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Credit Union Members Beware: Your Credit Union May Drop Federal Deposit Insurance

A reader emailed me a scan of the member newsletter he received from Velocity Credit Union in Austin, Texas. The newsletter informs members that the board of directors has unanimously decided to convert the credit union's share (deposit) insurance provider from the NCUA to ASI. Before it becomes final, at least 20% of the members must vote with a majority voting to approve of the conversion.

Overview of NCUA and ASI

For those not familiar with credit unions, NCUA is short for the National Credit Union Administration. It's an agency of the federal government, and it administers the National Credit Union Share Insurance Fund (NCUSIF). This is similar to the FDIC which insures deposits at banks. Like the FDIC, the NCUA is backed by the U.S. government. In wording similar to the FDIC, the NCUA states that the Share Insurance Fund is "backed by the full faith and credit of the United States Government."

ASI is short for the American Share Insurance. The ASI FAQ page provides an overview of the company with two important details:

Who is ASI?

American Share Insurance, or ASI, is an Ohio-based share guaranty corporation that insures consumer savings (share accounts) on deposit with state-chartered credit unions in selected states. Founded in 1974 by credit union activists, the corporation is the nation's largest private deposit insurer for credit unions. It only insures deposits in credit unions.

How is ASI different from the federal deposit insurance program?

The federal deposit insurance program for credit unions is operated by an agency of the United States government, the National Credit Union Administration (NCUA), not the FDIC. ASI is a private not-for-profit corporation, owned by the credit unions it insures. Individual members of ASI-insured credit unions can have multiple accounts (savings, checking, money market, CDs, etc.) and each is insured to $250,000. This allows members to have all their insured savings at one credit union.

The important thing to note is that ASI is a private company. At the bottom of each ASI webpage, the following is highlighted:

Members' accounts are not insured or guaranteed by any government or government-sponsored agency

Not all credit unions can change to ASI-only insurance. First, only state-chartered credit unions can drop federal insurance. All federal credit unions (with federal in their names) must be federally insured by the NCUA. For state-chartered credit unions, only nine states allow their credit unions to have ASI as their primary deposit insurance. These include

  • Alabama
  • California
  • Idaho
  • Illinois
  • Indiana
  • Maryland
  • Nevada
  • Ohio
  • Texas

Why Do Credit Unions Want to Switch?

For the case of Velocity Credit Union, the main reason for the decision to switch appears to be cost. Here's what is explained in the newsletter:

In 2009, due to estimated losses in the NCUSIF, the credit union's federal deposit insure announced a premium affecting all federally insured credit unions. As a result, Velocity Credit Union is to be assessed a premium in 2009 of approximately $675,000 (0.15% of insured shares). This additional cost for federal deposit insurance will adversely affect the credit union's earnings and net capital. This premium will not affect the level of federal share insurance on members' accounts.

There may be many other credit unions besides Velocity which are considering this change. This Credit Union Times article described how interest in private share insurance has increased after the corporate credit union bailout which is forcing the NCUA to hike premiums on the credit unions. In the article the ASI CEO described why ASI is appealing to credit unions:

biggest advantages of private insurance are lower premiums because they can be more selective in whom they insure and the company doesn't insure corporate credit unions. ASI also insures each account up to $250,000, regardless of how many accounts an individual has at the credit union. Not having corporate credit unions in their insurance pool could be a big competitive advantage in the months ahead.

Soundness of Private Deposit Insurance?

In Velocity Credit Union's newsletter, several stats are presented which are intended to ease concerns about the soundness of ASI. These include:

  • ASI holds no mortgage-backed or exotic investments like those that have plagued many financial institutions and investment firms
  • Over 95% of ASI's assets are held in cash and government-guaranteed bonds
  • ASI insures the deposits of over 1.3 million credit union members.
  • No credit union member has ever lost money in an ASI-insured account.

Instead of focusing on the financials of ASI, history may provide better insights to the potential risks. This old 1991 NY Times article does not discuss ASI, but another private credit union insurer that covered Rhode Island credit unions (RISDIC). There's an interesting quote that's relevant to the issue of ASI:

"The private insurance funds are well intentioned, but they are fundamentally flawed by inadequate capital and the lack of a sound reinsurance policy," said Bert Ely, a banking consultant and an expert on deposit insurance in Arlington, Va. "Anytime one of their large insured institutions fails, they have shown a lack of staying power."

