Modernizing field of membership laws: A gateway to financial inclusion and economic growth

In August 1998:

• Google hadn’t been founded yet.
• The Kosovo War was underway.
• The Credit Union Membership Access Act of 1998 (CUMAA or HR 1151) was signed into law.

It has been a generation since we saw meaningful change to the ability of credit unions to grow.

It’s safe to say that our financial and economic landscape has changed many times over since 1998, so it’s time for legislation to catch up and better meet the needs of the unbanked and underbanked populations. Just as credit unions have historically served the underserved, the United States has historically passed legislation to address evolving economic and societal needs: the Social Security Act of 1935, the Fair Labor Standards Act of 1938 (which established minimum wage), and the Tax Cuts and Jobs Act of 2017, just to name a few.

Drilling down to the state level, we find a hodgepodge of credit union powers related to field of membership (FOM). For example, data from the Missouri Division of Credit Unions shows that as of June 2023, residents of a staggering 19 out of Missouri’s 114 counties find themselves ineligible to join a credit union outside of family or occupational eligibility. This leaves more than 215,000 Missourians without access to the affordable financial products and services offered by credit unions, hindering their ability to secure their families’ financial futures.

Modernizing FOM rules is a crucial step toward making affordable financial products and services accessible to those who need it most. It just makes sense, given that Missouri’s outdated FOM laws stand at a crossroads where legislative reform could pave the way for financial freedom and economic growth.

Missouri lawmakers Senator Lincoln Hough and Representative Richard West’s proposed legislation (SB846/HB2452) signifies a promising leap forward, addressing the challenges posed by existing FOM rules. But first, some background.

Evolution of field of membership rules: A federal perspective

In understanding the need for modernization in Missouri’s FOM laws, it is crucial to delve into the federal landscape, where the Credit Union Membership Access Act of 1998 (CUMAA or HR 1151) has played a pivotal role. Title I of CUMAA amended the Federal Credit Union Act to introduce multiple common bond credit unions alongside the existing permissible categories of single common bond and community credit unions. Here’s a quick breakdown of the sections:

• Section 101 of CUMAA grants legacy membership status for existing credit union members as of the enactment date and members of groups that constituted a portion of federal credit union membership at that time.
• Multiple common-bond credit union groups are limited to less than 3,000 members, with exceptions for larger groups incapable of supporting a single-group credit union and groups transferred in connection with a voluntary merger.
• Eligibility for additional membership is restricted to immediate family or household members.
• As for approval criteria and regulatory directives, Section 102 outlines approval criteria for the expansion of multiple common-bond credit unions.
• Section 103 directs the National Credit Union Administration Board to prescribe regulations defining “well-defined local community, neighborhood, or rural district” for membership criteria.

Moving from the legislative to the regulatory front, the NCUA has been actively engaged in rulemaking regarding FOM, as evidenced by the 2023 proposed Advance Notice of Proposed Rulemaking (ANPR) on FOM.

The NCUA Board’s proposal aims to amend chartering and FOM rules, specifically focusing on enhancing the provision of financial services to low- and moderate-income communities. The overarching goal is to expand access to safe, fair, and affordable financial services and products on a broader scale.

In February 2023, then-NCUA Board Member Rodney Hood emphasized the need for increased credit union access in rural, minority, disabled, and tribal communities. He noted the existence of pernicious and predatory payday lenders in these areas, emphasizing the urgency for reform.

Final action on the rulemaking is anticipated this month. Predictably, the American Bankers Association (ABA) has expressed opposition to the proposed rule, which is no surprise, given their historical stance against such regulatory changes. In the ABA’s May 2023 letter, it states that “the Proposal, contrary to congressional intent, would authorize significant FOM expansion while undermining FCUs’ physical presence in local communities and undercutting the common bond requirement among membership.”

In a perfect world, FOM rules in all 50 states and at the federal level would be equally attractive. NASCUS’ State Benefits Guides reveal the advantages of strong dual-charter systems, such as local supervision, lower operating fees, and greater investment authority.

