After lengthy disputes including a lawsuit over their plans to convert to mutual savings banks, two large Texas credit unions prevailed and completed their conversions at the end of the year.
 
The focus of this issue has now shifted to Michigan, where DFCU Financial (originally a credit union for Ford engineering employees) has filed for conversion. With $1.8 billion in assets, DFCU is the largest credit union in the state, and if its plan succeeds it will be the largest credit union ever to convert to a federal savings bank charter.

Should credit unions be able to choose to convert to mutual savings banks and change their charter accordingly, if they think that would be better? I imagine most Americans, who like the idea of choice as part of our national heritage, would find the principle easy to identify and would answer, "Of course."

Most people would find this a pretty simple, if obscure, issue--certainly not an emotional one. They would doubtless be surprised by the high-toned rhetoric against giving others a choice that it occasions in some credit union circles. If average Americans learned that the federal credit union regulator was so worked up over this issue that it tried to prevent the Texas conversions because of the way a piece of paper was folded, they would (a) be amazed and (b) find it ludicrous--off the chart even for bureaucratic beltway behavior.

Consider that the National Credit Union Administration tried to block the conversions last year over the way the disclosure statement for members was folded in the envelope. This notorious attempt seems to indicate a regulator so caught up in its own agenda and self-interest that it was unable to imagine how foolish it would appear to the rest of the world. It subsequently retreated, under legal pressure and ridicule, including the magistrate judge's observation that its position was "simply erroneous and silly."

A further indication of the NCUA's self-absorption was its statement regarding possible legislation on the matter: "Congress has an important role in this process, as does the NCUA."
 
It was generous of them to recognize that Congress has a role, being the creator and designer of all the federal charters in question--not to mention of the NCUA itself. It is remarkable that this statement seems to reflect a view that the NCUA is a peer, rather than a creation, of Congress.

Indeed, Congress set up a quite different regulator of federal credit unions when establishing the charter in 1934.

The regulator under the original act was the Farm Credit Administration. In 1942 regulation was shifted to the Federal Deposit Insurance Corp. Amendments to the act in 1959 provided, "There shall be in the Department of Health, Education and Welfare a Bureau of Federal Credit Unions."

Charters and regulatory structures shift as times and the ideas of Congress change.

As of Sept. 30 there were 107 credit unions whose assets topped $1 billion. This would have been unimaginable to the authors of the 1934 act, who conceived of credit unions as very small and very local associations of "people of small means" seeking "to protect themselves from high rate money lenders," according to the Senate Banking Committee report on the bill. At the time the existing 2,850 state-chartered credit unions had average assets of $17,500. This would be $254,000 in 2005 dollars.

Of course Congress created the federal credit union charter for groups of closely associated people, such as "groups within a well-defined neighborhood."

How surprised the authors of the act would be if they could return from congressional Valhalla and read at the Web site of one large credit union that you can join it if "you are a member of the California Association for Older Americans"--and that "anyone can join this association, regardless of age or geographic location."

It seems perfectly logical that organizations subject to so much change from the original concepts might choose to change charters.

How should Congress view credit unions converting to mutual savings banks? Congress should certainly be pleased to have successful financial institutions converting to federal income tax paying status. Moreover, since credit unions are exempt not only from federal income taxes but also from state and local income taxes, conversion can make them contributors to the income tax base of their local communities and states.

Charter conversions also relate to something much more important. A profound principle in the design of the American government is that given the shortcomings, self-interest, and urge to power inherent in human nature, everybody--in particular everybody wielding the coercive power of the government - needs to be subject to a system of checks and balances.

Providing the ability to choose charters is an important way to ensure that regulatory agencies experience some checks and balances. That competition is good and monopoly is bad applies equally to them.

In short, the credit unions that wish to convert to a mutual savings bank charter should of course be able to do so without regulatory opposition and antagonism.

If conversion helps credit unions grow and bring more competition for consumers' business, that's good. If the national, state, and local governments thereby get more income tax revenue, that's good. If charter competition helps discipline the bureaucratic behavior of the NCUA, that's good.

If by charter conversions the NCUA loses some of its turf, fees, and clients, that's life.

Alex J. Pollock is a resident fellow at AEI.