Order Code RS22364
January 13, 2006
CRS Report for Congress
Received through the CRS Web
Conversion of Credit Union Charter to Mutual
Savings Bank Charter: Current Legal Process
and Congressional Response
Michael V. Seitzinger
Legislative Attorney
American Law Division
Summary
There are several statutory requirements imposed by the Credit Union Membership
Access Act (CUMAA) for converting a federal credit union to a mutual savings bank.
In addition, the National Credit Union Administration (NCUA), the federal agency that
charters and supervises federal credit unions, has issued regulations requiring significant
disclosures by a federal credit union attempting to convert its charter to a mutual savings
bank. Some of these disclosures are considered by critics to be speculative in nature,
such as whether the directors of the converted institution intend later to convert to a
stock-issuing entity, thereby possibly enriching themselves. Others believe that this kind
of information is at the heart of the conversion process and should be disclosed. H.R.
3206, 109th Congress, has been introduced to limit the kinds of disclosures required, in
particular disclosures of a speculative nature.
This report will be updated as needed.
Section 202 of the Credit Union Membership Access Act (CUMAA)1 amended the
provision of the Federal Credit Union Act2 concerning conversion3 of insured federal
credit unions4 to mutual savings banks.5 This 1998 amendment added subsection (b)(2)
1 P.L. 105-219, 112 Stat. 913 (1998).
2 12 U.S.C. §§ 1751 et seq.
3 12 U.S.C. § 1785(b).
4 A federal credit union is defined as “a cooperative association organized in accordance with the
provisions of this chapter [chapter 14 of title 12 of the United States Code] for the purpose of
promoting thrift among its members and creating a source of credit for provident or productive
purposes.” 12 U.S.C. § 1752(1).
5 A mutual savings bank is defined as “a bank without capital stock transacting a savings bank
(continued...)
Congressional Research Service ˜ The Library of Congress

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to 12 U.S.C. section 1785 to set out the requirements for converting an insured credit
union to a mutual savings bank.
These requirements are several. An insured credit union may convert to a mutual
savings bank or savings association, if the savings association is in mutual form, without
the prior approval of the National Credit Union Administration Board (Board) so long as
it meets the requirements and procedures governing banks and savings associations.6 The
National Credit Union Administration (NCUA) is the federal agency that charters and
supervises federal credit unions and insures savings in federal and most state-chartered
credit unions. A proposal for conversion must be approved by a majority of the directors
of the insured credit union and by a majority of the members of the insured credit union
who vote on the proposal.7 An insured credit union proposing to convert to a mutual
savings bank or savings association must submit notice of its intent to convert to each of
its eligible voting members 90, 60, and 30 days before the date of the member vote on the
conversion.8 Upon completion of the conversion, the credit union is no longer subject to
the provisions of the Federal Credit Union Act.9
The Board may require an insured credit union proposing to convert to a mutual
savings bank to submit a notice to the Board of its intent to convert during the 90-day
period before the date of the completion of the conversion.10
Directors and senior management officials of an insured credit union are prohibited
from receiving any economic benefit in connection with the conversion except director
fees and compensation and other benefits in the ordinary course of business.11
NCUA is required to issue rules applicable to charter conversions which are
consistent with rules issued by other financial regulators. These rules shall be no more
or less restrictive than applicable to charter conversions by other financial institutions.12
NCUA issued rules to comply with this requirement.13
NCUA later stated that it became concerned that “many credit union members do not
appreciate the effect that a conversion may have on their ownership interests in the credit
5 (...continued)
business, the net earnings of which inure wholly to the benefit of its depositors after payment of
obligations for any advances by its organizers.” 12 U.S.C. § 1813(f).
6 12 U.S.C. § 1785(b)(2)(A).
7 12 U.S.C. § 1785(b)(2)(B).
8 12 U.S.C. § 1785(b)(2)(C).
9 12 U.S.C. § 1785(b)(2)(E).
10 12 U.S.C. § 1785(b)(2)(D).
11 12 U.S.C. § 1785(b)(2)(F).
12 12 U.S.C. § 1785(b)(2)(G)(i).
13 63 Fed Reg. 65,532 (Nov. 27, 1998); 64 Fed. Reg. 28,733 (May 27, 1999).

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union and voting power in the MSB” [mutual savings bank].14 In February 2004 NCUA
amended its rule on credit union conversions, 12 C.F.R. Part 708a, “to require a
converting credit union to disclose additional information to its members to better educate
them regarding the conversion.”15 Among the requirements of the amended rule are the
following: 1. The vote on the conversion proposal must be by secret ballot and conducted
by an independent entity. 2. A converting credit union must enclose with each written
communication sent to its members concerning the conversion disclosures of ownership
and control, expenses and their effect on rates and services, possibility of subsequent
conversion to a stock institution (which may allow executives of the institution to profit
by obtaining stock in excess of that available to the institution’s members), and costs of
the conversion. 3. A federally-insured state chartered credit union must include in its
notice to NCUA a statement as to whether the state law under which it is chartered allows
it to convert to a mutual savings bank. It will remain subject to any state law
requirements more stringent than the regulation, including any internal governance
requirements. 4. A converting credit union must be careful to make certain that its
member list is accurate and complete. 5. A converting credit union must be careful to
conduct its special meeting concerning conversion in a manner which will accommodate
all members wishing to attend.
There is some concern that the NCUA may have overreached its authority in
Regulation 708a when it required such disclosures as an explanation of any foreseeable
stock related benefits associated with a subsequent conversion to a stock institution.
Some believe that this kind of disclosure, including the disclosing of future plans for
selling stock to the public, is an issue for the banking regulators, rather than NCUA, to
oversee. Others believe that the possible later sale of the converted credit union as a
stock-issuing organization is the major issue in converting a credit union to a mutual
savings bank. They argue that, if the directors of the converting credit union intend that
the organization later convert to a stock-issuing entity, thereby perhaps enriching these
directors, the directors should disclose this intention.16
H.R. 3206, 109th Congress, introduced July 12, 2005, and referred to the Committee
on Financial Services, Subcommittee on Financial Institutions and Consumer Credit,
would amend the Federal Credit Union Act concerning conversion of a credit union
charter to a mutual savings bank charter. It would limit the kinds of disclosures required
to be made by a converting credit union. The bill would prohibit a converting credit
union from being required to provide any information or statements that are speculative
concerning future operations, governance, or form of organization of the financial
institution resulting from the conversion or which may occur after completion of the
conversion; are inaccurate concerning a proposed conversion of the converting credit
union or the application for a mutual savings bank or savings association charter filed in
connection with the conversion; conflict with regulations of other financial regulators
related to the subsequent conversion of the resulting institution from mutual to stock
form; distort the impact of conversion on the members of the credit union; or are
attributable to the Board or state the Board’s position on conversions.
14 70 Fed. Reg. 4005 (Jan. 28, 2005).
15 Id.
16 CREDIT UNION JOURNAL, vol. 9, no. 38, p. 1 (Sept. 26, 2005).

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The bill also requires that the vote on the conversion shall be by secret ballot and that
the converting credit union shall appoint an independent inspector of elections to receive
and tally votes cast on the conversion proposal. Unless there is fraud or reckless disregard
for fairness during the voting process that affects the outcome of the vote, the Board is
prohibited from having further review or approval authority over the conversion process
following the submission and review of the certification of the results of the membership
vote.

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