Since early credit union laws were passed—the Federal Credit Union Act in 1934, and similar laws in many states near the same time—each credit union has been uniquely limited to what consumers they can serve. That is, each credit union serves a well-defined, unique group of people.
This limitation is circumscribed in two key concepts: common bond, and field of membership (FOM).
What are “common bond” and “field of membership”?
A common bond is something that a group of people have in common. For example, they may live in the same city or county. Or they may work at the same location, belong to the same church, or work in the same industry. The “common bond” is a description of what gives those people a shared interest.
Each credit union serves a group or groups of people with a common bond. Anyone who has that common bond is said to be in the field of membership (FOM). So, the field of membership of a credit union consists of all the people who are eligible to join the credit union based on their sharing that common interest.
History of common bond and field of membership (FOM)
Originally, these FOMs were small groups, centered around a small community where there was a high likelihood that one person in the community knew any other person in the community. There were few degrees of separation between members: one member might not know every person at the factory, but they probably knew someone who did.
Why these small fields of membership?
The Federal Reserve Bank of Atlanta, it its 1998, third quarter, Economic Review, observed that:
The [Federal Credit Union Act in 1934] neither elaborated on this definition at the time nor stated the reason for the [small FOM] requirement. Some courts have inferred that the purpose of the 1934 common bond requirement was to facilitate safe and sound operations.
In other words, the notion of FOM was used as a means of managing risk. By keeping the group small, limited to people that knew each other, the credit union could exert pressure on borrowers to repay loans. Members knew that if they did not repay their loan, it would affect their co-worker, or others in their congregation, etc. The credit union could also know who better to make loans to, because it could easily know the person’s character.
As the years passed, it became apparent that limited FOMs posed grave safety and soundness concerns for credit unions. After all, if the sponsor employer group closed the business, or moved the business out of state, suddenly the credit union’s entire membership was at financial risk. Or, a rural credit union focused on farmers could be brought down through a few years of bad crops in a small geographic area.
At the same time, credit reports, computers, and communication tools made it easier to manage credit risk, and to make loans to lesser-known people. An improvement in collection practices, facilitated by computers and communication technology, also helped.
These combined factors led regulators to expand the rules surrounding fields of membership. In Utah, in 1983, state-chartered credit unions could expand to serve multiple counties, and Federal credit unions were allowed to serve multiple groups with similar occupations[1] starting in 1981. In both in Utah and on a Federal level, these expanded rules led to separate lawsuits against the Utah Department of Financial Institutions and the NCUA. The government agencies lost both lawsuits.
Nationally, following the lawsuit decision in 1998, The Credit Union Membership Access Act was passed, which allowed the NCUA greater latitude in expanding fields of membership. Today, the NCUA allows Federal credit unions to have fields of membership with three different kinds of common bond[2]:
In addition, federal credit unions may add certain underserved geographic areas. Fields of membership also typically include family members of current members.
In Utah, following the lawsuit and a number of legislative actions, credit unions were allowed to have any of the following fields of membership[3]:
This means that a Utah state-chartered credit union can have one county and multiple associations, which is viewed as a strength of the state charter, since the Federal charter does not allow both associations and counties in the same credit union.
Over time, credit unions slowly changed their fields of membership. Often, it was out of a need to offset the risk of being focused on a small group. At other times, it was to obtain greater economies of scale, so that services and products could be provided at better prices. Why a credit union might want to grow is explained here.
In many cases, the employer sponsor of a credit union reduced its support of the credit union. Many employer sponsors have limited access to the employee base—which the credit union depended on—or removed access to the business’s facilities—which the credit union depended on. Such reduction of support from the primary membership group caused the credit union to seek other members elsewhere. Very often, this meant turning to a community field of membership.
Fields of membership today
Today, some credit unions have fields of membership that allow nearly anyone to join the credit union. For example, credit unions with member-based SEGs can serve anyone who joins the member-based group—and sometimes anyone can join the group. Some other federal credit unions have added hundreds of employee groups to broaden reach and decrease risk.
Yet other credit unions have stayed focused on a single employee group or narrower field of membership.
As fields of membership evolved over time, many credit unions have come to have overlapping membership bases, especially in population centers. In Northern Utah, especially along the I-15 corridor, most consumers have multiple credit unions they can join. Even in more dispersed parts of the state, because some credit unions have multiple employer groups or membership-based fields of membership, most people could join several credit unions even if the credit union has no physical presence in the local area.
It’s worth noting that in some states—Washington and Michigan—state-chartered credit unions have the option of serving the entire state.
Does common bond matter, anymore?
With broad fields of membership, it’s easy to wonder if common bond and field of membership matter, anymore. Are they relics? Another question to consider is should common bonds and fields of membership matter, anymore?
Field of membership does still matter. Regardless of the credit union—whether it has a narrow or expansive field of membership—each new member must qualify for membership before opening the account. And credit unions faithfully follow this rule. Practically, for some credit unions with very broad fields of membership, it’s easy to qualify people for membership, and so just about anyone can join. But, those people must still qualify. In this case, it’s a formality and perhaps a nuisance to the credit union and the member.
What about the notion of common bond—of people having something in common as they work together to improve their finances? Is this a relevant factor, anymore? Remember, the original purpose for the common bond was to manage credit risk—to help ensure the credit union made good loans, and could collect on them.
For some credit unions, which still serve tight-knit groups of people, common bond can matter when it comes to repaying loans, but only insofar as it provides general pressure to the borrower to repay the loan. Specific pressure cannot be applied to a borrower because privacy laws, enacted in relatively recent years (compared to the genesis of common bond and field of membership), ensure that most members of the community cannot know if a person even has a loan, let alone if that person is paying on the loan or not.
For credit unions with broader fields of membership, the common bond can feel meaningless. It’s true that once a person joins a credit union that person has an interest in the success of the credit union, because its success or failure will affect that individual. But, it can be difficult to find common interest beyond that in a credit union that serves hundreds of employee groups across a wide geographic area.
For such credit unions, that credit risk is managed through technological solutions. Indeed, even at credit unions focused on a single employer group, technology plays a critical role in managing credit risk. Fair lending laws have made it difficult or impossible to make loan decisions based on reputation or what today might be termed as hearsay or gossip.
So the answer is that while common bond and field of membership are still part of credit unions, today—that is, all credit unions follow the rules—for some credit unions they matter much less than others. Some credit unions view the field of membership and common bond as something that gives them uniqueness, while other credit unions view it as a hoop to jump through before allowing a person to join. Such credit unions would likely prefer if they did not have to jump through those hoops.
How do field of membership and common bond relate to credit union taxation?
Credit union opponents invariably make the claim that the credit union income tax exemption is related to the credit union serving a small group of people. This simply is not the case. As already demonstrated in this article, the purpose for small groups was to manage credit risk, not to obtain an income tax exemption. Likewise, the credit union income tax exemption was given because credit unions were structured as cooperatives. And they continue to be structured as cooperatives.
In fact, regardless of a credit union’s field of membership, it is a cooperative organized to benefit the members. This is the magic of credit unions, the secret sauce that credit union opponents will never fully grasp. Banks operate for profit. Credit unions operate for their members, whether they have a narrow field of membership with 200 members, or a broad field of membership with 1,000,000 members. In all cases, credit unions operate to benefit those members. There is no other motivation.
In fact, the notions of field of membership and common bond could be removed from credit unions, and they would remain cooperatives, operated for the benefit of their members. As long as this remains the case, credit unions will continue to merit their income tax exemption.
