Loss of Fed charters finally getting attention

The dramatic increase in the number of federally chartered credit unions that have chosen to switch to state charters has finally been moved up on the list of national CU priorities. Both CUNA and NAFCU have concluded that charter switching is a situation that needs to be addressed. Both groups are hard at work attempting to discover the reasons behind the accelerated charter switching. Both are also seeking to develop solutions less the much-prized dual chartering system becomes seriously weakened. In the last three years, the number of FCUs making the switch from federal to state charters totaled 146. In 1999, 32 feds converted to state charters. So far in 2000, the trend is continuing with three large California FCUs already dumping their federal charters in favor of a state charters. More large CU conversions will be announced soon. Just these three latest converts represent about $1.5 billion in lost federal assets. No wonder the most recent federal/state credit union statistics are so misleading. An immediate reaction to what's going on would be to lay the entire blame at the feet of NCUA. There are many who attribute the rash of conversions to NCUA's current leadership, especially its various policy interpretations and its setting of priorities. Many federal credit unions have made no secret of the fact that they are fed up with dealing with a regulator that has been described at various times by various people as dysfunctional, misguided, arbitrary, and out of touch. The inconsistencies from NCUA region to region, which are bound to worsen with the fallout from the current personnel scandal, is certainly a factor in blaming NCUA. Then there's the controversy surrounding NCUA and its reading of what Congress really intended when it passed H.R. 1151. Included in such discussions are the approval process for select employee groups and community charters. More recently there's the heated debate over the impact of prompt corrective action (PCA) and the definition of complex credit unions. Then there's NCUA's take on field of membership issues, low income designations, overlap protection, and exclusionary clauses. According to some recent converts, these are just some of the issues that they considered before deciding to convert. Looking at the increase in charter conversions from a completely different perspective, however, there are many in the fray who perceive the entire situation as not a problem, but an opportunity. The ultimate winners in a charter conversion, they say, are the members. Because credit unions have more choices than other financial institutions, the members stand to benefit. For example, if a federal credit union is located in a state with a law much more favorable than the federal law, converting seems like a logical choice, especially if the state law allows for better member service. While NCUA has been in turmoil, many state regulators have been busy improving their CU regulations, especially in regard to whom credit unions may serve. Taking it a step further, in a growing number of states, state charters don't even need federal insurance. By selecting private primary insurance as well as excess insurance they can completely disassociate themselves from federal oversight. (Need another CU difference regarding banks? Banks have no such opportunities.) Something else to think about: members don't really care if their credit union is federal or state chartered. They barely acknowledge any slight or major name change resulting from a charter conversion. What they do notice is good rates, good service, convenience, new products and services, etc. If a conversion is no big deal to members, but can result in a better credit union, why not convert? After all, it's no big deal to switch back again if the scales ever turn in favor of a federal charter, like after a change of NCUA leadership. There are other considerations. For example, if the drain continues, it could result in a smaller, less influential NCUA. That in turn could lead to serious consideration of folding NCUA into another regulator such as the FDIC. And there would be budget considerations, too. Fewer federal or federally insured credit unions paying for the operation of NCUA. NAFCU also has a couple of concerns. Fewer FCUs would mean fewer members and potential members for a national credit union trade group that has a much narrower niche than CUNA. NAFCU serves only FCUs while CUNA and its leagues are structured to serve any and all credit unions. An increase in charter conversions has already had a negative impact on NAFCU's once rising membership base. Some observers are asking if NAFCU will once again consider changing its membership criteria to include all federally insured CUs. Or even if current NAFCU leadership will consider abandoning the federal charter once they complete their service to that CU trade group. The broader question NAFCU raises is that if the federal presence is so weakened that credit unions are grouped by state law, wouldn't that make it easier for banking interests to attack credit unions one state at a time rather than fight a national battle? In upcoming months, watch for much more discussion regarding the charter conversion issue. Watch for a continued increase in the numbers of credit unions converting to state charters. Watch for more accusations from all the players on why the conversion process is escalating. Watch for individual states to do more than simply observe. And watch for a few credit union leaders, like NCUA Board Member Dennis Dollar, try and do something positive. His current Reg-Flex proposal is a prime example. Also keep an eye on the different approaches you'll see being taken by individual credit unions, CUNA, state leagues, NAFCU, NASCUS, and NCUA. In other words, watch for even more vested interests to surface. As the rhetoric heats up, let's hope that all the players keep in mind that credit union members must always come first in every credit union decision including whether or not to convert charters. Comments? Call 1-800-345-9936, Ext. 15, or Fax 561-683-8514, or E-mail mwelch@cutimes.com.