Tuesday, November 10, 2015

NCUA's Regulations Stymie Credit Union Mergers Into Banks

Over the last couple of years, I have reported on credit unions acquiring banks. While such mergers remain rare, these mergers are more frequent now than just several years ago.

However, these mergers appear to be a one way street -- banks merging into credit unions, not credit unions merging into banks.

What is keeping these mergers from being a two way street is the National Credit Union Administration's rules governing the merger of a credit union into a bank (Section 708a SubPart C).

The National Credit Union Administration (NCUA) requires the credit union board to either "conduct a well-publicized merger auction and obtain purchase quotations from at least three banks, two or more of which must be stock banks; or retain a qualified appraisal entity to analyze and estimate the merger value of the credit union."

If the board decides against an auction, the board needs to publish a notice on why the board is considering the merger and the major positive and negative effects of the proposed merger. The notice should also include information on where members can send comments on the proposed merger.

Furthermore, if a credit union's board votes to move forward with the merger, the majority of board members must vote in the affirmative that the merger is in the best interests of members and the selected merger partner is the best choice for members.

I don't know why this provision is necessary. It assumes that the board is not fulfilling its fiduciary duties.

Moreover, before members vote on the merger, the credit union must send to members prescribed language about the merger under the guise of protecting members interests. Unfortunately, the disclosure has language meant to dissuade members from voting for the merger.

For example, if the merger is with a stock bank, the disclosures must have a clear and conspicuous disclosure that if the merger is approved the members will lose all of their ownership interests in the institution, including the right to vote, the right to share in the value of the institution should it be liquidated, the right to share in any extraordinary dividends, and the right to have the net worth of the institution managed in their best interests.

Telling members that they will lose their ownership interest is meant to scare members into voting against the proposed merger.

Additionally, it seems to me that this disclosure is a red herring. If such a merger moves forward, members will be compensated for their ownership interest.

In addition, the disclosure is required to state that the merger may affect the ability of members to obtain non-housing-related consumer loans. Once again, this language is meant to scare members into thinking that they may not be able to get car loans or personal loans. I find this disclosure ironic, given NCUA's support for policies that would move credit unions away from non-housing-related consumer loans.

A cynical person would view this regulation as erecting a barrier to such mergers.

In my opinion, NCUA needs to modify its regulation governing credit union mergers into banks. The rule should not be any more onerous than the requirements governing credit union mergers.

Ultimately, these mergers are business decisions.


  1. Posting about this topic is akin to writing a novel about the war between the hatfields and mccoys versus the same opportunity to write about WW2.
    What about the charter change rules?
    They are heinous AND credit unions have been damaged by them in attempting or even contemplating charter change.
    Don't recall hearing of a bank being thwarted by acquisition rules...although it's possible plenty looked at the rules and withdrew consideration.
    Your solution is all wrong.
    The solution is for congress to deal with what they call this rogue agency and eliminate the NCUA.
    Larger credit unions are banks that don't pay taxes.
    We would switch and pay were it not for the rogue, it's rules and the pain and cost of what it leads to.
    And the joke of all is as you point out, to,protect members.
    That's the real joke.
    Members don't care and they have all the power.
    If the credit union converts or is acquired by a bank and they don't like what happens as a result...what's the crime?
    All they have to do is switch to a different bank or credit union. BOOM. DONE.
    The consumer has all the power.

  2. I have written numerous times about NCUA's regulation thwarting CUs attempt to switch to a bank charter.

    CUs that want charter choice need to find a champion in Congress, who will take NCUA out of the charter choice process.



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