Compliance Blog

Jul 26, 2023
Categories: Bylaws

Breaking Up is About to be Easier to Do

Last week, the National Credit Union Administration (NCUA) held its July board meeting, which featured a unanimous vote by the board to approve a final rule which will implement the Credit Union Governance Modernization Act (CUGMA). This rule will amend the Federal Credit Union (FCU) Model Bylaws (which are found in Appendix A to Part 701 of the NCUA regulations) to add new provisions relating to member expulsion and limitation of services. The NAFCU Compliance Team has already received several questions about this new rule. While there is likely too many nuances to cover in a single blog post, let’s dive into some of the major questions on this topic Q&A style:

How did we get here?

As we previously blogged, Congress passed CUGMA in March 2022. Prior to CUGMA, FCUs were limited in how they could deal with problematic members – such as members who engage in violent or abusive behaviors toward FCU staff, members who engage in criminal activity and members who otherwise violate the account or membership agreement. While FCUs could limit services to some members through a board-adopted limitation of services policy, such an approach required the credit union to maintain a relationship with the member and was only available if the member’s conduct met a specific definition of “not in good standing.” For FCUs that wanted to end the relationship with the member, the FCU Act prior to CUGMA only permitted FCUs to expel a member through a 2/3 vote of the members present at a special meeting, or through a non-participation policy (which basically only applied to inactive members).

CUGMA amended the FCU Act to allow FCUs to expel certain members through a 2/3 vote of the FCU’s board of directors. The law required the NCUA to adopt regulations regarding this new expulsion process within 18 months – setting a final deadline of September 2023. NCUA adopted a proposed rule on this topic in Fall 2022, which we blogged about here. As mentioned above, the NCUA adopted the final rule implementing CUGMA at the July 2023 Board Meeting last week.

When will this rule take effect?

The final rule will take effect 30 days after its publication in the federal register. The final rule published on the federal register on July 26, 2023. According to the federal register, this final rule will take effect on August 25, 2023.

What will the updated bylaws say about expulsion?

Once this final rule takes effect, the FCU Model Bylaws will be updated to include a new section on expulsion. FCUs can then adopt this new provision of the model bylaws through a 2/3 vote of their board of directors. This new section will note that there are now three methods through which expulsion can occur: the two pre-CUGMA methods mentioned above, plus the new expulsion method provided by CUGMA. FCU members who have engaged in certain conduct can now be expelled “for cause” by a 2/3 vote of the FCU’s Board of Directors. Additionally, FCUs will need to provide “each member of the credit union” with notice of this new expulsion provision in order to utilize the expulsion method provided by this bylaw amendment. According to the final rule, this notice can be accomplished through providing a model notice that will be added to the model bylaws. Alternatively, a FCU could just provide a copy of the new bylaws provision.

Which Members Can be Expelled Under the Rule?

Once the bylaws provision has been adopted and notice has been provided to each member, the FCU may begin to use this new expulsion method to seek “for cause” expulsion of individual members. Once this final rule takes effect, the updated commentary to the model bylaws will explicitly state that a FCU is prohibited from expelling an entire “class of members.” Notably, this includes the class of “members who are delinquent” – meaning that a credit union cannot use these new bylaw provisions to expel all delinquent members from the credit union en masse. Instead, the final rule and commentary to the bylaws make clear that a FCU must consider the expulsion of each individual member on a case-by-case basis. Additionally, the updated bylaws will also prohibit a FCU from expelling a member in retaliation for whistleblower activity or filing a complaint with a regulatory agency.

“For cause” expulsion will be available when a member has engaged in certain activity. The bylaws will now state that a member can be expelled through a 2/3 vote of the board of directors if the member has engaged in:

“(A) a substantial or repeated violation of the membership agreement of the credit union;

(B) a substantial or repeated disruption, including dangerous or abusive behavior, to the operations of a credit union, as defined below; or

(C) fraud, attempted fraud, or conviction of other illegal conduct in relation to the credit union, including the credit union’s employees conducting business on behalf of the credit union.”

With regards to violations of the membership agreement or disruptions to the credit union’s operations, the rule will permit expulsion due to a single substantial violation or disruption, or due to repeated non-substantial violations or disruptions. The NCUA board declined to define what violations or disruptions would qualify as “substantial,” and left that determination within the discretion of each FCU’s board. The final rule states that an FCU must provide at least one written warning about possible expulsion before it can seek to expel a member for repeated non-substantial violations or disruptions, and that incidents which occurred more than two years prior cannot be considered as part of the repeated violations or disruptions.

