What if your credit union decided it didn't want to be a credit union anymore? Rachel Witkowski at American Banker has a great story this month on one credit union's push to become a bank:
Har-co Maryland Federal Credit Union in Bel Air recently notified its members that it plans to convert to a mutual thrift to expand its customer base. It would be the first such conversion since Coastway Credit Union's in July 2009.
Though the switches can strengthen rivals, banks have long encouraged more credit unions to convert and compete on even terms as tax-paying financial institutions.
Such conversions are rare and nearly ceased during the financial crisis. Formidable obstacles remain even though conditions have improved.
"There's a lot of opposition in the credit union world to this" kind of conversion, said Kip Weissman, a partner at Luse, Gorman, Pomerenk and Schick.
Credit unions often convert to banks to free themselves of federally mandated constraints on how credit unions can do business. For one, credit union membership is restricted to certain categories of people, say employees of a certain utility or residents of a certain city. Such restrictions stymie credit unions' ability to recruit new members/customers and essentially limits their growth.
Another major restriction is on business lending, where credit unions are only allowed to have 12.25 percent of their assets invested. Taken together, these restrictions can be enough to push some credit unions to convert to banks in search of larger market share and higher profits.
It should also be noted that credit unions' management has a major financial incentive to push for conversion. Credit union board members are volunteers, whereas banks pay their boards generous salaries.
But while credit union conversion can be a good deal for the institutions themselves, it's not always great for credit union members. Credit unions that convert to thrifts have to act more like banks -- they pay their management more than credit unions do, they pay corporate income taxes and they are for-profit rather than not-for-profit entities -- and so they can't offer the same relatively low fees, high savings rates and low mortgage rates their members were used to.
On the other hand, in a credit union conversion, it's possible members, especially those with big deposit accounts, could get a one-time payoff for their stake in the credit union if it eventually converts to a stock entity, which many former credit unions eventually do.
If you're a member of a credit union and you'd like it to stay that way, keep in mind that converting isn't easy. First, thrift wannabes must get approval to convert from the National Credit Union Administration and the Office of Thrift Supervision. Also, a majority of members who participate in a member ballot on the issue must vote yes.
In such a ballot, it seems the question comes down to a one-time windfall versus years of higher interest rates on deposits and lower ones on loans. What do you think? Would you vote yes?
For more info on conversions and an interesting look at the issues involved, check out this report, a PDF, from the Haas School of Business at the University of California at Berkeley.