NCUA BOARD APPROVES FINAL RULE THAT UPDATES – THOUGH NOT AS MUCH AS NEEDED – THE AGENCY’S DEFINTION OF WHAT CONSTITUTES A CREDIT UNION SERVICE FACILITY   

At yesterday’s NCUA Board meeting, the Board by a unanimous 3-0 vote approved a compromise final rule updating NCUA’s regulatory definition of a credit union service facility.

A copy of the final rule can be accessed through the link below.

https://www.ncua.gov/files/agenda-items/AG20211118Item3b.pdf

For those of you who have been following the NCUA Board politics over recent months through our previous Client Updates, this service facility rule is the second of three that have been put on the NCUA agenda by Board Member Rodney Hood – with the support of NCUA Board Vice- Chairman Kyle Hauptman – over the objection of NCUA Chairman Todd Harper.

The first of these three rules, dealing with CUSO lending authority, was approved at the NCUA Board’s October board meeting on a 2-1 vote with Hood and Hauptman voting in favor and Chairman Harper voting no.

Having obviously seen the optics last month of a chairman that was dealing with what might be considered by some a runaway board that he cannot effectively lead to his point of view or was unwilling to compromise to avoid the defeat on a key policy issue like the CUSO lending rule, Chairman Harper was apparently much more willing to compromise with his fellow board to get to a 3-0 vote in November on the service facility rule.

By removing ATMs from the definition of a service facility for expanding service by a federal credit union into a qualified underserved area from the final rule, the NCUA Board was able to reach unanimity on shared branches being recognized as service facilities for both SEG expansion, associational group additions and underserved area service regardless of whether the credit union owns a share in the shared branching network. While ATMs do not meet the definition of a service facility for underserved area expansion, the final rule clarifies that ATMs whether owned or shared by the credit union are considered service facilities for SEG and associational group expansion. Further, ITMs and kiosks are recognized as as service facilities for both SEG and underserved area expansion.

This rule was originally proposed by Rodney Hood when he was NCUA Chairman and went considerably further than this final rule. The original proposal allowed ATMs to count as service facilities for underserved area expansions as well. In his remarks proposing the original rule, then-Chairman Hood actually spoke of the need to expand the definition further and to recognize that the digital delivery of financial services today should actually drive regulators to consider laptops, tablets and smart phones as service facilities. After all, you can make deposits, transfer funds, apply for loans, disburse loan proceeds – all through the phone in a member’s pocket or the tablet under the member’s arm.

While such a true modernization may well come and Mr. Hood will always be on record as the NCUA Board Member who challenged the agency to get out of the 1990s on its service facility definition and try to think about the financial service delivery market as it is in 2021, the reality is that neither NCUA staff nor Chairman Harper was willing to go so far at this time as to move beyond physical service facilities.

Still, this action was positive in that it at least brought NCUA up to the early 2000s on their service facility definition and put the entire issue of where digital service delivery is headed onto the future discussion agenda at the agency.

THE MICRO VIEW OF THIS NEW SERVICE FACILITY DEFINTION

 The most practical impact of the new rule will be for multiple common bond federal credit unions.

Because NCUA by law must determine that a FCU is within “reasonable proximity” of a SEG, associational group or underserved area it is applying to serve as a part of its field of membership and the agency has historically held an unwritten but consistent internal criteria that 25 miles from a credit union service facility is a good marker for “reasonable proximity,” this rule will help multiple common bond FCUs considerably in that participation in shared branching can now counted to satisfy for reasonable proximity requirements in serving a new SEG, association or underserved area.

This is new territory for NCUA because they have largely required that FCUs open a physical facility, either owned or leased, to meet the reasonable proximity requirements. And, when they considered shared branches to supplement the owned or leased physical facilities, they wanted to FCU to actually have an ownership interest in the shared branching network – rather than just a contractual relationship.

By recognizing shared branches for meeting the reasonable proximity requirement, NCUA is still of the mindset that a service facility must be physical (outdated though that may be) but they are at least allowing it to be a physical facility that a credit union shares through a shared branching network with other credit unions. Therefore, if a credit union is in shared branching, that FCU can count another credit union’s branch (provided both are in the shared branching network) as a service facility to help meet the often cited yet unwritten 25-mile reasonable proximity requirement.

It will save credit unions from having to lease storefront branch space just to bring in a key SEG or association. That is a safety and soundness benefit that, within itself, should have brought NCUA to this position two decades ago when shared branching first came of age and maturity.