The rule will also update the bylaws commentary to discuss what behavior could be labelled “dangerous or abusive.” The rule states the following conduct will qualify:

“(1) violence, intimidation, physical threats, harassment, or physical or verbal abuse of officials or employees of the credit union, members, or agents of the credit union (this includes actions while on FCU premises, through use of telephone, mail, email, or other electronic method, or otherwise related to the credit union’s activities);

(2) behavior that causes or threatens damage to FCU property; or

(3) unauthorized use or access of FCU property.”

Notably, the limitation of services provisions of the bylaws are also being updated so that a limitation of services is only appropriate if the member’s conduct fits the same criteria listed above. A limitation of services approach may be more fitting at times, as it is less extreme than expulsion, can be accomplished quicker (expulsion requires waiting 60 days, as discussed below) and does not require a board vote.

What are the Procedural Steps for For-Cause Expulsion?

Expulsion via vote of the board must follow a specific set of procedural steps. First, the board must vote on the member’s expulsion. If 2/3 of the quorum vote to expel, then the member’s status as a member of the FCU will be pending expulsion.

Secondly, the FCU must send a “notice of pending expulsion” to the member. According to the final rule, this notice must state the reasons for the pending expulsion and must use more than conclusory statements – for example, merely stating “your conduct violated our membership agreement” would likely be insufficient. Instead, the rule says the notice must provide specific reason for seeking “for cause” expulsion, with sufficient detail for the member to understand the grounds for expulsion. This notice must also inform the member that the member has the right to request a hearing and describe the procedures for doing so. The final rule states that the notice should also inform the member that if the member does not request a hearing within 60 days, then the expulsion will be finalized.

The notice should provide a “general statement” about the effect the expulsion will have on the member’s accounts at the FCU. The final rule also states that the notice should inform the member that any complaints regarding the expulsion can be submitted to NCUA’s Consumer Assistance Center. This notice can be provided in-person, through the mail, or (if the member has provided E-SIGN consent to receive electronic disclosures) electronically.

Third, the FCU must wait to see if the member requests a hearing. As noted above, a member is given 60 days to request a hearing. Importantly, the 60-day countdown does not begin until the member receives the “notice of pending expulsion.” The preamble to the final rule notes that NCUA purposefully decided not to provide a presumption of receipt – instead, NCUA states:

“The NCUA would consider a letter that was properly addressed and mailed as received by its intended recipient absent conclusive evidence it was not received, but local jurisdictions may have their own procedures regarding presumptions of receipt.”

Notably, the final rule also indicates that a member only needs to send the request for a hearing within 60 days of receiving the “notice of pending expulsion.” According to NCUA, it is possible for a request for a hearing to be sent by the member before the deadline, even though the FCU may not receive it until a few days later. Thus, when waiting to see if a member has requested a hearing, an FCU may want to wait 60 days after the member received the notice of the pending expulsion, and then may want to wait a few more additional days to see if a last-minute request for a hearing arrives. If the member does not request a hearing within 60 days of receiving the notice, then the member is automatically expelled based on the earlier 2/3 vote of the board (step 1, above). In that case, the FCU must provide written notice of the expulsion (see step 5 below).

Fourth, if a member requests a hearing, then the FCU must provide the member with a “reasonable opportunity to present the member’s case orally to the FCU board through a videoconference hearing.” If a member cannot attend via videoconference, then the updated bylaws state that using a telephonic conference will suffice. Alternatively, a member could choose to provide a written submission rather than oral statements. Finally, a FCU board could decide to allow a member to attend in-person, but the updated bylaws specifically note that “[a] member is not entitled to attend the hearing in person” – so whether to have an in-person hearing will be within the discretion of the FCU board.

Fifth, after a hearing has occurred, the updated bylaws state that the FCU board must vote again on the expulsion within 30 calendar days. If this vote expels the member, then the FCU must provide a notice of expulsion, which should discuss the effect on the member’s accounts and any deductions taken from the member’s funds relating to amounts due. This notice should also inform the member of the member’s right to seek reinstatement.

NAFCU Compliance will continue to monitor the implementation of this rule. NAFCU member credit unions may submit questions on this topic to the compliance team by emailing


📣 Sessions are open now! Join NAFCU's BSA School On-Demand and/or Risk Management Seminar On-Demand to unlock comprehensive training from anywhere.  


About the Author

Nick St. John, NCCO, NCBSO, Director of Regulatory Compliance, NAFCU

Nick St. John, Regulatory Compliance Counsel, NAFCUNick St. John, was named Director of Regulatory Compliance in August 2022. In this role, Nick helps credit unions with a variety of compliance issues.

Read full bio