Credit Union FOMs: What You Think You Know Is Wrong

When community charters were permitted for credit unions, many thought it would be a panacea. Others thought opening up credit union fields of membership so credit unions compete against each other would be the end of the industry as we know it. Both camps were wrong. Multiple common bond credit unions have a huge opportunity to grow by getting back to their roots to serve underserved communities.

The term underserved communities has a negative connotation with financial institutions and more specifically their leaders. Thinking that opening up your members and their capital to underserved areas means only adding the unbanked and often subprime borrowers is wrong.

Underserved field of membership expansions can allow credit unions to expand their reach, allowing them to serve growing, young, wealthy, super-prime communities.

Certainly, some credit unions are serving the unbanked and subprime through underserved FOMs and serving them well. But a grander opportunity awaits to serve wealthy, prime and super-prime borrowers through underserved area expansions.

Underserved area expansions are available to state-chartered credit unions with parity provisions and federally-chartered credit unions with SEG-based FOMs. And you don’t have to give up your original SEGs to do it as you would if your credit union converted to a community charter. Underserved FOM expansions allow credit unions with employer-based fields of membership to preserve their original FOMs, while also adding geographically-defined communities of service.

You may be surprised to learn that most metropolitan commercial areas qualify for development under the Community Development Financial Institutions Fund, but allow credit unions to serve the businesses and the people who work for them in that area – work being the critical term. Underserved area expansions allow credit unions to tap into large growing markets of wealthy prime and super-prime borrowers because an underserved area is defined by the people who live in an area rather than the people who work in that area. Field of membership rules typically allow credit unions to serve consumers who live, work, worship, study, volunteer or have businesses in the prescribed area.

Look at Washington, where CUCollaborate is located, for instance. The green tracts shown in the accompanying map are considered underserved tracts that a credit union could apply to serve under the new FOM rules. With an underserved charter, a credit union could serve Georgetown University, K Street lobbyists making $600 per hour, Capitol Hill and National Harbor, plus take advantage of currently underserved areas undergoing gentrification that can later be grandfathered within your FOM.

All of these areas already provide a great opportunity for credit unions to expand their market to allow them to serve more consumers, many of who are likely prime and super-prime borrowers simply because they work in these areas. As the urbanization trend continues, these areas will likely develop an increasingly attractive borrower profile. Moreover, the consumers who are moving to these areas skew younger and offer the opportunity for a longer term and more valuable financial relationship.

Carpe Diem

Seize the day – and tomorrow! If your credit union is SEG-based or multiple common bond, you may want to know how to take advantage of this opportunity. First, you need to already have or be willing to place a service facility in the prescribed area. If you believe in the investment, then you must determine how to pursue the many opportunities. Here are my recommendations:

1. Identify the area you want to add to your field of membership.
2. Choose a location for your service facility in the area if you don’t already have one. Selection criteria should include SEG locations, where existing members live and where you will achieve the most foot traffic.
3. Identify and persuade a large employer within the area to become an anchor SEG. Then you will already have a sizeable captive audience of prospective new members, which mitigates your investment risk.
4. Apply to amend your field of membership to serve the prescribed area.
5. Add new members and grow!

I’m not saying it will be easy, but with solid strategy and strong execution, it will be a sound investment in your credit union’s future.

Sam Brownell is Founder of CUCollaborate. He can be reached at 276-477-5077 or sbrownell@cucollaborate.com.