More information about what happened to RISDIC and opinions about ASI were discussed in this Bogleheads thread. Here are excerpts from the post of member nisiprius. He included excerpts from a Boston Globe article from July 1991 about RISDIC:

Marquette was the largest of the 45 banks and credit unions Gov. Bruce Sundlun closed on New Year's Day, following the collapse of the institutions' private insurer, the Rhode Island Share and Deposit Indemnity Corporation, or RISDIC. And the credit union, to which more than 40 percent of Woonsocket's 45,000 residents had entrusted their money, is one of 12 institutions that remains shut, awash in bad loans and unable to qualify for federal deposit insurance.

And here is his insightful opinion about ASI:

I have no reason to distrust ASI, but I'm sure the Rhode Island depositors had no reason to distrust RISDIC, either.

My own NCUA-insured credit union failed in the early 1990s, at a time when much of our life savings was in it, and it was a total nonevent. A new sign on the door, a new logo on the statement... I've experienced worse in ordinary bank mergers.

Based on what happened to me with NCUA insurance and what happened to Woonsocket depositors with private RISDIC insurance, I'd never consider private insurance--not when NCUA-insured credit unions are so easy to find.

Recent News Concerning ASI-Insured Institutions:

As mentioned by the banking consultant in that NY Times article regarding private insurers, "Anytime one of their large insured institutions fails, they have shown a lack of staying power." For the case of ASI, I know of at least one major credit union with only ASI insurance that may be considered undercapitalized. It's the Silver State Schools Credit Union in Nevada, and its problems were described in this Las Vegas Review-Journal article on September 6, 2009. Here are some excerpts:

Losses are swelling at $900 million-asset Silver State Schools Credit Union, the biggest credit union in Nevada with 80,000 members.

The credit union lost $15.5 million in the second quarter, up from $9.5 million in the first quarter.
Its net worth slipped to 5.52 percent, which credit unions consider undercapitalized.

There is something reassuring about federal insurance. As we learned last year, large and well-respected companies can fall quickly. When there's a financial crisis, it's nice to know that your money is protected by the full faith and credit of the U.S. Government.

Would you vote for dumping NCUA insurance in favor of ASI?

What's your opinion of ASI? You can often get higher deposit rates at an ASI-only credit union. Is that worth the risk? Share your opinion in the following poll or by leaving a comment:

Update 9/14/09: I have some additional details about what you can expect if your credit union converts to private insurance in this follow-up post.

Update 10/25/09: I emailed Velocity Credit Union regarding the status of the conversion process. Here is the reply I received:

At this time NCUA is still finalizing our timetable; the process for the conversion, and all of the policies and procedures are determined by NCUA. At this point, the timetable is being determined from week to week. Unfortunately, we do not have a definitive date as to when voting will begin. Once NCUA approves the voting period ballots will be mailed to each member, and voting can also be completed at any branch location.
  |     |   Comment #1
Do you know what happens if you have your CDs at a credit union that switches to ASI? You would be looking at some steep penalties if you closed them early to avoid the risk.
  |     |   Comment #2
My impression, from reading various CU newsletters, is that the NCUA is very aggressive at raising premiums as soon as a large CU fails. Although a sound and necessary insurance practice, it comes at a time when many CUs have little extra money to spend on unbudgeted premium hikes.

Under NCUA, small CUs are forced to support large corporate CUs, and that's not the case under ASI.
  |     |   Comment #3
At one time, there was a Golden Bay Federal Credit Union in Mountain View, California whose deposits were insured by both NCUA and ASI. This allowed depositors to have $100K in additional insurance on top of the $100K from NCUA. At a later time, Golden Bay decided to drop the ASI insurance and left some depositors holding uninsured funds in their accounts.

Golden Bay has since merged with Meriwest Credit Union in San Jose, California who has their deposits insured by both NCUA and ASI. Depositors with funds in Meriwest Credit Union should not exceed the NCUA amount of insurance under any circumstances.
  |     |   Comment #4
Another area that needs regulation! Why do these 9 states allow this??? Crazy. At minimum, there should be regulation by theses states, allowing anyone with NCUA insured cds to withdraw funds without penalty if the CU votes to get rid NCUA coverage. Duh!
  |     |   Comment #5
Excellent article on ASI. I have never depended on the supposed extra insurance that ASI provided to credit unions. (Including when I was at the new defunct Golden Bay.)

