Charter Conversions and “Junk Fees”

By Jennifer Williams

It may be unusual for the title of an article to contain the phrases “charter conversions” and “junk fees.”  Those two phrases are often not found together, but even the improbable has become possible in 2024.

In California, a state senator (Steven Bradford, D-Gardena) introduced SB 1075, which as of the writing of this article, specifically focuses on limiting overdraft protection services provided by state-chartered credit unions.  While many in the credit union industry may contend that overdraft services are aimed at assisting credit union members in accessing funds they lack, and that overdraft services serve as a financial tool in critical situations, that’s not the objective of this article.  SB 1075 specifically states that a credit union shall:

• Provide a customer at least five business days before requiring payment of an overdraft fee to give the customer an opportunity to repay the amount that triggered the overdraft fee
• Disclose the requirements by 1/31/2025 and annually thereafter
• Not charge more than three (3) fees per month

(The initial draft also included references to nonsufficient funds fees, which have since been redlined out of the current version, as of the writing of this article.  The provision related to charging no more than three (3) fees per month does not specify that it is overdraft fees, as is referenced throughout the rest of the bill.)

Unsurprisingly, many of the state-chartered credit unions are wondering how and why it’s come to this.  Converting to a federal charter may sound like a potential solution.  But is it the right solution and is it the right time for your credit union to consider such a conversion?  Both charters have benefits while also having disadvantages.

For state charters, some of the benefits can be:

• State governance to meet the particular needs of the citizens of that state
• Local supervision (greater access to regulators can sometimes be helpful – closer geographical proximity)
• Field of membership (can be less prescriptive/more flexible)

California credit unions have long enjoyed expansive potential for community field of membership, and more recently permissive investment rules.

For federal charters, some of the benefits can be:

• One regulator
• Interstate branching
• Taxation exemption (including (for now, and not without caveats) the excise tax on compensation over $1 million)
• Federal preemption of state lending laws

But replicating the field of membership possible in California with a federal charter has required either complex use of underserved communities, or reliance on associational groups.  The latter is a common option, but not without its strategic risks.

There’s always chatter amongst Californians leaving California (whether it’s the state charter or in people’s personal lives).  However, is the federal landscape much different?  In the case of credit unions, the answer is that it might not be much different.  The CFPB issued a proposed rule in January of 2024 which, if approved in its current form, would require financial institutions with assets over $10 billion to either charge a benchmark overdraft fee (the amount has not yet been determined), or determine the overdraft fee amount using the breakeven standard.  While the asset size gives the impression that the CFPB is trying to be somewhat reasonable, it will drive standardization for smaller institutions due to the potential threat of litigation risk.  Eventually, all financial institutions seem like they are going to be subjected to a new regulatory requirement related to overdraft fees.  If they haven’t already, some questions credit unions should start thinking about are: when will it be implemented and who will implement it and is it worth running away from California only to have to deal with a federal regulation?

What is a state-chartered credit union to do?  It depends.  Reviewing your credit union’s purpose, mission, vision, and values along with your strategic plan with a perspective of contemplating a charter conversion is a good place to start.  Reviewing your credit union’s financials is also something that should be taken into consideration; while the charter conversion application itself is not very costly, back-end costs following conversion approval can add up.  Once you’ve done this and if you are still considering it, please reach out to SW&M and we can assist you in further evaluation and application.