Two Georgia CUs in Process of Defecting from Federal Charter

Marshland Community Federal Credit Union (Brunswick, GA) and Interstate Unlimited Federal Credit Union (Jesup, GA) are seeking to convert to state charters.

Marshland Community FCU primary objective in seeking a state charter is to enhance the credit union’s potential for growth. As a state charter, the credit union will be able to extend membership to more people beyond the current areas served by the credit union. Also the change in charter will position the credit union to offer new products and services, improve convenience and potentially open new branches in the future.

The Georgia Department of Banking and Finance approved the charter conversion on May 28.

The credit union is encouraging members to turn in their ballots on the charter conversion no later than July 16.

Marshland Community FCU has $154 million in assets, as of its most recent call report.

Interstate Unlimited FCU stated that the change in charter would better position the credit union to grow and to serve people that they currently could not.

The credit union stated that the conversion would cost approximately $20,000.

The credit union will hold a virtual special meeting on July 27.

Interstate Unlimited FCU has almost $196 million in assets, as of the end of March 2020.

Read more about Marshland's conversion.

Read more about Interstate Unlimited's conversion.

Federal Credit Unions Should File Form 990s

The Tax Cuts and Jobs Act of 2017 imposed a new 21 percent excise tax on applicable tax-exempt organizations that pay more than $1 million in remuneration to any covered employee for any taxable years beginning after December 31, 2017.

A covered employee is one of the five highest compensated employees for any taxable year beginning after December 31, 2016. Once a person becomes a covered employee, he or she will remain a covered employee for all subsequent tax years regardless of whether the individual continues to be one of the five highest compensated employees by the organization.

Almost all tax-exempt organizations file Form 990s. The Form 990 includes compensation information for senior management at tax-exempt entities.

However, compensation information is not available for federal credit unions; because federal credit unions are not required to file Form 990s.

The Internal Revenue Service (IRS) should require federal credit unions to file Form 990s.

The Form 990 is an important tool for the IRS to monitor and track potential noncompliance with the new excise tax.

It would also allow the public to determine if federal credit unions are providing excess compensation to senior management.

BankBeat Publisher: Time Is Right for A Serious Fight Against CUs

Tom Bengston, the publisher of BankBeat, wrote on December 16 that the time is right for a serious fight against credit unions.

He argues that in states where the credit union charter is more liberal than the federal charter, banker advocacy efforts should seek to rollback these state charters putting them on a par with the federal charter.

Second, Bengston states that "bankers in all states should work to level the taxation playing field for smaller institutions." But instead of taxing all credit unions, Bengston advocates banker efforts should focus on exempting smaller banks from taxation.

Finally, he proposes that the net income of larger credit unions should be subject to taxation. He notes that this would place these large credit unions on equal footing with large banks. Bengston suggests that the line for larger credit unions could be drawn at $500 million or $1 billion in assets.

Read the article.

Iowa Lawmakers Discuss Taxing CUs at State Level

State lawmakers highlighted the challenges of taxing credit unions at the state level at a banker convention.

According to BankBeat, a panel of lawmakers at the recent Iowa Bankers Association Annual Convention pointed out that state chartered credit unions could switch to a federal charter, if taxed at the state level.

The Federal Credit Union Act exempts federal credit unions from all state and local taxes, except property taxes.

Lee Hein, chairman of the House Ways and Means Committee, stated: "Credit unions have options. They can move to a federal charter, so that makes taxing credit unions not such an obvious solution."

Gary Carlson, chairman of the House Commerce Committee, commented: "If they all go to a federal charter, we do not achieve our goal of leveling the competitive playing field."

While I think the threat of switching charters for Iowa credit unions are overblown because the state charter is more liberal than the federal charter, this perceived threat shows that Congress needs to solve this issue.

Read more.

Fewer Outstanding Enforcement Actions at the End of 2018

The number of outstanding enforcement actions for federally insured credit unions decreased from 296 at the end of 2017 to 278 at the end of 2018, according to the 2018 Annual Report of the National Credit Union Administration (NCUA).

Enforcement actions include Preliminary Warning Letters (PWLs), Letters of Understanding and Agreement (LUAs), Cease-and-Desist Orders (CDOs), and Conservatorships.

