We have been so busy following the legal wrangling between the American Bankers Association and the NCUA over the agency’s 2016 field of membership (FOM) modernization rules that it would be easy to have forgotten what they were fighting over.

While we have provided a number of Client Updates over the past four years about the issues involved in the ABA’s legal challenge to the NCUA’s 2016 FOM rule, we thought it might be valuable to you if we could provide an update on what is actually in the 2016 FOM rule that is now able to be fully implemented by NCUA.

We hope you find this a good reminder of the provisions within the 2016 rule, which ones were challenged and deferred until after the courts rules and which ones were not challenged and have been implemented already.

Summary of Key Provisions of the ABA Challenge and Subsequent Final Rule

Combined Statistical Areas Authorized

More expansive than what is available by expanding into a Core Based Statistical Area, the rule upheld by the Supreme Court gives credit unions the ability to apply to serve Combined Statistical Areas (CSAs) subject to a population cap of 2.5 million. These areas go beyond the boundaries of what typically constitutes a Metropolitan Statistical Area (MSA) and could provide additional flexibility for those credit unions desiring to expand their geographic footprint. Although a welcomed and needed change, it is important to note that such communities are still subject to an arbitrary population cap of 2.5 million that unfortunately diminishes the potential of this significant change for a number of credit unions in larger metropolitan areas. This provision also carries over to underserved areas located within a CSA, as the boundaries of the underserved area can extend beyond the MSA and into the CSA if CDFI qualifying census tracts exist.

Rural District

The final rule, now upheld through the courts, raises the population cap for Rural Districts from 250,000 persons or 3% of the state’s population to a flat 1 million population cap. This is a definite improvement over the previous very limited approach to defining a rural district.

The final rule retains and includes additional criteria (multi-state expansion test) for establishing a rural district that limits multi-state expansion to only those states with borders immediately bordering the state containing the federal credit union’s headquarters or main office.

This rural district option, with the increased population cap to 1 million, will provide a much needed community expansion option for federal credit unions with FOM and marketplace needs falling outside of Core Based Statistical Areas that are almost exclusively urban in nature.

In addition, this provision carries over to underserved areas located within a rural district, as underserved areas that meet rural district criteria can now extend up to a population of 1 million.

Core Area Service Requirement Removed

Under the final rule, federal credit unions were able to convert to a community charter or expand an existing community charter without having to serve the core area if electing to serve a portion of a Core Based Statistical Area. This is a significant change in that it provides additional flexibility to a credit union in determining what part of an area it can reasonably serve.

This is significant in that existing rules require a credit union to serve the “core area”, which is defined as the most populated county or municipality in the Core Based Statistical Area. In many cases this has resulted in a credit union taking on a larger community than it originally wanted to serve or abandoning efforts to serve or expand a community altogether. By removing the core area service requirement federal credit unions will now be able to serve those areas in a Core Based Statistical Area that it reasonably can serve in a safe and sound manner.

However, the Appeals Court questioned this provision as having the potential for redlining by excluding urban core areas. As a result, NCUA is expected to pass FOM3 at its upcoming July Board meeting that will remedy this provision. Under FOM3, a credit union will still be allowed to exclude the core area, but will have to provide an explanation for why they are not including the hub. In most cases the reason to exclude the core area is simply due to their ability to serve an area, but documentation will be required to demonstrate the basis for such a determination. This will also impact underserved area applications, as underserved area requests within a core-based statistical area, but not including the hub city/county, would need to show the same documentation for why the area was excluded.

Provisions from the 2016 Rule Already in Place (Not Part of the ABA Challenge)

The following is a recap of provisions of the 2016 NCUA FOM rule that were not challenged by the ABA, and thus are already being utilized by credit unions.

