Today the Board is finalizing our second field-of-membership rule. This rule once again allows, but does not require, credit unions to use a narrative approach to establish their well-defined local community. This is an approach the Board allowed until 2010, when it created objective, statistically based “presumptive communities,” based on towns, cities, counties, and core-based statistical areas defined by the Office of Management and Budget.
The use of statistically based “presumptive communities” is both more objective and less burdensome than the narrative approach. It provides very meaningful regulatory relief to credit unions and their members and prospective members. The narrative approach is more difficult, more cumbersome, and more expensive.
The narrative approach is occasionally more flexible than the use of statistically based “presumptive communities,” but it requires far more work by both the credit union and the agency. That is why we assume most credit unions that seek a community charter will still apply to serve a presumptive community such as a town, city, county, core-based statistical area, or a rural district. The narrative approach will simply be an option that a credit union can use if the borders of existing political jurisdictions do not represent their natural market. This can be the case with political boundaries that were often created more than two centuries ago and no longer reflect today’s world.
It should also be noted that the use of the narrative approach is consistent with the recent federal District Court decision on field-of-membership issues. The judge in that case specifically allowed the use of a narrative approach to add an adjacent area to an existing community-based field of membership.
It is important to remember that the reason field-of-membership requirements were created didn’t have anything to do with credit unions’ tax status. They were created to help credit unions succeed during the Great Depression because financial institutions didn’t have access to FICO scores and other methods to determine creditworthiness. In those days, the ability to know your member through a common bond was a way to reduce risk to the credit union, which was especially important because unlike banks, credit unions could not raise capital by issuing stock.
Today we have a variety of credit scoring and other metrics that help credit unions predict credit-worthiness. Credit officers no longer have to rely exclusively on their personal knowledge of their members.
Another indicator that safety and soundness are not related to field-of-membership requirements is that the Share Insurance Fund already insures a very wide array of state-chartered credit unions whose fields of membership are much broader than what is currently permitted for federal credit unions.
Some states allow statewide fields of membership, at least 34 states allow some form of interstate branching, and 33 states allow hybrid charters that mix select employee groups and associations with geographic fields of membership. The NCUA’s Share Insurance Fund insures all of these types of credit unions, even though their powers are broader than what is currently allowed for federal charters.
Today’s final rule will give individual credit unions greater flexibility to establish their own well-defined local communities rather than having someone else impose their definition on them. It will not please everyone. Banks may think it goes too far, and credit unions may think it doesn’t go far enough. But it is a logical next step, which is consistent with both the Federal Credit Union Act and judicial interpretations of that act.
As we approach our nation’s 242nd birthday, I will also note that this rule supports freedom of choice and freedom of association, rights that are as old as our nation and are embodied in both the Declaration of Independence and the U.S. Constitution. In that spirit, I am happy to support this final rule.