By Ray Birch
RANCHO DOMINGUEZ, Calif.—While Schools FCU has gone public with its claims that the much-larger SchoolsFirst FCU has engaged in “predatory” business practices, the credit union is also claiming that NCUA is partially responsible for the situation that the small credit union now faces.
Schools Federal reached out earlier this year to the federal regulator—which it believes erred in an earlier decision—to see if it might play a role in addressing the increasing tensions it was feeling in the marketplace.
As CUToday.info has reported here and here, the $110-million Schools FCU published a letter on its website stating that the $11.2-billion SchoolsFirst has engaged in a pattern of un-credit union-like practices and is “stealing away” its members.
In the letter from its board of directors, Schools FCU stated that SchoolsFirst FCU in Santa Ana, Calif. has been using its “deep pockets” and similar name to “confuse” Schools FCU members and its potential membership base as part of a campaign to bring them over to SchoolsFirst.
SchoolsFirst told CUToday.info that the allegations suggest unethical business practices and are “entirely untrue.”
NCUA A 'Culprit'
But Schools Federal believes there is another party that has contributed to the current situation.
“The other culprit here is NCUA,” said Schools FCU CEO John Drake. “Years ago they let this happen by approving a broad TIP (trade industry professional) charter for SchoolsFirst without any analysis of how it might impact our credit union and others. And then there were the name changes—we changed our name and then SchoolsFirst changed their name from Orange County Teachers. We had the ‘Schools’ name first and NCUA just rubber stamped SchoolsFirst’s request. But when you have two credit unions located within a 40-mile radius of each other with almost the same name and serving the same field of membership, it gets confusing for consumers and members.”
Schools FCU alleges that the similar names are hurting the smaller credit union.
Drake said that Schools FCU reached out to NCUA April 18 to see if the agency could offer some assistance, possibly help “broker a deal” or a “gentlemen’s agreement” between the CUs that would allow both to “coexist.” The letter to NCUA from attorney Todd Okun, who represents SFCU, addressed the overlapping fields of membership, the similar names, the alleged “predatory” marketing practices of SchoolsFirst FCU, and how all these things are threatening the “safety and soundness” of Schools FCU.
But Drake said NCUA in its May 13 response offered only to help with Schools FCU’s marketing efforts.
“NCUA essentially said that they would not do anything for us and that we will have to fend for ourselves,” said Drake. “We hoped that NCUA could act as some sort of mediator here, because not only is this situation affecting us, SchoolsFirst’s practices are impacting other smaller credit unions too.”
NCUA Says No To Broker Role
NCUA’s response to Okun, signed by Gail Laster, director of the agency’s Office of Consumer Protection, stated that NCUA takes seriously “the concerns SFCU raised and your request for assistance. Our review of this matter indicates that SchoolsFirst’s actions do not appear to violate regulations regarding field of membership, credit union names, or marketing practices. Furthermore . . . we have concerns about the appropriateness of an agreement regarding marketing tactics and competitive practices, and we decline to help broker such an agreement as you described.”
NCUA’s letter then addressed the specific concerns Schools FCU outlined to NCUA.
Regarding FOM overlap, NCUA said it is “committed to consumer choice and generally allows overlap in fields of membership. In general, competition between credit unions provides a benefit to consumers that outweighs the potential harm to either of the competing credit unions.”
Addressing Schools FCU’s allegations that SchoolsFirst’s marketing practices are “predatory,” the agency said that it “understands retaining your market share is important to SFCU’s financial well-being. Nevertheless, based on the situation described in your letter, the accompanying information, and the content NCUA reviewed on SchoolsFirst’s website, it does not appear that SchoolsFirst has violated 12 C.F.R 740.2.”
Okun, in a May 18 email response to Laster, emphasized to the agency that he did not believe that NCUA had any “specific statuary or regulatory obligation” to take any action based on SFCU’s “recitation of the facts.”
