Postal Community Credit Union officials are hoping pending legislation will allow the institution to convert to a federally chartered mutual savings bank. Pictured is the credit union’s main branch, located inside the U.S. Postal Service building at South Station in Boston.
Bankers have long argued that some credit unions operate too much like banks while enjoying a tax-exempt status. But one area credit union has faced numerous obstacles in its quest to actually become a bank. Legislation now rapidly working its way through Beacon Hill could change that, however, paving the way for Boston-based Postal Community Credit Union and others to make the conversion.
House bill 4927 (previously House 3029) would allow state-chartered credit unions to convert to banks. The new version of the bill was introduced this month when Rep. Bradley H. Jones Jr., R-North Reading, offered an amendment to allow credit unions the option of converting to a cooperative bank. The original bill covered only conversion of a credit union to a savings bank. The bill was recently ordered to a third reading without opposition from the floor.
Allowing credit unions the option of becoming a state-charted cooperative bank was a suggestion made by the Massachusetts Division of Banks in June 2005 during a public hearing for the original bill. However, the bill would allow for credit unions to consider both state and federal charters when opting to switch to a bank, which remains a concern of state regulators who say they would have little control over the process if a converting credit union opted for a federal bank charter. Despite the recent amendment, the Division of Banks continues to oppose the legislation, said David Cotney, senior deputy commissioner of the DOB.
Under the current law, state-chartered credit unions that receive regulatory approval can merge with a state-chartered bank, but there is no way for a credit union to make such a conversion on its own.
“With regard to a charter conversion to a bank, the division is concerned that the lack of any enhanced process and disclosure could result in credit union members having minimal understanding or opportunity for informed discussion relative to the reasons for or against approving a plan to become a bank,” the DOB noted in its written testimony opposing the original bill. “The division notes that the National Credit Union Administration, which is the regulator for federal credit unions, has implemented regulations to include member notice requirements, adequate disclosures, as well as detailed and extensive voting procedures, among other provisions. The intent is to implement strict control over many elements involved in the specific process for a credit union to convert to a bank.
“The division takes no position on the merits of whether a credit union should be permitted to convert to a savings bank Â… Given serious concerns about the implications of the lack of any enhanced process and disclosure requirements for credit union members being asked to vote to become a bank, the division strongly opposes [the bill],” according to the testimony submitted by state regulators.
Cotney said the DOB’s position has not changed with the new bill since it still fails to address concerns regarding conversion to federal bank charters. Even with conversion to state bank charters, Cotney said the bill fails to adequately spell out the process necessary to ensure the move is beneficial to the community and the credit union’s members.
“It’s not a philosophical opposition,” he said.
The DOB does support a separate piece of legislation that would allow state-chartered credit unions to convert to a federal credit union charter.
Although Jones is listed as the sponsor of the new bill, he said his intention was not to file a separate bill but to make an amendment that would address one of the DOB’s concerns.
“It’s not my bill. I just tried to make one amendment,” said Jones.
Now on its way to a third reading, Jones said the bill is approaching the last step before it would leave the House and go to the Senate. He also said some of the other concerns expressed by the DOB such as the disclosure process to credit union members could still be addressed before the bill reaches the House floor for a vote.
“That’s maybe something that is very reasonable,” he said.
Postal Plan
The original bill was filed by state Reps. Anthony Petruccelli, D-Boston, and Robert K. Coughlin, D-Dedham. Jones said Postal Community Credit Union is advocating for the bill, and leaders of the credit union approached him mainly because he is a Republican, which would ensure the bill would have support across party lines.
Petruccelli declined to comment on the bill.
However, the legislation has been winding its way steadily through the system. On Jan. 26, 2005, the House and Senate agreed to send it the Committee on Financial Services. Despite the DOB’s concerns, the committee reported favorably and referred the bill to the committee on House Steering, Policy and Scheduling on March 27 of this year. On May 4, it was ordered to a third reading following the amendment.
“We are very encouraged. We are hoping that the House acts as soon as [this] week and engrosses the bill,” said Bill French, president and chief executive officer of Postal Community Credit Union.
Although the House has not set any specific timetable for the bill, French said he remains optimistic and is pleased with the recent progress that has been made.
In November 2003, members of Postal voted on whether the institution should convert to a bank. More than have of the credit union’s members agreed, with 68 percent supporting the conversion plan, said French. “We thought it was a great idea and the regulators would concur,” he said.
However, the Division of Banks did not approve the plan and Postal began working to get legislation in place at the State House.
The DOB had resisted the idea of allowing Postal, a state-chartered credit union, to convert to a federally chartered bank from the beginning. The issue then made it way through the courts, where Postal argued that parity laws would allow the move, since federally chartered credit unions can convert to banks. The state Superior Court agreed with Postal, but that decision was overturned by an Appeals Court judge in 2004 and DOB looked to have successfully blocked the conversion until the new legislation began gaining support.
French said he does not think there will be a rush of credit unions converting to banks if the legislation passes. However, for Postal, it would be a good fit, he said.
“Our circumstances are a little bit unique,” he said.
Rob Kimmett, senior vice president of marketing for the Massachusetts Credit Union League, said he does not think there will be many credit unions looking to convert if the legislation passes. He also said the Credit Union League has not taken a position on the conversion bill.
According to French, there are a number of reasons behind Postal’s desire to convert to a federally chartered mutual savings bank. He said the credit union has members living in 38 states. Because of its state credit union charter, those members living outside of Massachusetts can not turn to Postal for certain services and products such as a mortgage. Massachusetts law prohibits state-chartered credit unions from issuing out-of-state loans.
“Our charter won’t permit it. We are stuck behind the eight ball,” said French. “It’s hard to say to someone who has done business with you for 20 years, ‘we won’t finance you.’ It’s a slap in the face to them.”
He also said the U.S. Postal Service has downsized over the years, which means there are fewer new members coming in and some members pulling out. Postal did increase its membership charter and now has the ability to recruit members who live in Suffolk and Essex counties. However, French said membership is still down, and becoming a bank would allow the institution to remain healthy and grow.
In 2001, Postal had 13,000 members. Today, it has 9,000 members.
“Any financial institution whose customer base is declining is at a disadvantage,” said French.
Kevin F. Kiley, executive vice president and chief executive officer of the Massachusetts Bankers Association, said he thinks such a conversion is an appropriate step for many institutions that he believes to have outgrown their credit union mission. While bankers have argued that some credit unions have been acting too much like banks, welcoming the tax-exempt institutions over to the other side is something the MBA would be pleased to do, he said. Kiley said he does not believe all or even most credit unions would take advantage of the ability to convert to a bank. However, the credit unions with more aggressive growth plans are the ones most likely to consider the option of converting to a bank, he said.
“We have generally been supportive of [allowing credit unions to convert to banks]. At some point in time they [large credit unions] ought to change their charter and become banks,” said Kiley. “We welcome them to the taxpaying world of banking.”
