By Ray Birch
BIRMINGHAM, Ala.—With associational groups growing as a means for field of membership expansion, Dennis Dollar is cautioning credit unions to approach such a strategy correctly, or risk attention from NCUA and possibly even loss of associational groups that have been added.
“Since the 1934 passage by Congress of the original Federal Credit Union Act, associational fields of membership have been authorized and utilized by federal credit unions,” noted Dollar, principal partner at Dollar Associates. “Every state with a parity provision in its statute or regulation has followed suit to one extent or another. For SEG-based, multiple common bond credit unions, including an associational group in your field of membership is a great option for diversification and a qualifier of last resort for membership growth.
“In fact, the number of SEG-based credit unions doing so has greatly increased over recent years,” Dollar added.
Overcoming Limits
The former NCUA chairman explained that SEG-based, multiple common bond credit unions are often limited in their ability to expand as they grow.
“And they need to continue growing, given the fact their employer groups are reducing in size through layoffs, downsizing, corporate mergers and more,” he said. “Plus, there are fewer and fewer large businesses, corporations or industries to recruit for SEG affiliation. There are more and more small businesses to recruit, and these can mount up into significant new credit union membership.”
Yet the crux of the challenge, according to Dollar, is that a credit union with limited size faces an often unlimited job in recruiting a sufficient number of new small business members and SEGs to drive the kind of growth necessary to create scale.
Another Hurdle to Overcome
“They have the option to convert to a community charter, and many do,” Dollar explained. “However, a community charter for many credit unions is limiting as well—particularly for SEG-based, multiple common bond credit unions that have SEGs outside the local community they could get approved to serve as a community credit union.
“And a community charter limits their ability to solicit business outside their community, a real problem for credit unions that do a great deal of indirect lending,” he continued. “A community charter also limits mergers with other credit unions—or purchases with community banks—outside the credit union's approved community.”
Two Different Approaches
Dollar said that many SEG-based, multiple common bond credit unions at the federal and state levels have approached the need for both growth and diversification in two ways.
“One is by adopting approved CDFI underserved areas into their fields of membership,” he told CUToday.info. “There are some real diversification and growth possibilities in underserved areas, and every SEG-based, multiple common bond credit union should look into whether there are underserved areas around their branches that might provide a real growth opportunity to serve.”
Dennis Dollar
The second way many SEG-based, multiple common bond credit unions address this issue is through incorporating associational SEGs into their fields of membership, said Dollar.
“The association picks up members through the credit union, and the credit union picks up members through the association. It is a win-win,” he said.
Passing the Test
To ensure that win, Dollar stressed the important factor to make associations work for a credit union is ensuring the association is legitimate and its bylaws validate it as such through NCUA’s “totality of the circumstances test.”
“Our firm has worked with hundreds of such credit unions applying to serve associational groups and getting them approved as a part of the field of membership,” he said. “It is important to recognize that serving associational groups is not some wide open FOM loophole with no guardrails, and that NCUA will approve almost any group for your FOM.”
Eight Criteria
According to Dollar, there are eight criteria that are listed in the NCUA field of membership manual as the types of factors that the agency—and most states follow suit for state-chartered credit unions.
“The criteria must be qualitatively met before the association can be approved to include in your SEG-based credit union’s field of membership,” he said.
Among those criteria are:
- Whether members of the association pay dues
- Whether members actually have an opportunity to participate in the association
- Whether members have voting rights in the association
- Whether the association maintains a membership list
- Whether the association sponsors activities, publications, events, etc.
- What are the association’s membership eligibility requirements
- How frequently does the association meet
- What is the level of corporate separateness from the credit union itself.
Additional Criteria
The association must have a membership component and not be merely a donor/donee or customer/vendor relationship, Dollar reminded
“These are all critical components of how the regulatory agencies view whether an association can be approved to become part of your FOM,” he said.
Does an association have to meet all of those requirements before it will be approved by the regulator as part of the SEG-based credit union’s field of membership?
“Not in entirety,” Dollar stated. “The regulatory test requires the ‘totality of the circumstances’ regarding any particular association must be taken into consideration by the regulator, not the ‘entirely of the circumstances’ regarding an association. But recognize that the fewer of the above referenced criteria are met, the tougher it will be to get approval of the association by your regulator to become part of your FOM.”
Reasonable Expectations
Dollar said NCUA and the states are very reasonable in their expectations of what is in the bylaws and the operational procedures of associations.
“However, they expect that enough of these criteria are met for them to know that this association meets their standards in the totality of the circumstances,” he said.
Dollar said it is important that someone knowledgeable of the regulatory approval process examine the association’s bylaws with the totality of the circumstances test in mind.
‘It Must be Done Right’
“Utilizing associational groups is good business and makes good partnerships for credit unions when it comes to qualifying new members and building the strength of the credit union through strategic growth,” he said. “However, recognize that it must be done right to provide the long-term advantage both the credit union and the association are looking for. If so, it is a great win for both your credit union and the association you partner with.”