Breaking Down NCUA’s CUGMA Proposal
Earlier this year, we blogged about the Credit Union Governance Modernization Act (CUGMA), which was signed into law in March. As our previous blog discussed, CUGMA amended the Federal Credit Union Act to make it easier for federal credit unions (FCUs) to expel problematic members, such as those that engage in violent, abusive or illegal behavior. Whereas FCUs previously needed a 2/3 vote of the credit union’s membership at a special meeting to expel a member, CUGMA changed federal law to allow FCUs to expel members “for cause” with a 2/3 vote of the FCU’s board of directors.
While FCUs welcomed this change, CUGMA is written so that FCUs cannot begin to utilize this new expulsion process until the National Credit Union Administration (NCUA) adopts a policy and regulations on this topic. NCUA adopted a proposed rule on this topic at their September 2022 Board Meeting. I’ll review some of the key points below. However, it should be noted that this is merely a proposal and that things may change by the time a final rule is formally adopted – in fact, the proposal asks for comments on basically all aspects of the proposed rule, indicating that NCUA is open to considering feedback and potentially making changes. Additionally, NAFCU has published a comprehensive regulatory alert on this topic – NAFCU members may want to review that alert and use the “comment now” button to send comments to our Regulatory Affairs team to be included in a future NAFCU comment letter regarding this proposal. Additionally, members can email their questions or comments to James Akin on NAFCU’s Regulatory Affairs team at email@example.com.
Expulsion Versus Limitation of Services
Pre-CUGMA, credit unions would often stop short of fully expelling a member through a special meeting, but would instead choose to use a limitation of services policy to limit services to certain members who were no longer “in good standing.” The current FCU Model Bylaws include language permitting FCUs to limit services to members who are no longer “in good standing” so long as the FCU has provided the member with notice of the limitation of services policy. Additionally, the services to be limited were required to bear a “logical relationship” to the member’s offending conduct.
With the passage and implementation of CUGMA, however, expulsion will now be a more expedient option than it was in the past. NCUA states in the preamble to the proposed rule that FCUs should still reserve expulsion for rare cases, stating: “…use of the authority under the Governance Modernization Act should be rare and saved for egregious examples of member behavior.” Thus, NCUA has decided to leave use of a limitation of services policy as an option for FCUs that don’t want to go so far as expelling a member. NCUA notes that limitation of services policies have some advantages, such as not requiring a vote by the board of directors and giving FCUs an option to address problematic behavior while the CUGMA process runs its course.
Interestingly, NCUA notes that the proposal would update the FCU Model Bylaws to remove the list of behavior that would cause a member to no longer be in good standing and would instead update that language to align with a list of behaviors that would make a member eligible for expulsion under CUGMA. The proposal would also remove the requirement for the services to be limited to be a “logical relationship” to the offending conduct.
Reasons for Expulsion
Under CUGMA, members can be expelled for the following reasons:
“(A) a substantial or repeated violation of the membership agreement of the Federal credit union;
‘‘(B) a substantial or repeated disruption, including dangerous or abusive behavior (as defined by the National Credit Union Administration Board pursuant to a rulemaking), to the operations of a Federal credit union; or
‘‘(C) fraud, attempted fraud, or other illegal conduct that a member has been convicted of in relation to the Federal credit union, including the Federal credit union’s employees conducting business on behalf of the Federal credit union.’’
The proposal elaborates on these reasons. For the first two (disruptions and/or violations of the membership agreement), the proposal notes that there is a difference between “substantial” and “repeated.” For activity falling under the “repeated” language, the member must have committed the offending conduct at some point, received notice that their conduct could result in expulsion, and then engaged in that same conduct/violation again. “Substantial” violations or disruptions, on the other hand, are different. These violations or disruptions would be so egregious that they should qualify for expulsion just for happening one time. The proposal requests comments on what types of violations or disruptions should be considered “substantial.”
With regards to fraud or attempted fraud, the proposal notes that the member does not need to be convicted of fraud or attempted fraud to qualify. However, if the FCU seeks to expel a member for “other illegal conduct” that does not fit into the “fraud” category, then the proposal states that a criminal conviction would be necessary.
