The NCUA Board recently approved a proposal to update their Field of Membership Rule. Its nine potential changes aim to enhance consumer access to safe, fair, and affordable financial services, especially in underserved communities. I dissect these proposed amendments with Rick Mumm, Former NCUA employee and FOM GURU. We explore the positive impact of eliminating census blocks, simplifying business and marketing plans, standardizing fillable applications, and much more. Rick also discusses the problems that could arise with the proposal’s failure to clearly determine a legal entity headquarters, especially with remote work setups being adopted by many entities.
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NCUA's Field Of Membership Proposal With Rick Mumm
In this episode, I'm excited to have a repeat guest and it is Rick Mumm. Rick, how are you doing?
I’m doing great, Mark. How about you?
I'm doing great. I'm glad that we can have our third episode on the field of membership. The NCUA has taken some action that when it came out, I quickly got in touch with Rick and said, “Rick, after you take a look at this, let's do another show.” The item that we're going to chat about in this episode came out on Valentine's Day, February 14th, 2023.
The NCUA Board approved a proposed field of membership rule, and it has nine potential changes that they're contemplating. Those are the things that we're going to chat about here. Before we do that, Rick, some of my readers may not have read your episode we did on the field of memberships. Could you give a little bit of background on what it is you did at NCUA, and what it is you're doing now?
I started with Mark at NCUA way back in the late '80s. I go a long way back with Mark. I retired from NCUA after about 34 years. Roughly 26 of that was in the field of membership dealing with everything in the field of membership, including mergers, liquidations, conservatorships, bylaws, share insurance, and the whole nine yards that goes along with the credit union's charter. Since I retired, I'm consulting on helping credit unions with their field of membership. I know how to put together a great package that will have the minimum of questions and delays.
You've helped several credit unions already and some of my clients. This proposed rule is going to lead to some better rules long-term, better options, and more clarity for some credit unions. With that, Rick, let's jump right in to talk about the changes. I printed off the Board Action Memorandum and a couple of pages of the rule.
It looks like based on what they're saying in the Board Action Memorandum that these nine changes fall into the underserved areas. They also touched on the community-based field of memberships, and then there is also some more broadly applicable field of membership provisions that they've adjusted in this proposal. Which one of the proposals would you like us to talk about first, Rick?
I was thinking of going down the order, the way it's listed in the proposal.
That sounds good, so if anybody else wants to follow along, that'll make it easy. What's listed as number one?
We’ll say that the request for comments is due on May 30th, 2023. CURE and General Counsel when putting this together did a good job. Some changes are overdue and good.
You and I and NCUA love acronyms. CURE is the Credit Union Resources and Expansion division, which is the office that you retired from. It's the office that handles the field of membership and other things for NCUA.
OGC is the Office of the General Counsel. You're right. We speak in our acronyms very fluidly.
We do speak in code. That's why I call myself the NCUA interpreter so that we can take care of some of that for the credit unions.
The first change is underserved areas based on rural districts. This one makes sense. What it does is when you have an underserved area, it has to meet the same community requirements as if you're going to expand or convert to a community charter. The underserved part of the regulation points you back to the community charter portion of the regulation on the communities. What this does is a rural district was limited in scope. You couldn't go across multiple states.
Wherever the credit union's headquarters was, they could have a rural area in the state that they border but they couldn't jump to another state. You have some very rural Western states. The intent was somebody in Montana couldn't jump through North Dakota to get to Minnesota. They would've been limited to North or South Dakota or wherever their corporate headquarters was in relation to those states.
This amendment eliminates that part of it. For an underserved area, you're not limited to that limitation because, on an underserved area, multiple common bonds can add to an underserved area regardless of location. The thinking was that this limits their location so it doesn't have the same impact. It makes sense from this standpoint. I'm not understanding why somebody would do an underserved area with a rural area that long that comes into play, but I don't have any issue with it.
Multiple common bonds can add an underserved area regardless of location.
Somewhere in Montana, an area near the Wyoming border, a credit union has a presence there and I would be able to pick up potential rural districts in Wyoming, the neighboring state that might make sense. Is that a good example?
