Credit unions strive to serve more members despite regulatory challenges.
In working toward sustainable membership growth, many credit unions are looking to firm up their foundations through charter changes, field of membership expansion and mergers—even as the regulatory framework for those building blocks continues to shift.
Credit union leaders cite a variety of considerations in seeking to expand their fields of membership, from positioning their organizations for future growth and merger opportunities to diversifying so they can weather economic setbacks in specific regions and business sectors. At the same time, they maintain that FOM changes support, not supplant, their commitment to continued growth within their existing membership bases.
For example, VyStar Credit Union recently completed two field of membership expansions beyond its Jacksonville, Florida, base and has been working on a merger with a community bank.
“Broadening our geographic area diversifies risk and gives VyStar more options to pull levels for loans and deposits for safety and soundness—and to build on already great organic growth,” says CUES member Brian E. Wolfburg, president/CEO of the $8.2 billion credit union now serving 635,000 members in 49 Florida counties and four southeast Georgia counties.
On the federal level, field of membership regulations have long been a legal and political battleground. As the accompanying timeline shows, the National Credit Union Administration’s authority to change FOM standards has been repeatedly challenged by the banking industry over three decades. Most recently, a lawsuit by the American Bankers Association over rules introduced in 2016 led to a split ruling that is currently being appealed.
“In many cases, the ABA is viewed as a four-letter word by the NCUA, and perhaps vice versa,” suggests E. Andrew Keeney, a nationally recognized credit union attorney who recently retired and now is a consultant with Keeney & Associates, LLC, Kitty Hawk, North Carolina.
Legal action by the ABA has had a chilling effect on NCUA rule-making for decades, Keeney says. The most recent divided court decision even forced NCUA to rescind some of its actions, including pulling back on a FOM expansion that forced a credit union to close a new $1 million branch.
A final ruling by the appellate court on the current suit could be a year or two away, and that decision could then be appealed to the U.S. Supreme Court, which would extend the uncertainty.
“As credit unions move forward with their field of membership expansions, they need to do so with caution because they could be caught up in a court battle even though they have done nothing wrong,” Keeney says.
NCUA has changed its FOM rule in response to the appellate decision, but the ABA could challenge those new rules as well, either as part of the appeals process or, more likely, in new litigation. Keeney suggests that the ABA may “sit back and see what the court decides on the appeal and let the current NCUA expansion stand so that there’s clarity as to what arguments they’re trying to maintain.”
Among a dozen new provisions, the 2016 final rule would:
- give federal credit unions with community charters more flexibility in electing to serve a portion of a core-based statistical area rather than requiring that their FOM include the most populated county or municipality in that area;
- permit credit unions to serve a well-defined portion of a core-based statistical area or the entirety of a combined statistical area (rather than being limited to a metropolitan statistical area), subject to a 2.5 million population cap;
- expand opportunities for credit unions to serve underserved areas;
- allow rural district credit unions to serve FOMs up to 1 million people;
- streamline the process for multiple common-bond credit unions seeking to serve additional groups, such as independent contractors with strong connections to employee groups under their existing FOM; and
- permit former military members with honorable discharges to join credit unions serving active-duty service personnel.
The court ruling found for the ABA in overturning two provisions: presuming any individual portion of a combined statistical area belongs to the local community (subject to the 2.5 million population limit) and increasing rural district population limits. The remaining portions of the 2016 rule have thus far been upheld.
The 2016 rules, in effect, were designed to loosen some of the FOM restrictions put in place in 2010, says Dennis Dollar, former NCUA board chair and principal partner of Dollar Associates, Birmingham, Alabama. “While they were not as far-reaching as the rules that were in effect from 2003 to 2010, NCUA took very solid action in 2016 to enhance the federal FOM rules that had been curtailed quite significantly in 2010.”
Dollar contends that NCUA is “on very solid legal ground” in enhancing options for credit unions to expand their fields of membership.
“I am confident that NCUA will ultimately prevail in court because their 2016 FOM rules are quite reasonable and very consistent with the 1998 credit union membership law passed by Congress,” Dollar says. “The 2016 rules are more restrictive than the 2003 rules or even the 1999 rules, which the courts upheld. … It is hard for me to believe that, after 20 years of broadening cross-community interaction, the courts will ultimately rule that what could qualify as a community in 1999 is not sufficient to be considered one in 2018.”
In the meantime, Richard Garabedian, an attorney specializing in financial institutions at Hunton Andrews Kurth LLP, Washington, D.C., agrees that credit unions should proceed with caution on possible FOM expansions. “Either side could appeal to the Supreme Court if they don’t like the outcome of the appellate case,” he notes. “We’ll see what happens, though the courts in the past have been pretty accommodating to say that if new members came in under a rule that was overturned, they could remain as members.”
