The difference between Utah-state-chartered credit unions ...



The difference between Utah-state-chartered credit unions and federally chartered credit unionsBecause both the United States of America and Utah have their own respective credit union acts, a credit union can choose to be chartered as a state credit union, or as a federal credit union. Why would a credit union choose one charter over the other? There are some differences between the state and federal charters. Some differences are minor, while others can be quite large. It all depends on the need of the credit union, and what the credit union’s priorities are. This document outlines the major differences between Utah state and federal credit unions. It covers (with links to sections in this document):Insurer, exams, and examinersInterest rate capExam feesInvestment powersField of membership rulesLoan limitsBusiness loan limitsHere is a chart summarizing differences, with details outlined in sections below:StateFederalExamsDFI, and sometimes NCUANCUAInterest rate capNo cap18%, 28% on payday loansExam feesMore expensive for small credit unionsMore expensive for large credit unionsInvestment powersCan invest in “reasonable and prudent” investmentsMore stringent guidelinesField of membershipCan have a SEG and community field of membershipOne of the following: single-occupational, single-associational, multiple-occupational, or communityLoan limits to individualsFor CUs under $2 million: $25k limit. For CUs over $2 million, greater of $25,000, 4% of capital and surplus, or 25% of the regular reserve10% of unimpaired capital and surplusBusiness loan limitsAggregate limit of 1.25 times sum of the credit union’s undivided earnings and reserves other than the regular reserves. Single-loan limit of 279,575 in 2012.Aggregate limit of 12.25% of total assets. Single-loan limit of either 15 percent of the credit union's net worth or $100,000, whichever is greater.Insurer, exams, and examinersState chartered credit unionsIn Utah, all credit unions must be insured by the NCUA. This is regardless of the credit union’s charter—state or federal. So, NCUA is every Utah credit union’s “insurer.” However, the “regulator” will depend on the credit union’s charter.The Utah Department of Financial Institutions (DFI) regulates state-chartered credit unions, making it their regulator. As regulator, the state DFI sends examiners in to the credit union roughly once a year, to ensure the credit union is being run in a safe and sound manner.In addition, because the credit union is insured by NCUA, NCUA will periodically come to the credit union to conduct an exam. In 2011, almost all Utah credit unions had the NCUA come to conduct an exam. Some credit unions relate that prior to 2011, an NCUA examiner hadn’t been to their credit union for decades.Federally chartered credit unionsFederally chartered credit unions are both regulated and insured by the NCUA. This means that only one team of examiners comes to the credit union during any given year.Interest rateFederal credit unions are prohibited from charging interest rates of more than 18% on loans. State-chartered credit unions have no such cap.An exception to the federal rule is that for payday loans, credit unions may charge 28% interest, and can also charge a $20 fee for the loan. Such loans must be for a minimum of one month and a maximum of six months, and any member can’t have more than one such loan from any one credit union at the same time.FeesWhether Utah state or federally chartered, credit unions must pay fees to the regulator. Among other things, these fees cover the cost of sending examiners out to the credit union. The state and NCUA calculate the fees differently. In 2012, credit unions under $67,778,700 in assets pay more in examiner to the state. Above that asset size, credit unions pay more to NCUA. Due to the nature of the formulas, this reverses again at enormous sizes (about $60 billion in assets).Here is a table outlining exam fees for different-sized credit unions.Credit Union SizeState FeeNCUA Fee$2 million$1,300$451.12$15 million$6,850$3,383.40$35 million$10,250$7,894.60$50 million$12,800$11,278$100 million$19,800$22,556$300 million$41,800$67,668$600 million$97,112.50$135,336$1 billion$74,612$225,560$2 billion$100,862.50$298,934.07StateThe state fees are set forth in the Utah Financial Institutions Act, here: . The state uses a tiered formula, so that for the same assets credit unions pay the same amount.AssetsOperating Fee AssessmentFor the first $5 million in assets:0.00065*assets in category, or $500, whichever is greaterFor the next $10 million in assets:0.00036*assets in categoryFor the next $35 million in assets:0.00017*assets in categoryFor the next $50 million in assets:0.00014*assets in categoryFor the next $200 million in assets:0.00011*assets in categoryFor the next $300 million in assets:0.00007*assets in categoryFor all assets above $550 million:0.00002625*assets in categoryNCUANCUA changes its operating fee schedule as often as once a year. It has a handy calculator to help you figure out what your operating fees will be: . Here is the regulation that outlines fees: . Fees are calculated based on asset size. Here