The Federal Credit Union Act, or FCUA, is one of the most important pieces of legislation for credit unions in the United States. It governs the ways that credit unions operate and how they can make changes. Specifically, it focuses on the regulation of investment practices of credit unions and CUSOs. But the act also covers other areas, such as disruptive member behavior and conducting a hearing.
Expulsion
Federal credit union members can expel a member for cause by a two-thirds vote of a quorum. The Board of Directors must then conduct a hearing to consider the case. During the hearing, the member is given the opportunity to present his or her case.
Before a member is expelled, the FCU must provide notice to the member. This notice can be sent by mail or provided electronically. A member has 60 days to request a hearing. If the member does not request a hearing, he or she will be expelled at the end of the 60-day period.
Once a member is expelled, the Credit Union is required to limit the services it offers to the member. In order to do this, the Credit Union must adopt a policy that complies with the Act.
The NCUA has proposed a rule that outlines the process by which an FCU can expel a member. The proposed rule is meant to allow FCUs to expel problematic members without having to go through a lengthy process.
Under the proposed rule, an FCU can expel a member for cause in a variety of situations. For example, a member may be expelled for failing to participate in a FCU’s activities or for engaging in egregious conduct.
An FCU can also remove a member for violation of a rule or for committing an act that may pose a threat to the safety of the organization. In addition, a member can be removed from the FCU for illegal conduct that affects the FCU’s employees.
To determine the cause of a member’s failure to participate in FCU activities, a board of directors must take into account the member’s failure to make loans to the Credit Union or to vote at annual elections.
Limitation of services policy
If you are a federal credit union, you should know that your Board of Directors has the authority to limit certain services to members. You will want to carefully review your bylaws and your limit of services policy to ensure compliance.
One type of limitation of service is limiting the number of share accounts a member may have. In some cases, the board of directors will also impose a fee for excessive withdrawals from a regular share account.
Credit unions are required to hold an annual meeting of members. At this meeting, the members of the credit union will elect the board. The members may participate in the meeting in person, or by virtual means. For example, a member who cannot attend a meeting in person can make a virtual vote. However, the order of business at an annual meeting must be in accordance with the credit union’s bylaws.
Another type of limitation of service is the amount of loans a member can borrow. Loans are authorized by the board of directors. These loans must be approved by a loan officer. To prevent fraud, the loan officer must screen applicants for eligibility. Once approved, the loan officer must keep accurate records of approved transactions.
In addition, a credit union may limit certain services to members based on the member’s behavior. Members who are abusive or disruptive, for instance, would not be eligible to receive these services. Similarly, a member who is severely delinquent on a loan might not be allowed to receive writing checks.
A limitation of services policy must be in writing and approved by the board of directors. In addition, the policy must be logically related to the offending behavior.
Disruptive member behaviors
A member who engages in certain conduct may be barred from using the facilities of the credit union. For example, a member who curses at a credit union employee could be banned from physical access to a branch. The Federal Credit Union Act contains procedures for expulsion, and a credit union’s board of directors must follow those procedures.
Although expulsion is a serious remedy, it may not be the right answer for every disruptive member. Other remedies may include limiting a member’s access to share accounts or credit products, or restricting ATM services. In some cases, an FCU may want to add an optional Section 10 to their Bylaws.
The proposed rule would make conforming changes to Article II of the FCU Bylaws. It would also remove the provision that requires a logical relationship between the disruptive behavior and the services being provided. This would make it easier for credit unions to exercise this power.
Additionally, the proposed rule would change the required disclosure form from a standard document to a plain-language notice. While not a requirement, some commenters felt that a disclosure form is an unnecessary complication.
The proposed rule would allow FCUs to expel a member for cause. However, the rule would require a two-thirds vote of the directors to accomplish that. To encourage participation, the rule would be easier to understand by ordinary members.
Alternatively, the Board of Directors may choose to adopt variations to the FCU Act’s procedures for expulsion. One option is to create a new Section 10 that allows the board to limit the services that are provided to disruptive members. Another option is to allow in-person attendance at hearings.
CUSO investments in non-CUSO service providers
The Federal Reserve Board recently considered whether to withdraw a proposed rule on the definition of a CUSO. While the Board declined to withdraw the proposed rule, it is considering the issue in the future. In the meantime, the Federal Reserve Board will consider comments on the definition of a CUSO.
CUSOs are organizational entities owned by credit unions that provide loan processing, sales, and service. They can also engage in debt and equity aspects of sale-leaseback transactions. However, CUSOs are not wholly owned by credit unions. Credit unions must comply with part 712 requirements when investing in a CUSO.
Currently, federally chartered credit unions are permitted to invest up to 1% of the paid-in share accounts in a CUSO. This amount may be expanded if a CUSO meets certain criteria. Investing in a CUSO that violates the FCU Act’s usury cap creates a legal risk.
In addition, CUSOs have been criticized for their role in abusive lending. A recent report by the National Consumer Law Center documented over 40 credit unions that partnered with CUSOs to market payday loans.
While the rule will not change the regulations on CUSOs, the NCUA will look at commenters’ concerns as part of its ongoing supervisory program. Some commenters raised concerns about the systemic risk posed by CUSOs. Others argued that expanding CUSO lending authority would have unintended consequences. Other commenters suggested increasing the use of the Payday Alternative Loans program.
One commenter urged the Board to limit CUSO lending activities to loans that credit unions can make. He also recommended requesting examination findings from the Consumer Financial Protection Bureau.
Currently, the NCUA has limited oversight of non-CUSO third-party vendors. This is because the regulatory body has limited resources for performing due diligence on critical service providers.
Conducting a hearing
The Federal Credit Union Act allows a credit union’s board of directors to expel a member for cause. A member must be notified in advance of the expulsion and must be given an opportunity to present a case for his or her continued membership. If a member does not request a hearing within 60 days, the member is automatically expelled.
This rule proposes to address some of the shortcomings of the current rule. It does not require the board to call a member’s outstanding loans or other obligations. Also, it is not prescriptive about the manner in which a hearing is to be conducted. Rather, it provides for a fair, reasonable, and consistent process.
One of the proposed rules would prohibit FCUs from expelling a member for causing a loss to the credit union. This type of action was permitted in the previous version of the Governance Modernization Act.
The proposed rule also requires the FCU to notify the member of the proposed expulsion in a timely manner. Members are allowed to opt to receive notice electronically. However, this is only available to those members who have opted to receive electronic communications.
The Board is soliciting comments on the proposed rule. Specifically, it wants to know whether the rule is too prescriptive. What types of flexibilities should be included in the final rule? Some commenters may suggest an alternative to the record retention requirement.
Another question for the Board is the length of time an FCU should retain a member. If the member is not expelled after the 60-day period, an FCU can continue to maintain the member’s account. Alternatively, the member can be denied access to the premises of the credit union.
