Legal Redlining of Minority, Low-Income and Underserved Communities

The National Credit Union Administration (NCUA) on October 27 repealed the "core area" requirement when a federal credit union (FCU) applies for a community charter consisting of a portion of a Core Based Statistical Area (CBSA). This could result in the redlining of low-income or minority communities by community chartered credit unions.

When the NCUA Board implemented the core area requirement, it noted the primary purpose of this requirement was to acknowledge the "core area" of a Core Based Statistical Area as the typical focal point for common interests and interaction among residents. An additional purpose was to extend FCU services to low-income persons and underserved areas, both typically located in the "core area" of a Core Based Statistical Area.

However, the NCUA Board reversed its position by stating correctly that the Federal Credit Union Act does not require a community charter based upon a CBSA to serve a "core area."

In justifying the abolition of the "core area" requirement, NCUA stated it "has in place a supervisory process to assess management’s efforts to offer service to the entire community an FCU seeks to serve. NCUA holds credit union management accountable for the results of an annual evaluation that encompasses a community FCU’s implementation of its business and marketing plans, extending for three years after the credit union either is chartered, converts or expands."

But this supervisory argument is a red herring.

The final rule allows an FCU to now draw its boundaries so as to restrict service to low-income, minority, and underserved communities. The agency's supervisory process will not address this issue; because the "core area" is not part of the credit union's community charter.

When this field of membership rule goes into effect, community charters should be examined to see if FCUs exclude core areas.

If FCUs exclude core areas from their community charters, this should raise questions about preserving the credit union tax exemption.

Read the final rule.