[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 
                         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



                    U.S. GOVERNMENT PRINTING OFFICE
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana          PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio                  MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio                  GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair   DARLENE HOOLEY, Oregon
RON PAUL, Texas                      JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio                BRAD SHERMAN, California
JIM RYUN, Kansas                     GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio           BARBARA LEE, California
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois               RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       JOSEPH CROWLEY, New York
VITO FOSSELLA, New York              WM. LACY CLAY, Missouri
GARY G. MILLER, California           STEVE ISRAEL, New York
PATRICK J. TIBERI, Ohio              CAROLYN McCARTHY, New York
MARK R. KENNEDY, Minnesota           JOE BACA, California
TOM FEENEY, Florida                  JIM MATHESON, Utah
JEB HENSARLING, Texas                STEPHEN F. LYNCH, Massachusetts
SCOTT GARRETT, New Jersey            BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida           DAVID SCOTT, Georgia
J. GRESHAM BARRETT, South Carolina   ARTUR DAVIS, Alabama
KATHERINE HARRIS, Florida            AL GREEN, Texas
RICK RENZI, Arizona                  EMANUEL CLEAVER, Missouri
JIM GERLACH, Pennsylvania            MELISSA L. BEAN, Illinois
STEVAN PEARCE, New Mexico            DEBBIE WASSERMAN SCHULTZ, Florida
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin,
TOM PRICE, Georgia                    
MICHAEL G. FITZPATRICK,              BERNARD SANDERS, Vermont
    Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina
CAMPBELL, JOHN, California

                 Robert U. Foster, III, Staff Director
       Subcommittee on Financial Institutions and Consumer Credit

                   SPENCER BACHUS, Alabama, Chairman

WALTER B. JONES, Jr., North          BERNARD SANDERS, Vermont
    Carolina, Vice Chairman          CAROLYN B. MALONEY, New York
RICHARD H. BAKER, Louisiana          MELVIN L. WATT, North Carolina
MICHAEL N. CASTLE, Delaware          GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
SUE W. KELLY, New York               LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      DENNIS MOORE, Kansas
PAUL E. GILLMOR, Ohio                PAUL E. KANJORSKI, Pennsylvania
JIM RYUN, Kansas                     MAXINE WATERS, California
STEVEN C. LaTOURETTE, Ohio           DARLENE HOOLEY, Oregon
JUDY BIGGERT, Illinois               JULIA CARSON, Indiana
VITO FOSSELLA, New York              HAROLD E. FORD, Jr., Tennessee
GARY G. MILLER, California           RUBEN HINOJOSA, Texas
PATRICK J. TIBERI, Ohio              JOSEPH CROWLEY, New York
TOM FEENEY, Florida                  STEVE ISRAEL, New York
JEB HENSARLING, Texas                CAROLYN McCARTHY, New York
SCOTT GARRETT, New Jersey            JOE BACA, California
GINNY BROWN-WAITE, Florida           AL GREEN, Texas
J. GRESHAM BARRETT, South Carolina   GWEN MOORE, Wisconsin
RICK RENZI, Arizona                  WM. LACY CLAY, Missouri
STEVAN PEARCE, New Mexico            JIM MATHESON, Utah
RANDY NEUGEBAUER, Texas              BARNEY FRANK, Massachusetts
TOM PRICE, Georgia
PATRICK T. McHENRY, North Carolina
MICHAEL G. OXLEY, Ohio

                            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


                         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.
    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.
    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.
    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 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 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.
    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.
    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 important 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 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 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 member-one 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 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.
    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 
ownership, 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?
    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 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 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.
    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.
    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.
    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.
    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 billion 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 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?
    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.
    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 taxing 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 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.
    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 well-published 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.
    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.

   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.
    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.
    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 stock-owned thrift. They determined that we 
would have an $850 million 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. 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 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.
    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 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?
    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.
    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.
    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.
    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.
    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.]

                            A P P E N D I X



                              May 11, 2006

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