In Texas, state-chartered credit unions are subject to state laws and regulations, including the Texas Credit Union Act, which outlines the responsibilities of the Credit Union Department. According to NASCUS, “Top decision-makers can respond timely to questions and concerns from Texas chartered credit unions. Unlike federally chartered credit unions, Texas chartered credit unions do not have to wait for decisions to be made in Washington, D.C. Additionally, Texas based offices allow for in-person or virtual collaboration between supervisory, legislative, and credit union engagements on short notice.”

Additionally, the Texas Credit Union Department allows state-chartered credit unions to have a much broader community field of membership than NCUA would allow under new FOM guidelines. TFC Sec. 122.051 broadly outlines FOM as a definable community of interest, in accordance with the credit union’s article of incorporation or bylaws; including a community of interest based on occupation, association, or residence.

(To view the state benefits guides completed to date, visit the NASCUS website.)

Why educating the public is crucial

Unfortunately, the misperception that current regulations are fair prevails among some lawmakers. Many elected officials – undoubtedly influenced by the banking lobby – may not fully appreciate the headwinds that credit unions are facing. If they are not properly educated on the benefits of modernizing FOM rules, elected representatives won’t feel compelled to support legislation that allows credit unions to grow.

Shifting public discourse is vital. By informing voters and encouraging them to engage with elected officials, the narrative can be reframed. Here are our arguments:

Growth shouldn’t require elaborate workarounds

Cornerstone Foundation has gone to great lengths to provide a work-around for FOM growth through our Friends of the Foundation FOM expansion program, but wouldn’t it be nice if the rules were reasonable to start with? While the program has provided a solution, it underscores the need for more reasonable rules. Credit unions often resort to filing for Community Development Financial Institution (CDFI) status or employing elaborate workarounds, diverting time and resources from serving members.

Consumers need choices in the financial services marketplace

As banks close branches in rural areas, credit unions can fill this void. Data collected on the change in the number of bank branches versus credit union branches over the years emphasizes the critical role credit unions play in maintaining financial services accessibility, especially in underserved regions. Since 2008, there has been a steady decline in bank branches in the United States with more than 2,000 closures in 2020, 2021, and 2022 (sources: America’s Credit Unions, FDIC).

Adapting to the evolving marketplace

The Credit Union Membership Access Act was written 26 years ago and no longer reflects the current financial landscape dominated by online and mobile banking. A national survey commissioned by the ABA last year shows that 48% of bank customers use apps on their mobile devices as their top option for managing their bank accounts.

Hood’s perspective in 2023 highlights the need for regulatory responses to technological shifts, emphasizing the increasing reliance on digital banking platforms: “At some point in the future, it is my great hope this Board can allow for mobile applications and digital delivery systems to meet service facility requirements. If we have learned anything since the COVID-19 pandemic, we should recognize that members are using mobile and internet banking at a higher rate than branches. In my view, the regulator must respond to changes in technology just like credit unions are having to do.”

Overcoming historical opposition

Bankers, historically resistant to credit union growth, have wielded legal victories against regulatory changes. Lawsuits, such as the 2018 ABA win over NCUA and the 2006 Missouri Bankers Association case, showcase the need for regulatory modernization to prevent restraint of trade upon credit unions.

Modernizing FOM rules for credit unions is not just about adapting to change. It is about unlocking the potential for credit unions to better serve their members and communities. Educating lawmakers and the public is paramount, and with compelling arguments for reform, the financial landscape can be reshaped to ensure the continued growth and prosperity of credit unions across the nation.

Change is possible, but not without your involvement. Educate yourself on your state’s field of membership laws and if you see an opportunity for modernization, by all means demand reform. Your state or regional credit union league is an excellent place to start. With a sound argument, persistence, and moxie, you can contribute to economic growth and financial inclusion.