By Ray Birch
MERIDEN, Conn.—The trend of federally insured CUs converting to a state charter in order to expand their fields of membership is being seen in Connecticut, according to the league here.
Jill Nowacki, president of the Credit Union League of Connecticut, said the league noticed the interest in making a charter change last year, with a marked increase toward the close of 2014.
“Where we have seen the most activity has been among our largest credit unions,” said Nowacki, noting the league can only cite names of credit unions that have converted or have filed applications. “Both of our credit unions in Connecticut over $1-billion in assets are now state-chartered, one of which converted at the end of last year.”
Federal Charter 'Strict'
Last year, the $37-million Nutmeg State Financial in Rocky Hill, and the $1.4-billion American Eagle Financial in East Hartford, made the switch from a federal charter. “Comparatively, no credit unions changed their charter in 2013 or 2012,” said Nowacki.
So far this year First New England FCU has requested permission to convert from a federal to state charter, the league reported.
Jill Nowacki, CULC
Nowacki acknowledged that she is somewhat surprised at how “strict” federal FOM restrictions are in Connecticut compared with other areas of the country. “The state charter here allows for a broader service to communities, as well as permits credit unions to work with a local regulator that truly understands the communities in the state.”
During Connecticut’s last 2014 legislative session, the league was able to help secure a sales tax exemption for state-chartered CUs, which before it was removed was a barrier to FCUs switching to a state charter, said Nowacki. “That had been seen as a negative to converting to a state charter. Since the sales tax barrier has been removed, a number of federal credit unions have begun exploring the possibility of converting.”
Dennis Dollar, principal at Dollar Associates in Birmingham, Ala., said his firm is currently working 17 federal-to-state charter conversion projects “in some form,” with each driven by the “tight” federal FOM restrictions and the “more flexible” approach to FOM in their states.
“There is no real advantage in one (federal or state) supervisory approach over the other, as both state regulators and NCUA are very safety and soundness oriented and are consistently becoming more and more demanding during this current post-financial crisis period of regulatory and supervisory activism,” said the former NCUA chairman. “From our experience, the difference that is driving the federal-to-state charter change trend line is 100% FOM related.”
NCUA Vice-Chair Rick Metsger has shared his support for easing some federal FOM restrictions, and has urged credit unions to share their opinions with the agency.
“I think field of membership—leveling the playing field between state and federal charters, leveling the playing field between credit unions and their competitors—is the most im
Dennis Dollar
portant issue facing the movement’s future,” Metsger recently told CUToday.info. “Credit unions can’t be operating under rules that others are not playing by, especially in a rapidly changing marketplace.”
NCUA has set up a working group to examine field-of-membership issues and established an e-mail address (fomsuggestions@ncua.gov) to allow CUs to send their thoughts directly to the group.
NCUA FOM Modernization
Dollar said it is “commendable” that NCUA has stated its willingness to look seriously at some FOM modernization.
“The long-term viability of the federal charter requires it,” noted Dollar. “NCUA has for the past decade hidden behind their own overly tight interpretation of what the statute allows them to do in the FOM arena. They need to get as flexible in interpreting their considerable FOM authority under the quite expansive 1998 (Credit Union Membership Access Act) statute as they have in viewing their legal authority under the same statute for RBC and also for the 2013 CUSO rule.”
Dollar insisted that the FOM initiative needs to be far reaching and progressive—or else the current federal-to-state charter conversion activity will only increase, leaving NCUA as “primarily an insurer,” with an ever-diminishing number of federal charters to regulate.
“The loss of a viable dual-chartering system would not be good for credit unions—state or federal,” concluded Dollar. “Credit unions need growth opportunities in order to build earnings and their required capital, both PCA net worth and capital under the new RBC regime. If credit unions can't find a path to necessary growth for their long-term viability under one charter, they will look at another.”