is the chart for 2012:Asset LevelOperating Fee Assessment$0 to $500,000$0.00 + 0.00000000 X total assets over $0.00$500,000 to $750,000$100.00 + 0.00000000 X total assets over $0.00$750,000 to $1,047,766,655$0.00 + 0.00022556 X total assets over $0.00$1,047,766,655 to $3,170,526,157$236,334.25 + 0.00006574 X total assets over $1,047,766,655.00$3,170,526,157 and over$375,884.46 + 0.00002195 X total assets over $3,170,526,157.00InvestmentsFederal and state laws differ in what they allow credit unions to invest in.State Investment PowersAccording to the state credit union act (), state-chartered credit unions can invest in:Any security, obligation, or other instrument fully guaranteed by the United States of America or any of its agencies. Or in any trust established by investing directly or collectively in these instruments;Obligations of any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, and the territories organized by Congress, or any of their political subdivisions;Certificates of deposit or accounts issued by a federally insured state or national depository institution;Loans to, or in shares or deposits of, other federally insured credit unions, central credit unions, corporate credit unions, or a central liquidity facility established under state or federal law;CUSOs and other organizations or corporations primarily restricted to credit unions, and the purpose of which is to “strengthen or advance the development of credit unions or credit union organizations;” andOther “reasonable and prudent” investments.The last bullet point is the sticky part. Orla Beth Peck, state supervisor of credit unions, gave the following guidance in June 2012:Reasonable and prudent means something different for different credit unions.It certainly isn’t reasonable and prudent to invest in something you don’t thoroughly understand, or don’t have the expertise to know how the investments work.Credit unions should also consider their capital, and limit the concentration of investments to a % of capital based on the risk of the investment.Some Utah credit unions are invested in corporate bonds, which NCUA wouldn’t allow. But state-chartered credit unions can purchase these investments in a reasonable and prudent manner, and may earn a better return than with your average corporate deposit. But you have to realize that you could get a Lehman Brother’s corporate bond, and it could end up being worthless. So, you limit your exposure to the whole bond market, completely, and limit exposure to each company and industry. You wouldn’t want to be in all financials or all automobile bonds. You would want to diversify, which is part of being reasonable and prudent.Federal Investment PowersSection 107 (7) & (8) of the Federal Credit Union Act (FCU Act) specifies the types of investments into which a federal credit union can place its funds. The available avenues of investment, other than loans to members and other credit unions, are as follows:Obligations of or securities fully guaranteed by the United States. Shares and deposits of mutual savings banks and saving and loan associations and only if the accounts are federally insured. Obligations issued by: Banks for cooperatives; Federal land banks; Federal intermediate credit banks; Federal home loan banks; The Federal Home Loan Bank Board; or Wholly owned government corporation, so designated in 31 USC 9101(3). Obligations, participations or instruments of, or issued by, or whose principal and interest are fully guaranteed by the: Federal National Mortgage Association (Fannie Mae); Government National Mortgage Association (Ginny Mae); Obligations, mortgages, or securities sold by, or ever have been sold by, the Federal Home Loan Mortgage Corporation (Freddie Mac). Obligations or securities sold by the Student Loan Marketing Association (Sallie Mae). Obligations, securities or instruments of, or issued by, any other U.S. Agency whose principal and interest are fully guaranteed by the United States.Participation certificates of any U.S. trust or trust where the trustee is, or is the head of, a U.S. executive department, agency or instrumentality. Shares and deposits of any central credit union. Shares, certificates, and deposits of federally insured credit unions. Shares, stock, and obligations of credit union service organization (CUSO): Limited to 1% of the credit union’s paid-in and unimpaired capital and surplus; excluding any investment that would give direct or indirect control, of another financial institution, insurance company, trade association or similar company, organization or association. Stock of the Central Liquidity Facility (CLF). Obligations and investments of a state and its political subdivisions or any of their agencies, corporations, or instrumentalities. (Limited to 10% of the credit union’s unimpaired capital and surplus in any single issuer, other than general obligations.) Deposits in: National banks; State banks, trust companies, and mutual savings banks operating in accordance with the laws of the state where the credit union operates; or Banks or institutions federally insured by the FDIC or FSLIC (or its successor).See these pages for details Field of MembershipState