Dual Chartering System on the Line

We in the state system – state regulators, credit unions, leagues and national professional and trade associations – are keenly aware of the many challenges facing the system. And although the state system is alive and well and has been so for a number of years, today the dual chartering system is under stress, mainly under the guise of federal preemption. In several forums, I have expressed grave concern for federal preemption of state law and regulation of financial institutions and the detrimental effect such preemption presents to the dual chartering system. “We are concerned about the `contagion impact’ on the dual chartering system if the powers of the state banking regulators are significantly curtailed by actions of the Office of the Comptroller of the Currency (OCC),” I told the U.S. House and the U.S. Senate earlier this year. At issue are the OCC’s regulations and the “contagion impact” of the NCUA following suit by issuing preemptory legal opinions which override various state laws and regulations. While many states are moving forward by modernizing their state credit union statutes and regulations – which is a good thing for the dual chartering system – the actions of the federal regulators, including the NCUA, are eroding the state’s progress – which is a bad thing. States are the “laboratories of innovation” – this is not a myth. Through the dual chartering system, the accomplishments attributed to innovations in the states are noteworthy. State governments have pioneered in empowering credit unions and other depository institutions to provide consumers innovative new financial services. Later, after a period of experimentation in the state sector, these new powers often have been granted to credit unions and other federal financial institutions by statute or regulation. It was through the dual chartering system that the NCUSIF 1% recapitalization came about, having been first created by private share insurers. The dual chartering system brought share drafts, ATMs, real estate mortgage lending, home equity loans, and field of membership diversity to credit unions. The dual chartering system brought progressive member business lending rules that were ultimately approved for all federally insured credit unions. It was on the state level that credit unions first existed in this country. OCC’s preemptive regulations will have a broad impact on the dual chartering system for banks, and the door is being opened to similar actions by the federal credit union regulator. The NCUA’s recent legal opinions on critical matters such as state specific member business lending rules, predatory lending and privacy rules are examples of the door being opened. Determining the extent to which such additional federal banking powers should be granted is an important matter for those who support the dual chartering system for depository institutions. “It is a matter of such importance that the Congress should resolve such conflicts. Congress should intervene and block such precipitous federal actions,” I told the House and Senate earlier this year. Federal preemptions by rule and legal opinion are not the only stresses to the dual chartering system. The persistence of the agency that charters federal credit unions and also administers the NCUSIF for federally insured credit unions to ignore a potential conflict of interest in these dual roles is a disservice to fairness and a threat to the dual chartering system. For years, NASCUS has called attention to the definition of what the NCUA deems insurance related and what is safety and soundness related when it allocates examination expenses and sets the overhead transfer rate. For years, NASCUS has been convinced that the two hats the NCUA wears should be clearly defined; the Agency’s Title I and Title II responsibilities should be separate. We believe the overhead transfer rate is merely a symptom of the underlying problem, which is ultimately a threat to the dual chartering system. NASCUS has published a study, “Restructuring the NCUA,” that puts forward a proposal to administratively reorganize the agency by separating its chartering authority from its duties as administrator of the credit union share insurance fund. The study is a starting point intended to generate dialogue and positive action to correct the inequities posed by the current system. While NASCUS strongly supports appropriate separation between NCUA’s regulatory and insurance functions, let me be clear what NASCUS also strongly supports: 1) the NCUA remaining an independent federal regulator; and 2) an independent share insurance fund for credit unions. We believe administrative restructuring is possible, however, and is necessary to maintain the dual chartering system. Another serious threat to credit union dual chartering, and ultimately to all credit unions regardless of charter, is the disparity in tax treatment between state and federal credit unions. This happens in several ways. For example, state credit unions file 990 forms with the IRS, yet federals do not because they have been determined to be “instrumentalities of the federal government.” Another example of taxation disparity comes in the form of unrelated business income tax (UBIT). Consider this: two credit unions which offer identical products and services, in the same community, and with similar memberships. The state charter may pay UBIT, the federal charter does not pay UBIT. First enacted in 1950, UBIT was intended to assure that “not-for-profits” paid federal income taxes on income from activities not “substantially related” to their tax-exempt purpose. Although the situation has existed for years, activity is heating up. Audits of state credit unions have been conducted by the IRS in several states, but there is no consistent definition of what is unrelated to a credit union’s tax-exempt purpose. It’s pretty much a given fact that as the states go, so go the federals. Look at the credit union taxation debates that are happening in the states. If state legislatures determine that credit unions should be taxed, it will only be a matter of time until Congress will change its mind and tax federal credit unions. As NCUA Board member Deborah Matz has stated a number of times, “tax fever is contagious . no matter what state, what charter or what size, I believe every credit union has a stake in the tax debate.” The mission of NASCUS is to enhance state credit union supervision and regulation and advocate policies that ensure a safe and sound credit union system. We achieve those goals by serving as an advocate for the dual chartering system that recognizes the traditional and essential role that state government plays as a part of the national system of depository institutions. Unless the charge of federal preemption is halted and other stresses to the system are alleviated, dual chartering will disappear. If that happens, we all lose.