The proposal also places some limits on expelling members. First, NCUA states: “members cannot be expelled solely due to or in retaliation for their complaints to the NCUA or any other regulatory agency, such as the Consumer Financial Protection Bureau, and members who are employees or former employees of the FCU cannot be expelled for any protected whistleblower activities.” Thus, FCUs cannot expel members merely for complaining about the FCU to regulators or for acting as whistleblowers. Additionally, the proposal notes that FCUs cannot expel members en masse for belonging to an entire class. While that might seem obvious from an anti-discrimination standpoint (i.e. you can’t expel an entire class of members that share the same race, sex, religion, national origin, etc.), the proposal clarifies that it also means that an FCU cannot adopt a policy of, for example, expelling all members who have caused a loss of $500 or more. Instead, NCUA states that FCUs must expel members individually and on a case-by-case basis.
Finally, the proposal also states that FCUs may only expel members for conduct that occurs after the effective date of the final regulation. However, the proposal does invite comments on whether that provision should be changed or some expulsion for earlier activity should be permitted.
Required Notices and Timelines
Under the proposal, FCUs are required to provide notice of the expulsion policy to members before the FCU may begin expelling members pursuant to CUGMA. The proposal notes, however, that providing the updated bylaws language (specifically Article XIV) would suffice. However, the notice must be provided to all members individually – NCUA notes that merely posting the notice on the FCU’s website would not be sufficient.
Once the member has been notified of the expulsion policy, an FCU may use the CUGMA process to expel problematic members. If a 2/3 vote of the board of directors favors expulsion, then the proposal requires the FCU to notify the member of the vote, the specific reasons for expulsion, and that the member has the right to request a hearing within 60 days. Interestingly, the proposal states that the member will have 60 days from when they receive the notice to request a hearing, not 60 days from when the credit union sent the notice. Thus, the date of receipt will be important in setting the deadline to request a hearing. If a member does not request a hearing, then the proposed rule states the member would be automatically expelled when the 60-day deadline expires.
If a member requests a hearing within the 60-day deadline, then the proposal would require the FCU to provide a hearing at which the member must be given the opportunity to be heard and present their case against expulsion. However, the proposal states that this hearing does not need to be in-person – FCUs could choose to offer virtual hearings. Additionally, members may choose simply to provide a written statement rather than actually presenting live testimony.
The proposal also states that the hearing can only cover the specific reasons for expulsion that were included in the notice sent to the member – no other reasons may be discussed. If additional expulsion-worthy conduct were to occur between when the member receives notice and when the hearing is held, the proposal states that additional conduct must either be ignored or the FCU must sent a new notice that includes the additional conduct but which must also provide another 60 days to request a hearing (thus the expulsion process would be set back).
At the hearing, the board of directors will eventually vote on whether to expel the member. If 2/3 of the board vote to expel, then the FCU must provide the member with a notice about the expulsion, which explains the effect of the expulsion (including that expelled members are not relieved of “outstanding liabilities” to the FCU). Members will receive their shares – amounts due to the FCU can be deducted from the shares, but the FCU must then provide a line-by-line accounting of any amounts deducted.
Once a member has been expelled pursuant to CUGMA, the proposal states that the member will have the right to request reinstatement, which can be achieved either through another 2/3 vote of the board (this time in favor of reinstatement rather than expulsion), or by a majority of members present at a special meeting.
The proposal states that FCUs should retain records relating to the expelled member for a period of five years. NCUA clarifies that this does not necessarily require retaining all records, but does require retaining “general documents related to the member, such as their last known contact information, membership agreement, or loan files, and specific documents related to the cause of the member’s termination.”
NAFCU will continue to monitor the implementation of CUGMA and will provide more updates through the Compliance Blog as the proposal changes or is finalized. As mentioned above, NAFCU members may want to submit their comments to NAFCU’s Regulatory Affairs team to make sure their opinions on this topic are heard by NCUA.
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About the Author
Nick St. John, was named Director of Regulatory Compliance in August 2022. In this role, Nick helps credit unions with a variety of compliance issues.