During the past 12-18 months, we have noted a significant increase in the number of brokers underwriting share certificates issued by credit unions. It is vital for brokers in the credit union share certificate market to understand the fundamental differences (1) between brokered CDs and brokered share certificates (brokered CD documents cannot be repurposed for share certificates) and (2) between share certificates issued by federally chartered credit unions and state-chartered credit unions.
We are circulating this reminder to our clients to take account of the unique regulatory considerations that apply to share certificates. Furthermore, we will offer an upcoming webinar on these and other share certificate topics in the coming weeks. Stay tuned for details.
As we have advised, both directly and through prior Client Alerts, state-chartered credit unions frequently do not have the same authority to issue shares to non-members as federally chartered credit unions or are subject to conditions not imposed on federally chartered credit unions. As a consequence, when a state-chartered credit union issues shares to a person who is not eligible for membership under federal law, the NCUA will not insure the shares.
Many, though not all, of our clients underwriting credit union share certificates reference a chart we have developed on state law membership requirements or, alternatively, consult with us about a specific state’s laws. However, we have become aware of share certificate issuances by state-chartered credit unions that raise significant NCUA insurance issues and, indeed, entire share certificate programs that appear to be offered without taking state laws into account. We do not believe it is sufficient to rely on representations from an issuing credit union that it can offer shares on the same basis as federally chartered credit unions without independently confirming such authority under relevant state law.
Our credit union documents, including the standard disclosure document, are drafted to permit the offering of share certificates by (1) federally chartered credit unions and (2) state-chartered credit unions that are empowered by state law to issue shares to non-members on the same basis as federally chartered credit unions.
For state-chartered credit unions without a low-income designation, the NCUA will only insure shares issued by a state-chartered credit union to nonmembers that are (1) other credit unions and (2) state and federal public units.
For state-chartered credit unions with a low-income designation, the NCUA will insure shares only if:
(1) state law specifically authorizes the low-income designation on the same basis as the federal designation;
(2) the credit union has received approval from its state regulator to issue shares to non-members as a low-income designated credit union; and
(3) the credit union has received approval from the NCUA to issue shares to non-members as a low-income designated credit union.
If any one of these conditions is not met, the NCUA will not insure the shares and our documents will not protect the underwriter.
We should note that this product operates on a minimum amount of published guidance from the NCUA and virtually no published guidance from the states. The credit union industry itself has never sought guidance or, to our knowledge, petitioned its regulators in any meaningful way.
We are revising our state law chart to reflect the ambiguities more clearly in this area. Please contact us if you wish to discuss these issues further or obtain a copy of our revised chart (forthcoming shortly).
