If federal regulators deny them critical insurance coverage, organizers of the world’s first credit union for the marijuana industry may have an ace in the hole.
By rule, Colorado-chartered credit unions must have deposit insurance from the National Credit Union Administration — but it’s a requirement that can be waived by the state’s financial services commissioner.
That means if Fourth Corner Credit Union can’t get NCUA insurance for its pot-only deposits — a possibility given that marijuana is illegal under federal law — it could ask the Colorado commissioner to reverse the 11-year-old rule that prevents state-chartered credit unions from obtaining the same coverage privately.
The credit union could point to the same Colorado law it used to obtain its state charter, one that also says credit unions must apply for NCUA coverage “or comparable insurance approved by the commissioner.”
“It would be an issue of a credit union providing a critical public service, of serving an underserved, or in this case unserved, sector,” said Mark Mason, a South Carolina attorney who helped organize Fourth Corner.
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Fourth Corner, which hopes to be open Jan. 1, plans to offer banking services such as checking accounts to cannabis-related businesses and individuals who are members of nonprofits that support legal pot.
Deposit insurance protects against the credit union’s insolvency and is typically provided by the NCUA, although one company in Ohio offers it privately.
Other private insurance protects deposits against theft or other crimes.
In March 2003, then-Financial Services Commissioner David Paul decided private insurance was not an option for the state’s 77 chartered credit unions, largely because it lacked the kind of financial backing that NCUA had.
As was true then, only one company — American Share Insurance in Dublin, Ohio — offers private deposit insurance.
“It is my finding that both ASI and the (NCUA insurance) have substantial resources on their balance sheets and through their assessment authority to cover insurance losses,” Paul wrote. “However, it is clear (NCUA) has much greater borrowing authority to cover the liquidity needs of its insured credit unions.”
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To quiet critics who suggested the insurance was merely ceremonial, Paul spoke, almost prophetically, of the inevitability of a financial collapse — which materialized within five years.
“The question that some may ask is whether or not a deposit insurance fund’s ultimate backing has more than theoretical significance,” Paul wrote. “My answer to that question is that it certainly does, because financial crises do happen in this country.”
The three-member NCUA board at the time lobbied hard for Paul to decide in its favor, sending a sternly worded letter that called its insurance “the superior product for credit unions … and public policy.”
Financial Services Commissioner Chris Myklebust, who gave Fourth Corner its charter last month, after learning NCUA could take up to two years to decide whether to insure the credit union, said he understood the process could loop back around to him.
“The commissioner does have the discretion to decide what is comparable insurance to that offered by NCUA,” Myklebust said. “Whomever is commissioner, should that question come to this office, would have the authority to reaffirm or repeal that policy.”
ASI did not return calls seeking comment, and it is unclear how many credit unions it insures in the nine states it is permitted to offer the coverage.
Banking website Bankrate.com in March 2013 reported ASI insured 140 credit unions in those nine states — California, Nevada, Idaho, Illinois, Indiana, Ohio, Alabama, Texas and Maryland.
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Allowing ASI to operate in Colorado would open a new set of issues for the state Division of Financial Services, which currently regulates credit unions in conjunction with NCUA, as well as a financial impact on the state budget because additional personnel would be needed.
A privately insured credit union would be subject only to state regulation. That would fall on Myklebust’s staff of 13, which also handles savings and loan associations, life-care institutions, and enforcing the Public Deposit Protection Act for institutions that hold government deposits.
While insured similarly to banks, fewer credit unions failed during the peak of the financial crisis than did banks, so fewer fell back on bailouts and insurance coverages.
Since 2009, 76 credit unions have failed, according to NCUA. Two were in Colorado and 32 were in states that allow private insurance, though it’s unclear if any were insured in that manner.
But NCUA extols quietly that privately insured credit unions that run into financial crisis have a smaller pool of institutions to bail them out. Not so with NCUA. Nationally, there were 18 additional credit unions NCUA kept afloat by merging them with another.
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In contrast, 481 banks failed during the same period, according to the Federal Deposit Insurance Corp. Of those, only 26 were not acquired by another institution, the remainder purchased or assumed by some other banking entity, FDIC records show.
“The critical issue is whether private deposit insurance is comparable to that offered by NCUA,” Myklebust said. “Former Commissioner Paul determined it was not. That was in 2003. If asked, we’d have to make that determination for today.”
David Migoya: 303-954-1506, email@example.com or twitter.com/davidmigoya