STATE OF CALIFORNIA

BUSINESS, CONSUMER SERVICES AND HOUSING AGENCY

DEPARTMENT OF FINANCIAL PROTECTION AND INNOVATION

ORGANIZING A STATE CREDIT UNION

INFORMATION BOOKLET

DFPI-391 (Rev. 01-2021)

STATE OF CALIFORNIA – DEPARTMENT OF FINANCIAL PROTECTION AND INNOVATION
ORGANIZING A STATE CREDIT UNION INFORMATION BOOKLET
DFPI–391 (Rev. 01-21) Page 2 of 11

SECTION I

FOREWORD

This information booklet is prepared for persons interested in organizing a state-

chartered credit union. The material included is intended to provide basic information
relative to credit unions and their formation.

WHAT IS A STATE CREDIT UNION?

A State credit union is defined as a "cooperative, organized for the purposes of promoting
thrift and savings among its members, creating a source of credit for them at rates of
interest set by the board of directors, and providing an opportunity for them to use and
control their own money on a democratic basis in order to improve their economic and
social condition. As a cooperative, a credit union conducts its business for the mutual
benefit and general welfare of its members with the earnings, savings, benefits, or
services of the credit union being distributed to its members as patrons." (Section 14002,
California Financial Code)

LAWS AND RULES FOR CREDIT UNIONS

The Credit Union law is contained in the California Financial Code and begins with
Section 14000. The Credit Union Regulations are contained in Title
10 of the California Code of Regulations, beginning with Section 30.101. Since all
State-chartered credit unions are organized as nonprofit corporations, the requirements of
the Nonprofit Mutual Benefit Corporation Law will also apply, unless restricted by the
Financial Code. These provisions can be found in the California Corporations Code
beginning with Section 7110.

The above laws and codes may be found in the reference sections of most libraries, at
the Department of Business Oversight website at dbo.ca.gov, or may be purchased
from the California Credit Union League (1-800-472-1702).

WHO MAY FORM A CREDIT UNION?

Any group of persons having a "common bond" of occupation, association, or groups

within a well-defined neighborhood, community or rural district, which number at least 500
persons, may be eligible for formation of a credit union.

While a group consisting of at least 500 persons is the statutory minimum required to
form a credit union, economic considerations generally mandate that a much larger
group apply to obtain approval to form a credit union.
STATE OF CALIFORNIA – DEPARTMENT OF FINANCIAL PROTECTION AND INNOVATION
ORGANIZING A STATE CREDIT UNION INFORMATION BOOKLET
DFPI–391 (Rev. 01-21) Page 3 of 11

If the proposed group is too small to form a credit union, it can generally be approved to
join an existing credit union's field of membership with much less effort and expense.
Other credit unions will often accept small groups in their operating areas. Please feel
free to discuss this possibility with our staff as this is frequently a less involved means of
obtaining credit union service.

FIELD OF MEMBERSHIP - COMMON BOND

Credit Union membership must be limited to groups having a common bond. Common
bond is a characteristic prerequisite to the fulfillment of a group objective, and when
present among persons of related interests and purposes, these persons could
be expected to effectively operate a credit union. Situations of common bond may
occur most typically as follows:

Occupation - by the same employer and in that employer's related activities, or

employment in which employees are so situated that as a consequence of their
employment and relationship they could be expected to effectively operate a credit
union.

Example:

"Employees of XYZ Corporation and of its subsidiary, ABC Company...", or "Employees

of the Police Department of the City of San Francisco, California..."

Association - Membership in an association, organization, church or union whose

members participate in activities developing common loyalties, mutual benefits, and
mutual interests.

Example:

"Regular members of Local 23, United Carpenters and Joiners of America who reside in
Santa Clara County, California, members of Local 23..."

Residence - Persons living within a well-defined geographic area who have a commonality
of community interests, activities and objectives.

Example:

"Residents of Kern River Valley, California, within a twenty-five mile radius of the
Wofford Heights Post Office..."
STATE OF CALIFORNIA – DEPARTMENT OF FINANCIAL PROTECTION AND INNOVATION
ORGANIZING A STATE CREDIT UNION INFORMATION BOOKLET
DFPI–391 (Rev. 01-21) Page 4 of 11

HOW ARE FUNDS PROTECTED?

1. Every credit union is required by law to have share deposit insurance or other
insurance not unsatisfactory to the Commissioner. The shares of a majority of
California credit unions are insured by the National Credit Union Share Insurance
Fund, which is administered by the National Credit Union Administration, a federal
agency.

