NCUA's plan for provisional charters stirs debate

The National Credit Union Administration may soon roll out a new charter that could result in an uptick in de novos.

Speaking at the Credit Union National Association's Governmental Affairs Conference in Washington this week, NCUA Vice Chairman Kyle Hauptman said the regulator will introduce a provisional charter that could be used by organizers of de novos seeking startup capital from community development financial institutions. 

Hauptman said this would fix the current "chicken-and-egg problem." These organizers can't secure this type of funding without a charter but they aren't able to get the charter without the funding. 

"Still, we wouldn't issue the charter until that credit union has the capital," Hauptman said. "I'm proud of these improvements — I think it's a part of facilitating true financial inclusion."

Hauptman did not provide further details on the provisional charter, and the NCUA did not respond to requests for additional information.

There have long been complaints that the chartering process is too burdensome, which limits the number of new credit unions. Chip Filson, former NCUA regulator and co-founder of the consulting firm Callahan & Associates, has seen this firsthand. He's been assisting a potential de novo that has been trying to get off the ground for seven years. That effort involves a group of students at George Washington University in Washington that wants to open an entirely student-run credit union.

Filson said that group is no closer to getting the go ahead than it was when it started.

He said he is unsure of the specifics involved with the provisional charter but he wasn't convinced this change would help. 

"I think NCUA confuses process with results," he said. "If staff were focused on results, there would be more charters. This is either the second or third charter process redo in the last three or four years."

But others were more optimistic. Geoff Bacino, a credit union consultant and former NCUA board member, said it is never a bad thing when the agency is looking to be proactive in helping to charter new credit unions.

"I know the argument could be that [a de novo] could fail and it would be a drain on the share insurance fund," he said. "But the reality is, if they do fail, in most cases they're going to find somebody who will take the credit union in a merger."

Bacino added that the provisional charter could be another building block and another step in making the chartering process easier and faster. 

"And that, I will tell you, has been a major complaint," he said. 

Hauptman has made it a priority to help de novos since joining the agency in 2020. The industry loses several hundred credit unions a year, mostly through mergers, and there needs to be a way to offset that decline, he said.

Since 2014, the NCUA has granted only 25 new charters. The regulator has approved one federal charter so far in 2023 after granting four charters each of the last two years. The NCUA approved just one federal charter in 2020.

The NCUA rolled out new chartering guidelines last summer. These changes included streamlining the chartering manual and publishing an updated guide that was supposed to be simpler for credit union founders to follow. 

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However, these changes were more form than substance, said Michael Bell, an attorney at Honigman.

"To date, I cannot say that this has had a positive impact. Issues with the agency staffing and expertise in this area still remain and hamper the process," Bell said. 

But John McKechnie, a Washington-based financial services consultant, said at first glance, the concept of a provisional charter seemed like a "smart and forward-looking approach."

It addresses some of the most common de novo issues — capital formation and getting the right management in place. He expects there would be some kind of limitation on service offerings until the credit union proves it can function properly. 

"Taken together, that is a balanced way to encourage new charters," McKechnie said.

Capital is the biggest obstacle to the formation of de novo credit unions and it is "wonderful" that the NCUA is actively trying to address the issue, said Sam Brownell, founder of the consultancy CU Collaborate.

"I would love for them to formally lower the required amount of capital necessary to get a full charter to essentially zero — like they used to — but this is a fantastic step," he said.