Areas Adjacent to a Core Based Statistical Area Authorized

The proposal gives credit unions the ability subject to the population cap of 2.5 million to serve an outside area contiguous to its existing Core Based Statistical Area or single political jurisdiction, or apply to convert to a community charter that includes an area adjacent to a Core-Based Statistical Area. To do so and reminiscent of NCUA’s community charter application procedure prior to 2010, a credit union will be required to submit a narrative to demonstrate interaction or common interests of the proposed expanded community as a whole. This is an important and indeed substantive change, and it will allow a number of our client credit unions with a currently approved community charter serving a Core Based Statistical Area or single political jurisdiction to potentially make the case that one or more surrounding counties are an interactive part of the community.

Although the addition of Combined Statistical Areas combined with the ability to serve a portion of such communities arguably provides greater potential for expansion and diversification than adding contiguous areas to an existing community, this contiguous county provision is nonetheless significant because it provides an additional layer of flexibility, particularly for those credit unions in a Core Based Statistical Area with a limited geographic footprint.

Population Caps Retained

Perhaps the biggest disappointment with the final rule is the retention of arbitrarily imposed population caps on communities comprised of a more than a single political jurisdiction. While the addition of Combined Statistical Areas and the removal of the “Core Area” service requirement are unquestionably good moves and noteworthy, the improvements are undermined and not nearly as far reaching as they seem at first glance when they are still subject to what we see as an arbitrary 2.5 million population cap.

Population Limit as Applied to a Well-Defined Portion of a Core Based Statistical Area

Previous NCUA rules inexplicably did not permit a portion of a Core Based Statistical Area to qualify as a well-defined local community if the population of the Core Based Statistical Area as a whole exceeded 2.5 million. The effect of this provision was that a smaller portion of a statistical area with 1.5 million could not qualify if the entire Core based Statistical Area had a population in excess of 2.5 million. For example, the Houston Metropolitan Statistical Area has far greater than 2.5 million people, but previously a credit union could not even serve a portion of this area even if that portion was less than 2.5 million people.

The final rule rectified this error by amending the rules to state that the population limit of 2.5 million will apply to the Core Based Statistical Area or any well-defined portion thereof. The practical effect is that a federal credit union can serve any well-defined portion of a Core Based Statistical Area provided the area sought does not exceed 2.5 million in population even if the Core Based Statistical Area in its entirety is well above 2.5 million in population.

This was a good and very practical change. And its provisions are certainly much more flexible than what was previously available, even though we continue to be concerned that continued application of arbitrary population caps is burdensomely restrictive and seems counterproductive to the letter and the spirit of the Credit Union Membership Access Act of 1998.

Concentration of Facilities Test for Establishing Underserved Areas

The retention of a Concentration of Facilities Test (CFT) for validating underserved areas that SEG-based credit unions can apply to serve is retained in the final rule but with some revisions. The revised CFT excludes non-depository institutions and non-community credit unions from the concentration of facilities ratio. This is an improvement, although not a total solution, to a very flawed, burdensome matrix.

Additionally, the final rule states that NCUA will accept a CFPB designated “underserved county” as an underserved area and will consider alternative methods a federal credit union can rely on to determine whether a proposed area is underserved by other financial institutions, provided the analysis relies on NCUA or another federal banking agency’s data. For example, a credit union may rely on publicly available Community Reinvestment Act reports or HMDA data produced by a one of the federal banking agencies.

This could open the door for SEG-based credit unions to be able to expand their service offerings into more underserved areas and to have the chance to include entire counties as underserved, provided the CFPB criteria is met. While this was the intent of the rule, NCUA has yet to put this into practice. Therefore, to date this has not proven to be a helpful addition for credit unions.

Inclusion of SEG Contractors in a Multiple Common Bond

The final rule adds to a SEG based credit union independent contractors with a “strong dependency relationship” to the SEG. While not universe shattering, this provision makes perfect sense in today’s marketplace and constitutes a nice addition that should be helpful in qualifying potential members for a number of multiple common bond credit unions.

Inclusion of Office/Industrial Park Tenants in a Multiple Common Bond  

This is another very positive addition that allows a SEG-based federal credit union to serve any business in an office complex, any store in a mall or any tenant in an industrial park if the complex, mall or park administration seeks the service. It prevents having to sign up as a separate SEG each individual tenant in such a multi-business enterprise and enables a credit union to sign up the entire complex in one SEG approval that covers all businesses within the complex.