Are you talking about the underserved or converting a community? There's a distinction.
You tell me.
As a community expanding from Montana, you could expand into Wyoming but given Wyoming is Wyoming, there's not a whole lot there.
If I was multiple common bonds and I had underserved areas that I wanted to add that included rural districts in Wyoming, that's what this proposal is getting to potentially. That's an example that might help.
Potentially, yes. As a multiple common bond and you want to add an underserved area, you can add one without regard to location. If you prove that the rural area is underserved and most rural areas, I believe, are underserved, you could add it regardless of the location. A lot of this is more clarification so I don't see where as a practical matter it does anything.
That takes care of that one. What's next on the list?
The next one is the CDFI economic distress criteria. This is an excellent change. It's overdue. It's under NCUA regulation. For the underserved, you have to follow the decennial census. The further away you get from a decennial census, the more stale the data is and the more likely the area may or may no longer qualify. What this does is it mirrors CDFI which moves from the decennial census to the American Community Survey Information.
What happened is up until 2000 when you did the decennial census, there was the short form or people got lucky enough to do the long form, which asked for a bunch of economic data. Congress got away with that and went with what's called the American Community Survey or ACS. It collects economic data. There are other nuances to it but every five years it comes up with economic data.
CDFI went to ACS. NCUA was on decennial and that caused problems because CDFI was no longer maintaining or necessarily updating the decennial data, which made it very difficult for NCUA to use CDFI, which is all NCUA used for the underserved areas. This changes the lines. It's aligning everything that NCUA does with the underserved with whatever CDFI does. If CDFI makes a change going forward on whatever, the board automatically with this change makes that same change. We won't have to go back. It's a great change.
It keeps us singing from the same hymnal to prove that they qualify for the field of membership expansion. Does it also play into the CDFI certification?
It could. Certification is a different process for the underserved. To be honest, I don't know what data they ask for or what CDFI wants.
That's a definite maybe on that part of it but it would allow us to have better and more up-to-date data when credit unions were looking at an expansion of this type.
Also, the underserved. Yes. It's a great change.
Kudos to NCUA on that one. Next up is what?
The next one is also related. It’s the technical update to eliminate the census block group as a permissible geographic unit when doing an underserved area. This is a fantastic change. Census blocks have always been in there but until lately, no one ever tried to use a census block for an underserved area. When the census does its census, they break data into census blocks and census tracts census. There's no real hard and fast. It's usually 3 to 5 census blocks that roughly make up a census tract and then the census tract is a basic unit.
Going down to the census block level is very difficult. It was always there but until a couple of years ago, no one ever tried to use the census block because the data wasn't as readily available. It wasn’t as easy to work with because everything is pretty much in a census tract. What this does is eliminates the use of census blocks. It also aligns with CDFI because according to the preamble and in the background for the proposed rule, CDFI has also removed census blocks from all their considerations. It's aligning with CDFI and making a great change of eliminating something that was there that wasn't practical or easy to use.
That sounds like that makes good sense too. What’s proposal number four?
It's a statement of unmet needs or what's commonly referred to as a SUN section. When you're adding an underserved area, the SUN section required that you did at least a one-page narrative on what the significant unmet need in an underserved area was or is. The manual also said if you could quote third-party documentation, it was even more compelling. The problem is the SUN section is very subjective. You aren’t making stuff up.
It was anecdotal information but not maybe statistical information that proved it.
You had to make a stretch at times.
That gets rid of this so people won't be trying to put packages in this way and it focuses them more on the statistical analysis.
Yes and no. What it does is it is still required because I believe it still gets required in the act so you can't totally get rid of it.
If it's in the act, they're going to make them do it. That's for sure.
What they're doing is making it much simpler in that the credit union has to discuss it in its business plan. They could address one item like loan shared drafts that they offer that they see needed in the community. They no longer have to cite third parties. It makes it a lot easier and simple.
It’s a little bit more efficient for the credit union so maybe they can trim a few hours off preparing the package and getting it in. What's number five?
