FAQ: Understand Credit Union Conversion

Most credit union conversions allow insiders and professional investors to enrich themselves, while turning an institution dedicated to making money for the consumer into an institution dedicated to making money off the consumer.

1. How is a credit union different from a bank?
2. What is a credit union conversion?
3. Who has the right to decide if the credit union converts?
4. How is the conversion election decided?
5. How do I protect my credit union from conversion?
6. Why do credit union conversions happen?
7. How much money do insiders make?
8. Why is it a problem that some people make money off conversions?
9. How do the insiders and investors make so much money?
10. Do credit union members get reimbursed when their ownership is taken and sold as stock or given to insiders?
11. Is it credit union members' own fault for not buying stock?
12. Why don't more members buy stock?
13. What responsibilities do executives and board of directors have to members?
14. If a member cannot sell his or her ownership at any time, do they really own the credit union?
15. Will the rates change if my credit union becomes a bank?
16. Will my credit union still be democratic after it becomes a bank?
17. What would a fair conversion look like?
18. What are the advantages and disadvantages of a bank charter?
19. When is a conversion good for the members?
20. My credit union's board of directors says they plan to convert to a mutual savings bank, not a stock-owned bank. Does this mean I will retain my ownership and good rates?
21. My credit union says it will convert to a “mutual holding company,” not a stock bank. Does this mean the conversion is more likely to benefit members?
22. Will converting to a for-profit bank increase growth and profitability, and so allow my credit union to provide better services?
23. Then why is the board of directors talking about increasing growth?
24. How much money does conversion cost?
25. Other questions?

How is a credit union different from a bank?

Credit Unions are non-profits whose goal is to provide low-cost financial services. They are member-owned cooperatives. The member-owners pool their savings and offer loans and other financial services to one another. Credit unions are run democratically on a "one member, one vote" basis. Every member, whether saver or borrower, employee or CEO, owns an equal share and gets an equal vote. Because credit unions are non-profit and exempt from taxation, among other reasons, they are able to provide better rates on deposits and loans than banks can. The money that, in a bank, would go to executives and shareholders as profits is instead passed back to the member-owners by lowering the cost of loans and fees or paying more for savings.

Banks are in business to make a profit. They are typically operated for the benefit of their owners, not necessarily the customers. They are not democratic, and are usually governed on a "one dollar, one vote" principal where those with larger investments have more say. Stock banks have a legal duty to maximize returns to shareholders. (See a chart comparing banks and credit unions )

What is a credit union conversion?

It is possible for a credit union to change its not-for-profit legal structure to various for-profit bank structures. Conversions typically happen in two steps.

• In the first step, the credit union converts to a mutual bank, which is similar to a credit union, although it is for-profit, has higher costs because of taxes, and weaker member ownership rights. Governance of most mutual banks is also less democratic, and the board of directors often effectively controls the institution by controlling members' votes by using "running proxies."
• In the second step, the mutual bank converts to a stock bank or "mutual holding company" and issues stock. To date, over 75% of the credit unions who have converted to mutual form have taken this second step. At this point the board and management are released from their legal duty to work in the interests of the members (customers) and instead are legally obligated to maximize returns to shareholders. In a conversion, members typically lose the superior savings and loan rates that credit unions are able to provide, the value of the credit union which they have built up and own themselves, democratic control of their credit union, and the value of supporting a community based institution. In return, they are able to buy back some of their ownership as stock. Insiders are also able to buy and give themselves ownership that had belonged to the members, and professional investors can purchase the rest. (Here is a website dedicated to helping professional investors profit off of credit union conversions.)

Who has the right to decide if the credit union converts?

Do you have an account or loan from the credit union? Then you, as an owner of the credit union, decide! All members will receive ballots to vote on whether to convert.

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How is the conversion election decided?

A majority of members who choose to vote decide whether or not to convert. There is no minimum participation rule. Because of low turn out, credit unions that convert typically do so with only 10-15% of total membership voting for the conversion. Your vote is important and powerful.

How do I protect my credit union from conversion?

Vote, and join with other members who are organizing to protect your credit union. Tell the other members you know the facts about credit union-to-bank conversion. If you contact us, we can help you get in touch with other member-owners who are organizing. No member groups? Start one. With a little effort, you could make a big difference.

Why do credit union conversions happen?

Most conversions are not in the members' interests. However, conversion may be in the interests of the directors and executives who propose it, as they often make hundreds of thousands or millions of dollars by converting their members' credit union.

How much money do insiders make?

According to a Credit Union National Association study of insider gain at five converted credit unions, the board of directors acquired an average of $742,000 each in stock and awards by converting. They also began paying themselves annually and per-meeting.

The CEOs at these former credit unions acquired or were given an average of $1.9 million in stock gifts and options, are now paid more than 150% the salary of CEOs of similarly sized credit unions. Both groups are able to profit on the stock they purchased in a closed initial public stock offering.

