently exists with regard to charter conversions.
Because in his view, credit unions need to have a choice, and that, that, and that’s what I’d like to leave the audience with. You wanna have a meaningful choice that either because of economics or other reasons or just dealing with [00:25:00] a regulator that doesn’t understand your business, you should have a meaningful choice.
And having your hands tied, so to speak, with the current regulation really diminishes that possibility
Sarah Snell Cooke: All righty. I said I’d give you last word, I’m giving you last word. I’m zipping my lips. Okay. That’s
Richard Garabedian: fine.
Sarah Snell Cooke: I’m not gonna respond. Thank you very much. I do appreciate it, Richard.
Richard Garabedian: Thank you for the opportunity.
If anybody has follow-up questions, I’m happy to respond.