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 What are the issues involved with charter conversions?
 When considering a credit union charter change, either federal to state, or state to federal, there is a myriad of issues that require thoughtful analysis by the credit union’s management and board of directors before proceeding with such a monumental change.
Conversion from an Illinois chartered credit union to a federal credit union and conversion from a federal credit union to an Illinois-chartered credit union is authorized by Section 64 of the Illinois Credit Union Act (205 ILCS 305/64) and by Section 125 of the Federal Credit Union Act (12 U.S.C. 1771). Such conversions must be approved by the Illinois Division of Financial Institutions (“DFI”) and the National Credit Union Administration (“NCUA”).
Section 190.200(a) of the DFI Regulations sets forth the requirements for conversion from state to federal. Any Illinois-chartered credit union wishing to convert to a federal credit union should notify DFI prior to commencing the process to convert.
The application forms and requirements of the NCUA for approval of conversion from an Illinois-chartered credit union to a federal credit union are set forth in Chapter 4, section II of the NCUA’s March 2003 Chartering and Field of Membership Manual. NCUA will also consult with DFI regarding the credit union’s current financial condition, management expertise, and past performance.
The NCUA will review the proposal for compliance with Section 125 of the Federal Credit Union Act, including compliance with the NCUA’s field of membership policies and meeting the criteria for federal share insurance. While the Federal Credit Union Act authorizes a federal credit union’s field of membership to include a number of occupational and associational groups, such multi-group charters may not include a community field of membership. The field of membership of a federal credit union with a community charter is limited to persons who live, work, worship or attend school in a single geographical area and may not include any additional occupational or associational groups in the field of membership.
The NCUA Regional Director may further investigate the proposal and may require submission of additional supporting information. When the Regional Director has received evidence that the board of directors has satisfactorily completed certain actions, including a vote by the credit union’s membership in favor of the charter change, the federal charter and a new certificate of insurance will be issued.
All federal credit unions must include the phrase, “Federal Credit Union,” in their name. The credit union has 180 days from the effective date of the conversion to change its signage and promotional material. Member share drafts with the state-chartered name can be used by the members until depleted.
Any federal credit union may apply to convert to an Illinois-chartered credit union. In order to do so, it must:
- Notify NCUA prior to commencing the process to convert to an Illinois charter and state the reason(s) for the conversion;
- Comply with the requirements of Section 125(a) of the Federal Credit Union Act that enable it to convert to a state credit union and to cease being a federal credit union; and
- Comply with Section 190.200(b) of the DFI regulations.
It is important that the credit union provide an accurate disclosure of the reasons for the conversion. These reasons should be stated in specific terms, not as generalities. The federal credit union converting to a state charter remains responsible for the entire operating fee for the year in which it converts.
There are also a multitude of considerations regarding conversion, including but not limited to, election of directors, expulsion of members, income tax and tax returns, maximum interest rates on loans, and investments in and loans to credit union service organizations.
ICUL is a key resource to its member credit unions that may be considering a charter change. For a more detailed analysis, please see the attached comparison chart. Please contact the League’s Legal & Technical Department at 800-942-7124 to discuss in more detail issues specific to your credit union regarding a charter conversion.
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