The Benefits of a Federal Charter
In most states, credit unions have a choice of operating with a state or federal charter. There are a number of considerations in determining which charter is more advantageous. This is a list of some of the more important benefits provided by a federal credit union charter.
Federal Share Insurance
All federal credit unions (FCUs) have federal insurance coverage on their member share accounts, backed by the full faith and credit of the U.S. government. Most state credit unions (SCUs) have this coverage as well, but as of 2017 there were 9 states that authorized private share insurance, which is not backed by the government. SCUs and their members should be aware of the nature and scope of their insurance protection.
One vs. Two Regulators
Federal credit unions have only one primary regulator and insurer, the National Credit Union Administration (NCUA). SCUs with federal share insurance are subject to regulation and examination by both their state regulator and the NCUA.
Credit Union Taxation
The FCU Act exempts FCUs from all federal and state taxation, with the exception of certain property taxes. Federal law exempts SCUs from federal income tax, but not from any state taxes. The extent to which SCUS are subject to taxes under state law will vary from state to state and must be considered in each state where an SCU operates. SCUs have also faced issues with over the years with respect to federal taxation of “unrelated business income,” although up to now those issues have largely been resolved in favor of SCUs.
Federal law and NCUA do not regulate branching by FCUs. FCUs are free to operate branches and ATMs wherever they choose in order to best serve their members. SCUs must consider start law, which varies from state to state.
Federal credit unions are subject to a loan interest rate ceiling, which is 18% for most loans. Certain “payday alternative” loans are permitted for FCUs at higher rates under NCUA rules. SCU loan rate limits vary from state to state and may offer more or less flexibility to SCUs. SCUs operating across state lines must consider the laws of each state.
NCUAs rules preempt FCUs from state law and regulation in many important respects. For example, FCU loans are not subject to state laws affecting interest rates, finance charges, late charges, terms of repayment, and a number of other terms and conditions, and NCUA rules preempt FCU share accounts from state law affecting rates, fees and other charges. For these and other issues, SCUs must look to state laws in each state in which they operate.
Field of Membership
Federal rules on field of membership have become increasingly flexible for FCUs, providing for large community charters and for multiple groups charters with unlimited expansion opportunities. It is also possible to combine the two FCU charter types by adding large underserved communities to multiple group FCUs. State law varies from state and can be either more or less flexible than the federal rules.
If you are interested in exploring converting, here is a link to download our free state to federal charter conversion checklist.