CUGMA Offers Promise, But Awaits NCUA Action
On March 15, 2022, President Biden signed a large omnibus spending package into law. Included within that Omnibus bill was a legislative change that Federal Credit Unions (FCUs) have requested for a long time – the Credit Union Governance Modernization Act (CUGMA). In summary, CUGMA amends the Federal Credit Union Act (FCU Act) to add a new avenue through which FCUs can expel problematic members. I enjoy a good FAQ, so let’s break down CUGMA FAQ-style:
Why was CUGMA needed?
Let’s review the pre-CUGMA landscape. As discussed in this previous post in the Compliance Blog, sometimes FCUs have to deal with members that commit fraud or who engage in violent, disruptive or belligerent behavior – such as acting abusively towards FCU employees. However, FCUs are limited in the tools they have to deal with these types of members. One such tool is an FCU’s ability to use a board-adopted limitation of services policy to limit certain services to the problematic member, like removing the ability to conduct activity in-person at branches, removing the ability to write checks, or other limitations that bear a “logical relationship” to the member’s problematic behavior.
However, sometimes a member’s behavior is so bad that an FCU may want to expel that person from membership. Under the pre-CUGMA FCU Act, a credit union could only expel a member pursuant to a 2/3 vote of the membership at a special meeting, or pursuant to a nonparticipation policy (which could only be utilized for members who were not actively using their accounts). Thus, unless an FCU was willing to call a special meeting of its membership for the sole purpose of expelling someone, they were often stuck keeping members who engage in abusive or illegal behavior. CUGMA attempts to remedy that problem by giving FCUs another avenue for expelling problematic members, which might be more palatable to FCUs than having to call a special meeting.
Can FCUs begin using CUGMA right away?
Not exactly. Technically CUGMA became law upon the signature of the omnibus bill on March 15, 2022, and thus is in effect now. However, the text of the Act requires the National Credit Union Administration (NCUA) to adopt regulations relating to certain aspects of CUGMA. For example, the Act requires NCUA to adopt a policy approved by the NCUA Board regarding the ability of FCUs to seek expulsion for cause. The act also states that an FCU cannot expel a member under CUGMA until it has provided its membership with a copy of that NCUA-approved policy – thus, the Act itself indicates that FCUs cannot begin to use its new expulsion procedures until NCUA has adopted certain rules and policies required under CUGMA. The Act states that NCUA must adopt those rules no later than 18 months after the enactment of CUGMA (which was March 15, 2022). That means NCUA should adopt the rules and policy required by approximately September 2023 at the latest.
Which members can be expelled under CUGMA?
CUGMA states that a credit union can now expel a member “for cause” if a specific process is followed. We’ll discuss that process below, but first let’s look at what it means to expel a member “for cause” – the Act defines “cause” to mean:
“(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.’’
Thus, CUGMA allows an FCU to expel members that repeatedly or substantially violate the FCU’s membership agreement, who repeatedly disrupt the FCU’s operations or who have engaged in fraud or other criminal behavior. As you can see in the quote above, the Act requires NCUA to define “dangerous or abusive behavior” in a future rulemaking, making this one of the rulemakings required before FCUs can begin utilizing CUGMA. The act also does not define what a "substantial" violation would mean.
While we’re discussing which members can be expelled under CUGMA, it should be noted that the Act also states that CUGMA cannot be used to expel an entire class of members – instead, it states “[a]n expulsion of a member pursuant to this section shall be done individually, on a case-by-case basis…”
How does this new expulsion process work?
CUGMA states that an FCU will be permitted to expel a member “for cause” (as discussed above), by a 2/3 vote of a quorum of the FCU’s board of directors. The Act states that such an expulsion should be done “pursuant to a policy which the [NCUA] Board shall adopt, pursuant to a rulemaking, not later than the end of the 18-month period following the date of enactment of the Credit Union Governance Modernization Act of 2022.” Thus, as outlined above, CUGMA requires NCUA to issue a rulemaking and to adopt a policy on this topic. The Act also states that FCUs must distribute the NCUA-adopted policy to their membership before they can expel a member under CUGMA.
Once the membership has been provided with the NCUA policy regarding expulsion for cause, FCUs may then begin using the policy to expel individual members on a case-by-case basis. In order to do so, the Act says that the FCU must provide advanced notice to the member regarding the expulsion and the reasons for it. This notice can be provided in-person, by mail, or even electronically (if the member has elected to receive electronic communications).
Once the member receives the notice, they have 60 days to request a hearing. If no hearing is requested, then CUGMA states that the member will be expelled at the end of the 60-day period. If the member does request a hearing within the 60-day window, then the FCU’s board of directors must provide the member with a hearing and then afterwards must timely vote on the member’s expulsion. If the member is expelled (either after a hearing or because they failed to request one within 60 days) then another notice must be provided that informs the member of their expulsion from the FCU.
Finally, members who are expelled under the process detailed above must be given the opportunity to request reinstatement, which can occur either through a majority vote of a quorum of the board of directors, or through a majority vote of the members present at a special meeting. The Act also notes that the FCU does not have to allow the expelled member to be present in-person at the reinstatement meeting (either the meeting of the board or the special meeting).
Hopefully CUGMA will provide some desperately-needed relief to FCUs that have had to put up with members who are violent, disruptive or who engage in criminal behavior. NAFCU will continue to monitor the NCUA’s implementation of CUGMA and will continue to discuss developments here in the Compliance Blog.
About the Author
Nick St. John, was named regulatory compliance counsel in March 2020. In this role, Nick helps credit unions with a variety of compliance issues.