By Frank J. Diekmann
It’s put-up-or-shut-up time, credit unions!
You either step up and defend what you believe in, or put the For Sale sign up out front of your Credit Union Houses, put your cooperative values in a box and sell them at the yard sale, and buy a place over at the bankers’ condo complex.
The announcement by HAR-CO Credit Union in Maryland that it intends to convert to a mutual savings bank charter is a call to action for everyone in the credit union community to either step up and practice what they are so often preaching, or Just. Shut. The. Heck. Up.
Let’s be clear: I’m not saying the credit union community should stop the conversion attempt; indeed, I’m right there at the front of the line defending the rights of members in a democratically controlled cooperative to vote on their future. But only if that vote is an INFORMED vote.
And if history is any judge, members of the credit union will be “informed” in the same way North Koreans are: with a very careful parsing of the language, including statements that are written by some slick lawyers that are technically ‘true,” but…
The $188-million HAR-CO Credit Union has filed a Notice of Consideration to Convert from a Maryland-Chartered Credit Union to a Maryland-Chartered Mutual Savings Bank and is now moving forward with the process. Quietly. This isn’t the first time it has done so; the credit union also announced it wanted become a bank back in 2011, before dropping those plans.
This also isn’t the first time a credit union has either attempted or made such a charter change, as there have been several dozen even if it’s been a few years since such a move has been attempted (NCUA gets some credit here, having changed the rules to require a majority of ALL members to vote in favor, not a majority of members at a special meeting).
In Maryland, unfortunately, the law requires only a majority of members at a special meeting to vote in favor. Those meetings are typically not well publicized, and attended by employees, board members, management and their families to ensure the vote is packed in the favor of insiders.
The 'True, But's'...
In a disclosure that is more “dis” than “closure,” HAR-CO’s Notice features language straight out of the Charter Conversion Playbook (specifically, the chapter on the “How To Put A Shine on Fine Print”) in making the conversion sound to members like nothing is going to change. It notes, for instance, the credit union will be doing little more than converting to a form that is “mutually owned by its membership” and that it will “continue to have no stockholders.”
True, but… Members aren’t told that as a mutual savings bank it will be one-dollar, one vote, and no longer one-member, one vote. It’s dollar democracy, and it’s unlikely the average HAR-CO member is going to have enough dollars to have much say, especially after the hot money starts flowing in in bulk from outsiders and firms looking to force a conversion to a commercial bank and cash in.
In HAR-CO’s Notice, it claims a conversion to a bank charter would allow it “to offer loan and deposit services to anyone, something it cannot currently do as a credit union.”
True, but… HAR-CO’s current FOM is education-based. It never tells members that it could simply apply for a little something commonly known as a “community charter” that would no doubt encompass the market area it is seeking to serve as a bank (as if expanded market area is really the goal of the individuals behind this switcheroo).
In HAR-CO’s Notice, it tells members that its “existing branch locations would, as bank branches, be permitted to serve and attract more citizens than they can now as credit union branches. The Board believes this would enable HAR-CO to preserve its tradition of competitive pricing, plus make it easier to cost-justify adding branches. As a bank with the increased ability to add customers, we believe HAR- CO would be able to generate substantially greater revenues. The Board of Directors believes that greater revenues would help support and expand the types of products and services offered to the membership.”
True, but… First, see previous note on a community charter, which would allow it to do the same thing. But what I really I love is the part about how “greater revenues” (which most customers of a MSB will never share in) will lead to more branches, not lower rates or fees or anything that will really benefit the rank and file. Instead, this canard is dangled knowing that everyone wants a branch at the end of their driveway, even if they are visiting less and less frequently. And who doesn’t want expanded “products and services,” even if these are never actually mentioned?
Other finely parsed language in the CU’s Notice include a claim that a conversion will give it “additional business flexibility” (how it doesn’t say, but it sure sound swell) that will allow it to continue to “operate as a first-rate financial institution” (but not for everyone), and that it cannot raise capital--actually, it has options as a CU there, too. I guess they just ran out of space.
An Illusionist Would Be Jealous
But the real David Copperfield-worthy obfuscation is hidden, as it always is, near the end of the Notice when it offers up an oh-by-the-way observation that it would “have the option to raise additional capital by changing from the mutual to the stock form and selling stock to members and the public, although a change to stock form is not part of the current Conversion Proposal.”
This is the mother of the True-buts…. These conversions are always a two-step process, which is fitting, since there’s a two-step being danced here alright. That change isn’t part of the “current” proposal. It will come later. Converting first to a mutual savings bank charter allows these CUs’ management teams and boards to ease their members into surrendering their rights and ownership by making it all sound like it’s all just some harmless formality. And then, quicker than you can boil a frog, suddenly the members are now “customers” and the institution, capital and voting rights that used to be theirs all belong to someone else.
“A change to stock form would require separate approvals in the future from the then current HAR-CO Board, HAR-CO members, and bank regulator,” the credit union says in its Notice. Again, it all sounds so innocent. Wonder how the board might vote, since they stand to cash in big? And it goes unmentioned that as a mutual bank the average depositor’s vote ain’t gonna count for much.
Speaking of the board and the two-step dance with the language, the Notice further points out that the CU’s directors are currently unpaid and that “HAR-CO has no plan for changing its Director compensation policy following the Conversion.” It then adds, however, that “as a Maryland savings bank, HAR-CO would not be required to seek the approval of its members before providing compensation to its Directors for service on the Board.”
Wonder which way that vote will go?
Paying Taxes An Advantage? Wait! What?
The cherry on top of this Sales Job Sundae, however, has to do with what it says about the loss of the CU tax exemption as a bank.
“Based upon our analysis and meetings with consultants, the Board of Directors believes that the tax impact should be more than offset by the enhanced earnings capacity under the mutual savings bank charter and the ability to more effectively serve HAR-CO’s current and future members,” HAR-CO claims in its Notice. “We further believe this change would improve our ability to sustain a competitive pricing philosophy while continuing to increase our convenience and service to members.”
Yes, you read that correctly: “Paying taxes will improve our ability to sustain a competitive pricing philosophy!” Gosh, I seem to recall reading once or 10,000 times somewhere where some group has been saying that the CU tax exemption has just the opposite effect and improves CUs’ pricing and unfairly tilts the playing field. Who said that? Oh, yeah, the banking industry and its trade associations. Again. And again. And again.
And pardon me for questioning the opinion of “consultants” who are billing by the hour to handle the credit union’s attempted conversion and who will no doubt be among the insiders cashing in should HAR-CO ever become a commercial bank.
A number of years ago when these same “consultants” and others were making conversion attempts something of a micro-trend, some good CU folks got together and created the National Center for Member Trust. That included a website on which all of the claims around these conversions were debunked, and other more truthful information was also provided. It includes some data about how much insiders have raked in from the members’ money when these conversions have been successful. The National Center for Member Trust is still up and running, and can be found here.
Get Off Your Horse
If you’re at a credit union or a trade group in the U.S.—and especially Maryland—and you’ve been talking the credit union talk, it’s time to walk the credit union walk. This is not an “internal” matter when members aren’t being given the whole truth. You only get to wear white hat if you’re willing to get down off the white horse some times, take off that hat, and roll up you sleeves. It’s time to speak up and make sure HAR-CO’s members are informed on exactly what they’re being asked to vote on.
HAR-CO’s membership is primarily made up of people in the education field. If you don’t step up and help educate them, they are all about to get schooled.
Frank J. Diekmann is Cooperator in Chief at CUToday.info and can be reached at Frank@CUToday.info or @FrankCUToday.