Private or Federal Insurance for SCCUs Comes Down to Choice vs. Member Confidence

HARRISBURG, Pa. – The debate over whether state-chartered credit unions should, as Maryland’s Commissioner of Financial Regulation advocated during CUNA’s GAC, be allowed a private insurance alternative, or whether, as the NAFCU Board has opined, all credit unions should be required to be federally insured, shows no signs of abating. If anything, discussions show there’s not just disagreement on the issue between federal and state-chartered credit unions, but among SCCUs. There are currently 18 states and territories that have statutory provisions permitting the state regulator to authorize alternative insurers – Alabama, California, Colorado, Idaho, Illinois, Indiana, Kentucky, Maryland, Massachusetts, Montana, Nevada, New Hampshire, New Jersey, New Mexico, Ohio, Oregon, Pennsylvania, and Puerto Rico. Of these 18 states, 12 have provisions in their state credit union code allowing private insurance as an authorized alternative. Those that do not are Kentucky, Massachusetts, Montana, New Jersey, New Mexico, and Pennsylvania. In addition, one state – Idaho – has no insurance requirements. Mike Wishnow, press secretary for the Pennsylvania Department of Banking said there has never been a privately insured credit union in Pennsylvania, nor “to my knowledge has the Department of Banking ever been asked by a state-chartered credit union to allow it to be authorized to be privately insured.” Hypothetically though, he explained, if the DOB were to receive such a request, “it would have to weigh it on its merits. But based on Rhode Island’s experience with private insurance and what transpired with credit unions there, there would have to be a compelling argument for the Department of Banking to allow it.” Pennsylvania actually had its own experience with private insurance up until the late 1990s. Although it didn’t involve credit unions, it made the Department of Banking wary of allowing the insurance alternative. In 1979, the state allowed the Pennsylvania Savings Association Insurance Corp. (PASAIC) to privately insure small thrifts operating in Pennsylvania that didn’t qualify for federal insurance because they either did business as part-time operations or they didn’t have an office at street level. At one time, Wishnow said about 100 thrifts were insured by PASAIC. In addition to PASAIC, the Pennsylvania Deposit Insurance Corp. (PDIC) insured three private banks. When two of these banks failed, they were taken over by Pennsylvania. “While there might not have been a legal obligation by Pennsylvania to do this, the reality was account holders at the banks looked to Pennsylvania to do something,” said Wishnow. The Commonwealth of Pennsylvania in fact wound up taking over the banks and then selling them, which required infusing the banks with capital. “It turned out to be a costly solution for the Commonwealth,” said Wishnow. In 1992, when then-Gov. Tom Ridge took office, there were about 40 savings and loans in Pennsylvania that Wishnow said were well-capitalized and making money. Still, then-Secretary of Banking Richard Rishel saw the private insurance situation “as an accident waiting to happen,” and he convinced legislators and Gov. Ridge that PASAIC should be phased out. The affected S&Ls had three options – obtain FDIC insurance, merge with a S&L that already was federally insured, or liquidate. Wishnow said it took three years – 1996-1999 – for the situation to be resolved. Considering Pennsylvania’s experience with private insurance, then why is there still a statutory provision allowing the state regulator to authorize alternative private insurers? Wishnow said the provision was written in to the original code. Even though the code has gone through various updates over the years, it still was never changed. “It’s never been a priority,” he said. Wishnow said he was aware of the ensuing debate concerning the merits of allowing state-chartered credit unions to be privately insured versus requiring all credit unions, as NAFCU has opined, to be federally insured. “We’ve been fortunate not to be engaged in that debate in Pennsylvania because private insurance is not an issue for financials here,” he said. Rick Wargo, SVP and general counsel for the Pennsylvania Credit Union League agrees private insurance has not been a priority for Pennsylvania’s 82 state-chartered credit unions or for the League to pursue. “We’re well aware that some state-chartered credit unions like the idea of having a private insurance option and the Department of Banking has the discretion to decide whether to allow state-chartered credit unions to be privately insured. But the entire private share insurance debate hasn’t gotten much track in Pennsylvania, and state-chartered credit unions have never expressed an appetite for it,” said Wargo. All 82 SCCUs are federally insured by the NCUSIF, and Wargo said he’s never heard any of the SCCUs complain they couldn’t deal with the regulations for federally-insured CUs. James Blake, president/CEO of Brockton CU in Massachusetts – the state’s largest state-chartered credit union – also has never been interested in being privately insured, and he said CEOs of other Massachusetts state-chartered credit unions he’s spoken with also are satisfied being federally insured. Blake said the issue is very simple: “It’s a question of risk and consumer confidence in credit unions.” Brockton’s facility sits on the border of Massachusetts and Rhode Island. “From a parochial standpoint, the situation in Rhode Island made the weakness in private insurance very evident,” he said. Blake reiterated that it comes down to consumer confidence in credit unions. “All insurers have a series of challenges and stress points they have to deal with. When you get in to long periods of economic downturns when a large number of financials hypothetically could have difficulties, there `s a greater stress on a private insurer. During those times, I don’t think a credit union wants to have members questioning whether their credit union has the full-faith backing of the U.S. government. “I’ve always been a supporter of credit unions having more options and choices, but you have to prepare your credit union for when the world gets ugly,” Blake added. Blake said he was unsure if the real issue being debated is allowing state-chartered CUs to be privately insured, or as some credit union executives have posited, state-chartered credit unions’ dissatisfaction with the overhead transfer rate and NCUA as being the administrator of the NCUSIF. He offered though that, “If people are upset about the overhead transfer rate, then they’re fighting the wrong battle. They shouldn’t hide behind that issue and charge to private insurance as a way to fight the overhead transfer rate.” Over in New Jersey, Andrew Jaeger, president/CEO, Credit Union of New Jersey said he’s never had a problem working with NCUA or with the agency being the administrator of the NCUSIF, but he said many state-chartered do have a problem with this and the overhead transfer rate because “they prefer to work solely with their state regulator and they don’t think what they’re getting for being federally insured is in proportion to what they’re paying.” For Jaeger, a state-chartered credit union having the option to be privately insured comes down to choice. That’s not to say he doesn’t appreciate the merits of having the full-faith backing of the federal government, but “people should be able to make their own decision,” he said. That’s why Jaeger has worked with the Credit Union Affiliates of New Jersey and the state Division of Banking over the past few years for the agency to authorize private insurance as an alternative for state chartered credit unions. Jaeger currently serves as chairman of the New Jersey Credit Union Advisory Council which was created by the state legislature and is made up of five people who are executives or board members of state-chartered credit unions and who are approved by the state legislature. “Having only one federal insurance company insuring all members’ deposits is paternalistic,” Jaeger opined. “Most people running credit unions today are very savvy. They should be able to make their own decision on what’s best for their members.” Jaeger said he approached CUANJ on the private insurance issue a few years ago and they subsequently had discussions with American Share Insurance. CUANJ also arranged meetings with the Division of Banking commissioner, and at one point the state insurance department looked in to ASI, “but then we had a change in commissioners, and the issue died.” Jaeger said he’s put private insurance on the agenda every time the advisory council has its quarterly meetings, but he’s realistic about the chances of anything being done on it. “The read I get is we have too many other priorities now,” he said, acknowledging that allowing New Jersey’s state-chartered credit unions to be privately insured “is probably a long-term proposition.” -