The following table shows the number of outstanding enforcement actions by type for both state chartered and federal credit unions between 2014 and 2018 (click on image to enlarge).

PenFed Acquires Ad Agency

Pentagon Federal Credit Union (Tyson, VA) last week announced that it had acquired a Washington-area advertising agency, WHITE64.

The advertising agency led the rebranding of Pentagon Federal Credit Union to PenFed, and launched the PenFed “Great Rates Across America” campaign.

Under the terms of the agreement, WHITE64 will retain its name and operate as a virtually autonomous unit rather than an in-house agency. The price tag of the deal was not disclosed.

Under regulations governing a credit union service organization (CUSO), the National Credit Union Administration (NCUA) designated marketing services as a pre-approved power.

The agency will continue to serve its existing customers, including Washington Metro, Koons Automotive Group, and Luray Caverns. WHITE64 will also look at expanding its clientele and will provide marketing services to other credit unions.

But according to regulation, a CUSO must primarily serve credit unions, its membership, or the membership of credit unions contracting with the CUSO. It is unclear how NCUA will enforce this provision, since it has failed to define primarily.

In addition, the agency will be structured as a limited liability company. This means the income from its operations would be taxed at PenFed's tax rate. In other words, the income from the ad agency will not be taxed.

In conclusion, marketing services are unrelated to a federal credit union's tax exempt purpose. Policymakers should require federal credit unions be treated like other tax exempt organizations and pay taxes on income from unrelated business activities.

Read the press release.

Public Hearing for CUs Using Narrative Approach Seeking WDLC with Population Over 2.5 Million

The National Credit Union Administration (NCUA) Board will allow federal credit unions to submit a narrative to establish the existence of a well-defined local community (WDLC), if the proposed community extends beyond a single political jurisdiction. If a federal credit union is using a narrative approach for a proposed community with a population in excess of 2.5 million people, NCUA will hold a public hearing.

The Board believes that it is appropriate to require a public hearing, because it would give an applicant, community groups, business, and competitors with the opportunity to present their views.

Here is what you need to know about the public hearing process.

• Upon receiving such an application, information stating the location, time, procedures and other relevant information about the hearing will be published in the Federal Register at least 30 days prior to the hearing date.
• The hearing will either be held at the NCUA's Headquarters in Alexandria, VA or a location near the applicant's anticipated community.
• The public hearing will last no more than four hours with interested parties being permitted to make presentations of no more than 30 minutes each.
• The applicant along with no more than seven other interested parties may request to make presentations.
• The first six entities contacting the NCUA in writing will be permitted to make presentations.
• A seventh entity may be permitted to make a presentation, but only at the discretion of NCUA staff.

In addition to the presentations, interested parties may submit written statements at least twenty business days prior to the hearing.

NCUA has identified 13 criteria that the credit union applicant should address in its narrative to show that the proposed community meets the requirements of common interaction and interest among residents. The NCUA Board believes the more a proposed area satisfies the 13 criteria, the stronger the applicant's case.

However, applicants are not limited to the 13 criteria. Applicants may introduce other evidence that shows the proposed area is a WDLC.

The final rule becomes effective on September 1, 2018.

Read the Federal Register Notice.

NCUA Should Require Greater Transparency Regarding CEO Pay

The National Credit Union Administration's Voluntary Merger proposal would require a merging FCU to disclose to its members all merger-related financial arrangements in whatever form they may take that are paid to its CEO, the next four highest paid employees after the CEO, the board of directors, and the supervisory committee.

In justifying the proposal, the agency cites the need for transparency and disclosure so that members can make an informed decision about a merger.

Both Chairman McWatters and Board member Metsger invoked transparency numerous times during the May 25th Board meeting, when discussing the proposal.

If transparency and disclosure is so important, then why should the National Credit Union Administration (NCUA) stop at requiring only the disclosure of merger-related financial arrangements?

NCUA should require all federal credit unions to reveal the pay of their CEOs and other highly paid employees.

Credit union members have the right to know.

This would ensure that federal credit unions are treated the same as other tax exempt organizations regarding the disclosure of executive compensation, including state chartered credit unions.

