The Key Implication of the Supreme Court’s Field of Membership Decision

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4 minutes

Credit unions will now be able help more people if they can effectively reach out to and serve larger markets.

The U.S. Supreme Court’s decision not to hear American Bankers Association v. National Credit Union Administration is a huge win for credit unions. It not only means that credit unions will be able to help more Americans through expanded fields of membership, but also could embolden the National Credit Union Administration to take steps to advance credit unions that they might have otherwise shied from.

Instead of formal rules that prevent credit union expansion, credit unions will now face a different obstacle: demonstrating their ability and intent to serve larger markets.

Despite Jim Nussle’s recent argument, NCUA is not going to eliminate or effectively eliminate field of membership anytime soon. Rightly or wrongly, doing so could jeopardize credit unions’ tax-exempt status—an unnecessary risk. Instead, NCUA’s new field of membership rule offers something better. It provides room for long-term continued growth and bolsters credit unions’ tax-exempt status by stipulating that the largest fields of membership require a greater commitment to a mission of meeting the credit and savings needs of persons of modest means.

The Supreme Court’s decision not to hear the case leaves the vast majority of NCUA’s 2016 field of membership modernization rule, which the ABA challenged before it was even implemented in early 2017, intact. The case was first decided largely in ABA’s favor by Judge Dabney L. Friedrich of the U.S. District Court for the District of Columbia. Friedrich found that two key provisions contained in the rule exceeded the regulator’s statutory authority:

  • The switch to combined statistical areas instead of core-based statistical areas as an acceptable boundary for local well-defined communities
  • The increase of the population limit of rural districts from 250,000 people to 1 million people

However, on August 29, 2019, the U.S. Court of Appeal for the D.C. Circuit’s reversed the lower court’s decision, effectively restoring these two key provisions to NCUA’s field of membership rules. The Supreme Court’s decision not to hear ABA’s appeal means the provisions will stand.

On July 30, expect the NCUA board to adopt an amendment to the field of membership rule, which will address some minor changes requested by the court and establish the final set of guidelines for the foreseeable future. The amendment addresses a concern that the court raised about ensuring that community fields of membership aren’t constructed in a way that effectively serves as a form of redlining. More importantly, the final rule will include the change from core-based statistical areas to combined statistical areas for local well-defined communities. It will also increase the maximum population of rural districts from 250,000 to 1 million. These two provisions are at the heart of the field of membership rule changes and are key to allowing credit unions to continue to flourish.

NCUA has understandably touted the legal victory:

“This ends nearly four years of uncertainty and helps the NCUA foster greater financial inclusion for all Americans. The lack of financial access is especially prevalent in rural communities, which have experienced the withdrawal of financial institutions over the last decade. The Supreme Court’s decision will assist the agency’s efforts to bring these important and often overlooked communities back into the financial mainstream.”

On its face, the new field of membership rule seems like it would benefit community credit unions most. Community-chartered credit unions serve a single common bond—their community—and, under the rule, they can serve larger and more flexibly defined communities. However, a community credit union only serves the single community.

In actuality, the field of membership rule provides multiple common bond, or select employee group-based, credit unions the greatest growth opportunities. This is because of underserved areas, particularly underserved rural districts.

An underserved area is a form of common bond. Multiple common bond credit unions can serve employer groups, associations and underserved areas. Just like other community-based fields of membership, an underserved area charter allows anyone who lives, works, worships, studies, etc. in the area to join the credit union. Additionally, multiple common bond credit unions can serve as many underserved areas as they have service facilities, which generally means branches.

If you analyze how all of this can be combined, you find that, in most states, the new field of membership rule allows federal SEG-based credit unions to serve larger communities than federal community-chartered and state-chartered credit unions, including entire states in some cases. This is one of the reasons we may see a wave of conversions to the federal multiple common bond charter in the coming years. As was said earlier, instead of formal rules that prevent credit union expansion, credit unions will now face a different obstacle: demonstrating their ability and intent to serve larger markets.

Sam Brownell is founder of CUCollaborate, which has built different software solutions that support credit union growth, including one that helps credit unions identify their optimal field of membership. The company also offers field of membership consulting services to help credit unions identify and implement progressive field of membership strategies to accelerate growth.

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