The final rule clarifies that park tenants, in each one’s capacity as an employer are eligible to be included within a multiple occupational common-bond credit union, subject to two conditions:

1. Each employee group must have fewer than 3000 employees working at a facility within the park, and
2. Only those employees who work regularly at the park during their employer’s tenancy would be eligible for membership.

Streamlined Determination of Stand-Alone Feasibility of Groups Greater Than 3,000

In addition to existing streamlined documentation requirements for groups less than 3000 potential members, federal credit unions may now use a new and appropriately reduced level of documentation requirements for determining whether a group between 3000 and 4999 potential members would be unable to form its own single common bond credit union.

A group of fewer than 3000 members is subject to the existing process under the Application for Field of Membership (NCUA form 4015 EZ).

A group between 3000 and 5000 will now only be required to document its inability to form a credit union of its own based on evidence of a lack of available subsidies, disinterest among the group’s members, and an overall lack of sufficient resources (New NCUA form 4015-A).

Groups with more than 5000 members are subject to the existing standard application process, requiring a group to fully describe its inability to establish a new single common bond credit union (NCUA form 4015).

Other Persons Eligible for Membership in Credit Union

Consistent with affinity relationships, federal credit unions may now include, within its common bond, the honorably discharged veterans of any branch of the United States Armed Services listed in its charter.

This continues the eligibility of military personnel for credit union membership beyond active duty. Any federal credit union with a military or defense-oriented sponsor, whether they be single sponsor or a SEG, will find additional flexibility in their ability to bring in members who are honorably discharged from the US Armed Services.

This is a win for our vets, as well as for our credit unions with a defense component to their FOM.

TIP – Trade, Industry or Profession Charter

The inclusion of the adding employees or independent contractors with a “strong dependency relationship” to the TIP is a good move that is most likely going to be regarded as a clarification change rather than viewed as meaningful reform.   It is good to have it clearly defined that a trade, industry or profession includes those entities that have a dependency relationship to the TIP but may not be part of the TIP itself.

For example, a TIP serving the health care industry would now be able to potentially serve individuals in the pharmaceutical business that work in a dependency relationship with the hospitals, doctors and clinics that are served under the TIP charter.

What happens next?

Once NCUA has finalized the enabling regulations which Chairman Hood announced yesterday will be on the July NCUA Board meeting agenda, community chartered credit unions will now be able to apply under the federal charter to serve either the entirety or contiguous portions of the US Census Bureau’s combined statistical areas (CSAs), rather than being limited to metropolitan statistical areas (MSAs) as has been the case since 2010.

Likewise, federal community charters can serve the population hub of a CSA. However, if for safety and soundness reasons a credit union does not feel it is financially responsible to serve the entirety of the CSA including the hub, the option is available to apply to serve a portion of a CSA as long as it is contiguous and provides an explanation for excluding the hub.

Also, for federal credit unions in rural areas where the total population density is less than 100 persons per square mile, the 2016 rule increased the population cap for rural district FOMs from 250,000 persons to 1 million persons.

These options, while already available in whole or in part for many state-chartered credit unions, are now worth considering for federal chartered credit unions.

While we have predicted this outcome in our Client Updates since the original ABA lawsuit was filed almost immediately after the NCUA board approved the 2016 FOM modernization rule as the actions taken by NCUA are very much within their statutory authority and consistent with both the letter and spirit of the Credit Union Membership Access Act, it is good to have the legal battles behind us.

This ruling will benefit not only federal charters, but it will also serve to enhance FOM options at the state level in states with parity provisions in their credit union law. Some are likely to even go further than the NCUA rules allow as a number of states have done in the past.

The bottom line is that this US Supreme Court ruling should put NCUA back in the FOM business in a way that credit unions can seriously consider both the federal and the state options going forward.

Please don’t hesitate to let us know if you have any questions about any of the provisions of the new FOM rules or how NCUA is progressing toward finally implementing them after four years of legal battles over some of the key provisions.

Until next time. Stay safe.