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Kahley Tells CU Journal Why Arkansas Has No State-Chartered CUs
Tuesday, August 4, 2015 7:00 AM

Reta Kahley

Three states don't offer a state-chartering option and two states where the option exists have no state charters currently in business there. As the NCUA seeks to enhance its field of membership rules to make the federal charter more competitive in a number of states, Credit Union Journal recently asked the question why the state charters in a handful of states never took off.

Delaware, Wyoming and South Dakota lack state charters because there is no enabling legislation under which to charter a state CU. Arkansas and Hawaii, on the other hand, have enabling legislation on the books, but still no state charters.

Reta Kahley, president of the Arkansas Credit Union Association, a division of the Cornerstone Credit Union League, said there were state-chartered credit unions in operation until the late 1990s.

"There is a section in the Arkansas Constitution that references lending and lending rates (a usury provision)," Kahley said. "It severely limited state-chartered credit unions and community banks in the interest rates they could charge."

So, as rates increased and large multi-state banks started opening branches in Arkansas, it became increasingly difficult for in-state financial institutions to compete with them because the out-of-state banks were not subject to the usury law, Kahley said.

"The last state-chartered credit union merged with a federal charter many years ago and we haven't had any since," she said. "Now, since that date, an amendment to the Constitution was passed by the citizens of the state of Arkansas to raise that [interest rate] limit, which was 6 percent to a maximum of 17 percent."

Meanwhile, in Wyoming, Delaware and South Dakota, it's currently impossible start a state-chartered CU because there's no enabling legislation to allow it. One big reason appears to be these states' small populations and little desire from state government officials—and credit unions, themselves—to change the laws.

State or Federal? Kahley noted that a dual-chartering system works well and institutions have different reasons why they prefer a state or federal structure.

"Sometimes it depends on which they perceive is better for their field of membership—a federal charter or a state charter," she noted. "Choice is good in the credit union system."

There are roughly 2,450 state-chartered CUs across the U.S., according to Patrick Keefe, director of communications at the National Association of State Credit Union Supervisors (NASCUS). Keefe commented that the whole purpose behind a dual chartering system is to encourage innovation and, in some ways, competition among the charters.

"States can fine-tune their charters to the immediate needs of their local markets," he noted. "Further, since states are working with their local legislatures (which they tend to be closer to, primarily because of proximity), it's a bit less complex to fine-tune state statutes; more complex on the federal side."

"When the states do tweak charters, often with innovative approaches, it puts some pressure on the federal system to consider adjustments," he added.

In addition, state-chartered institutions must annually file IRS Form 990, while federal CUs are exempt. Finally, state-chartered credit unions must pay fees to the state Division of Financial Institutions as well as NCUA.