The Long, Uncertain Path to a De Novo Credit Union Charter
Challenges people have faced chartering new or de novo credit unions with state regulators and the NCUA.
The list of credit unions newly chartered in the past decade, often referred to as “de novo” institutions, is not a particularly long one. Increased regulation in the aftermath of the 2008 financial crisis appears to have made an already difficult, uncertain process only more arduous for newcomers to the industry.
According to the NCUA (National Credit Union Administration), an average of 7.7 new credit unions were chartered each year from 2000–2009. Over the next seven years, following the enactment of the Dodd–Frank Wall Street Reform and Consumer Protection Act, that number fell to just 2.3.
This was just one of the arguments brought up by Keith Stone, President and CEO of The Finest Federal Credit Union in New York City, when he testified before the House Financial Services Subcommittee on Financial Institutions and Consumer Credit on behalf of the NAFCU (National Association of Federally-Insured Credit Unions) in 2017.
In his testimony, titled “Ending the De Novo Drought: Examining the Application Process for De Novo Financial Institutions,” Stone argued this decrease was “largely due to the drastic increase in regulation…that many smaller credit unions simply can’t keep up with.”
“Small and mid-sized credit unions,” he stated, “often cannot afford the staff needed to comply with redundant regulations from multiple agencies outside of NCUA, the principle regulator for credit unions.” Credit unions, Stone claimed, should not be subject to the same intense regulation as banks, when both “lawmakers and regulators readily agree that credit unions did not participate in the reckless activities that led to the financial crisis.”
In his conclusion he called for a simplified chartering process and expressed concern over the future growth of the industry: “The compliance requirements in a post-Dodd-Frank environment have grown to a tipping point where it is nearly impossible for many smaller institutions to survive, much less start from scratch.”
Much of Stone’s opinion on the matter is informed by his own experience at The Finest Federal Credit Union, which was chartered in 2015 to serve law enforcement personnel in the state of New York. Their own chartering process took 18 months, during which, he told CUCollaborate, the most difficult aspect was a lack of clear answers and guidance from the NCUA: “We would have benefited from better communication and outreach.”
Ultimately, The Finest was able to secure the necessary capital in the form of a grant from an insurance company, but Stone knows they are among the lucky ones, noting in his brief that “were it not for a tremendous amount of volunteered legal and organizational help…we could not have made it across the finish line.”
Yet the obstacles facing a new institution don’t simply vanish with a charter, in many ways they multiply. “Our main challenges center around growth, providing necessary member services, and the dynamic issue of increasing income and reducing expenses,” he explained. “And then we need to maintain a well capitalized balance sheet. This is not an easy task for a young, small credit union trying to provide viable services and make a difference in our members lives.”
Start up Challenges for CUs are Common
Other de novo credit unions we reached out to echoed many of these same sentiments, sharing similar stories as to the difficulty both of obtaining an initial charter and then finding ways to survive and grow. Sue Cuevas, President and CEO of Nueva Esperanza Community Credit Union located in Toledo, Ohio and chartered in 2010, told us the process took more than six years.
“Obtaining capital for the credit union was very challenging,” she explained. “Also, since it was a start-up credit union we had to recruit members. We would set up at every festival and every community event to promote Nueva Esperanza, so it literally became a 24/7 project.”
Through grant funding as well as community and private donations, her credit union managed to raise the necessary capital, but, the whole process still took much more time than anticipated. “Since Ohio hadn’t chartered a credit union in over 16 years,” she said, “the process took longer and required more in-depth commitment from Nueva.”
Further, Cuevas noted the unique challenge facing smaller institutions, even once they’re established, with regards to regulatory measures: “Small credit unions also have to comply with regulations and sometimes are expected to perform as large credit unions which can make it difficult to fulfill as the work load can be overwhelming,” she related. Thankfully, another local credit union, Directions Credit Union, has offered their support and guidance, which has proved vital. “Without them,” she said, “it would be very difficult to move forward.”