NCUA Proposes Controversial Voluntary Merger Regulation

The National Credit Union Administration (NCUA) is in the process of amending its regulations that govern a voluntary merger of a federal credit union (FCU). The comment period runs through August 7.

The proposed rule would make several significant changes to NCUA's voluntary merger regulations.

In justifying the changes to its voluntary merger regulation, NCUA Board Member Metsger stated that "[t]he net worth of the credit union belongs to the members, and they deserve a full and transparent accounting of how it is going to be used."

However, this proposal is controversial and not without its critics.

The proposal would require the merging FCU to disclose to its members all merger-related financial arrangements in whatever form they may take that are paid to its CEO, the next four highest paid employees after the CEO, the board of directors, and the supervisory committee. NCUA believes that some prospective merger partners may be seeking to influence the merging credit union by offering financial incentives to management and certain highly compensated employees to support the merger. According to NCUA staff, between 75 percent to 80 percent of all voluntary mergers reviewed had significant merger-related compensation. The transcript from the May NCUA Board meeting noted that one credit union merger had a total payout in the low seven figures to about 18 different people with four people getting the bulk of the payout.

The proposal increases the minimum time period before the member vote that the merging FCU must give to its members. The proposed timeframe is no less than 45 days and no greater than 90 days. This should give the members of the merging FCU adequate time to consider the information.

This proposal would add procedures to enable members to communicate with each other on a large scale regarding the merger. Under this proposed rule, the agency borrowed member-to-member communication provisions from its rule regarding conversion to mutual savings banks. This will allow members to share information and have discussions prior to the membership vote. This will also provide dissenting members with an opportunity to make their views known to the general membership, in hope of torpedoing the merger.

This proposal also revises and clarifies the content and format of the member notice that credit unions must send, and it makes conforming amendments to other provisions in various parts of our regulations to accommodate for these changes.

If adopted, the proposal could make voluntary mergers of FCUs less attractive.

In addition, the NCUA Board is seeking input on whether the proposed voluntary merger rule should be extended to all federally-insured credit unions, just not FCUs. The agency worries that its proposed rule, when finalized, could shift merger targets from FCUs to state chartered credit unions.

FCUs Taking Advantage of New Rural District FOM

Federal credit unions are taking advantage of the new, higher population threshold for a rural district.

The National Credit Union Administration (NCUA) raised the population threshold for a rural district from 250,000 to 1 million. But NCUA eliminated the alternate population limit of 3 percent of the population of the state in which the majority of the rural district members reside.

In May, NCUA approved three rural districts with populations in excess of the old threshold of 250,000. The credit unions are Black Hills FCU (Rapid City, SD), Rocket FCU (McGregor, TX), and Marshland Community FCU (Brunswick, GA).

Under the old rule, the two credit unions in Georgia and Texas could have had rural districts with populations in excess of 250,000; but not exceeding 3 percent of the state's population. However, Black Hills would have been capped at a population limit of 250,000.

In comparison, only 8 federal credit unions between 2013 and 2016 were approved to serve rural districts with populations in excess of 250,000. According to NCUA, the eight credit unions were Red River Employees (Texarkana, TX), MobilOil (Beaumont, TX), Neches (Port Neches, TX), 1st Community (San Angelo, TX), Complex Community (Odessa, TX), Sidney (Sidney, NY), Sun Community (El Centro, CA), and Interstate Unlimited (Jesup, GA).

The final rule went into effect on February 6, 2017.

Leasing of Excess Space by FCUs Should Be Subject to UBIT

Federal credit unions (FCUs) are leasing their excess space; but the income from such leasing arrangements is not subject to unrelated business income taxes (UBIT).

Recent examples of FCUs announcing plans to lease excess space include:

• Apple Federal Credit Union with $2.1 billion in assets is building a six-story, 150,000 square-foot headquarters building in Fairfax, Virginia. Apple FCU plans to occupy three floors and will lease the remaining office space.
• Pentagon Federal Credit Union has paid $164.1 million for a new 11-story, 307,634 square-foot headquarters building in Tysons, Virginia. The credit union plans to initially occupy about half of the office building. Pentagon FCU will lease about 150,000 square feet to LMI.