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Why is it a problem that some people make money off conversions?

The problem is not that insiders and outside speculators get rich. The problem is that they take advantage of their credit union members and eliminate a cooperative institution to do it. If conversion advocates were straightforward with their members about the likelihood of increased costs for members, the loss of ownership without compensation, and the potential for insider gain, it is doubtful that members would ever approve a conversion. In a credit union, the board of directors is elected, and the executives are appointed, to serve the members' interests and the members' interests alone. They should give members the whole story, not capitalize on members' trust and lack of information. If the credit union is sold, that money should go to the credit union members who own the credit union, not into the stock portfolios of the board of directors, executives, or professional investors.

How do the insiders and investors make so much money?

Insiders and investors are able purchase the members' ownership for a low price, without paying the members. It would be like your house-sitter offering to clean your house for you, and then holding a big yard sale of your stuff. They sell or give themselves their favorite things of yours, and keep all the money they make. Your house may be clean, but is that what you had in mind?

Here's how it works: First, credit union directors encourage member-owners to agree to the conversion because of supposed advantages to the credit union. When the credit union converts to stock form, the ownership is taken from the member-owners to be sold as stock. They are not compensated for this loss. Member-owners are given the first chance to buy back their ownership as stock, but typically 95-99% do not. Instead, insiders and professional investors buy nearly all the stock ownership. This stock can be very lucrative, as explained in this article, "For Years, Consultants and Greed Have Driven Coops in Other Industries to go Stock-owned; CU Wave May be Just Starting", Credit Union Times, 3/17/04. In addition to being able to purchase stock, directors and executives are able to give themselves 4% of the stock they issue in what is called a "Recognition and Retention Reserve" and reserve 10% more as stock options. Directors also give up their credit union volunteer status for annual and per-meeting compensation, and CEOs are given substantial raises." More info.

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Do credit union members get reimbursed when their ownership is taken and sold as stock or given to insiders?

No. Credit union members build up a credit union's value (called retained earnings, net worth, or members' equity) by paying interest on loans, and also providing customer network which increases resale value of the credit union. If the credit union is sold, the members, not the investors, deserve to keep the value that members have created.

Is it credit union members' own fault for not buying stock?

Proponents of conversion may blame the membership for allowing themselves to be taken advantage of. However, most or all of the information members receive on sale of stock comes from the board of directors. It is the legal and ethical responsibility of that leadership to serve the members. Purchasing stock is the primary benefit of conversion for members, although it may not outweigh the losses of conversion. If, in case after case, around 95% of the members do not buy stock, the leadership should conclude that either stock sale does not benefit the members, or that they need to do a much better job educating them. However, the less stock members buy, the more is available for purchase to that same board of directors. For comparison's sake, stockholders cannot lose their ownership without choosing to sell it.

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Why don't more members buy stock?

• The people who need the credit union's services most may not be able to afford the stock.
• Those who could afford it may want to invest their money elsewhere. After all, people join credit unions to use financial services credit unions offer, not because they are looking for investment deals.
• Members also may simply be uninformed. Their main source of information is the same board of directors that stands to profit from conversion. Ownership is widely dispersed in a credit union, and individual members may feel their stake is not high enough to actively monitor what is going on.

Proponents of credit union conversions are able to capitalize on all of these factors for their own gain.

What responsibilities do executives and board of directors have to members?

Directors and senior management have a legal, fiduciary duty to serve the members, just as the managers of a stock bank have a legal duty to serve shareholders.

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If a member cannot sell his or her ownership at any time, do they really own the credit union?

Yes they do. According to United States case law, "the members of a credit union are, in the same sense as the shareholders of an ordinary business corporation, the owners of the entity" (Anheuser-Busch Employees' Credit Union v. Federal Deposit Insurance Corporation, 651 F. Supp. 718, 724). If the value of the credit union is converted into stock, the cash paid for that stock rightfully belongs to members.

Will the rates change if my credit union becomes a bank?

At credit unions that have converted, rates and fees have typically gotten worse. One reason is that after conversion, the bank will pay 34-45% of its income in taxes. Another reason is that the legal mission changes. If the bank issues stock, management will have a legal duty to maximize profits, which may force them to charge worse rates and fees.

Will my credit union still be democratic after it becomes a bank?

Probably not. The American principal of "one person, one vote" will probably be replaced by the principal of "one dollar, one vote"—even in so-called "mutual" bank form, which is sometimes portrayed as democratic. In the majority of mutual banks, just as in stock-issuing banks, votes are generally assigned according to how much money a person has invested. Mutual thrift members typically get one vote per $100 deposited, with voting interests capped at $100,000. A wealthy person who saves a lot, but borrows little, might have one thousand times the voting rights of another member who uses the institution for all his or her credit needs, but has little savings. Additionally, a bank's Board of Directors is able to solicit "running proxies," which allow them to control members' votes and often assume de facto control of the institution.

