Pendulum Swinging Back in Favor of Federal Charters

ARLINGTON, Va.-When NAFCU President and CEO Fred Becker started with the trade association three-and-a-half years ago, people within the credit union community were raising concerns with him about the value of the federal charter. Now, midway through 2003, that is not happening anymore. “It’s becoming extremely more balanced if not swinging back.Let me say first though that it’s very important we have a strong dual chartering system,” Becker emphasized. He pointed out that in 1934, federal credit unions were permitted an occupational or associational common bond or groups within a well-defined local district. By 1993, NCUA created the multiple common bond and, in 1998, streamlined the application for adding multiple common bond groups under 200. With the most recent field of membership updates, that streamlined application process expanded to groups under 3,000. In 2001, the definition of local community was stretched somewhat, but by the time the amended FOM rules were passed earlier this year, federal charters could adopt TIP groups-which stands for trade, industry, profession- the definition of local was broadened to be determined by metropolitan statistical areas, and ATMs now qualify for the reasonable proximity requirement for adding select groups. “We’ve come quite a long way in the past 10 years,” Becker commented, “especially in the last three.” As evidence to the strength of the revamped federal charter, a total of 17 state chartered credit unions converted to federal charter, while 15 did the reverse. However, the assets of those converting to state charter beat out the reverse nearly four to one, according to NAFCU data. While the total assets of the federal credit unions converting to state charters came to $1.9 billion in 2002 alone, the aggregate assets of state charters converting to federals only tallied $1.9 billion from 1998 through 2002. “Asset size has not taken over yet, but it’s coming.it’s not tipped to the federal side but it’s coming,” Becker predicted. The $1.9 billion figure is the lowest total assets for federals converting to states in at least five years. That is down from $9.25 billion in 2000, NAFCU said. Large conversions from tax-attacked state charters, like Utah, are expected to boost the aggregate assets of state-to-federal charter conversions. NAFCU’s CEO commented, “In Utah, there’s a long line to convert to a federal charter.” Using an analogy from former NCUA Board Member Geoff Bacino, Becker said that he sees NCUA calling the balls and strikes but not actually playing the game for credit unions into the foreseeable future. “To the extent that the regulatory agency is and remains progressive in their outlook toward credit unions, that does serve to enhance the federal charter and the attractiveness of the federal charter,” he said. Even though it is reasonably easy to convert between federal and state charters, credit unions must weigh the advantages and disadvantages of each with their overall business plan and policies. For example, while California may have one of the most liberal FOM policies in the country, in the recent credit card disclosure case in California, federal credit unions were exempt as “instrumentalities of the U.S. government,” Becker explained, but the state charters were left up in the air. Eventually, the state decided it would treat its and other state’s charters similar to federal charters, but he pointed out, that the law could have been applied solely to state chartered credit unions doing business in California. Becker added that NAFCU stayed on as plaintiffs in the case, even after it no longer directly affected federally chartered credit unions, because it was important to the strength of the dual chartering system. Another issue that may be pushing credit unions away from the state charter rather than toward the federal charter is the Unrelated Business Income Tax, with credit unions in some states being audited. “I’m disappointed the IRS takes such a narrow view of what a credit union’s functions are,” Becker said. In his view, most, if not all, products credit unions offer are related to the purpose of non-profit charter. He did say the issue is resulting in some state chartered credit unions examining the federal charter. While conversions of state chartered credit unions to federals more than doubled in 2002 (from eight in 2001 to 17 in 2002), the overall conversion activity slowed, which Becker said indicates a healthy balance between the charters. Federal to state conversions dropped from 40 in 1998 to 15 in 2002, according to NAFCU. Total conversions dropped from 44 in 1998 to 32 for 2002. “I’m past the stage where{I am}going to get on stage.and talk about the federal charter not being in competition with the state charter,” he concluded. However, Becker promised that NAFCU’s work on the federal charter is not done. [email protected]