NEW LAW SIGNED BY PRESIDENT BIDEN EXPANDS FEDERAL CREDIT UNIONS ABILITY TO EXPEL PROBLEMATIC MEMBERS

On Tuesday March 15, 2022, President Biden signed into law a $1.5 trillion omnibus bill (basically a spending bill for the government that is open to other amendments of all types) that included, among many other things, legislative wording that revised the ability of federal credit unions to expel problematic or disruptive members.  This legislative provision, which had been referred to as the Credit Union Governance Modernization Act (CUGMA), has been pushed by CUNA and NAFCU for some time and essentially removes the previous statutory provision that required a federal credit union to call a special meeting and secure a 2/3 affirmative vote of the entire credit union membership to expel a member for cause.

So, why is this significant?

 While it is unlikely that including this legislative language in an omnibus “catch all” bill will ever be heralded as earthshaking or monumental in comparison to many much more far reaching bills that credit unions would like to see Congress pass (MBL cap increase, allowing all credit unions to expand into underserved areas, supplemental capital counting as net worth for all credit unions), these changes that have now been signed into law still have some significance for federal credit unions.  The new legislation will provide a workable and expedient process in dealing with unruly members that to date has been viewed as unnecessarily cumbersome and so impractical as to not be worth pursuing.

As stated earlier, federal credit unions have been for decades very limited in their ability to deal with members that commit fraud or who engage in violent, belligerent or disruptive behavior – most commonly directed toward credit union staff members.

Although federal credit unions have been able to utilize limitation of services policies such as suspension check writing services or the ability to conduct in person transactions at branches to deal with certain problematic behaviors, there was really no practical method to remove unruly and disruptive members from the membership without calling a special membership meeting and securing 2/3^rd vote of the membership to do so.  Most federal credit unions have been unwilling to exercise such an option and thus continue to have these abusive individuals as members of the credit union – albeit in some cases with member service options having been limited

The CUGMA language addresses this issue by providing federal credit unions with the ability to expel members for cause without calling a special membership meeting and vote to do so.  In short, the legislation removes the requirement of a special meeting and vote of the membership to expel a member for cause and now permits a federal credit union to expel a member upon a 2/3 vote of a quorum of the board of directors.

Let’s take a look at the specifics of the new CUGMA provisions

 The first question that federal credit unions will ask is when does it go into effect?

Although the legislation has indeed been signed into law by the President, that fact alone does not mean that federal credit unions can immediately begin utilizing these new provisions to expel members for cause.  The legislation specifically requires NCUA to adopt and implement regulations related to CUGMA within 18 months of the enactment of the legislation.  This, in effect, means NCUA has until September 2023 to promulgate new rules necessary to establish the policy permitting federal credit union boards of directors to expel abusive and disruptive members.

The follow-up question is likely to be what type of action can generate the ability of a federal credit union to expel a member.  In other words, what is cause for expulsion?

The legislation states that a federal credit union can now expel a member “for cause.”  “Cause” is defined in the Act as:

– A substantial or repeated violation of the membership agreement of the federal credit union;

– A substantial or repeated disruption, including dangerous or abusive behavior (as defined by the NCUA Board pursuant to a rulemaking), to the operations of a federal credit union; or

– 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.

As you can see, NCUA must yet define what constitutes “dangerous or abusive behavior”.  Although there are some other provisions in CUGMA that NCUA will need to incorporate in the NCUA Board approved policy required under this legislation, we expect that this will be the area where most of the agency’s attention will be focused.

They will need to either define “dangerous or abusive behavior” or authorize in regulation the ability of each federal credit union to do so by their own board approved policy.

It should also be noted that this legislation does not permit the expulsion of an entire class of members – the right to expel only applies to individual members on a case-by-case basis subject to the requirements of a policy approved by the NCUA Board and the individual federal credit union board established expulsion policy or action.

Let’s look at what the expulsion process would likely look like.

Once the NCUA Board adopts and approves an expulsion policy as required under CUMGA, federal credit unions must distribute the NCUA policy to their membership before the federal credit union can expel a member.  If NCUA delegates that authority by regulation to each individual federal credit union, the board of the FCU would establish the policy.

Our feeling is that NCUA will establish the policy themselves because, well, regulators love to regulate things.  While it would make sense for the agency to authorize federal credit unions to adopt their own standards of problematic or disruptive behavior and their own definitions of “cause” for expulsion, the most likely outcome is that NCUA will put in place that definition themselves.

After the policy has been properly distributed to the membership, the federal credit union can begin using the policy to expel members for cause on an individual and case-by-case basis subject to the following procedure and the requirements of the NCUA policy:

• A federal credit union must provide advance notice to the member regarding the expulsion and the reasons for the expulsion. Notice must be provided in person, by mail or electronically if the member has elected to receive electronic communications from the federal credit union.
• The member to be expelled has 60 days from date of notification to expel to request a hearing from the Board of Directors of the federal credit union. If the member fails to request a hearing within 60 days, the member will be expelled from the membership.
• If a hearing is requested during the 60-day period, the Board of Directors must provide a hearing to the member. After the hearing the Board of Directors must hold a vote in a timely manner on expelling the member.
• If a member is expelled the notice of the expulsion must be delivered in person, by mail or electronically if the member has elected to receive electronic communications from the federal credit union.
• Members who are expelled under the above-described process must be given the opportunity to request reinstatement which can occur through a majority vote of a quorum of the Board of Directors or through a majority vote of the members of the federal credit union present at a meeting.

Again, the NCUA Board has 18 months to adopt a member expulsion policy and that policy must be distributed to membership of the federal credit union before the federal credit union can begin implementing the changes set forth under CUGMA.  Chances are that NCUA will move on this before the 18-month window expires as the promulgation of this policy seems to be quite straightforward.  In the meantime, we will keep our eyes on developments at NCUA on this as well as other issues

Please recognize that the provisions of this new federal legislation and the resulting NCUA action to implement it will only apply to federal credit unions.  State chartered credit unions are and will remain subject to the state laws and regulations in their state of charter as to the ability to expel members for cause.

Until next time,

Dennis Dollar