This trend should continue as the National Credit Union Administration yesterday finalized a rule eliminating the requirement that FCUs plan for, and eventually achieve, full occupancy of acquired premises. The final rule modifies the definition of “partially occupy” to mean occupation and use, on a full-time basis, of at least 50 percent of a premises by an FCU or by a combination of the FCU and a credit union service organization in which the FCU has a controlling interest.

This would allow an FCU to venture into real estate activities, which are outside the mission and purpose of an FCU's tax exemption.

Therefore, Congress should repeal Section 1768 of the Federal Credit Union Act. This would permit the income from unrelated activities such as the leasing of excess space be subject to UBIT.

Outstanding Enforcement Orders Down by 21 Percent at the End of 2015

The total number of outstanding enforcement actions for federally insured credit unions at the end of 2015 was down by approximately 21 percent from a year earlier.

The following table appeared in the National Credit Union Administration's 2015 Annual Report (click on image to enlarge). It shows the number of outstanding enforcement actions at year end by type of action against federal credit unions (FCU) and federally insured state chartered credit unions (SCCU) between 2010 and 2015. LUA stands for Letters of Understanding and Agreement.

The 2015 Annual Report noted: "The total number of enforcement actions at federal credit unions decreased by 24.5 percent, from 290 outstanding at the end of 2014 to 219 at the end of 2015. Total enforcement actions against federally insured, state-chartered credit unions decreased 14.6 percent, from 164 as of the end of 2014 to 140 at the end of 2015."

Total outstanding enforcement actions peaked in 2011 at 631 and has steadily declined, as the economy improved and federally insured credit unions worked to address problems.

Large Georgia CU to Defect from Federal Charter

Warner Robins-based Robins Federal Credit Union will change to a state charter on New Year's Day, becoming Robins Financial Credit Union.

The credit union cited that the state charter would give it greater flexibility to expand.

Robins has almost $2.1 billion in assets.

Read the story.

Does Director Pay and Taxes Impact Rates and Fees?

At one time, NCUA required that any converting credit union include the following information in any disclosure to its members.

EXPENSES AND THEIR EFFECT ON RATES AND SERVICES. Most credit union directors and committee members serve on a volunteer basis. Directors of a mutual savings bank are compensated. Credit unions are exempt from federal tax and most state taxes. Mutual savings banks pay taxes, including federal income tax. If [insert name of credit union] converts to a mutual savings bank, these ADDITIONAL EXPENSES MAY CONTRIBUTE TO LOWER SAVINGS RATES, HIGHER LOAN RATES, OR ADDITIONAL FEES FOR SERVICES.

While it is true that federal credit union directors and committee members serve on a volunteer basis, it is not true for all state-chartered credit unions. Some states, including Pennsylvania, Rhode Island, Indiana, and Texas, currently allow their state-chartered credit unions the option to pay their board members.

In addition, some states tax their state-chartered credit unions. For example, Indiana and Oklahoma tax their state-chartered credit unions. In addition, state-chartered credit unions are subject to the unrelated business income tax.

If it is true that these additional expenses impact interest rates and fees, then there should be differences in the interest rates and fees between federal credit unions and state-chartered credit unions in states that allow for directors to be paid or where state chartered credit unions pay taxes.

NCUA's Chief Economist John Worth should conduct a statistical analysis comparing savings rates, loan rates, and fees between federal credit unions and state-chartered credit unions and publish the results.

Reimbursing Directors for Lost Wages Is Pay

The Credit Union National Association (CUNA) is requesting that Congress permit federal credit unions to reimburse credit union board volunteers for wages they otherwise forfeit by participating in credit union affairs.

CUNA stated that permitting "credit unions to reimburse directors for lost wages resulting from carrying out their board duties would help encourage interest and involvement in credit union boards of directors. Whether or not a volunteer attends a meeting or training session is sometimes determined by whether or not the director will have to miss work and not be paid."

Reimbursing board members for lost wages is the same as paying board members. Once paid, they would no longer be volunteers.

According to my American Heritage College Dictionary, "to volunteer" means to do helpful work without pay.

Not a Credible Threat

Vermont State Employees Credit Union (VSECU) is considering whether to switch from a state to federal charter, if the state regulator denies its appeal of a cease and desist order over the use of the term "bank" in its advertisements.

