When Things Go South: Limitation of Services
Like the start of any relationship, the beginning of a credit union’s relationship with a member is full of hope and optimism. Unfortunately, things don’t always work out as planned. Sometimes a credit union may find itself wanting to limit services to the member, such as in response to egregious conduct. However, there are some specific rules that apply to these situations, particularly when a share account is involved.
NCUA has recognized a federal credit union’s (FCU) right to adopt a “limitation of services” policy, and even added a discussion of those policies into the current version of the NCUA Model Bylaws. Under NCUA legal opinion letters and the model bylaws, this policy should be in writing, approved by the board of directors, and communicated to the credit union’s members. The policy can only be utilized against members who are no longer in “good standing” – which includes (but is not limited to) members who have caused a loss to the FCU, who are significantly delinquent on a loan, or who have engaged in conduct that is violent, belligerent, disruptive or abusive. Additionally, there must be a “logical relationship” between the member’s offending conduct and the services to be limited. For example, limiting the ability to write checks may be appropriate for a member who has bounced numerous checks, but likely would not bear a “logical relationship” if the member is merely delinquent on a loan.
NCUA has discussed which services may be limited in this legal opinion letter, as well as in the preamble to the 2019 Final Rule which adopted the most recent version of the model bylaws. The 2019 preamble stated: “An FCU has broad discretion to deny, as it deems appropriate, all or most credit union services, such as ATM services, credit cards, loans, share draft privileges, preauthorized transfers, and access to credit union facilities…” (emphasis added).
However, the model bylaws and NCUA legal opinion letters state there are two basic rights an FCU cannot limit through its limitation of services policy: the right to vote at annual and special meetings, and the right to maintain a share account. Denying either of those rights would amount to an expulsion of the member. Because the FCU Act requires an FCU to follow specific procedures when expelling a member, taking any action that would amount to an expulsion without following those procedures would be a violation of the Act. In other words, restricting a member’s ability to vote at meetings or maintain a share account – even if done pursuant to a limitation of services policy – would be a violation of the FCU Act.
At first blush, these rights might seem fairly clear-cut. For example, while some members may choose not to exercise the right to vote at annual or special meetings, the FCU Act would prohibit an FCU from denying a member the right to vote at those meetings.
Similarly, the right to maintain a share account would indicate that the FCU Act would prohibit an FCU from closing every share account owned by a particular member. However, short of closing all share accounts, it may be less clear what actions would violate the right to maintain a share account. NCUA has discussed this right in a 1999 legal opinion letter. In that letter, an FCU proposed limiting a member’s share account to the FCU’s par value. For example, if the par value for the FCU was five dollars, then the FCU would limit the member’s share account so that the member could have no more than five dollars in the account. While this would technically mean the member would still have a share account, NCUA concluded doing so would still violate the member’s right to maintain a share account. NCUA stated: “The basic privilege of maintaining a share account includes the right to make deposits into and withdrawals from that share account” (emphasis added).
While a 1991 legal opinion letter stated an FCU could limit a member’s right to receive dividends on a share account, NCUA reversed that opinion in a May 1999 letter. In the letter, NCUA stated the Truth in Savings Act – and the NCUA’s implementing regulations – requires dividends to be paid on the full amount of principal in the account. Thus, using a limitation of services policy to restrict dividends on a share account could be a violation of the Truth in Savings Act and section 707.7 of the NCUA regulations.
Putting these things together, a credit union may restrict certain services relating to share accounts, but the FCU Act requires the FCU to allow the member to maintain at least one share account, and to make deposits into and withdrawals from that account. NCUA’s TISA regulations require the credit union to provide dividends on the funds in the share account. FCUs may want to review their limitation of service policies and procedures to determine if members are afforded the right to maintain a share account and to earn dividends, and whether any other limitations bear a “logical relationship” to the member’s offending conduct.
For more information on NCUA guidance regarding limiting services or expulsion of members, see this article in NAFCU’s Compliance Monitor.
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.