2. Fidelity bonds are required for officers and employees having access to funds and
securities.

3. Reserves and allowances are required to provide for losses on loans and investments.

4. Periodic examinations are conducted by the staff of the Department of Financial

Protection and Innovation.

5. The supervisory committee, a necessary and integral part of every credit union,
shall make or cause to be made annual audit and verification of members'
accounts.

ECONOMIC FEASIBILITY

As in any business, the first three years of operations of a credit union are the most
difficult and are often critical to its success.

The accumulation of capital and the making of prudent loans and investments is
normally a gradual process with little income generation in the early stages. Therefore,
a credit union that commits itself to large expenses at the outset may incur a severe
financial burden that would be difficult to overcome in later periods. Frugality may not
seem appealing, but it could mean the difference between success and failure for a
new credit union.

The law allows a credit union to pay dividends to its shareholders only from undivided
profits after expenses and statutory transfers to regular reserves have been paid or
provided. Because adequate dividends are needed to attract new capital for growth, a
plan of business must be prepared and will be carefully reviewed for the purpose of
determining a potential credit union's ability to generate such profits.

Because a credit union starts with no reserves, losses on a few delinquent loans can
quickly impair its capital. Therefore, careful screening of loan applicants and good loan
collection procedures are important.
STATE OF CALIFORNIA – DEPARTMENT OF FINANCIAL PROTECTION AND INNOVATION
ORGANIZING A STATE CREDIT UNION INFORMATION BOOKLET
DFPI–391 (Rev. 01-21) Page 5 of 11

Some of the information that the staff of the Department of Financial Protection and
Innovation will review in assessing the economic feasibility of a credit union are as
follows:

1. Plan of Business - Is it thorough and realistic?

2. Business skills of management and employees.

3. Commitment of volunteer officials and their own business abilities and skills.

4. Potential membership

a. Level of loyalty and interest.

b. Anticipated needs for office space and equipment.
c. Number of qualified borrowers to support projected loan demand.

5. Sponsorship

a. Payroll deductions
b. Use of space and equipment
c. Utilities, telephone
d. Employee time
e. Cash subsidies
f. Share deposits ("seed capital")

Regarding item #5 above, a letter from the sponsor committing to any forms of support
are necessary in evaluating the prospects of a proposed credit union.

Subsidies can be a considerable aid in overcoming the initial economic challenges of a

credit union, but the plan of business must be geared to the credit union operating
without outside help within a reasonable period of time.

WHO MANAGES A CREDIT UNION?

Each member has a single vote, regardless of the amount of money on deposit. Members
elect a board of directors and a supervisory committee. The credit union may adopt
bylaws to provide for the election of a credit committee by the board of directors, or the
board of directors may approve a credit manager, who is a paid, professional employee, in
lieu of a credit committee.

Since a credit union is a cooperative corporation, its officers are volunteers and are not
compensated. Only employees may be paid for their work performed.

Initially, a credit union may be able to afford only one employee, who will serve as
manager. It is very important that the manager and employees be able to maintain
proper accounting records, prepare financial reports, and manage credit union business,
STATE OF CALIFORNIA – DEPARTMENT OF FINANCIAL PROTECTION AND INNOVATION
ORGANIZING A STATE CREDIT UNION INFORMATION BOOKLET
DFPI–391 (Rev. 01-21) Page 6 of 11

such as loan procedures and bad debt collections.

The duties and responsibilities of credit union volunteer officials are

summarized as follows:

1. BOARD OF DIRECTORS

a. Acts on applications for membership.

b. Obtains bond coverage for officers and employees.

c. Sets the rate of interest to be charged on loans.

d. Sets the maximum number of shares that may be held by a member and the
maximum amount that may be loaned to a member.

e. Declares dividends and establishes the dividend rate.

f. Authorizes payment of interest refunds to borrowers.

g. Amends the bylaws.

h. Authorizes investments and withdrawals.

i. Approves expenses.

2. CREDIT COMMITTEE OR CREDIT MANAGER

The credit committee or credit manager has the responsibility to review loan
applications of members in order to ascertain their ability to repay the loans and to
assess the adequacy of security offered. The committee or credit manager should
also endeavor to assist applicants in solving any financial problems. The
committee meets weekly or more frequently, if necessary, to review members'
applications for loans. Certain responsibilities of the credit committee or the credit
manager may be delegated to one or more loan officers.