But I think VSECU is bluffing.

VSECU, as best as I can tell, has a hybrid charter. Its field of membership includes individuals who live and work in the state of Vermont, but also includes other select groups.

However, the Federal Credit Union Act does not permit such hybrid charters. A federal credit unions must have one of the following common bonds -- single common bond, multiple common bond, or community common bond.

In addition, the Federal Credit Union Act requires a community charter to be local and well-defined. NCUA's chartering manual explicitly states that although state boundaries are well-defined, a state does not meet the local requirement.

In other words, VSECU could not keep the state of Vermont as a community charter, if it switched charters.

Therefore, switching to a federal charter would require VSECU to make substantive changes to its field of membership.

It is doubtful that the benefits associated with using the term "bank" in its advertisement would outweigh the cost associated with changing to a federal charter.

VSECU is hoping that the state regulator will believe its threat; but I believe the state regulator should call VSECU's bluff, as it is not credible.

RegFlex Net Worth Requirements

The National Credit Union Administration (NCUA) in 2002 exempted federal credit unions (FCUs) that have demonstrated sustained superior performance as measured by CAMEL ratings and net worth classifications from certain regulatory restrictions through its Regulatory Flexibility (RegFlex) Program. The agency is now looking to rescind certain RegFlex authorities, because these activities pose a safety and soundness concern. NCUA should also revisit its net worth standard for participation in the program.

In November 2002, the criteria to achieve RegFlex designation were a CAMEL ratings of 1 or 2 for two preceding examinations and net worth ratio of 9 percent or more (200 basis points above the minimum regulatory standard for being “well-capitalized”).

In 2006, the NCUA Board relaxed the net worth portion of the RegFlex qualifications from a minimum 9 percent net worth ratio for one quarter to exceeding a minimum 7 percent ratio for six consecutive quarters. A seven percent net worth ratio is the minimum requirement for being well-capitalized.

This watering down of the net worth standard allowed more credit unions to qualify for RegFlex authority by by-passing certain safety and soundness restrictions. NCUA estimated that at the end of 2004 the change in the net worth standard would increase the number of FCUs qualifying for RegFlex authority from 3,457 to 3,919.

Given the agency's concerns about the risk posed by certain RegFlex powers, it would be appropriate for NCUA to look at raising the net worth standard above the minimum requirement for being well-capitalized and to require an FCU to meet a net worth duration requirement for RegFlex eligibility. This would demonstrate superior capital (net worth) management on the part of the FCU.

It is obvious from the issuance of the the proposed rule by NCUA that some FCUs, through their expanded authorities, have assumed excessive risk relative to their net worth positions.

By imposing a net worth cushion for RegFlex eligibility above the bare minimum for being well-capitalized should significantly reduce the risk to credit unions and the NCUSIF.

Mortgage Recording Tax

Arguments are scheduled to be heard today in the New York Supreme Court over whether federal credit unions operating in New York are exempt from the state's mortgage recording tax.

New York assesses two mortgage recording taxes -- a regular mortgage recording tax that is paid by the borrower and a "special additional mortgage recording tax" that is paid by the lending institution

According to the New York Times, Hudson Valley Federal Credit Union, in Poughkeepsie, N.Y., is suing the state of New York. The credit union contends that New York State forced the credit union to collect the recording tax, despite its tax-exempt status. Hudson Valley Federal Credit Union is seeking a refund of all of the special additional mortgage recording taxes paid prior to the Tax Department's ruling that the credit union is exempt from the tax.

The complaint states that Hudson Valley FCU and other federal credit unions, as instrumentalities of the United States government, are afforded immunity from taxation under the Supremacy Clause of the United States Constitution in that a state cannot tax an instrumentality of the United States government without the express authorization of Congress. The U.S. Justice Department filed a brief supporting the federal credit union.

However, the New York Times wrote that:

The state maintains that it has not violated the tenets of the Federal Credit Union Act of 1934, which stipulates that credit unions “shall be exempt from all taxation,” except on real and tangible personal property. The tax, the state says, is not on the credit union or on mortgages but for the privilege of recording a mortgage.

A decision is expected in about 6 weeks.

If the credit union wins the case, the state of New York could lose millions of dollars of revenue.