The American Bankers Association has challenged a new rule expanding credit union membership, filing suit in federal court to argue that the National Credit Union Administration has overstepped its congressionally mandated bounds.
What happened
On December 7, 2016, the National Credit Union Administration (NCUA) adopted a final rule expanding the universe of members eligible to join a single federally chartered credit union.
But the rule flies in the face of congressional intent and historic practice, the American Bankers Association (ABA) argued in a new complaint filed in Washington, D.C., federal court.
The Federal Credit Union Act (FCUA), 12 U.S.C. § 1751 et seq., authorizes the NCUA to charter three types of credit unions, distinguished by field of membership. The new rule concerns community common-bond credit unions, which are limited to “[p]ersons or organizations within a well-defined local community.”
Pursuant to the new rule, the NCUA declared a “well-defined local community” to include up to 2.5 million people in a “combined statistical area,” up to 2.5 million people in a “core-based statistical area,” and areas adjacent to well-defined local communities.
“The Final Rule permits credit unions to expand their tax-exempt operations at the expense of other financial institutions,” the ABA alleged, adding that multiple federally chartered credit unions are already planning to take “prompt advantage” of the rule change to expand the scope of their operations. According to the complaint, “ABA’s member banks compete with credit unions, and thus will suffer competitive injury as a result of provisions in the Final Rule that allow credit unions to serve larger areas and greater numbers of customers. This competitive injury, which flows directly from the Final Rule, would be redressed by a favorable court ruling.”
Federal credit unions receive significant tax and regulatory advantages over banks that compete with them for business, the ABA said, with an estimated $2.68 billion saved per year by credit unions because of the federal income tax exemption alone. ABA argues that because Congress granted credit unions highly favorable tax treatment, Congress also restricted the markets that they can serve to ensure they do not also receive an unfair competitive advantage over taxpaying banks.
Requiring that members share a common bond or community of interest is one of the primary limitations imposed by Congress, the ABA asserted. But the Final Rule “permits a single ‘community’ credit union to serve an area that is far larger than a single ‘local community’ or ‘rural district,’” the group said. For example, the Washington-Baltimore-Arlington, DC-MD-VA-WV-PA area has a population of more than nine million and includes the District of Columbia, most of Maryland, a large portion of Northern Virginia, three counties in West Virginia, and one county in Pennsylvania.
“No reasonable definition of ‘a well-defined local community’ could include so many different communities spread over such a large area,” the ABA contended. “The Final Rule thus permits NCUA to rubber stamp the expansion application of any credit union, paving the way for uncontrolled enlargement of credit unions beyond the ‘local community’ lines Congress required.”
The Final Rule also expanded the definition of a “rural district” by quadrupling the numeric limit, effectively permitting an entire state (such as Alaska and North Dakota, among others) to qualify as a single “rural district.” This change creates the potential for indefinite expansion, allowing a credit union to expand to any “immediately adjacent area” to geographic units, the ABA said.
This is not the first time the NCUA has attempted to impermissibly expand membership, the ABA told the court. Twice before the ABA has successfully challenged NCUA efforts to broaden membership, via charter expansions in Pennsylvania and Utah, both rejected by federal courts. See Am. Bankers Ass’n v. NCUA, 347 F. Supp. 2d 1061, 1069 (D. Utah 2004); Am. Bankers Ass’n v. NCUA, 2008 WL 2857678, at *10 (M.D. Pa. July 21, 2008).
The complaint seeks declaratory and injunctive relief enjoining the NCUA from granting approval of any federal credit union’s field of membership pursuant to the Final Rule.
To read the complaint in American Bankers Association v. National Credit Union Administration, click here.
Why it matters
If the Final Rule stands, the market share of community credit unions is likely to expand, perhaps exponentially. As the ABA noted in the complaint, the number of credit unions with more than $1 billion in assets more than doubled between 1995 and 2015 as the NCUA has gradually eased membership limitations. On the other hand, if the Final Rule falls, the status quo generally will be preserved without major reductions in the number or size of community credit unions based on membership criteria. Unless the court takes action, the Final Rule is set to take effect February 6, 2017.