FOMCurrently, Utah state-chartered credit unions can have the following field of membership:Residents of a single county, and/orOne or more associations, and/orThe employees of the credit union, and/orThe immediate family (parents, spouse, surviving spouse, children, and siblings of the member) of a member of the credit union, and/orResidents of a city with a population of less than 65,000 thousand (or a town, which has a population of less than 1,000) if the city is in a county with a population of less than 31,000, and if the commissioner approves the city to be in a field of membership.Note that once a Utah state chartered credit union has opted to include a county in its FOM, it cannot change its FOM to include a different county. It cannot switch counties. The field of membership of the credit union must be outlined in the credit union’s bylaws. Any change to the bylaws must be approved by the state’s credit union commissioner.Federal FOMCurrently, federally chartered credit unions can have the following types of field of membership:Single-occupational common bond: If a credit union serves a single-occupational sponsor, such as ABC Corporation, it will be designated as an occupational credit union. A single occupational common bond credit union may also serve a trade, industry, or profession (TIP), such as all teachers.Single-associational common-bond: If a credit union serves a single associational sponsor, such as The Ohio State University Alumni Association, it will be designated as an associational credit union.Multiple-occupational/associational common-bond: If a credit union serves more than one group, each of which has a common bond of occupation and/or association, it will be designated as a multiple-common-bond credit union. A multiple common-bond federal credit union may include in its field of membership, without regard to location, communities satisfying the definition of underserved areas in the Federal Credit Union Act. Adding an underserved area will not change the charter type of the multiple-common-bond federal credit union. More than one multiple-common-bond credit union can serve the same underserved munity: A community charter is based on a single, geographically well-defined local community, neighborhood, or rural district where individuals have common interests and/or interact. In July 2010, NCUA clarified that a single political jurisdiction; a statistical area; or a grandfathered area qualifies automatically as a well-defined local community.Here are the details of the field of membership rules: LimitsThe state and NCUA set limits on the sizes and amounts of loans that credit unions can offer.StateThe state establishes aggregate loan limits based a credit union’s “capital and surplus”, with two tiers: less than $2 million in capital and surplus, and more than $2 million in capital and surplus.State law defines “capital and surplus” as “shares; deposits; reserves; and undivided earnings.” . In most cases, this approximates asset size.The limits apply to the aggregate amount of all loans to a member.Less than $2 million in capital and surplus: greater of $1,000 or 15% of capital and surplus up to a total of $25,000.Greater than $2 million in capital and surplus: the greater of $25,000, 4% of capital and surplus, or 25% of the regular reserve.See this page for the law establishing loan limits: limits the amount a credit union can lend to one individual or group of associated individuals. The rule is much simpler than for state-chartered credit unions: for federal credit unions, loans to any one member or a group of associated individuals cannot exceed 10% of unimpaired capital and surplus. NCUA defines this as “shares plus post-closing undivided earnings.” () Get details about the NCUA loan limits here: LoansBoth NCUA and the state place limits on business lending.StateState-chartered credit unions can make business loans up to 1.25 times the sum of its undivided earnings and reserves other than the regular reserves.There is also a single-loan limit. This limit was originally set at $250,000. It is indexed to the consumer price index, and can therefore change. From year-to-year. In 2012, the limit is 279,575.For state-chartered credit unions, any loan made for a business purpose (the member’s business purpose) must be categorized as a member business loan. There is no minimum threshold under which a loan is not considered a member business loan.See this page for the law establishing loan limits: NCUAThe NCUA Business lending rule is relatively complicated. For more details, please see: are some basic guides.Loans for less than $50,000 do not count as business loans, even if they are made for a business purpose.The total amount of outstanding business loans is either 1.75 times the actual net worth of the credit union or 1.75 times the minimum net worth required for a well capitalized credit union (seven percent of assets) whichever is less. This means that a credit union is limited to 12.25% of its total assetsFor an individual loan, a credit union is limited to either 15 percent of the credit union's net worth or $100,000 whichever is greater. ................
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