Shift to State and Association Charters
To settle the long-running legal battle with the banking industry over field of membership standards, credit unions might need to turn back to Congress for support, suggests Peter Matthews, recently retired president/CEO of $614 million Merrimack Valley Credit Union, Lawrence, Massachusetts. (Read a web article about his credit union’s quandary in the wake of the federal court ruling in “Field of Membership Dispute Nearly Derails Merger”) Certainly, the ABA shows no signs of giving up the fight, so NCUA and federal credit unions can expect a continued barrage as they work toward a charter/FOM framework that allows credit unions to keep pace as the financial services market evolves.
“But what are the chances of Congress coming together to approve anything these days? I don’t see that happening either,” Matthews says.
The tightening of FOM rules for federal credit unions in 2010, which limited community charters to the boundaries of a metropolitan statistical area, slowed community charter conversions, Dollar notes. In response, many states relaxed their FOM regulations, which led to a significant shift in credit unions seeking state charters over the next seven years.
“This also impacted the choice of the continuing credit union in a lot of mergers because, if a state charter was involved in the merger, the enhanced FOM flexibility at the state level would create a situation whereby the surviving charter following the merger would in many cases be the state charter with the broader FOM,” he notes.
NCUA may have sought to level the playing field with state FOM regulations, but the ongoing legal dispute may tip the advantage back to state charters for the present. Dollar says his firm is currently working with credit unions on 20 charter conversions, 14 from federal to state and six in the other direction.
For the most part, state charters give credit unions more strategic options for membership growth than federal charter regulations, Garabedian says. “States quite often have more expansive geographic rules than you would find at the federal level, and they also have combination charters, where you can have a SEG-based membership and a geographical membership.
“A wider geographical base not only provides access to more potential members, but it also expands your ability to acquire other credit unions, which can be a much quicker path to expanding membership than acquiring new members organically,” he adds.
Another option is for federal credit unions to shift between a community charter and a charter to serve multiple employee groups. Richard Schulman, a Chicago attorney and former NCUA associate general counsel, says a credit union must weigh carefully whether to switch from a multi-group federal charter to a community charter.
In making that change, “it keeps its members of record but loses its occupational and associational groups. If those groups have statewide or national footprints, the community credit union may be excluding long-term sources of membership,” he notes. “And if they have a branch serving an occupational group, that branch may be lost in the conversion.”
In addition to more expansive FOM rules in many states, credit unions moving to state charters may be able to take advantage of opportunities to work in the legislative process, Keeney says.
“At the federal level, seeking regulatory change either through the NCUA or Congress is exceedingly difficult,” he notes. In comparison, credit union executives and directors may have a more effective voice in making their case for change to state regulators and legislators.
Another federal charter option is serving members with an occupational common bond based on employment in a trade, industry or profession (Read more in “TIP Charter Opens Door to Nationwide Niche Membership”.)
In some cases, association or TIP charters may offer more flexibility for membership growth than state charters. But Keeney cautions that though TIP charters may seem “broad and all-encompassing, offering tremendous opportunities,” they also present marketing and operational quandaries in connecting with and serving prospective members across the country. And a TIP charter may also limit future growth: If a credit union wants to merge, it will have to find a partner with its own TIP charter, he says.
In sum, “any charter change requires a lot of considerations. It’s never just one thing. You do thing A and then you have things B, C and D to deal with,” Schulman notes. “With a TIP charter, as a practical matter, you have to already be a credit union that serves a limited group to consider it. Those are becoming fewer and far between.”
Aiming for Sensible Growth
The pursuit of future growth opportunities and market diversification through field of membership and charter adjustments are illustrated in Evergreen Credit Union’s story.
The $298 million, 23,000-member credit union, Portland, Maine, was founded as S.D. Warren Federal Credit Union in 1951, named for a large paper mill. The credit union converted to a state charter in 1993 with the goal of widening its FOM beyond mill employees; six years later, its base was expanded to serve all of Cumberland County.
Over the years, production at the mill slowed due to declining demand, and it was eventually sold to another company. “We still serve some current employees, but the employee base there has dropped significantly,” says Evergreen CU President/CEO Jason Lindstrom.
The credit union, however, has continued to grow and, in early 2018, expanded its field of membership to include adjoining York County. Lindstrom credits the FOM expansion and increased marketing overall for the 10 percent asset growth the credit union achieved over the past year.
“Our team is also very dedicated to our vision of being the most innovative credit union in Maine. We’ve streamlined many processes and implemented many new products and services in 2018 to help better our members’ lives,” he adds.
About 300 York County residents joined Evergreen CU in the first year of eligibility, in response to local newspaper ads and the tag line “Now serving York County” added to online and print materials. Lindstrom expects member growth to pick up in both counties as the organization continues to step up marketing. Opening a branch in York County is also in its three-year plan for the new market.
“Going forward we will continue to ramp up marketing in York County in all channels, and most York County residents already hear our radio, TV and social media commercials—another reason why it made great sense to go into York County,” he says.
The FOM expansion may help Evergreen CU with member retention, Lindstrom adds.
