State vs. Federally Chartered Credit Unions: An Overview
The world of credit unions is divided into two categories: state chartered and federally chartered. Though they share many characteristics, requirements and purposes, the difference in charters impacts the regulation and titling of a given credit union.
State chartered credit unions fall under the regulatory authority of their respective state's division of financial services. Federally chartered credit unions all include the word "federal" in their name and fall under the regulatory authority of the National Credit Union Administration, or NCUA.
What Are Credit Unions?
Credit unions are nonprofit financial savings and lending cooperatives whose members are also part owners, distinguishing them from true intermediaries like banks. Many credit unions are considered to be more "community-oriented" and have significantly different operational objectives than other savings and lending institutions.
In the United States, credit unions are not-for-profit, tax-exempt organizations that were established with the Credit Union Act of 1934. All credit unions are either chartered by the federal government or a state government. To maintain their tax-exempt status, they are limited to providing membership to narrowly defined segments of the population (church groups, labor unions, specific occupations, etc.).
However, it is possible for different credit unions to merge and combine their allowable population segments, meaning that many credit unions have broad memberships. The board of directors for credit unions is elected by all of its members, and members have votes in the decisions made by their union.
- Credit unions are financial institutions that provide banking services that are created, owned, and operated by their participants. As such, they are not-for-profit enterprises that enjoy tax-exempt status.
- A federal credit union (FCU) is a credit union regulated and supervised by the National Credit Union Association (NCUA).
- State credit unions instead adhere to state-specific regulations and guidelines, but not all states have such laws in place.
State Chartered Credit Unions
There are some advantages to state charters for credit unions. For one, federal credit unions have maximum interest rate regulations, whereas different states may have higher limits or no limits at all on interest rate charges. In addition, state regulatory authorities often have a much greater level of familiarity with their local credit unions than the NCUA enjoys with federally chartered credit unions.
Not all states charter or regulate credit unions. Arkansas, Delaware, South Dakota, Wyoming and the District of Columbia do not have state-specific charters, meaning that all credit unions that operate within those states' borders must be federally chartered. Some, though not all, state chartered credit unions carry deposit insurance that is backed by the full faith and credit of the U.S. government.
Federal Chartered Credit Unions
Even though they include the word "federal" in their name, federal credit unions (FCUs) are not operated by the federal government. Not only are all of these organizations regulated by the NCUA, they are also insured by the National Credit Union Share Insurance Fund, or NCUSIF. Much like the Federal Deposit Insurance Corporation for banks, the NCUSIF is backed by the full faith and credit of the U.S. government.
Ultimately, the differences between state and federally chartered credit unions are much less significant than the difference between credit unions and banks.