Virginia SCCU converts to federal charter, cites complex state regs

FAIRFAX, Va. – Federal credit unions converting to state charters because of complex federal regulations have become commonplace in the CU industry. Not so common though is a state-charter CU converting to a federal charter because of the restrictiveness and complexity of state regulations, but that’s exactly what’s happened in Virginia. Members of Fairfax County Employees Credit Union, the sixth largest state-chartered credit union in Virginia unanimously voted at a special meeting last month to convert to a federal credit union. It is the first state-to-federal charter conversion that has occurred in the state in almost 10 years. According to Thomas, 40 of the credit union’s more than 17,000 members showed up at the special membership meeting to change the credit union’s articles of incorporation. Under Virginia law, only 10 members are required to be present to be considered a quorum, and the members present must vote by a two-thirds margin to change the incorporation articles. Once FCECU receives its federal charter identification number, the credit union will be known as Fairfax County Federal Credit Union. FCECU President Joe Thomas is in the process of working with NCUA to finalize the credit union’s application to convert. He said both NCUA Acting Chairman Dennis Dollar and NCUA Region II Director Tawana James have expressed their support for the CU’s conversion to a federal charter. After doing business since its inception more than 40 years as a state-chartered credit union, the decision to convert to a federal charter was not something the Fairfax County Employees CU Board made lightly. In fact, the board mulled changing to a federal charter for several years before making the move to actually convert. What it all boiled down to, said Thomas, was that as a federally insured SCCU, FCECU was frustrated with state regulations which Thomas said impeded FCECU’s growth and ability to expand its members and which he said were different enough from federal regulations that the credit union often felt it was following two sets of rules. By example, Thomas cited federal regulations concerning reserve transfers from undivided earnings to regular reserves. Under federal regulations concerning Prompt Corrective Action (PCA), if a federal credit union is well-capitalized-as FCECU is-it is not required to make a special reserve transfer. Virginia state regulations, however, mirror NCUA’s pre-PCA regulations and require state-chartered credit unions to make an additional 10% payment to the credit union’s reserve account. “The state’s regulation forces well-capitalized credit unions to put money in reserves that could be better spent on services for members or paying dividends to members,” said Thomas. Last year, he said FCECU had to transfer about $200,000 in undivided earnings to reserves, even though the credit union was 14% capitalized. “The move to a federal charter will allow the credit union to operate under one set of rules and regulations,” said Thomas. To a lesser degree but still a contributing factor to FCECU’s charter conversion was the Virginia Bureau of Financial Institutions requirement for state-chartered credit unions to annually pay an assessment to be registered as a financial institution with the state, a fee comparable to NCUA’s operating fee. The fee is on a sliding scale and is based on a credit union’s assets. The assessment ranges approximately from $900 for CUs with up to $1 million in assets, to $125,000 for CUs with $700 million in assets. “Up to a certain point, it’s cheaper to be a federal credit union, then it reverts back to being better to state-chartered,” said George Latham, deputy commissioner of financial institutions for the credit union division of the state’s Bureau of Financial Institutions. More specifically, Latham said for credit unions with less than $35 million in assets, it’s more beneficial for the CU to be federally chartered; from $35 -$815 million, it’s cheaper to be an SCCU; for CUs with more than $815 million in assets it’s better to be a federal credit union. Taking into consideration the dividend federally insured credit union receive from the NCUSIF-last year it was a 3% dividend of $99.5 billion-Thomas said in FCECU’s case the assessment the credit union paid to the BFI was about $800 more than the overhead transfer fee it would have had to pay NCUA as a federal credit union. But the final straw that pushed FCECU’s Board to move for a charter conversion had nothing to do with expenses or fees. It concerned the credit union’s ability to add contractors of the county government to its field-of-membership and the bureaucratic red tape Thomas said the credit union was forced to deal with at the state Bureau of Financial Institutions. Chartered in 1958, Fairfax County Employees CU’s field-of-membership primarily is made up of employees or a “family members” of an employee of Fairfax County Government. Employees or “family members” of nine government-related groups and two county contractors are also eligible to join, as are former employees and “family members” who have retired from Fairfax County Government. According to Virginia credit union regulations, if a credit union- “credit union #1″-wants to take a group into its field-of-membership that is already included in another CU’s-”credit union #2″-FOM, then credit union #1 has to receive a “permission” letter from credit union #2 that allows the other credit union to include the group in its FOM. In addition, Virginia law requires the BFI to do an analysis of the involved credit unions to assess what effects the overlap could have on the safety and soundness of either credit union. Latham admitted that, “The statutory wording is obtuse. Basically, the potential benefits have to exceed the potential detriments.” Thomas described the regulation as, “The BFI’s loose attempt at overlap protection.” Last year, FCECU wanted to take into its FOM a special bus service the county runs and has had a contract with for about 11 years. A few months ago, the bus company was sold to a company headquartered in Florida. That company was already included in a Florida CU’s FOM. Thomas found himself in the position of asking a Florida credit union for permission to serve one of its select employee groups that was based in Virginia and had served Fairfax County for many years. As for the bus drivers, Thomas said they were put in an awkward position and were caught in the middle. At the same time, the FCECU Board felt it was letting the bus drivers who had served Fairfax County for many years, down. It became a Catch-22 situation. Latham agreed that, “The bureaucratic red tape that state-chartered credit unions in Virginia have to go through to add a group to their field-of-membership is ridiculous.” He alleged that the problem was caused by a “miscommunication,” and that “I wouldn’t have made a credit union go through that. It’s a shame Fairfax County Employees Credit Union had to deal with that.” Latham and BFI Commissioner E.J. Face Jr. met with Thomas and the credit union’s board when they learned of the CU’s conversion plan and discussed the situation, but it was to no avail. “As county government evolves, the county is contracting out a lot of work. To grow and be able to offer the types of services our members want, we have to be able to take in other groups easily,” said Thomas. He noted that with a federal charter, the credit union will be able to apply for a SEG addition online. “We hate to lose them,” said Latham. FCECU is one of nine SCCUs in Virginia with assets over $50 million. “But there are no hard feelings. I’m more interested in asking what can we as regulators do to avoid this in the future with another credit union.” Latham said he wouldn’t object if the Virginia Credit Union League went to the state legislature and asked them to streamline the SEG addition process. “We are interested in trying to do things as reasonable as we can without violating the state’s credit union statute,” he said. -