Call it the Year of FOM.

Constraints on the ability to expand a credit union’s field of membership have long been the bane of the industry, but a rule change that went into effect earlier this year has the power to change that.

Though the National Credit Union Administration modernized its field of membership rule at its board meeting Oct. 27, 2016, the rule didn’t go into effect until Feb. 6, 2017, and credit unions are still exploring how to maximize the new rule.

Among the changes: letting community charters serve portions of a core-based statistical area, allowing a CU to avoid the population cap of 2.5 million. Community charters can also apply to serve a Combined Statistical Area, as designated by the Office of Management and Budget, subject to the population cap of 2.5 million.

CUs also were given the ability to serve a rural district of up to 1 million persons. There also were updates to the definition of “underserved” areas.

Matthew Biliouris, NCUA’s acting director of office of consumer financial protection and access, helped lead the regulator’s FOM working group. He told Credit Union Journal the new rule has a “broad suite of options” in all three recognized charter types: community, single common bond and multiple common bond.

Matthew Billouris, NCUA’s acting director of office of consumer financial protection and access
Matthew Billouris, NCUA’s acting director of office of consumer financial protection and access

“We tried to create a rule that went to a number of different charter types,” he said.

The new rule comes with an “array of strategic options,” that allow credit unions to shop for the most advantageous FOM for expansion purposes, he added.

Asked if there are common mistakes/pain points the agency is seeing as credit unions begin to apply for FOM expansion under the new rule, Biliouris said the agency goes “very far not to reject” FOM requests, if it can avoid it.

“Our staff works with credit unions as long as they follow the rules,” he said. “A credit union might put in a bid to increase their field of membership that exceeds the population limit, so we suggest a rural district or another path that follows the rules.”

When applying to expand to a community charter, Biliouris said the chances for approval go up if the plan supports the CU’s ability to do so by addressing existing infrastructure, including branches, ATMs and shared branches. “We want a good comfort level you can serve the entire area.”

So far, most expansion requests have been related to community charters, but there are a number of other routes CUs can explore, such as associational FOMs, in which people are eligible to join a credit union via membership in a particular group.

For example, the $678 million SCE Federal Credit Union in Irwindale, Calif., expanded its field through the addition of a foundation, while the $709 million Clark County CU in Las Vegas can now extend membership to donors to the local National Public Radio affiliate, according to Susan Mitchell, CEO of the Las Vegas-based consultancy Mitchell, Stankovic & Associates.

Susan Mitchell, CEO of Las Vegas-based consultancy Mitchell, Stankovic & Associates
Credit union consultant Susan Mitchell, CEO of Mitchell, Stankovic & Associates, a 2018 Wegner Award winner.

Mitchell noted one big focus has been on serving the underserved. “If you want to get NCUA to approve your expansion request to reach those underserved, I recommend that you thoroughly study the definition as that will facilitate the approval process.”

In addition, Mitchell recommended CUs document how they will go about reaching underserved consumers. “This will come in handy when you have future dialogue with examiners as they will question the services and quality of your portfolios.”

How DEXSTA FCU expanded its FOM

DEXSTA Federal Credit Union was chartered in 1937 as DuPont Experimental Station Federal Credit Union to serve the financial needs of the company’s employees and their family members. It converted to a community charter in 2002, serving all of New Castle County, Del.

Because of the unique geography of Delaware, the northern tip of the state is next to the extreme northeast corner of Maryland. Jerry King, president and CEO of the $274 million CU, told Credit Union Journal residents of both Kent County, Del., and Cecil County, Md, frequently visited DEXSTA branches seeking to become members, but had to be turned away because they were not residents of New Castle County. It also was an issue with potential indirect lending dealers.

Nowhere was the problem more acute than in the city of Smyrna, Del., which is actually straddles two counties, New Castle and Kent.

“NCUA will not award a community charter to an entire state, but there are only three counties in Delaware,” King said. “We have branches throughout New Castle County, the southern part of which is adjacent to Cecil County, Maryland. We were, of course, looking to grow and to add new members.”