“I indicated that perhaps a case could be made that the activities engaged in by SchoolsFirst might constitute an unsafe or unsound practice in their impact on SCFU,” wrote Okun. “As noted many times in both my letter and in the telephone call (between the agency and Okun on April 26), the goal of SCFU was to request that NCUA use its good offices and obvious influence to look into the matter to determine if it might simply facilitate and encourage an agreement between the credit unions that would be agreeable to both of them. In sum, there was no statutory or regulatory basis alleged, yet the NCUA, for reasons that are unclear, nonetheless deemed it necessary to set forth why no such statutory basis exists.”
Low-Income CU
Okun explained that NCUA’s response indicates that Schools FCU requested that NCUA assist in “development and enforcement” of the agreement.
“This is inaccurate. We did not request by any stretch of the imagination that NCUA play any role in the enforcement of any such agreement,” he said. “As a matter of fact, the conversation specifically described any such agreement as a ‘gentlemen’s agreement’ that would state generally agreed to principles with no remedies included. While arguably NCUA’s assistance in the development of an agreement was something that would have been appreciated, our main purpose was for the NCUA to use its influence to encourage SchoolsFirst to sit down with SCFU to hammer out such an agreement.”
Okun emphasized that SFCU’s asset size, which is about 1% the size of SchoolsFirst was not the only relevant factor. So, too, he said, it’s it’s low-income designation.
“I understand that credit unions, both big and small, must compete and that it may be inevitable that the smaller ones will fall by the wayside or merge with larger credit unions,” wrote Okun. “It is said, or at least speculated in the credit union press, that NCUA would like to see such consolidation in order to reduce the number of small credit unions it must examine. However, given the fact that low-income credit unions have been given this specific designation and that they are subject to some different standards than other credit unions, presumably to assist them in surviving and in carrying out their special mission in the face of strong competition, one wonders whether or not NCUA should go out of its way to at least give some consideration to an overlap when the credit union being overlapped is a low-income credit union, especially one in the same geographic area. Apparently, NCUA feels no obligation in this regard preferring to indicate that its lack of a legal or regulatory obligation is sufficient to leave a small, low-income credit union to fend for itself without NCUA assistance.”
Okun asserted that NCUA’s response demonstrates a lack of interest in helping a small credit union in the situation that he believes SFCU faces.
“We understand that there may be many sides to a story and that such an inquiry might have caused NCUA to conclude that the tactics employed were not and are not objectionable nor unsafe or unsound,” said Okun. “However, to draw that conclusion without inquiring further and basing it solely on the ‘only specific example’ you inaccurately indicate was provided by SFCU can only lead to a conclusion that NCUA is simply not interested in assisting SFCU nor the other small credit unions similarly situated if not required to.”
'Astonished' By NCUA Response
Okun concluded saying that he was “astonished” by NCUA’s response to the name change issue.
“You respond to SFCU’s assertion that the names Schools Federal Credit Union and SchoolsFirst Federal Credit Union might be confusing by indicating that when the name change to SchoolsFirst Federal Credit Union was approved by NCUA, which occurred after my client was already named, NCUA’s obligation was to ensure to the extent possible that the credit union’s name would not, among other things, be confused with the name of another credit union. You then simply conclude that it was not confusing. Using logic that escapes me and in a breathtaking example of bootstrapping, your rationale for that conclusion is simply the fact that NCUA’s records indicate that there are 365 credit unions that have the word ‘school’ in their names.”
Drake, told CUToday.info that there is a “Catch-22” regarding NCUA in this matter.
“NCUA is lurking in the background,” said Drake. “If I have to take a lot more of the credit union’s money and use it for marketing, which I have to do now, and it lowers my profitability, NCUA then comes in and hits me over the head and can force a merger.”
In the meantime, Schools Federal continues to address what it says remains the confusion in the marketplace.
“We published the letter with the intent to bring awareness to members, because there is confusion between our credit union and SchoolsFirst—just the name itself,” said Drake. “So we have many people thinking they are joining our credit union, but in fact they are joining SchoolsFirst. SchoolsFirst can offer $250 to bring over your checking account and rock-bottom loan rates. It is hard for us to compete with that.”