Common Bond Backdoor Scrutinized
What common bond does a website editor in Los Angeles share with a military-based credit union in Virginia?
That is, until she joins an association–one she’d never heard of previously–promoted on the credit union’s website.
Is this method of recruiting new members compatible with common-bond requirements in the Federal Credit Union Act? The NCUA, trade associations and credit union leaders say yes. Predictably, the banking lobby disagrees.
Jennifer Calonia, an editor for the Go Media Network in Los Angeles, which produces financial content for consumers published on a network of more than 2,000 websites, published a March 25 article, “10 Credit Unions Anyone Can Join.” In the report, she dispels the common conception that credit union membership is only open to those defined by employer groups or geographical boundaries.
On the contrary, Calonia reported, “There are many credit unions anyone can join” through association affiliation.
The story was born out of personal experience. Calonia said she had been searching for a local credit union to join that offered a competitive gas rewards credit card program. While researching online, she discovered the $15.5 billion Pentagon FCU, headquartered in Alexandria, Va. PenFed is listed in Calonia’s article as one of the 10 credit unions open to anyone.
“While I’m not a military member, I paid into one of their sponsored organizations, Voices for America’s Troops, with a $15 membership fee,” Calonia said.
On its website, PenFed helps consumers determine membership eligibility by providing an interactive questionnaire. In addition to questions regarding military employment, eligible family members and existing association memberships, the million-member credit union also includes this option: “Help me join another way.”
After selecting that option, a pop-up screen asks, “Need another way to join? No Problem!” and promotes membership in two organizations that support the military, the National Military Family Association and Voices for America’s Troops.
PenFed spokeswoman Tawnya Lancaster declined an interview to discuss the topic.
Calonia said she was not recruited by PenFed or any other credit union to write the article. In fact, she didn’t speak with the credit unions listed in the report, but rather, simply researched membership eligibility online and quickly found 10 credit unions that fit the bill. The consumer researcher said she was excited to have discovered the membership eligibility strategy, and based upon her good experience as a member of PenFed, wanted to share the information with consumers.
“Among my own peers, there was this misconception that no credit union was available to them,” she told Credit Union Times. “They all thought credit unions were employer based only. I’ve been educating them about community charter credit unions, and when those aren’t available, there are certain credit unions that give anyone the ability to join by supporting a nonprofit that the credit union supports as well.”
The NCUA requires that associations wishing to partner with credit unions to offer membership to their list of benefits maintain bylaws, a membership list, meetings and have dues requirements. However, there is nothing in the rules that prevents a credit union from using associations as a catch-all for those who aren’t eligible for membership through employment or via community charter.
Examiners do check for compliance within field of membership limitations when there is a concern or a suspicion that the credit union is not complying with the established limits, Fairbanks said.
“It is not a standard part of the risk-based examination process, but in cases where membership growth is unusual or there may be indicators the credit union membership screening process is not well-controlled, examiners may perform sample testing during the exam,” he said.
Examiners develop the scope of such reviews based upon factors such as observations made during the loan review, for example, seeing if employment listed by borrowers is consistent with the field of membership, general business plan objectives and the general internal control environment.
Birmingham, Ala.-based industry consultant and former NCUA Board Member Dennis Dollar said associational common bonds are as old as the credit union movement itself. Further, he added, there’s nothing wrong with collaborative arrangements between credit unions and associations .
“More and more associations are seeing the value in these relationships, as are a number of SEG-based credit unions looking for additional avenues for membership growth,” Dollar told Credit Union Times.
Officials at both CUNA and NAFCU agreed that if an association meets NCUA requirements and is within the credit union’s field of membership, there’s nothing wrong with using that association to grow membership.
NAFCU General Counsel Carrie Hunt said that credit unions put thought and effort into field of membership expansions, and when they propose adding a new select employee group or association, they must include a business plan that details how they plan to serve the group. Credit unions that promote association membership online aren’t doing anything underhanded, she said.
Meeting regulatory requirements is good enough for the NCUA, but what about the impression the marketing strategy left on Calonia, that credit union common bond requirements are a myth? Could bankers seize upon the article and use it as ammunition on Capitol Hill, as lawmakers debate tax reform?
Yes, said American Bankers Association Chief Economist and Blogger Keith Leggett. In fact, he said he’s observed credit unions creating their own associations as a backdoor to membership.
“For some of these credit unions, it appears that the ends justify the means. Their goal is to grow membership, and they don’t care how,” he said. “Ultimately, they are making a mockery of the common-bond requirement. What is the common bond of a $10 or $20 donation?”
The practice abuses and devalues the credit union charter, Leggett said, and makes the case for Congress to repeal the credit union tax exemption.