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Where Federal Charters Rule—and Why

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There are three states that don't offer a state-chartering option and two states where the option exists, but no state charters are currently in business there. The question is: why?

As the NCUA seeks to enhance its field of membership rules to make the federal charter more competitive with some of its more liberal counterparts in a number of states, Credit Union Journal explores why the state charter never took off in a small handful of states.

Delaware, Wyoming and South Dakota lack state charters because there is no enabling legislation under which to charter a state CU. Arkansas and Hawaii, on the other hand, have enabling legislation on the books, but still no state charters.

There are roughly 2,450 state-chartered CUs across the U.S., according to Patrick Keefe, director of communications at the National Association of State Credit Union Supervisors (NASCUS). Though that number has fallen by about 4.2% year-over-year from 2009 to 2014, federal charters have been disappearing at nearly the same rate-4.3%-during that same time period.

Credit Union Journal took a look at these states to see why no CUs are currently in business there and whether there is any appetite to change that.

Reta Kahley, president of the Arkansas Credit Union Association, a division of the Cornerstone CU League, said there were state-chartered credit unions in operation until the late 1990s.

"There is a section in the Arkansas Constitution that references lending and lending rates (a usury provision)," Kahley told Credit Union Journal. "It severely limited state-chartered credit unions and community banks in the interest rates they could charge."

So, as rates increased and large multi-state banks started opening branches in Arkansas, it became increasingly difficult for in-state financial institutions to compete with them because the out-of-state banks were not subject to the usury law, Kahley said.

"The last state-chartered credit union merged with a federal charter many years ago and we haven't had any since," she said. "Now, since that date, an amendment to the Constitution was passed by the citizens of the state of Arkansas to raise that [interest rate] limit, which was 6% to a maximum of 17%."

Most Hawaiian CUs were chartered in the 1930s and 1940s by NCUA's predecessor, so they were federal credit unions from their inception, said Dennis K. Tanimoto, president & chief executive officer of the Hawaii Credit Union League in Honolulu.

"There were a handful of credit unions that were state-chartered or converted from federal to state charter for various reasons," Tanimoto said. "However, in the late 1980s, a couple of industrial loan companies failed in Hawaii, which caused the state to require all depository institutions to be federally insured. As a result, those credit unions were subject to examinations by state as well as federal regulators."

Interestingly, at that time, there were some advantages to being state-chartered in Hawaii.

"One of them was a 'central credit union' charter, which allowed for more flexible powers," Tanimoto noted. "Another was the ability for a credit union's field of membership to include a community as well as occupational common bond."

A major recodification of the Hawaii Code of Financial Institutions in 1993 removed the latter advantage, though a credit union with the more expansive field of membership was grandfathered in. Hawaiian law also contains a "wild card" provision that permits a state-chartered credit union to apply with the state commissioner of financial institutions for any power permissible under the Federal Credit Union Act or NCUA regulations.

Despite those advantages, however, state-chartered credit unions found the state's Division of Financial Institutions to be "slow and not very responsive."

"Even something as simple as a name change would take months to approve," Tanimoto said. "Frustration with the state bureaucracy caused a few credit unions to convert from state to federal charter."

As the number of state-chartered credit unions declined, the Division of Financial Institutions found it increasingly difficult to properly train and certify state examiners.

In 2010 the commissioner of financial institutions urged the last state-chartered CU to convert to a federal charter, the $202 million Hawaii Central FCU in Honolulu.

Wyoming, Delaware and South Dakota
Meanwhile, in Wyoming, Delaware and South Dakota, it's currently impossible start a state-chartered CU because there's no enabling legislation to allow it.

One big reason appears to be these states' small populations and little desire from state government officials — and credit unions, themselves — to change the laws.

Timothy Dore, SVP-government relations of Mountain West Credit Union Association, noted that Wyoming is the least populated state in the nation.

"The state covers a land area of 97,814 square miles, and with only 32 credit unions, the need for a state charter has never been at the forefront, and the cost to the state would be prohibitive," Dore said. "Credit unions in the state feel the federal charter is a good match."

Patrick J. Mahaney, president/CEO of the Delaware Credit Union League declined to comment at length for this article other than to e-mail Credit Union Journal that: "At the current time… there is no movement to create legislation for state chartering."

And the same conditions exist in Wyoming. "To my knowledge there has been nothing in the past decade or more bringing that legislation to enable state-chartered credit unions] up at a lobbying level," said Dore of Mountain West CU Association.

State or Federal?
The Arkansas CU Association's Kahley noted that a dual-chartering system works well and institutions have different reasons why they prefer a state or federal structure.

"Sometimes it depends on which they perceive is better for their field of membership — a federal charter or a state charter," she noted. "Choice is good in the credit union system."

Keefe of NASCUS commented that the whole purpose behind a dual chartering system is to encourage innovation and, in some ways, competition among the charters.

"States can fine-tune their charters to the immediate needs of their local markets," he noted. "Further, since states are working with their local legislatures (which they tend to be closer to, primarily because of proximity), it's a bit less complex to fine-tune state statutes; more complex on the federal side."

State regulators are also more familiar with local market/economic conditions — and can respond accordingly with adjustments to CU regulation, according to Keefe.

"When the states do tweak charters, often with innovative approaches, it puts some pressure on the federal system to consider adjustments," he added.

But Tanimoto cited a number of disadvantages with having a state charter in Hawaii.

State-chartered CUs in the Aloha State are subject to unrelated business income tax, and federal credit unions are not, he said.

In addition, state-chartered institutions must annually file IRS Form 990, while federal CUs are exempt. Finally, state-chartered credit unions must pay fees to the state Division of Financial Institutions as well as NCUA, whereas federal CUs in Hawaii only have to deal with NCUA.

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