Jafari No-Interest Credit Union in Houston, Texas had their charter approved by the state credit union department in 2013, then had to wait a further three years to get approval from the NCUA. “The most difficult aspect was the NCUA process,” said Imran Dhanji, the credit union’s President and CEO. “The information about what was required did not indicate much. After we sent in our initial application the NCUA sent us a long list of things that they wanted us to provide.”
Despite claiming that overall most of what the NCUA asked for was helpful in preparing them to launch the credit union, he was critical of the level of communication and slow response times. “Another aspect was the back and forth and how long it took,” he explained. “We would provide information and the NCUA would come back a few weeks later and ask for different information, and sometimes ask for the same information or ask the same questions again.”
To remedy this, he believes “the NCUA should provide more explicit guidance,” as his credit union was often forced to rely instead on local support. “We got a lot of help from Lorri Gaither of the Cornerstone Credit Union League and other credit unions in Houston and elsewhere,” he said. “They were very helpful in educating and guiding us.”
This grassroots approach also helped Jafari raise their capital through donations from the local community, the support from which Dhanji calls “a huge blessing.” Even once they were set up, however, effort was still required to meet and understand regulations as “some of the startup steps required by the Texas Credit Union Department and the NCUA were not clear.” The process was thankfully made simpler again by those willing to donate their time and expertise: “We were fortunate that we had volunteers who were Accounting, Finance, Legal and IT professionals and who helped guide us, and continue to guide us. We are still learning.”
Looking back on the entire saga, Dhanji said he believed “organizations like the Cornerstone League and the NCUA should put together a detailed manual that lists the things that are needed to establish a new credit union. It is not rocket science but it is slow and you have to learn a lot along the way, something that better documentation of the process should be able to address.”
Otherwise, he claims, prospective credit unions will continue to view the path towards a charter as a daunting one, much like his own experience. “When we started we were told that it takes an average of five years to get approval and 80% of the efforts to establish a new credit union are unsuccessful,” he recalled. “That’s very discouraging.”
Blake Jones, a volunteer board member at the Colorado-based Clean Energy Credit Union, likewise called on the NCUA to simplify the chartering process and improve overall communication: “One challenge stemmed from the unpredictable and often long response times from the NCUA after we would submit our next round of responses to their questions and/or the next round of information and documents,” he recounted. “Another challenge was the lack of clarity for what was expected and required in our charter application.”
In order to remedy this, he believes “the NCUA should do more to provide a roadmap, blueprints, and/or reference materials—and even human resources—to help subscriber groups work towards obtaining a charter. More importantly,” he continued, “the NCUA should allocate more staff/personnel/human resources bandwidth towards the charter application process and charter applications so that they can respond more quickly.”
It took Clean Energy three years to receive its federal charter in 2017 and they were able to raise their capital through a combination of donations from individual supporters (most of whom became early members), a crowdfunding campaign, foundations supporting the environment and/or climate action, and a few companies.
In terms of growth and success, Jones points out a de novo credit union is subject to many of the same challenges faced by any startup organization, but in addition, Clean Energy has what he terms a “pretty strict” Letter of Understanding and Agreement with the NCUA. “We don’t know how long the NCUA will keep our LUA in place, and they’re careful not to set any expectations for when this will be lifted,” he explained. “Fortunately, we’ve been operating and performing very well, and we’ve gotten good reviews during our NCUA exams, and this has allowed us to successfully request that a few of the restrictions and constraints in the LUA be amended.”
While it’s more than apparent no two de novo charters are identical, there does appear to be significant overlap and agreement when it comes to the overall process and how it could be improved upon as well as made more user-friendly. In their own way, everyone we spoke to seemed to mirror a basic message at the heart of Keith Stone’s presentation to the House Subcommittee: “In essence, we would encourage NCUA to think outside the box when it comes to new credit union charters and we stand ready to work with them on those efforts.”
Federal & State Charters