The next one is simplifying the business and marketing plan. You no longer have to list all your services to check off the box because what do you do with the list of all your services? You would also discuss your credit union branches in terms of drive-throughs, lobby capacity, where were they in relation to public transportation and all of that. It eliminates that and gets to define yourself as full service. Everybody knows what that is. You get into more on how your branches or facilities can serve the community, what makes them unique or whatever to be able to reach out and serve the community. That's a better way of doing the branching in that than what we had before.
What's up next then? What's the next proposal?
The next is a standard fillable application. I'm not against a fill-in-a-blank checkbox application. I just don't think it should be required. I don't think an application form for a community makes sense. Doing a community lends itself more to a narrative approach than it does fill-in-the-blank. The board is thinking that it'll be easier and the process is more standardized.
There is some truth to that but I also think with a fill-in-the-blank, some credit unions are going to give 1 or 2-word answers thinking they addressed it when more is needed. I don't think there's as much thought put into the review part. If you see a check box and be like, “Yes, we have that,” you check it. The analyst sees it's checked and moves on. There's no analysis or looking at, “Does this make sense? Should they have X?”
NCUA is thinking that the membership process will be easier if it is more standardized. But with a fill-in-a-blank approach, some credit unions will likely only give one or two-word answers.
It could encourage shorter answers but those shorter answers might not provide enough information to prove that it's a community so that the agency could improve it. While its goal is likely to speed up the process, it might lead to one more turn because as you know, Rick, packages go to NCUA’s office. CURE looks at it. Sometimes they're complete. A lot of times, some things are missing and you have to go ask for more information.
It becomes this game of tennis to try and get to the finish line. Maybe there's going to be a little bit of retraining or something along the lines where they have this standard form and you give shorter answers but that only means you go back and ask for more details, which could have an initial sense of frustration potentially.
Yes. I also think there are a lot of new people in CURE and they just see the check. They're not going to go in and ask more questions. They may say it's a good package. They can serve it but can they really? There's no real analysis. If you don't have an analysis to explain that, why do you need an analyst? You can get a technician to go down through the application, “This is check,” and be approved.
It comes closer to, “How do you add a small group where you can do it automatically online as opposed to needing analysis and an analyst?” It’s interesting. What is the next item?
A community state-chartered credit union wants to convert from state to Fed. This change eliminates them having to provide a business plan and treat their community as if they've never served it like a Federal. It's never made any sense to me why a state chartered that's been serving a community for however many years has to act as if they've never served the community.
They have to provide all that documentation to convert from a state to Fed when a state chartered multiple common bonds could have how many groups that do not even conform to Federal policy that a Federal credit union cannot have, never could have and yet we will let them bring it over, no questions asked. There's a disconnect there. This eliminates the change that if they've been serving, they don't have to do the business plan. They just bring it over. To me, this is a fantastic change.
The state could have been serving that exact field of membership for 10, 20, 30 or 40 years, pick a number and NCUA is wisely saying, “Since you've already been doing it, you don't need to explain how you're going to do it because you've done it.”
The way the process is now, it doesn't matter. NCUA treats you like you've never served it. It never made any sense. If they're wanting to convert from single or multiple states to a community Fed, then they would have to do the process, which is reasonable and that makes sense. The proposed rule doesn't specifically state it. I'm assuming it would apply but if the credit union wants to expand its existing community, that case should apply.
Next up is what?
The next up is the one that I have the most concern with and the one I don't think is very well thought out and will potentially cause issues. Community credit unions have what's referred to as affinity groups on whom they can serve and that's typically live, work or worship. It’s anybody who lives in the community, works in the community, worships in the community or attends school in the community that is part of a community charter.
This proposal adds a paid employee for a legal entity headquartered in a well-defined local community, neighborhood or rural district. I can see tons of problems. That rule does not define what headquarters is. It does get into the need because a lot of people are working remotely. That's true. With the advances in technology, people aren't necessarily having to go into an office anymore.
The board is correct. I don't disagree with any of it but it's all anecdotal to say that that's going to impact a credit union from one estate wanting to convert to a Federal community because they're going to lose all these employees that they could serve or that it's going to adversely impact the community credit union. I don't think this is very well thought out. It doesn't define headquarters. To me, a headquarters is where you're legally chartered to do business as a corporation and where your CEO is.
