NCUA BOARD FINALIZES RULE TO IMPLEMENT THE NEW LAW ON EXPULSION OF CREDIT UNION MEMBERS

As we previously reported to you in September 2022 following the action of Congress earlier that year on the member expulsion issue, the NCUA Board today – in response to the enactment of the Credit Union Governance Modernization Act and following a public comment period when a proposed rule was sent out for comment – issued a final rule that would authorize federal credit unions to expel members for cause without the burdensome steps previously required in order to do so.

Previously, expulsion of a member required a special membership meeting where 2/3rds of the participants must vote to expel the member and only after the individual member was provided a right to be heard at the special membership meeting.

After receiving and reviewing the public comments on the proposed rule, the NCUA Board unanimously approved a final member expulsion rule that will go into effect 30 days after the final rule is published in the Federal Register.

While the NCUA Board did include a few changes as a result of the public comment process, the final rule closely mirrors the proposed rule on this matter.

The following link will take you to the final member expulsion rule approved by the NCUA Board today.

https://ncua.gov/files/agenda-items/federal-credit-union-bylaws-final-rule-20230720.pdf

We encourage you to read the final expulsion rule and begin familiarizing yourself with the procedures and disclosures that will be required in order to utilize the additional flexibility that is now available under this new regulation. Again, the final rule is effective 30 days after publication in the Federal Register – usually ten days to two weeks after action by the NCUA Board.

Some points to notice in the final rule.

Remember that this rule only applies to federally chartered credit unions. State chartered credit unions are governed by their respective state laws and regulations in regards to member expulsion.

The Credit Union Governance Modernization Act, as well as this final rule, includes a list of behaviors that may warrant termination of membership and that will now become included in the standard federal credit union bylaws upon the effective date of this final rule. Those actions include what the Act calls disruptive, abusive, or violent behaviors and would allow the member to be considered not in good standing if he or she has engaged in any such behavior.

What will the credit union have to do to put in place the terms of this final rule?

Under the Credit Union Governance Modernization Act, a FCU’s directors may expel a member only if the FCU has provided, in written or electronic form, a copy of NCUA’s expulsion policy to each member of the credit union. As such, before an FCU expels a member under these provisions, it must send a copy of its Article XIV to each member. It would be insufficient for an FCU to post a copy of Article XIV on its website, as the Act states the FCU must provide the policy to “each member” and also uses the phrase “distribution of policy to members.”

The NCUA Board did include in the final rule an Optional Standard Disclosure of Expulsion Policy for credit unions to use if they so desire. This would essentially be, though not required to be utilized exactly as NCUA provided, a safe harbor disclosure notice that FCUs can use if they so desire.

Additionally, the Credit Union Governance Modernization Act states that the policy has to be provided in written or electronic form and a member has 60 calendar days from the date of receipt of a notification of pending expulsion action against him or her to request a hearing from the board of directors of the FCU.

The credit union board must grant the hearing before final action is taken. However, if the member does not request a hearing within 60 days, the board may proceed with the expulsion vote which must be approved by 2/3rds of a quorum of the Board.

As stated above, there are some other minor nuances included in the final rule that you can read for yourselves that are of less significance than those we have outlined herein.

Implementation after the effective date of this final rule.

Once the rule becomes effective FCUs will have the option to amend their bylaws to provide their boards of directors with authority to expel members for cause. FCUs seeking to adopt these authorities must amend their bylaws through a two-thirds vote of their boards of directors.

Those credit unions who choose to do so do not need to submit the amendment to the NCUA for its approval provided the amendment is identical to the language included in this final rule or only includes additional language on hearing procedures as discussed in the preceding paragraphs. FCUs may adopt amendments immediately after the effective date of the final rule or at any point in the future.

However, the amendment included in this final rule is optional, and FCUs do not need to amend their bylaws or take any other action in response to this final rule. Those FCUs electing not to act in response to this final rule, however, could expel a member solely through a special meeting of the members or on the basis of a violation of a nonparticipation policy.

If you have questions regarding this rule, please do not hesitate to reach out to us. It is fairly straightforward, as you will see when you read the final rule through the link provided above. And it is certainly a better process than the current one that is overly cumbersome with a special-called membership meeting and the offending member being able to plead his or her case to the credit union members in attendance.

Remember that short of expulsion, credit unions can deny services to a member for a variety of justifiable and supported reasons. This is the path most often taken for members that have caused a loss to the credit union or are serious serial offenders of credit union policy. That authority remains in effect and can be implemented without expelling the member from the credit union.

This new policy, intended to be used seldom and judiciously, is designed for the situation where the member not only should be denied access to services but whose actions are so determinantal or dangerous to the credit union and its staff that expulsion from membership is justified.

Until next time.

Dennis Dollar