Identifying the Appropriate Charter for a Conversion
Credit unions must re-examine their big-picture needs from time to time, and that often leads to the question of whether you’re operating under the appropriate charter. It may have worked in the past, but will it take you where you want to go? Community charter or multiple common bond? State or federal? Given the changes in your business, the economy and regulations, it’s a good idea to look into all of these questions occasionally. We’ll start with a primer on state to federal charter conversions.
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It’s a big investment of time and money to convert. When a state-chartered credit union converts to a federal charter, they are treated the same as any application for a federal charter. The NCUA will perform an on-site examination as appropriate and consult with the state regulator regarding the credit unions financial condition, management expertise and past performance. When a state charter applies to convert, the credit union must:
- File proof that it in compliance with state laws through the application process as well as the NCUA
- Submit the required conversion application, proposed federal credit union organization certificate, and other documents with NCUA
- Comply with the Federal Credit Union Act regarding chartering and reserve requirements
- Be granted insurance through the National Credit Union Share Insurance Fund
Field of membership must be written in accordance with the NCUA’s chartering policy, which is a bit easier with a multiple common bond credit union, because the resulting federal charter may retain its existing field of membership that the credit union was serving at the time of conversion. Future changes would then have to confirm to NCUA chartering policy. A community charter must conform to federal limitations, which are often stricter than many state field of membership requirements. If part of the existing community under a state charter would fall outside what is permissible for a federal charter, the credit union can only continue serving members of record and not the entire state-approved field of membership upon conversion. Regardless of charter type, the credit union can continue serving any members of record. Additionally, the converting credit union may retain its field of membership for any group
or community added pursuant to state emergency provisions, such as an emergency merger.
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As part of the conversion process, the converting credit union must submit:
- Conversion of State Charter to Federal Charter (NCUA 4000);
- Organization Certificate (NCUA 4008). Only Part (3) and the signature/notary section should be completed and, where applicable, signed by the credit union officials.
- Report of Officials and Agreement to Serve (NCUA 4012);
- The Application to Convert From State Credit Union to Federal Credit Union (NCUA 4401);
- The Application and Agreements for Insurance of Accounts (NCUA 9500);
- Certification of Resolution (NCUA 9501);
- Written evidence regarding whether the state regulator is in agreement with the conversion proposal; and
- Business plan, as appropriate, including the most current financial report and delinquent loan schedule.
- If the state charter is applying to become a federal community charter, it must also comply with those additional documentation requirements included in Chapter 2, Section V.A.2
First, the Credit Union Resources and Expansion Director’s office will review the application to determine completion and compliance. The CURE director may further investigate and request additional information to support the request to convert from a state to federal charter.
Next, the NCUA may conduct on onsite review of the books and records of the credit union. Additionally, state chartered, privately insured credit union will be assessed a federal deposit insurance application fee to convert to a federal charter, which are required to have federal deposit insurance.
Once the conversion is determined to be in compliance with Section 125 (page 26) of the Federal Credit Union Act (FCUA), and the applicant credit union meets the criteria for federal insurance, the NCUA will notify the credit union and the state regulator of the decision to convert. The CURE director will specify any special conditions as appropriate that the credit union must meet in order to convert to a federal charter, including changes to the credit union's field of membership to conform with federal chartering policies, which may be set forth in a Letter of Understanding and Agreement, requiring the signature of the officials and the appropriate NCUA regional director or Office of National Examinations and Supervision Director.
When a conversion applicant does not meet the standards of regulatory scrutiny, the credit union will be informed in writing the details as to why it was not approved, options to consider to come into compliance and ultimately receive approval, and procedures to appeal the decision.
If the applicant is denied a federal charter, the credit union may appeal the decision. Prior to that, it has 30 days from the denial to bring the application into compliance through supplemental information and data. The request should contain “new and material evidence” as to any extenuating circumstances explaining why the materials were not included in the initial application. The CURE director then has 30 days from the receipt of the reconsideration request to make the final decision. If the application is denied again, the applicant credit union has 60 days from the last denial to appeal again. The decision may be appealed to the NCUA board in accordance with additional requirements.
Upon preliminary approval, the applicant credit union’s board must take the following steps:
- Comply with all state requirements
- Obtain an official statement from the state regulator certifying that the credit union has met all of the state requirements and will cease to be a state credit union upon receiving a federal charter
- Obtain a letter from the private share insurer (includes excess share insurance users), if applicable, certifying that the credit union has met all withdrawal requirements and submit it to the CURE director
- Submit a statement of the action taken to comply with any conditions imposed by CURE in the preliminary approval of the conversion proposal and, if applicable, submit the signed LUA.
Once the CURE director has received this information, the federal charter and new Certificate of Insurance will be issued. Then the conversion may be completed. The date of the conversional approval from CURE and the approval of the NCUSIF insurance application, as necessary, is the date the credit union becomes a federally chartered credit union and will be relayed to the credit union and the state regulator. The board will transact any final business as necessary to complete the conversion, and the credit union will operate in accordance with the FCUA and NCUA’s rules and regulations, including accounting systems, records and forms. The credit union has 180 days from the conversion date to change its name on all signage and promotional materials to reflect its new federal charter, however, member share drafts serve as legal tender until depleted by the member. CURE may choose to extend that timeframe for an additional 180 days.
Then, within 10 days, just submit the NCUA 4501, the report of officials, and financial and statistical reports as your credit union begins work as a federal charter. Congratulations!