Credit Union Governance Modernization Act Becomes Law

A recent amendment to the Federal Credit Union Act (FCU Act) will provide federal credit unions (FCUs) with additional flexibility to expel members in certain situations. The Credit Union Governance Modernization Act (the Act) was included in a recent omnibus spending bill passed by Congress, and signed into law by President Biden on March 15, 2022. Many FCUs are wondering what this law will allow moving forward. The short answer is, if certain procedures are followed, and in limited circumstances, an FCU’s board of directors will be able to expel members for cause by a two-thirds vote. However, this will not be an option until the National Credit Union Administration (NCUA) finalizes regulations sometime in the next 18 months.

As background, under the FCU Act and longstanding interpretations from the NCUA, for FCUs, the general rule is, once a member, always a member. There are exceptions, such as someone ceasing to be a member because their account balance is below the par value required by the FCU for a period of time set in the FCU’s bylaws. FCUs can also expel members, but the process to do this has been rather onerous. Historically, to expel a member, FCUs would need to call a special meeting for the specific purpose of considering the member’s expulsion, give the member an opportunity to be heard, then have two-thirds of the members at the special meeting vote to expel the member. Expulsion could also occur through a “nonparticipation policy,” a narrow path that allows a FCU’s board of directors to vote to expel a member for not doing things like voting in annual meetings, purchasing shares, or taking out a loan. This option is not used often given the limited scope. Overall, FCUs were left with very little flexibility, especially compared to many state laws which permit state-chartered credit unions to expel members by a vote of the board of directors

While credit unions often see expulsion as a last resort, in some circumstances it can be the best path forward. For example, credit unions sometimes have members who pose a risk to staff or otherwise engage in egregious conduct. FCUs can limit these members’ services, like prohibiting the members from coming to a branch, but that does not always seem sufficient for every situation. The NCUA amended the model bylaws for FCUs back in 2019, but declined to adopt any additional flexibility for FCUs dealing with these kinds of situations, asserting that adopting a limitation of services policy and seeking police assistance where appropriate was enough to address problematic or potentially dangerous members. Since the NCUA took the view the FCU Act did not give it authority to provide any additional flexibility, FCUs needed a change in the FCU Act itself. After a couple of years of advocacy, credit unions succeeded in convincing Congress to finalize amendments to the FCU Act’s expulsion provisions.

The FCU Act now includes a new section, “expulsion for cause,” that will allow a FCU’s board of directors, by a two-thirds vote, to expel members in three specific circumstances:

• a substantial or repeated violation of the membership agreement;
• a substantial or repeated disruption, including “dangerous or abusive behavior”; and
• fraud, attempted fraud, or other illegal conduct that a member has been convicted of, including insider fraud conducted by FCU employees.

This fraud provision is not as helpful as it could be, since members can only be expelled if actually convicted of the underlying crime and authorities are not always able or willing to prosecute every instance of fraud. Meanwhile, the NCUA is tasked with defining what constitutes dangerous or abusive behavior, so the rulemaking process will be key to determining the parameters of what could constitute cause to expel a member.

The Act also details specific procedures that a FCU’s board of directors will need to follow to expel a member for cause. This includes:

• Providing the member with notice in advance outlining the reason for expulsion;
• Allowing the member to request a hearing within 60 days of receiving this notice; and
• If the member requests a hearing, the board of directors must hold the hearing and then hold a vote “in a timely manner” on whether to expel the member.

If the board does vote to expel, the member must be provided a notice of the expulsion. Members must also be given an opportunity to request to have their membership reinstated, and can be reinstated either by a majority vote of the board of directors, or a majority vote of FCU members present at a meeting such as the FCU’s annual meeting. Where the member does not request a hearing, expulsion will occur 60 days after notice was provided to the member.

Unfortunately, FCUs cannot immediately benefit from this increased flexibility. The Act allows expulsion for cause “pursuant to a policy” adopted by the NCUA within 18 months of the Act becoming law. As a result, the NCUA has until about September 2023 to undertake rulemaking to implement the statutory change. The NCUA will also need to interpret some key provisions such as what constitutes dangerous or abusive behavior. Once the agency finalizes such a rule, FCUs will then need to adopt a policy that complies with the Act and the future rule and distribute that policy to members. That said, this will result in improved flexibility for FCUs dealing with difficult situations and the NCUA will be seeking feedback from the industry once it begins the rulemaking process. In the meantime, FCUs can continue to utilize a limitation of services policy to deal with difficult members, adopted in accordance with the FCU’s bylaws and relevant guidance from the NCUA.

A redlined version of the relevant section of the FCU Act, as amended, can be found here.