DEXSTA submitted its application to add the two counties on July 13. It was approved on Nov. 27. As part of the application, the CU had to submit a timetable for notifying new members. King said the first step was a staff meeting to educate the team about the plan, followed by a press release. DEXSTA is advertising in a number of local newspaper and radio stations.

“We will not immediately be building branches,” King said. “We have a number of electronic options, including home banking, mobile banking and remote deposit. In a year or two we might entertain expanding our physical presence, but right now we do have branches nearby.”

According to King, adding the two new counties to the CU’s FOM means attainable growth while also providing access to consumers of modest means. Indeed, DEXSTA is involved in Delaware’s financial literacy program in inner city schools, and is committed to expanding to the new areas in its field.

“Overall, we are looking to grow as a full-service financial institution,” he said. “We are very, very excited for the opportunity that comes with this charter approval.”

A high-tech growth blueprint

Sam Brownell, founder of CUCollaborate in Washington, D.C., said his company has created software that identifies growth opportunities unlocked through the updated underserved area expansion regulations.

Leagues representing seven states and the District of Columbia have contracted with CUCollaborate to provide their member credit unions with access to the company’s web-based software — Nebraska, New Jersey, Utah, Hawaii, Montana, Vermont, and Maryland and D.C. The tool is available to both leagues and credit unions through CUCollaborate’s website: www.cucollaborate.com.

Brownell told CU Journal the company originally formed three years ago as a website where credit unions could review technology providers in a Yelp-like fashion. He eventually founded a new company that generated consumer-facing maps showing which CUs a person could join. That led to a database showing fields of membership, which led to software that offered identification of merger candidates, as well as businesses that are not served by a specific CU.

Sam Brownell, founder of CUCollaborate
Sam Brownell, founder of CUCollaborate

“We are trying to help credit unions of all field of membership types expand,” Brownell said. “The times we have been most helpful is figuring out what areas they can serve. Sometimes it is counterintuitive. If a credit union is serving three counties and wants to add a fourth, it cannot unless it adds a couple more counties. That happens with underserved areas.”

According to Brownell, NCUA applies various mathematical tests to FOM expansion applications, including a concentration-of-facilities test. “Because it is difficult for credit unions to analyze what is available to them, they miss out on opportunities,” he said. “There is a lot of ‘what if’ analysis. If you attempt to add underserved areas the numbers are very complicated. There are a lot of moving parts, so if you are trying to calculate it manually it is easy to miss an opportunity.”

“We help pick an area that passes the mathematical requirements of NCUA while finding an area that fits the credit union’s business plan,” he added.

For credit unions that are considering converting to a community charter, Brownell said they should look at the new rules concerning multiple-common-bond charters and how they can reach out to underserved urban areas.

“If you look at how community charters work, the math is defined by people who live there, while if you get people who work in an area they might live in many different areas. A community charter, on the other hand, often works better for rural underserved areas.”

For example: if a CU is trying to serve a city that has less than 1 million people in its metropolitan area, Brownell said it is better to add a rural district expansion. Per the new FOM rule, the population in the area in question needs to stay under 1 million and the population density needs to stay under 100 people per square mile.

“One credit union we worked with wanted to serve Minneapolis, but it was a rural-based credit union. It had to add counties that were extremely rural with urban areas to balance the equation and keep the population density down,” he explained. “It is not the easiest process to go through, but it is helpful to figure out if it is worth the time and money to pursue.”

“We help find the largest number of ways for someone to join a credit union,” he added.

To do that, credit unions need to be looking at all of the options under the new rule, instead of being wedded to one particular charter.

“A lot of credit unions are not considering every option, and are not aware of the opportunities each option provides,” he said. “In different states there are different ways to maximize the field of membership, but what we keep coming back to is an underserved area expansion. When people hear the word ‘underserved’ they think of people with bad credit, but when you look at census tracts many affluent areas are considered underserved – such as downtown Washington, D.C. With gentrification, more and more urban areas are becoming affluent but are still counted as underserved based on number of financial institutions, median income and other factors counted by the CDFI.”