Anyone can join: how open charters offer some CUs a nationwide reach
When Long Island-based Bethpage FCU absorbed Montauk Credit Union last year, it quietly gained a massive addition to its field of membership most credit unions only dream about—and banks fret about: Bethpage can now offer membership to literally every man, woman and child in the U.S.
While open charters were somewhat common in the early years of the credit union movement, only a handful of them exist today, most of them remnants from the early years of the movement, predating the passage of the Federal Credit Union Act in 1934.
According to Linda Armyn, SVP of corporate affairs at Bethpage, the expansion possibilities that came with absorbing Montauk were an added bonus from the merger, but Bethpage wasn’t initially aware of Montauk’s open charter until late in the process. In spite of that expanded reach, a nationwide strategy is not in the cards.
“We’re sticking to Long Island,” said Armyn. “We’re not abandoning it in any way, shape or form. This is where our roots are.” The $6.9 billion credit union also picked up a branch location in Manhattan’s Chelsea neighborhood as a result of the merger, which Armyn said will also be a part of the membership expansion efforts when it begins promoting itself to residents in that area later this year.
“We have a lot of commuters – people who live on Long Island but work in Manhattan – so we’re focused on letting commuters know they have another branch they can use to service them when they’re in the city, because it’s not far from Madison Square Garden and Penn Station.”
Two other credit unions in the Empire State have an open charter: Progressive CU and Melrose CU.
“The ones that have it today were grandfathered in,” said Henry Meier, general counsel at the New York Credit Union Association. “That option no longer exists in New York.”
On Friday, Feb. 10, NCUA announced that Melrose Credit Union had entered into conservatorship, citing “unsafe and unsound practices at the credit union.”
Montauk, Progressive and Melrose all made headlines last year after seeing increased delinquencies on high concentrations of taxi medallion loans as that industry suffered following the rise of ride-hailing services Uber and Lyft. Despite their charter similarities, however, those CUs’ troubles are not considered to be related to their open fields of membership.
No common bond required
Open charters aren’t available to federally chartered credit unions, but Bethpage was able to absorb Montauk’s open charter because it was “an emergency merger to protect the Share Insurance Fund from losses,” explained NCUA’s John Fairbanks. “The Act does not allow NCUA to authorize the transfer of an open charter under any other circumstances.”
Before any New York-based CUs run right out to amend their charters to open up their FOMs, the state’s banking laws were amended in 1929 “to require that the bylaws of a credit union reflect that membership was limited to persons having a common bond,” said Richard Loconte, executive deputy superintendent for communications and strategy at the state’s Department of Financial Services.
Even if Bethpage isn’t tackling a cross-country strategy, it lists 324 million potential members on its latest call report – the entire U.S. population, according to the U.S. Census Bureau.
One other credit union with an open charter is Madison, Wis.-based Summit CU, which up until 2008 was known as CUNA CU, having originally been chartered to serve those who worked in the credit union movement, including the Credit Union National Association and employees of CUs.
At the time the credit union was chartered, employees of a credit union were legally barred from borrowing money from the institutions they worked for. In time, the field of membership grew to include CUNA Mutual Group, the Filene Research Institute and even the World Councils of Credit Unions (all of which are based in Madison), so that Summit today has an international field of membership.
Despite a broad FOM similar to that of Bethpage, Summit only lists 1 million potential members on its call report, which CEO Kim Sponem said is more a reflection of reality than possibility.
“From our perspective, if we’re not going to go after it today, we don’t want to list it today,” she said. “We don’t want to call great attention to that. We don’t want our charter to be threatened, so if we’re not going to go after that, then we just scale it back to what we think we’ll potentially go after today. That could change over time.”
Summit does pick up some members here and there from all over the world thanks to WOCCU, but it still focuses primarily on Madison and southern Wisconsin. There are currently no plans to launch either a nationwide – much less a worldwide – marketing campaign, and Sponem said there’s a very simple reason more open-chartered CUs don’t try to make better use of their wide FOM.
“It’s a scale issue,” she explained. “From a marketing perspective, if I’ve got limited dollars, I’m going to want to spend those dollars in the areas I think I’ve got the most opportunity to grow at the fastest rate. Most credit unions aren’t big enough to try to market nationally, but if we tried to go into a market where we don’t have name recognition and don’t have a branch, it’s going to be a really long-term strategy and it’s going to be expensive to do that with limited success at least for quite a while until you’re able to build that name recognition.”
One open-charter credit union said it’s also a question of identity.
New York City-based Progressive began life as “a fraternal self-help organization founded by immigrants in the Bronx,” explained CEO Robert Familant. “Those folks pooled their resources and lent money to each other to help them establish businesses in the New York area. In Progressive’s case, in those very early days they were primarily, I’m told, garment-center related businesses. They would borrow money for boilers and pressers and sewing machines, and set up small workplaces. That was who contributed money to the credit union, and those were the people who borrowed money from the credit union.”
Later, as immigrants got into the taxi business, the CU got into taxi medallion lending. But even with its open charter, Progressive lists only 10,000 potential members on its current call report. “We grew pretty nicely here in the New York metropolitan area and that was good enough for us,” he said.
Adding fuel to the fire?
Field of membership has long been a hot-button issue for bankers, most notably in the court and legislative battles that eventually led to passage of the Credit Union Membership Access Act, and the current suit filed by the American Bankers Association against NCUA’s modernization of its FOM rules.
Summit CEO Sponem noted that various banking lobbies have tried to use open charters as part of the “How are they different from a bank?” argument, “but of course it doesn’t hold any water. We’re still fundamentally very different from banks at a structural level, so it doesn’t really matter what size a credit union is or what their field of membership is. We are fundamentally different than banks and their motivations are different than banks.”
Bill Hampel, CUNA’s chief economist and chief policy officer, suggested bankers will use any tool at their disposal to go after CUs, regardless of how effective the argument might be. “Anytime an employee of a credit union breathes the same air a banker breathes, the bankers complain about that,” he quipped. “Field of membership was not created to protect the banks from competition, and the reason for the credit union tax exemption is our cooperative structure. That’s it.”
Representatives from the American Bankers Association did not return calls for comment, but Chris Cole, EVP and senior regulatory counsel for the Independent Community Bankers of America, said open charters perfectly illustrate CUs’ continued “eroding” FOM rules. “This is another example of where field of membership rules have become so meaningless, and the distinction between tax-exempt credit unions and tax-payer community banks have been eroded, thereby completely undermining any justification for credit unions to remain tax exempt,” he said.
Despite such broad fields of membership at some CUs, Cole said ICBA has never put much focus on open charters, choosing instead to target credit unions as a whole instead of a select few. “Now you have this proposal by NCUA to allow credit unions to have FOMs up to 10 million persons and that’s considered a local community,” he noted. “Again, that’s another example of where these rules have just about become meaningless.”
While the ability to attract members from anywhere might seem to be an easy growth strategy, CEOs of open charter institutions say it’s a bit more complicated than that. For one thing, said Summit’s Sponem, many of the nation’s largest credit unions still maintain ties to SEGs or have other affinity relationships that help them grow.
“They may not want to lose that affinity among their members,” she said. “But if you’re a credit union whose sponsor group won’t be able to get you that level of growth and you want to continue to grow, you’re going to need to expand your charter.”
Plus, said Progressive’s Familant, a wider FOM doesn’t mean everyone will join. “The flipside of being an open charter is you don’t have that bond of occupation, geography or association, so getting new members isn’t all that easy,” he said. “Because who are you? You’re somebody with one or two branches in New York City as opposed to more of a branding name.”