For a CU to be completely dependant on private share insurance is crazy.
  |     |   Comment #6
Patelco Credit Union use to be ASI insurance only. I wanted to join them but waited until they switched to NCUA insurance. I'm sure ASI provides good insurance, but they could run out of money if several large credit unions failed. At least if the NCUA runs out of money, the federal government can print some more.
  |     |   Comment #7

The ASI arrangement is similar to the arrangement they have for the insurance companies that offer Annuities. If you have ever purchased Annuities you know that funds in there are not insured by FDIC or NCUA. So far as I know, various insurance companies come together and form some sort of shared arrangement that comes into play if any of them were to fail.

Hard as it may sound, inherently I trust the government, so I'd not vote for dumping NCUA insurance in favor of ASI. However, if a credit union is offering a great deal then I'd not dis-consider just because it has ASI insurance rather than NCUA.

Oh ... BTW ... even the FDIC/NCUA insurance is a result of various banks/CUs coming together. Only difference is that government (in which I trust) is standing behind FDIC/NCUA.

  |     |   Comment #8
putting a poll at the end of an article where you are very clearly arguing for one perspective is rather meaningless. Not to say that I am not to convinced.
  |     |   Comment #9
What does happen. Are you allowed to move your money out without penality becuase the rules have changed.
  |     |   Comment #10
To: Anon @ 7:55 pm on 9/10
Re: What if?

Short answer is, you're prolly SOL. If your credit union does this, and you're unhappy and want to withdraw your CD early, you'll undoubtedly be nicked with the early withdrawal penalty. If you're dealing with an out-of-state credit union that does not "actively solicit" CD deposits in your state, your state small claims court might not even have jurisdiction to hear your beef.

Even assuming you can somehow establish jurisdiction, and prove that the NCUA insurance was a "material" inducement in your purchase of the CD, a small claims court judgment for the penalty amount must be "enforced" before you'd see any money. You'd need to obtain an abstract of judgment and then use it in a separate action in the state of domicile of the credit union. In that action, the credit union could raise all defenses (such as a binding arbitration clause in the account disclosure) and you, as the plaintiff, would have to appear to present your case and show why your judgment should be enforced.

Assuming your have the fortitude to do all this, and get a "sister state" judgment, and levy on some credit union assets, and get a seizure order, you might (just might) get your early-withdrawal penalty back.

Don't think the credit union hasn't thought about your question (which was a good one, might I add).

  |     |   Comment #11

To the legal purists in the audience, I probably should qualify my response above. In some states, not "all" defenses may be raised in an action to enforce a sister-state judgment enforcement action. It might turn on whether the sister-state action was contested or obtained by default. Even here in California, sister-state judgment enforcement may be contested by a Motion to Vacate based on lack of jurisdiction of the sister-state court or improper service of process.

Any way you cut it, when you get even remotely close to the credit union (and its assets), you can expect a contested proceeding.

I should have known better than to use the word "all".

  |     |   Comment #12
Most CUs will allow you to terminate a CD without penalty if they change insurance.
  |     |   Comment #13
That's true. CUNA, the Credit Union National Association, with which 90% of all credit unions are affiliated, established a final rule in 2005 that members have a right to terminate, without penalty, the federally-insured portion of a share term account as the result of an insurance conversion.
  |     |   Comment #14
Here is some further information about the CUNA rule regarding withdrawals that Doug mentioned above:

"The credit union would be required to inform members that they could make penalty free withdrawals. Such withdrawals could be for the federally insured portion (up to $100,000) of funds in certificate accounts and would have to be made between the time of the approval of the conversion and its effective date."

  |     |   Comment #15
Isn't choosing ASI over NCUA analogous to choosing Kaiser Permanente over a Public Healthcare?
  |     |   Comment #16
CUNA is a trade association and does not publish rules. NCUA (the National Credit Union Association) is a federal agency and does regulate credit unions. NCUA has made sure that if a federally insured credit union converts to a privately insured credit union members with share certificates (CDs) may withdraw those certificates before maturity without any penalty.
  |     |   Comment #17
Well, this is some information, at least. Not as much as I'd like, but there seems to be very little out there.

The whole idea seems silly to me. The government prints and controls the money, so having someone other than the government "insure" it really seems like a joke.

To the one who was comparing this to public health care, it's different since the government doesn't inherently control health care, so they would be subject to the same issues as any other insurance.

To me, it feels more like a car dealership trying to sell cars without a warranty from the manufacturer, but adding a third party warranty into the mix, yet not charging you any less.

I mean, really, my checking account is free...what do I stand to gain from this besides less security?

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