Credit Union State Charter Benefits Not Enough in NJ
New Jersey state chartered credit unions enjoy looser regulation on field of membership and interest rates, but remain a minority due to taxes such as UBIT
Garden State CUs Stick to Regulatory Approach
Not ones for following the crowd, New Jersey’s nine state-chartered credit unions seem to be staying put with their choice of regulatory oversight – even as one or two of those state charters are in danger of being liquidated or merged. The state is home to a total of 161 credit unions.
New Jersey’s field of membership rules are a bit looser than federal regulations, but most credit unions there are content to hold tightly onto a select employee group, New Jersey Credit Union League SVP of Compliance Nicola Foggie explained. The state’s regulator also permits parity regarding field of membership with the federal charter, allows investment in corporate and municipal bonds, and requires fewer members and less capital to launch a new credit union.
Despite the state charter’s advantages on paper, credit unions are steering clear. Plus, as previously mentioned at least 25% of the state-chartered credit unions in New Jersey are on their way to extinction. As happens all across the country, some hold on for years as their membership or sponsor is dying, not knowing what to do. (Read our previous blog, A Strategic Approach to Field of Membership Can Save Credit Unions.)
Bob Fouratt, CPA, managing partner at the Curchin Group in Red Bank, N.J., further explained the state FOM benefits: “When credit unions are looking at going to a community charter, the feds will have the credit union freeze its current SEGs, whereas the state regulator is fine with that.” Still, he said his state-chartered credit union clients have not discussed converting to a federal charter with him.
As part of its member-ROI strategy, NJCUL even licensed CUCollaborate’s ExpandCU to offer as a free member benefit. ExpandCU is a software that helps credit unions identify opportunities and gather the necessary data to complete a field of membership amendment application. “CUCollaborate’s invaluable FOM analysis tools are the kind any credit union with a growth mentality ought to be using, NJCUL President/CEO David Frankil said. “It helps in a way nothing I’ve ever seen does.” Additional league member benefits include various compliance offerings; strategic growth and revenue opportunities, such as a green loans program that covers loans for energy efficiencies except for solar; member business lending collaboration and more.
The biggest advantage to a New Jersey state charter is the credit union can charge a higher interest rate on loan products, Foggie added. However, New Jersey state charters do not enjoy certain exemptions that federal charters do. The big one is the income tax exemption. They must pay sales tax and excise taxes, but the huge hit can come from UBIT – Unrelated Business Income Tax, Fouratt said. In 2014, a legal case spearheaded by CUNA Mutual Group, CUNA and others sent the IRS packing on many instances of UBIT; only state charters are subject to UBIT.
According Fouratt, who heads up Curchin’s credit union group, the first $1,000 in UBIT-covered income is exempt. Beyond that, a credit union can be hit with a 21% tax, including automobile warranties, accidental death & dismemberment insurance, life insurance, health insurance and nonmember ATM fees. Formerly accounting for UBIT was all activities in aggregate, Fouratt explained, but following the Tax Cuts and Jobs Act of 2017 you can no longer hedge a revenue-generating product with a losing product. The change could cost credit unions even more, but his two state-chartered clients keep income covered by UBIT below the $1,000 threshold.
Positives and negatives abound on both sides of the charter lines, but it seems New Jersey is firmly staked out in the federal camp. Either way, business partners like NJCUL, Curchin Group and CUCollaborate are looking out for your credit union’s interests. Learn more about CUCollaborate today.
Federal & State Charters