In this case, I could see that you've got a credit union in Seattle, Washington where a community credit union with Amazon headquarters. They're going to say, “Under this, you could serve Amazon employees everywhere in the country, if not the world where the tie to the people is with the company, not the community.” How many people in the middle of the country have ever gone to Seattle or even know Seattle is Amazon's headquarters? This creates a hybrid charter, essentially. It combines multiple common bonds with the community and makes it a hybrid charter.
You know this inside and out from having worked on it for so long. When I look at it, setting aside what the act allows and what the rules have been in the past, we go back to that affinity group, live, work or worship. It's a community charter. If I live within the boundaries of that charter, that's okay. Let's say we're talking again with Seattle.
If I live in Seattle, that's pretty clear that I'm okay. If I work in Seattle, I come in and come to Amazon and that's okay. If I worship, meaning if I'm a member of one of the many churches under every denomination, that's okay. In that work scenario, I didn't have to live there. In the worship scenario, I didn't have to live there. If I’m interpreting this right to what NCUA is saying, if I'm paid from there, I would be eligible.
In this scenario, an Amazon worker who is outside of Seattle under the current rules could belong to that community charter. Let’s say Amazon is building one of its headquarters in the Arlington or Alexandria Virginia area. Maybe this is a bad example but this might get to your headquarter question. They have this headquarters that's in Seattle. They're adding a dual headquarters in Alexandria. Which one are they paid from?
Let me give you a different example. Let's talk about Boeing. Let's assume it's still based in Seattle, if it is and I work for them in another area. I'm paid by them. The difference is I'm not driving there to go into the community. It's more of an electronic connection to the community. You nailed it. It goes a potential solution to the increasing number of remote workers that we have. A lot of board members and credit unions have talked about this. When was the last time you went into your credit union or your bank? Your phone is usually your branch.
However, the Federal Credit Union Act doesn't allow it. It doesn't allow you to say that your branch office can be that. Therefore, you don't need to have branches anywhere. Anybody can join any credit union, which is not what this is but it's a step towards some flexibility for remote working. Rick, if they did define headquarters and they put some more fences and definitions around this, would that make you a little bit more comfortable on this?
Yes, it would. More people work remotely. In the electronic age, society's changing in that regard, how we do business and all of that but this is so open-ended. There are no controls. The ties are to the company, not the community the way this is worded. It's all subjective or anecdotal. There is no support for this objectively with numbers or anything like that. I see this as a hybrid charter. You're combining groups.
Most people are working remotely in today’s electronic age. This open-ended model has ties to the company instead of the community.
The thing that I can see happening here too is some credit union doesn't define what headquarters is. Credit unions are like Joe came in. He said he had a couple of employees way over here. This is his headquarters. They start making loans all over the country. They blow up sometimes credit unions making loans all over the country or outside of their area. It tends to happen. Examiners go in on-site.
They see all of this and all of a sudden, some SC who's trying to get toward the end of the year, who’s got his time budget and is trying to make a program has this credit union that has loans all over the country because, in their community, there was a paint thing. They can't support that there was a headquarters. They were adding people all over because someone said they had a headquarters.
You've got this SC saying, “I'm not going to make a program. I need to get help from other SCs who are worried about making a program.” They're going to have to call in special actions. They're going to get GC involved and then CURE, which has some analysts or two, is going to have to get involved because how are we going to fix this? They're already behind and our credit union's complaint packages aren't getting. I could see going down the road this causing a whole lot of problems for a whole lot of people because they put no thought into it or support upfront.
You are not a fan of this one is what my takeaway is going to be from that last one.
I am not as proposed.
They could do a little work on this. Maybe you need to submit some comments to make their final rule better. That's a rhetorical question. You don't have to answer that but you've got a lot of thoughts on it. Special Actions is busy with some other issues economically with NCUA's priority letter on making liquidity and interest rate risk. It’s priorities 1 and 2. If I was still there, I probably wouldn't transfer anything over to Special Actions but I get your point. I understand the road you were describing there. If I've been adding right, we have maybe 1 or 2 more items here that are proposed. Is it one?
