FOM Rule Presents Growth Opportunities for Credit Unions

The NCUA’s unanimous decision in July to approve the Field of Membership modernization rule is expected to open a new chapter of opportunities and growth for credit unions, including small cooperatives and those that primarily serve minority and rural populations. Moreover, some credit union professionals said they hope the independent federal agency will consider leveraging this new rule to further expand FOMs.

This FOM rule was originally adopted by the NCUA in 2016, but legal challenges brought forth by the banking industry delayed and nearly killed it. A four-year court battle with bankers ended in June, however, when the U.S. Supreme Court denied an appeal from the American Bankers Association to review the FOM rule.

Former NCUA board member Dennis Dollar said his firm, Dollar Associates LLC in Birmingham, Ala., has helped more than 700 credit unions expand their fields of membership over the past 15 years.

“The 2016 NCUA FOM rules were a significant update for federal charters, and there has certainly been a considerable pent up ­demand for more diversified FOM approvals since the rule’s implementation was halted shortly after it was enacted, as the bankers ran a very costly and totally unsuccessful legal strategy for over four years that was ultimately thrown out by the U.S. Supreme Court,” Dollar said. He added, “The pent up demand is truly significant. [The] NCUA can, judging just from the number of calls we are getting since the Supreme Court decision, expect a long line of federal charters getting in the queue for FOM expansions in the next 12 to 18 months. Credit unions know that enhanced FOM options are key to their long-term marketplace viability, building the scale necessary to compete, and financial safety and soundness.”

Moreover, Ryan Donovan, CUNA’s chief advocacy officer, said he is hoping the Supreme Court ruling will give the NCUA the confidence to look at the law and identify ways it can expand the rule to provide more opportunities for credit unions to ­include more people in their pool of potential members.

“Certainly the court, through the reaffirmation of the Chevron doctrine, seems to be pointing the agency in that direction and we hope that they go forward in that direction,” he said.

Carrie Hunt, NAFCU’s EVP of government affairs and general counsel, said even though the new FOM rule will allow certain credit unions to expand their field of memberships, there is still much more room for FOM growth.

“In particular, in rural areas even the caps that are put in place right now potentially are too low for credit unions to be vibrant and viable, and for everyone to be able to belong to a credit union who wants to belong to one,” she said, adding that while it’s incredibly important to have FOM expansions in rural districts, it’s also incredibly important to have FOM expansions in densely populated areas.

Donovan said he believes the new FOM rule is a good springboard for an industry discussion about the relevance of the field of membership as the limiter for credit unions. He pointed out that when the credit union movement was created, Congress never said credit unions would get their tax-exempt status only if they served small groups of people. In fact, what Congress intended when conveying the tax exempt status was for credit unions to do more, not less, he said.

“From that perspective, the field of membership holds credit unions back in the bag and it’s also inconsistent with the first ­cooperative principle, which is open and voluntary membership,” Donovan said. “In the modern setting it seems to be fully inconsistent with the desire to have financial institutions that are inclusive. I think this is the time for us to be really looking at whether or not field of membership is relevant, and in so many ways it appears that it’s not.”

Although Donovan acknowledged FOM may never be eliminated from a practical standpoint, it is critically important for credit unions to be more inclusive.

“We are in a digital environment. Could you imagine a single common bond credit union that is organized around association with a social media platform so that members and users of Facebook, for instance, could come together and join and form a credit union? What a community means, what an association means in the 21st century is a bit different than what it meant in 1934 or 1909,” he said.

But for now and in the months ahead, credit unions will be looking closely at the NCUA’s newly-adopted FOM rule for potential growth opportunities.

According to Dollar, the biggest improvements in the 2016 rule over the 2010 rule are found in the arena of community charters, rural districts and underserved areas – each of which were made easier to define and broader based.

“There are great FOM options for smaller and larger credit unions alike in this new NCUA rule,” he said. “Smaller credit unions can take a portion of a community and not have to stretch themselves too thin by taking on a whole MSA or CSA.”

A CSA, or Combined Statistical Area, is a combination of contiguous MSAs, or Metropolitan Statistical Areas, that have documented interaction with each other, or an expansion of an MSA into surrounding counties that share common interactions of a community nature, Dollar explained.

“One of the key provisions of the 2016 rules is that a credit union can apply to serve a CSA, in whole or in part, if it has the financial capacity and a solid business plan to do so,” he said. “Previously, under the 2010 rules, all federal credit unions were limited to a single MSA or portion thereof.”

What’s more, the new FOM rule will be very helpful for smaller SEG-based credit unions because it allows them to serve entire office complexes, shopping centers and industrial parks without having to sign up each individual business as a separate select employer group (SEG). And, both larger and smaller SEG-based credit unions can apply to service one or more underserved areas through a process that is considerably less restrictive under the new 2016 rules than under the 2010 rules, according to Dollar.

The new FOM rule provides both expansion and diversification options for credit unions serving largely minority memberships.

“The ability to adopt underserved areas or take a portion of a community that desperately needs service may be just the leg up some minority credit unions need to move to expand their operations to the next level in service and financial performance,” Dollar said. “FOM expansion could literally save a countless number of smaller and minority credit unions.”

And the rule is particularly beneficial for credit unions that serve rural communities because as long as the population density stays below the established rural definition of 100 persons per square mile, a rural district community can now cross contiguous state lines and have a total population up to one million – a four-fold increase over the 250,000 population cap for rural districts under the 2010 rule, Dollar said.

“That population cap increase is huge for credit unions serving rural areas where people have to drive an hour to get to a branch and may not have broadband to access their accounts digitally,” he said. “Larger rural service areas for the lower cost financial services that a credit union provides will literally impact the lives of millions of rural residents.”