New federal credit union charter applicants face a long and laborious journey on the road to becoming a financial institution — and history shows that it's not getting any easier for new CUs to open up shop.
The process, which the National Credit Union Administration said takes about 12 months on average, can be riddled with back-and-forth over business plans, market viability, products and services offered, and a laundry list of other requirements. Few new charters are granted each year and the number has dwindled in the last two decades.
Some in the industry think the process is in dire need of a revamp, while others think the NCUA's caution with granting new charters is the safest route available.
The regulator recently released a five-step guide to assist groups with the chartering process.
"We try to look at it on a step-by-step basis," said a NCUA official who works with charter applications. "It can sometimes prolong the process…We encourage [applicants] to take it in slower steps."
This official and one other who spoke to CU Journal asked to remain anonymous because of the sensitive nature of the chartering process.
Although the regulator has released guides to assist charter applicants, the guidance cannot assist with the viability of the business plan or how risky the applicant looks on paper.
"It's difficult for organizers [without] a strong financial background and poor credit reports — some just realize how much work is involved and it kind of discourages them," one official said.
Since 1990, the NCUA has approved 151 new federal charters — amounting to just fewer than six a year. From 2000 to 2008, 48 new charters were approved by the regulator, and from 2009 to first-quarter 2016, just 17 charters were approved. When asked about the significant decline, the NCUA officials said, "Typically, the competition and not being able to get funding necessary to start a credit union," are the primary reasons for a lack of new charters.
'The Hardest Charter to Get in America Today'
"I am sad that the hardest charter to get in America today is a new credit union charter," said Chip Filson, chairman of Callahan & Associates, former director of the NCUA Office of Examination & Insurance and president of the Central Liquidity Facility.
"The new chartering process is cumbersome, not positive," Filson said. "[Chartering] is not something that has been actively encouraged." The NCUA requests internal operations which can be overwhelming for a smaller organization "and much more elaborate than even existing smaller credit unions," he suggested.
Of those institutions chartered since 1990, just 43% are currently describe as active, meaning the remaining 57% have either ceased operations or were merged into another credit union.
From 1990 to 2014, an average of 334 credit unions — both state and federal charters — have merged or ceased operations each year, contracting the overall industry by an average of 3.27% annually. Overall, the credit union community has shrunk by 44.7% since 1990, 13 points below the 57% of new charters established since 1990 that are now inactive.
Specifically for FCUs, an average of 190 have closed their doors each year since 1990, a drop of 3.15% on average per year. Overall, federal charters nationwide are down 53.8% since then.
Industry analysts debate whether what's happening is just a continuation of the industry-wide trend toward consolidation and fewer credit unions or if NCUA is insufficiently analyzing would-be CUs' business plans.
"There are reasons for the NCUA to have stringent standards when chartering," said John McKechnie, partner at Washington-based Total Spectrum and former director of public and congressional affairs at the NCUA. The risk to the NCUSIF and members of a newly chartered credit union is too great, McKechnie offered. "No doubt the NCUA is right to err on the side of caution."
Filson offered a different perspective on de novo charters and their risk to the industry; he suggested newly chartered CUs hold very little financial risk to the insurance fund.
"Even if they fail they are so small and startups are so limited," Filson said. "I think it would be very helpful if the strategic plan at NCUA were changed so that examiners' effectiveness were based on how many CUs are active on their list in the beginning of the year and the end of the year."
So what's the solution?
"I think in some cases the more sustainable solution would be to provide a new business model or plan to help the CU get out of the rut that it's in, rather than give up on them," Filson suggested.
Some credit union service organizations (CUSOs) such as Grand Rapids, Mich.-based CU*Answers provide services to newly chartered institutions or prospective charters that can offer the ability to perform most back-office functions and offer many services through a reduced fee for credit unions just starting out.
"Other vendors are more than happy to launch new programs because it helps them expand their services as well," noted Filson.
New Charter in Pennsylvania
One proposed de novo charter — Tenants and Landlords Federal Credit Union (TLC FCU), based in Harrisburg, Penn. — began it charter application in April 2015. Sixteen months later, the credit union is still not in operation, but organizers have said they expect to open their doors in October of this year. Michael Wishnow, spokesman for the Pennsylvania Credit Union Association, said there has not been a new charter in the state in more than a decade.
According to Robert Pauletta, a proposed board member for the fledgling credit union, TLC FCU did not consider joining an existing credit union during its inception stages — one route that some new charters undergo, operating under the umbrella of another established institution. Pauletta has handled all stages of TLC's application process, due in part to his lengthy tenure in the credit union and for-profit banking industries, including having served as a senior loan officer at the $2.3 billion Middletown, Penn-based Mid-Atlantic Corporate FCU.
TLC FCU hopes to garner around 250 members within its first six months of operations when it opens up shop in a renovated bank facility converted to a mixed-use property with apartments above a ground-level lobby. Pauletta said the plan is to continue with that pace of 250 new members every six months for at least the first year.
"Pennsylvania is the 18th-largest economy in the world and Harrisburg is the capital," Pauletta said. "Rents are getting higher, there are fewer apartments every year — help could be had…We have a good group of directors, a community behind us, the [Pennsylvania Housing Finance Agency] cheering us on, county commissioners — we've got a lot of support in the community."
