Compliance Blog

Last week the NCUA Board finalized a handful of rules, including an update to the FCU Bylaws housed in Appendix A to Part 701. Several substantive changes were made in the Final Rule, which we will cover in a couple blogs, beginning with the discussion and changes surrounding expulsion, limitation of services and unlawful purposes.

Article XIV: Expulsion

Whenever an update to the bylaws is proposed, it generates conversation around member expulsion. In the 2019 final rule, NCUA stated that, unsurprisingly, many commenters focused on the proposed provisions governing limitation of services and expulsion of members. The Federal Credit Union Act only allows a member to be expelled in two ways: (1) by a two-thirds vote of the membership present at a special meeting called for that purpose or (2) by virtue of the member’s non-participation in the affairs of the federal credit union (FCU). Calling a special meeting for the purposes of expulsion costs money and staff time, and can be a significant operational lift. This creates some very difficult situations for credit unions where the barrier to removing dangerous or abusive members is quite high. NCUA has consistently recognized that FCUs report this issue, but stated that its hands are tied by the language of the Federal Credit Union Act.

In the final rule, Article XIV, which specifies the expulsion procedures, was rewritten, but not changed substantively. New commentary to the article specifies that only in-person voting is permitted at the special meeting. The commentary also directs the reader to Article II regarding the limitation of services as alternative measures for responding to abusive or disruptive members and Article XVI regarding the use of accounts for unlawful purposes.

Article II: Limitation of Services

NCUA’s Office of General Counsel has a significant body of legal opinions regarding federal credit unions’ ability to limit services to members who are abusive and disruptive. In order to clarify credit unions’ right to limit services and restrict access to credit union facilities to these members, NCUA incorporated much of these prior legal opinions into the bylaws.

New Section 5 has been added to Article II, entitled Member in Good Standing. The bylaws define “good standing” as maintaining par value, being not significantly delinquent on loans, having no accounts closed due to abuse or negligence, not having caused a loss to the FCU, and not having engaged in violent, belligerent, disruptive or abusive activities. The bylaws then offer nonexclusive illustrations of these objectionable activities including threats or harassment of staff, damaging property, unauthorized use of credit union property or causing risk or financial harm to the FCU. Commentary to Article II contains more specific examples of objectionable behavior which justifies limiting services to a member.

If the member has not satisfied these conditions and is not in good standing, services to that member may be limited. However, the bylaw makes it clear that the core rights of membership (the right to vote and maintain a share account) are retained by the member. The commentary also provides some additional guidance on establishing the limitation of services policy including:

• The FCU has the flexibility to draft a limitation of services policy that is reasonably designed to preserve the safety of its employees and the integrity of the workplace.
• The policy need not be identical nor applied uniformly in all cases – its application can be customized to fit the particular circumstances.
• The FCU should disclose the policy to new members when they join and notify existing members of the policy at least 30 days before it becomes effective.

Article XVI: Unlawful Purposes

For a long time, NAFCU and credit unions have asked NCUA to interpret “nonparticipation” in an expulsion context to include not using an account in a legal or legitimate manner. NCUA has consistently stated that it will not consider this interpretation. This has left FCUs  with few options regarding members who use accounts for the purpose of conducting fraudulent or criminal transactions.

Article XVI, Section 1 has always specified that members, directors, officers and employees of the FCU must all be done in conformity with the law and applicable regulations. In response to FCU’s concerns about accounts opened for unlawful purposes, NCUA added comment ii to Article XVI. In it, NCUA states that an FCU need not adopt a specific policy or requirement that accounts be used in conformity with the law and that the section is “ample support” for an FCU to justify limiting services for any member who is found to be using an account in furtherance of an unlawful purpose.

While these changes are helpful in that they codify existing guidance in a single place, it does not actually represent any significant change for FCUs in terms of their ability to cope with abusive members or members who use their accounts for unlawful activities. It appears that for a substantive change on these issues, action by Congress would be necessary.

As of yet, the final rule is not yet in the Federal Register or the eCFR, but it can be viewed in a pdf on NCUA’s website. The final rule becomes effective 90 days after publication in the Federal Register.