3. SUPERVISORY COMMITTEE

The supervisory committee is charged with the responsibility to perform or obtain an

annual audit of the books and records and an examination of the business and
affairs of the credit union. The supervisory committee must report its findings to the
board of directors and to the members. In addition, it must make an annual
verification of all member accounts and report the results to the Department of
Financial Protection and Innovation.
STATE OF CALIFORNIA – DEPARTMENT OF FINANCIAL PROTECTION AND INNOVATION
ORGANIZING A STATE CREDIT UNION INFORMATION BOOKLET
DFPI–391 (Rev. 01-21) Page 7 of 11

The supervisory committee has the power to suspend directors, members of the
committees or officers; call shareholders' meetings; inspect the books and records and
temporarily fill any vacancy in their own committee. The supervisory committee usually
meets every three months to examine the affairs of the credit union.

WHAT WILL IT COST TO FORM A CREDIT UNION?

The initial cost is made up of the following items:

1. Filing Fees - Secretary of State

2. Tax Prepayment - Franchise Tax Board

3. Recording Fee - County Recorder

4. License Fee - Department of Financial Protection and Innovation

5. Bond Premium

6. Supplies

In order to pay for these initial costs, 15 to 20 prospective members (the organizers)
usually advance funds to the credit union. After the credit union has
received its Certificate to Act as a Credit Union, the amount advanced by each person is
credited to his share account.

WHAT IS THE DEPARTMENT OF FINANCIAL PROTECTION AND INNOVATION?

The Department of Financial Protection and Innovation (DFPI) is the State agency charged
with the responsibility for the administration and regulation of the California Credit Union
Law. Within the DBO is the Division of Financial Institutions and the Office of Credit Unions.

Offices of the Department of Financial Protection and Innovation are located at:

320 West 4th St, Suite 700 One Sansome St, Suite 600
Los Angeles, CA 90013-2344 San Francisco, CA 94104-4428
(213) 576-7500 (415) 972-8565

300 South Spring Street, Suite 15513 2101 Arena Blvd

Los Angeles, CA 90013-1259 Sacramento, CA 95834
(213) 897-2085 (916) 576-4941
STATE OF CALIFORNIA – DEPARTMENT OF FINANCIAL PROTECTION AND INNOVATION
ORGANIZING A STATE CREDIT UNION INFORMATION BOOKLET
DFPI–391 (Rev. 01-21) Page 8 of 11

1455 Frazee Road, Suite 315

San Diego, CA 92108-4304
(619) 610-2093

SECTION II

ORGANIZERS

The Department of Financial Protection and Innovation welcomes opportunities to

encourage sound development of the credit union movement through the ready
organization of qualified new credit unions. Credit union organizers may welcome the
assistance of a representative of the Department of Financial Protection and Innovation,
another credit union, or any person whose training and experience qualify him or her to
assist in such organization. The organizer should stimulate the interest and enthusiasm
present in the group, unless it becomes clear that the group will not qualify for a charter.

Credit union organizers are encouraged to lead charter-organization meetings and instruct
new officials. They can be of real service by keeping in close contact with a new credit
union and by assisting the new officials in solving initial operating difficulties and in aiding in
the development of an aggressive educational program.

INVESTIGATION PRIOR TO INCORPORATION

The preliminary investigation is important as it enables the organizer to learn about a

prospective group's particular needs. It provides an opportunity to explain the advantages and
objectives of the credit union plan. The more completely the organizer understands the group,
the more able the organizer will be to guide its members and officials and lay the foundation
for a sound credit union.

REQUESTS FROM PROSPECTIVE GROUPS

A credit union organizer should give prompt attention to a request from a prospective group.
The organizer should arrange with a representative of the group to hold a mutually convenient
meeting to discuss the organization and operation of a credit union. At this meeting the
organizer should obtain all necessary information about the group so that there can be a
definite decision as to whether the group meets the requirements necessary to form a credit
union. This decision should be obtained before the group commences with
incorporation or any other phase of organization. If the group is clearly ineligible, all activity
towards organization should be discontinued and the group fully informed as to why they do
not qualify.
STATE OF CALIFORNIA – DEPARTMENT OF FINANCIAL PROTECTION AND INNOVATION
ORGANIZING A STATE CREDIT UNION INFORMATION BOOKLET
DFPI–391 (Rev. 01-21) Page 9 of 11

CHARTER-ORGANIZATION MEETING

This meeting must include all those persons who have agreed to serve as members of the
Board of Directors, Credit Committee and Supervisory Committee. All other potential members
of the credit union should be encouraged to attend.

A. Consultant's Presentation

The consultant should advise the group of general procedures and requirements in forming
a credit union.

