For a time, adopting underserved areas had been one of the hot trends among federal credit unions. For example, according to NCUA records, between Jan. 1, 2005 and Dec. 31, 2007, 246 federal credit unions added underserved areas to their fields of members, which made CU membership and services available to 353 groups and an additional 56.8 million people.
But in May 2008, the NCUA stopped approving underserved areas until it approved the latest version of its regulations defining underserved areas and overseeing the process of adding them. Even though the agency approved the new rule in November 2008, the NCUA has yet to approve any applications, leading some to wonder whether adding underserved areas remain the same priority for the NCUA or the industry given the current state of the economy and industry challenges.
"Oh no, for sure I think that eventually the fog will lift, and the economy will come back. And when it does, credit unions will start to add underserved areas again," said Dennis Dollar, a former NCUA Board chairman and now principal partner in Dollar Associates. "But I think it's important to note that the agency's new regulations are liable to make it significantly more difficult now than it had been," he added.
Dollar, who was chairman during the uptick in underserved additions and launched Access Across America to help advance the effort, credited "saber rattling by the banks" as one reason the agency has become more cautious and targeted in the underserved areas it allows federal credit unions to add.
He pointed out that even prior to May 2008, the agency had already prevented community-chartered credit unions from adding underserved areas, which took out over one-third of credit unions that would otherwise be eligible, and that the economics of adding areas made it unlikely that smaller CUs would want to do it.
"So really what you're down to is moderate- to large-sized multiple group credit unions," Dollar said, "and that just isn't as big a population."
The chief change the NCUA has made to the underserved area rules, Dollar explained, was to shift away from relying on another agency, the U.S. Treasury's Community Development Financial Institutions Fund, for the data it uses to define an underserved area, and instead expects credit unions to provide some of their own data on why a given area should be considered underserved.
"At the time we chose to use CDFI data because we considered that it was information from an independent, third-party agency who didn't particularly care if a credit union added an underserved area or not," he said.
Now, the agency's new regulations require that credit unions take steps to certify that the areas they propose to add are truly underserved, an effort rooted in the CDFI data but can also include additional details, Dollar explained.
The new rule overseeing how a CU adds an underserved area to its field of membership does three things. First, it clarifies the procedure for establishing that an underserved area qualifies as a local community. The agency left previous versions of this part of the rule unchanged, deciding against requiring a letter from the CU explaining why that underserved area met the common community requirements used to establish community charters.
The rule also makes explicit the process for applying the economic distress criteria that determine whether an area made up of different "geographic units" (usually census tracts) is sufficiently "distressed" to qualify as "underserved." The NCUA retained the requirement that a proposed underserved area, which can comprise multiple census tracts, would have to have at least 85% of its population qualifying as underserved.
Finally, it updates the documentation and clarifies the scope of requirements for demonstrating that a proposed area has "significant unmet needs" for loans and financial services. The agency laid more of the burden of proving significant unmet needs for depository or loan services with the credit union, requiring a page detailing those needs and the CU's proposal to meet them to be added to the business plan.
"Third-party documentation is generally the most compelling," the agency wrote. "Anecdotal evidence will not suffice."