There are two. They said 9 but I think they combined 2 as one because I counted 10.
That's exactly right. It's either 1 or 2, whether or not there are 9 or 10 of them. What's number nine?
The other is the eligibility of an immediate family member, a decedent. It's a decent change. The way they fill membership is if you are eligible to join a credit union, any of your family members, a spouse, child, grandchild, parent, or sibling can join the credit union. You do not have to. Once they join, then that goes out to the next level. Their spouse, child, grandchild, parent, or sibling can join.
What this does is if you die and say your siblings didn't join the credit union, they intended to but you passed, it gives a six months grace period for any family members that didn't join but could have while you were alive for them to do it. It aligns with share insurance that gives the estate six months to restructure its account before you have to do something with the account. It aligns with share insurance in that respect.
I like this a lot. If you've got someone who does come in, your parent passes away and you just discover the credit union while you're helping them wrap up their affairs, it's great to have the option while you're doing that and they're treating you well. It's going well. It's like, “Why can't I become a member?” I'm a big fan of this one.
That’s a great example. It's a good change.
What is number ten?
I get why they're doing it. I don't understand why all of a sudden the need for it. It's been there forever. What it does is review and update prospective officials. New board members or subscribers on a new credit union have to go through a background and credit check. What this is doing is the Chartering Manual cited 70114, which deals with troubled credit union officials. What they're saying is they're making the correction, “These are not troubled credit union officials.”
It's citing the wrong site that you use for this. They're eliminating that and changing the reference to Section 201 of the act, which is more of a correct site. Why it took all of the years or this long to figure that out? I don't understand. You're still in the same place. You need a credit and background check. This is nice.
It’s a technical amendment that has no harm and no foul. They were doing it but they just made the wrong reference. The rule changed and they missed that one. That's a cleanup. Rick, one other thing that you and I had chatted a little bit about offline is NCUA has come up with a concept of a provisional charter. There's not a lot of meat in the discussion of that. From what you've read relative to the new charter, any thoughts that you'd like to discuss here for the readers?
Yes. It's a good idea or something to be looked into or flushed out. One of the things is they want more credit union charters, but their insurance is one of the stumbling blocks to doing new charters because the share insurance fund doesn't want to take in all the risks. That means new groups have to raise capital and that's a big stumbling block trying to raise capital when you're not a 501(c)3. It's not a charitable deduction but you need a charitable donation.
Insurance is one of the stumbling blocks to doing new charters because the share insurance fund doesn't want to take in all the risks.
It eliminates opportunities to charter a credit union. Before share insurance, the members bore 100% of the risk so we could charter credit unions all day long. It didn't matter if they succeeded or not because the members bore the risk. If they wanted it to succeed, they're going to work harder to make it succeed. If not, they're the ones out. Share insurance fund transferred all the risks from members to the fund, which means we're going to take a lot closer look at viability or how much money you have.
A provisional charter would some ways divide that risk somehow. What I'm envisioning is the fund, and members will take on some of the risks. How that would work or do from what I've read isn't there. The concept has been thrown out. That's something that is a good idea. It could potentially charter more credit unions. Do a provisional charter somehow based on the members and the fund taking some risks. The details in that would have to be worked out.
It's good that they're thinking outside the box. Rick, are there any other questions I should have asked you or any last things you'd like to chat about your Field of Membership proposal that's out here that we’ve walked through? Is there anything else?
No. This covers it. People take a look, see what they think, and have an opinion right into the board.
The board does listen. They do like those comments. Rick, if someone is reading this and they're going, “I want to talk to Rick about expanding my field of membership,” what's the best way for our reader to reach you to talk about that?
They can send me an email to Info@RCUServices.com.
Rick, I want to thank you for sharing your wisdom on the field of membership in general and your thoughts on this proposal. Thanks again for your time, Rick.
Thank you, Mark. I appreciate it.
Readers, I thank you for reading.
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