What’s next for credit union membership rule?

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More than three years after the American Bankers Association began its legal challenge of the National Credit Union Administration’s updated field-of-membership rule, credit unions can finally ask “What’s next?”

The Supreme Court on Monday declined to consider an appeal of the case, effectively bringing the saga to an end. But much has changed since ABA first filed suit.

Credit unions are currently grappling with a global pandemic and a new recession. That means the number of institutions interested in taking advantage of the expanded rules may be more limited, at least for now.

“Those that feel comfortable with their financial statements are going to continue to move forward,” said Michael Fryzel, a Chicago-based attorney and former NCUA board member. “The others that are smaller and may be experiencing some financial difficulties are going to hold back and make a determination. Those that are in good shape aren’t going to wait for things to happen; they’re going to move forward and make sure they get in on it early.”

The rule, originally passed in 2016, expands how credit unions can define membership eligibility, including across broad rural areas that cross state lines or excluding core-based statistical areas.

The ABA sued NCUA late that year and two provisions of that rule were initially struck down but later upheld by an appeals court. That same court was receptive to bankers' arguments that the rule could effectively permit redlining. NCUA subsequently put forth a proposal to address those concerns. Still, bankers attempted to appeal the rule being upheld, first requesting an en banc hearing of the appeals court. After that was denied, they turned to the Supreme Court.

It’s unclear how many credit unions have applied to take advantage of the expanded FOM rule. NCUA couldn’t provide data on the number of these applications.

A number of credit unions that submitted expansion applications to NCUA since late 2016 subsequently merged with others, which affects the data. Overall, the number of active institutions has shrunk by just over 10% since the legal challenge began, while credit union membership is up nearly 13% since then, according to figures from CUNA Mutual Group.

Those that are still active, however, are likely to see their applications approved quickly. An agency spokesperson said the regulator’s “primary focus is to move expeditiously to process and approve field-of-membership expansions affected by this decision.”

The most recent revisions to the rule have not yet been approved by the board, but the agency is expected to move quickly to put those provisions in place. Some sources indicated that could happen as soon as NCUA’s next open board meeting on July 16.

New playing field

Credit unions were heavily focused on growth in recent years. While mergers continue to be announced, it’s fair to say the industry is prioritizing growth less in the wake of the pandemic and instead focusing on managing profitability and compressed margins. As a result, the number of credit unions lining up to take advantage of the finalized FOM rule could be reduced compared to what it might have been before COVID-19 hit.

In particular, smaller credit unions – which are generally less profitable than their larger counterparts and in the most need of help growing – may be less likely to utilize the new powers granted by the rule.

Smaller credit unions, said Onker Basu, senior director at Cornerstone Advisors, “have got a lot more basic problems to solve before getting into this area of growth and expansion.”

Sam Brownell, CEO of the consultancy CU Collaborate, pushed back on that, suggesting size has less of an impact on which institutions are likely to utilize the rule than appetite.

“The people it benefits the most are credit unions who want to serve the underserved,” he said noting specifically that credit unions serving rural, underserved areas are the most likely to benefit from clarity on the rule. The delay until now “has hurt them in the sense of they haven’t been able to serve as large a rural district. If you’re dealing with a rural district capped at 250,00 people, it’s going to cap how big you can get and all the problems that come along with that,” he added.

Rick Metsger, a former NCUA board member who helped pass the rule, noted that credit unions hoping to serve rural districts across a broad geographic area will now be able to do so without having to seek permission from multiple state regulators.

“This gives opportunity to have fewer financial deserts that are often talked about,” Metsger said. “It takes those financial deserts and gives them more opportunity to give more access to financial services.”

One side effect of the rule finally moving forward, some suggested, is that it’s likely to strengthen the federal credit union charter, which has been losing ground to state charters. Multiple state legislatures have updated their credit union statutes in the last several years, and data from the National Association of State Credit Union Supervisors shows that conversions to state charters have exceeded state-to-federal conversions nearly every year since 2011.

“This makes the federal multiple common-bond charter much more competitive,” said Brownell, noting that with the revisions NCUA introduced last fall “you can serve a larger community as a federal multiple common-bond credit union than as a federal community charter in most markets throughout the country.”

Banking trade groups are likely to be stung by the Supreme Court’s decision not to consider the rule, and that could have a trickle-down effect to the wider credit union industry.

“I suspect … there will be a continued push to try to keep the limitations for credit unions as tight as possible over time and if field of membership doesn’t end up being an area where they managed that, I suspect they’ll switch to another area of focus,” said Basu, adding that the court’s decision could lead to a new focus on the credit union tax exemption.

For its part, ABA already called on Congress “to reassert itself and either restore real credit union eligibility rules, or ask this growing industry to start paying taxes.”

The Independent Community Bankers of America – which has recently issued its own calls for congressional investigations into NCUA actions – claimed late Monday the agency still has not addressed redlining concerns related to the membership rule and called NCUA a “captive regulator bowing to the growth-obsessed financial firms it is charged with regulating at the expense of local communities.”

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