What would a fair conversion look like?

In a fair conversion, members would be paid for the ownership they lose. When Nationwide Federal Credit Union became a bank, it divided up its net worth and paid it out directly to the members—with premium. Another method would be to distribute the stock in the new bank directly to members. If your credit union leadership is not using one of these conversion methods, they are probably not serving your interests. They may be planning to take the value of your ownership for their own gain.

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What are the advantages and disadvantages of a bank charter?

The credit union's mission is to serve its members. To weigh pros and cons of a conversion, we should look at how it will affect members like you, rather than talking about what is "good for the credit union" as if it belonged to someone else.

• Learn the pros and cons of conversion for members and for insiders.
• Learn about the differences between credit union and bank charters.
• Learn about common arguments for conversion.

A bank charter is probably not advantageous to the members who lose ownership of the credit union. It is not advantageous to the former members and new customers who will pay more in rates and fees. Of course, the bank charter is advantageous to the investors who will own the bank's profits and to the executives who will receive pay raises and stock options.

As for specific differences in operations, a bank charter means giving up credit union advantages like tax-free status and volunteer directors. In return, a bank charter will allow the former credit union to expand membership beyond the community it was chartered to serve, and to offer more business loans. This is of little benefit to current or even new members, because the former credit union is now a bank. The services it offers will be like those already offered by the other for-profit banks in the area.

When is a conversion good for the members?

Rarely, and only when the members are fairly compensated for their lost ownership rights. If your credit union has not promised to pay you for the share you own of the accumulated earnings ("net worth") before converting to a bank, then you are not getting a fair deal. For an example of a credit union that compensated its members before converting to a bank, read about Nationwide Federal Credit Union on the Past Conversions page.

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My credit union's board of directors says they plan to convert to a mutual savings bank, not a stock-owned bank. Does this mean I will retain my ownership and good rates?

Very unlikely. A study released by the University of Wisconsin explains that mutual bank status "is simply a stage. The credit union that converts to a mutual is simply creating the device through which it can issue an IPO and become a commercial bank." In fact, to date over 80% of converted credit unions eligible to sell stock have taken that step.

Even without issuing stock, rates and fees will likely become more expensive because the bank will have to begin paying taxes. Here is more info on the significant differences between credit unions and mutual banks.

Additionally, experts are now questioning the future of the mutual bank industry.

My credit union says it will convert to a "mutual holding company," not a stock bank. Does this mean the conversion is more likely to benefit members?

No. Issuing stock as a mutual holding company rather than a stock bank is a technicality which obscures the basic injustice of conversion. This model still allows insiders to obtain personal gain while rates and fees generally get worse. While members may formally maintain ownership of the mutual holding company, proxy voting generally allows insiders to assume effective control. Because those insiders will have a legal duty to maximize shareholder returns, and are likely to hold stock and stock options themselves, they will have an interest in maximizing profits rather than benefit to customers. According to Columbia Law Professor John Coffee, "You have a management group that effectively insulates itself and controls the mutual holding company. Across all financial institutions that use that structure, you have suboptimal corporate governance." Read an excellent article from the American Banker about insider self-enrichment through mutual holding company conversion. More info on our Conversion Myths page at Myth #8.

Will converting to a for-profit bank increase growth and profitability, and so allow my credit union to provide better services?

Probably not. But first, notice that conversion proponents are talking about the credit union as if it were already a bank. Credit unions aren't designed to generate profits– they are not-for-profit cooperatives. A credit union's mission is to provide low cost financial services to its member-owners, who are the users of the credit union's services. The measure of a credit union's success is not rate of growth, but the price and quality of service.

Even if we assume that after conversion, the bank actually is able to increase revenues despite losing its credit union tax-free status, the answer is still probably no. Just because a bank can afford to offer better rates, it doesn't mean it will. The legal purpose of the bank after conversion to for-profit status will be to generate profits. If the management of a stock bank passes savings along to customers that could reasonably have been paid out to shareholders instead, they could be sued by their shareholders.

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Then why is the board of directors talking about increasing growth?

By discussing credit union performance in terms of growth, as if it were a bank, they shift the discussion away from the better service that a credit union provides and obscure the important differences between the credit union member-mission and a bank's profit-mission. Additionally, because it is difficult to link executive pay to quality of service, credit union and mutual bank executives are typically paid according to the size of the institution. If they lose sight of their credit union mission, they may notice a personal interest in increasing growth rather than increasing quality of service to members.

How much money does conversion cost?

Executives spend hundreds of thousands, which belongs to the member-owners, to convince those member-owners to approve conversion to bank. Costs include mailings, election management, and pro-conversion advertising.

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Other questions?

Try our page of resources, or contact us.