The following subjects should also be covered:

1. Management and membership control of a credit union stressing the responsibility of

the group for operating a successful credit union and the importance of the cooperative
thrift and credit services a credit union can provide;

2. Functions of the Department of Financial Protection and Innovation, including licensing,

supervision, examination and the fees charged;

3. Qualifications of effective directors and committeemen, including their duties and

responsibilities;

4. Opportunities and responsibilities of the members and need for maximum

participation in services provided by the credit union; and

5. Functions of State and National credit union trade organizations. Sufficient time
should be allowed for a question and answer period.

Following the presentation and a discussion period, the member- subscribers will select the
persons they desire to serve on their Board of Directors, Credit Committee and Supervisory
Committee. Then a credit union name will be selected. Make a first and second choice.

At this point, the Charter-Organization meeting should be adjourned and a new meeting of
the selected officials (incorporators), should be immediately convened.

B. Incorporators Meeting

At this meeting, the incorporators decide who will fill the positions of corporate
officers and committee members.

Those selected will proceed with the following:

1. Complete and sign the Application for Authority to Form a Credit Union.

2. Each official must complete and sign a Statement of Identity and

Questionnaire (Form S.I.Q. 512) and Affidavit of Understanding the Credit
Union Laws and Regulations.
STATE OF CALIFORNIA – DEPARTMENT OF FINANCIAL PROTECTION AND INNOVATION
ORGANIZING A STATE CREDIT UNION INFORMATION BOOKLET
DFPI–391 (Rev. 01-21) Page 10 of 11

3. Complete the Agreement by Directors and Committeemen to Serve which

should be attached to the application as Exhibit "D".

4. Complete and sign four (4) sets of Articles of Incorporation.

5. Complete two (2) sets of Bylaws.

6. Select the insurance carrier for the Surety and Fidelity Bond.

7. Select the insurance carrier for the Worker's Compensation Insurance (if
needed.)

8. Select the vendor(s) from whom supplies are to be purchased.

9. The treasurer should collect at least $25 from each incorporator for the purpose of
financing the cost of organization and supplies. After the credit union obtains its
"Certificate of Authorization to Act as a Credit Union", these amounts will be recorded
into the records as a share deposit of each individual.

The consultant should now explain the order in which organization will proceed, which is as
follows:

1. The Application for Approval to Form a Credit Union is to be submitted to the

Department of Financial Protection and Innovation.

2. After all application requirements have been met, the Department of Financial
Protection and Innovation will issue a letter of initial approval to organize a credit union.

3. Upon completion of all the stipulations contained in the letter of approval to organize a
credit union, the Department will issue the Certificate of Authorization to Act as a Credit
Union. Receipt of this Certificate permits the credit union to commence business.

ARTICLES OF INCORPORATION

The Articles of Incorporation should be filed with the Secretary of State in Sacramento. The
Secretary of State should be requested to file one set of Articles, certify two sets and stamp
mark one set. The two certified copies and marked set are to be returned to the President.
(Enclose a self-addressed envelope.) One certified copy of the Articles of Incorporation should
be recorded with the County Recorder of the county in which your main office will be located.

ORDERING SUPPLIES

New credit unions should be guided by reason in ordering supplies to meet anticipated
needs. A supply of accounting and report forms should be on hand when operations
commence.
STATE OF CALIFORNIA – DEPARTMENT OF FINANCIAL PROTECTION AND INNOVATION
ORGANIZING A STATE CREDIT UNION INFORMATION BOOKLET
DFPI–391 (Rev. 01-21) Page 11 of 11

Supplies can be obtained through the California Credit Union League or other suppliers.

BONDING COMPANIES

There are a number of insurance companies other than those affiliated with the California
Credit Union League who write the type of insurance coverage needed by a credit union.
It is suggested that you contact your insurance broker or the League.

FIRST STEPS IN ORGANIZING

If you decide to apply for a State credit union charter, complete the enclosed application and
attach a check for $5.00 made payable to the Department of Financial Protection and
Innovation, and mail it to either (depending on the region where the proposed credit union will
be headquartered):

Joni Kimbrell, Financial Institutions Manager

Office of Credit Unions
Department of Financial Protection and Innovation
300 S. Spring Street, Suite 15513
Los Angeles, CA 90013-1259

OR

Les Thompson, Financial Institutions Manager

Office of Credit Unions
Department of Financial Protection and Innovation
300 S. Spring Street, Suite 15513
Los Angeles, CA 90013-1259

OR

Sean Sisser, Financial Institutions Manager

Office of Credit Unions
Department of Financial Protection and Innovation
One Sansome Street, Suite 600
San Francisco, CA 94104-4428

OR

Laura Leung, Financial Institutions Manager

Office of Credit Unions
Department of Financial Protection and Innovation
2101 Arena Blvd
Sacramento, CA 95834-2306