“As property values climb in the Portland area, there are more affordable homes just down the road in York County. Our members may choose to relocate there and, with us now serving York County, they may decide to stay with us. We also have one of the largest business loan programs in Maine, so having the expanded FOM should help us garner new business members.”
As Evergreen CU’s example illustrates, the scale and range of credit unions’ member base will remain a strategic concern in the pursuit of sustainable growth and economies of scale, Dollar says.
“That is why the bankers oppose any reasonable expansion of FOM options for credit unions,” he contends. “They do not want to see credit unions competitive in the marketplace, and one of their most effective strategies to thwart that effectiveness is to limit the number of people to whom credit unions can offer their lower-cost financial services.”
Here to Stay
Since for the most part, the movement is long past the days of small financial cooperatives serving close-knit member bases, do FOM requirements still serve a purpose?
“It all comes back to the elephant in the room—the American Bankers Association,” Keeney says. “As long as the goal and objective of the ABA is to ensure that credit unions are taxed and the goal of credit unions is to remain tax-exempt, there will be field of membership and expansion restrictions. It’s been that way throughout my 40-year career, and I expect it will be that way for the next 40 or 50 years.”
There is no direct regulatory correlation but a very strong political connection between FOM restrictions and taxation, he notes. “Small community banks that work hard to serve their customers argue that credit unions have an advantage through their tax exemption, and taxation always seems to be the basis of the burdens between NCUA, Congress, the ABA and the Independent Community Bankers of America.”
And so the political and legal wrangles are likely to continue as NCUA persists in periodic updates of FOM and charter regulations. Cynics might argue that the agency’s ongoing efforts to modify fields of membership are driven by instincts for self-preservation, to stem the tide of federal-to-state charter conversions and to discourage credit unions from converting to bank charters to eliminate membership restrictions.
“But financial industry observers would say that it’s always good to have charter choice rather than locking into only one regulatory option,” Garabedian notes. “Charter choice keeps both sides honest, such as the more expansive field of membership options in many states for credit unions that federal charters don’t have.”
On the other hand, a federal charter conveys the regulatory protections of federal preemption (of state laws regarding loan rates and terms, for example) and the exportation of interest rates (the ability to charge the same rates across the country).
“I think the NCUA has an interest in expanding the field of membership limits to allow further growth by credit unions and to help ensure their financial viability in the long run,” Garabedian says. “That probably takes on more importance as the competition heats up from nontraditional financial services providers.”
Restricted fields of membership might seem anachronistic in today’s technology-driven marketplace, but these requirements remain the law at both the federal and state level. The likelihood that Congress and state legislators would abolish them over the continued lobbying of the banking industry is “practically nil,” Dollar says.
The challenge that must be met for credit unions to achieve long-term financial stability “is for federal and state regulators to be as flexible as possible within their laws to make sure FOM restrictions are modernized with the changing marketplace and interactive nature of member service in today’s society,” he notes.
Field of membership expansion and organic growth within a credit union’s existing member base are not mutually exclusive, Dollar adds. “Just as any business must strive to get repeat business from existing customers even as it works to expand its customer base, so must credit unions grow their productivity from greater penetration of existing member relationships as they build new ones. Both strategies are absolutely essential.”
As the movement continues to advance, Schulman poses a key question and an answer: “Is a $40 billion credit union sufficiently different from a $40 billion bank to care about field of membership as a distinction? No. It’s the credit union industry’s challenge to continue serving members as if they were a neighborhood $40 million operation regardless of how large they become. If that stops, then banks and credit unions will become the same.” cues icon
Karen Bankston is a long-time contributor to Credit Union Management and writes about membership growth, operations, technology and governance. She is the proprietor of Precision Prose, Eugene, Oregon.
A Brief History of the FOM Legal Battle
- 1980s NCUA permits federal credit unions to serve multiple occupational groups.
- 1990 U.S. banking industry, led by the American Bankers Association, initiates a legal challenge in a test case over NCUA’s decision to allow AT&T Family Federal Credit Union to expand its field of membership.
- 1998 U.S. Supreme Court upholds appellate court decision ruling against NCUA; Congress adopts and President Clinton signs the Credit Union Membership Access Act to provide for multiple common bond fields of membership.
- 1999 NCUA issues regulations enacting CUMAA; court challenge of those rules fails.
- 2003 NCUA issues new FOM rules permitting an occupational common bond based on employment in a trade, industry or profession, commonly known as a TIP charter.
- 2010 New federal FOM rules limit community charters to the boundaries of a metropolitan statistical area.
- 2016 NCUA issues new rules to “modernize” FOM regulations for credit unions serving urban and rural communities, employee groups and military members; ABA files a federal court challenge against several provisions.
- 2018 U.S. District Court for the District of Columbia upholds two provisions of the NCUA’s 2016 rules and vacates two others; as the appeal of that decision continues, NCUA revises rules “consistent with the District Court revision.”