That ability to count a shared branch as a service facility also comes into play when a multiple common bond FCU applies to serve a qualified geographic underserved area as validated by census tract data. Now, depending upon the size and ability to serve the entire underserved area, having a shared branch location within the underserved area may meet the reasonable proximity requirement that currently requires a FCU to have a physical presence inside the geographic boundaries of the underserved areas.

If we could tell you how many of our multiple common bond credit union clients have elected not to serve some underserved areas because it was not worth it to them to open a leased or owned physical presence in an area that already required more risk mitigation when the FCU already had a branch nearby and was a part of shared branching located within the underserved area, you would be surprised how high the number is.

Likewise, there have been had numerous SEGs and associations that would have been major contributors to a FCUs growth that could not be added because there was no physical credit union branch within 25 miles. The ability to count shared branches, not to mention ATMs, ITMs and kiosks, for SEG and associational group expansion will be a big plus for many of the FCUs that were stymied by the previous NCUA position on physical facilities and 25-mile reasonable proximity.

And, for state chartered multiple common bond credit unions, this rule will likely be beneficial as well for those states that apply federal parity on field of membership issues. Good regulatory practice is contagious, so it is very likely that many (or perhaps even most) states will follow suit on this new regulatory position on service facilities.

For community-chartered credit unions, the benefit is less significant. However, any movement toward recognizing shared branching, shared ATMs, ITMs and kiosks as service facilities for SEG-based credit unions helps NCUA begin to be more open to such service facility definitions for helping a community credit union to meet its responsibility to serve the entirety of its community – which is a part of the ongoing examination process for community-chartered FCUs.

Also, if and when Congress allows community-chartered FCUs to also expand into qualified underserved areas outside their existing communities, this service facility definition will enable more community credit unions to do so.

Overall, this is a positive action. Board Member Hood and Vice-Chairman Hauptman are to be commended for taking the action to make sure this final service facility rule got on the NCUA Board agenda and came up for a vote. There is little doubt but that no compromise would have been reached and no action would have taken place unless the issue was forced to be dealt with at the board table.

And Chairman Harper is to be commended for his willingness to compromise in order to get to a 3-0 vote. Whether he did so to avoid the appearance that he was losing his leadership of the board he chairs, to demonstrate himself as bipartisan with his pending Senate committee vote for confirmation to another NCUA term or because he felt his objections had been met by removing the ATM provision as a service facility for underserved areas, it matters not. The rule has been approved and unanimously.

While not as far reaching as it could have been, it was certainly a positive action. While it was probably fifteen years overdue, there are no time machines to go back and approve it in 2006.

The final rule is a positive move. The NCUA Board should be commended for moving forward on it.

Now they will move forward to the third final rule Board Member Hood and Vice Chairman Hauptman came together to put on the agenda over the Chairman’s objection – mortgage servicing. That issue is scheduled to be addressed in December.

THE MACRO VIEW OF THIS NEW SERVICE FACILITY DEFINITION

 Thanks to Former Chairman and now Board Member Hood, notice was given that he did not think the NCUA Board should consider its work done on the service facility issue.

He strongly emphasized that most credit union members, perhaps a solid majority today, never go into a credit union physical branch. He correctly pointed out that COVID has decreased the number who regularly go into branches dramatically because the physical facilities were closed or had limited access.

As more and more credit union members utilize digital means to access the services of their credit union, it is imperative that NCUA open up FOM expansion and service extension to recognize laptops, tablets, and smartphones as service facilities.

Board Member Hood made that point, and this service facility rule gave him the opportunity to do so. Vice Chairman Hauptman, who has raised the need for the agency to get into the blockchain and crypto era, also essentially made the point that NCUA must look forward – not behind – when it comes to recognizing how so many credit union members want to be served digitally and whether they will stick with their credit unions if the regulator does not allow them to be served that way.

The big victory on service facilities may be a number of years in coming. But this rule at least put it before NCUA as an agency and credit unions as the agency’s stakeholders.

That is a good thing, making this rule good from a short term and long term basis.

DO YOU HAVE OTHER MEMBERS OF YOUR EXECUTIVE TEAM, MANAGEMENT TEAM OR BOARD THAT MIGHT BENEFIT FROM THESE CLIENT UPDATES?

 Many of our credit union clients have multiple executive, managers and/or board members on our Client Update list. Others of you have limited access and share the Client Updates to selected staff or board yourself.

That is totally your call. We just wanted to remind you that we will send the Client Updates to anyone in your organization that you want to receive them. That is a part of what you receive as a Dollar Associates client.

If you wish to have additional names at your credit union included on our Client Update distribution list, please reply to this email and give us the name and email address. We will see to it that they are added to the distribution list for your credit union when we send these periodic Client Updates.

Until next time.

Dennis Dollar