FOM Goes to Supreme Court

With everything that’s been going on, it would be easy to forget that the American Bankers Association suit challenging the NCUA’s Field of Membership rule had not been brought to a conclusion.

If you did forget, you may have been reminded on March 11, when the ABA asked the U.S. Supreme Court to review an appeals court ruling that upheld much of the agency’s 2016 FOM rule. In that ruling, a three-judge panel of the U.S. Circuit Court of Appeals ruled that the NCUA has wide discretion in defining terms in the rule.

The ABA disagreed.

“In sum, the agency’s definitions of ‘local community’ and ‘rural district’ are ‘not anywhere near the standard meaning’ of those terms,” the ABA said in its petition.

If the court accepts the case, it would be just the latest challenge of the agency’s FOM rule by the ABA that reached the Supreme Court.

Until 1982, federal credit unions that had been formed along occupational parameters had to be employees of one employer. That year, the NCUA announced a multiple occupational credit union plan.

That type of credit union “resulted in large, interstate credit unions that offer banks competition for consumer products and service,” the Congressional Research Service said.

Following the adoption of the new rules, AT&T Family Federal Credit Union expanded its operations. Following that expansion, the credit union had about 110,000 members across the country, with 35% being employees of AT&T and its affiliates.

Naturally, bankers were upset.

At the time of the Supreme Court decision, the NCUA said thousands of credit unions relied on the new rule.

And the court said it was undisputed that the bankers were hurt because, under the new NCUA rules, people who might otherwise be their customers were allowed to join the AT&T credit union.

On Feb. 25, 1998, the Supreme Court ruled that occupation-based credit unions had to consist of an occupational group that had a single common bond.

The ruling could have affected millions of credit union members and the viability of many credit unions, but both sides asked the court to delay the ruling so Congress could decide what to do.

Congress did act and on Aug. 7, 1998, President Clinton signed the Credit Union Membership Access Act. It restored the expansion rights and allowed for multiple common-bond credit unions.

The law also required the NCUA to create a system of prompt corrective action and set minimum capital ratios that credit unions must maintain. The law also contained triggers that limit the activities of a federally-insured credit union if it drops below those levels.

Jump ahead to 2016, when the NCUA board approved additional revisions to the FOM rule – bankers immediately said the board once again was exceeding its authority to expand credit union fields of membership.

Under those rules:

• Federal credit unions would be permitted to apply to convert to a community charter or expand an existing charter without serving the core area if they elect to serve a portion of a core-based statistical area.
• The NCUA’s population limit of 2.5 million people would apply to any well-defined portion of a core-based statistical area regardless of the whole area’s population.
• Federal credit unions would be able to serve a Combined Statistical Area as defined by the Office of Management and Budget, subject to the 2.5 million population cap.
• Federal credit unions may only serve a rural district in those states bordering the state containing the credit union’s main office.
• The NCUA would use the CFPB-designated “underserved county” as an underserved area.
• Multiple-bond credit unions would have parity with single common-bond credit unions in serving contactors.

As expected, the ABA again filed suit against the NCUA.

And in March 2018, Judge Dabney Friedrich of the U.S. District Court for the District of Columbia agreed.

Friedrich struck down sections of the rule that:

• Automatically qualified a Combined Statistical Area or a contiguous portion of it with fewer than 2.5 million people to be a local community.
• Increases the population limit to one million people for rural districts.

Friedrich did not accept the NCUA’s argument that a 2.5 million population cap would keep distant and unconnected areas in a Combined Statistical Area from being considered a local community.

The remainder of the rule, dealing with Core-Based Statistical Areas and adjacent areas, did not violate the credit union act, the judge ruled.

However, a three-judge panel from the U.S. Court of Appeals for the District of Columbia overturned large parts of that decision, ruling that major sections of the FOM rule complied with federal law.

“The NCUA possesses vast discretion to define terms because Congress expressly has given it such power,” the judges wrote. “But the authority is not boundless. The agency must craft a reasonable definition consistent with the Act’s text and purposes.”

However, the appeals court sent one section of the rules, one dealing with the elimination of the urban-core requirement for local communities based on Core Based Statistical Areas, back to the lower court. The appeals court said the NCUA should be given an opportunity to better explain that part of the rule.

The appeals court deemed that requirement to be “arbitrary and capricious.”

The NCUA board has approved revisions in an attempt to remedy that situation.

The ABA asked the full court of appeals to reconsider the three-judge panel’s decision.

In December, the appeals court declined that request and the ABA said it was considering its options.

That’s where things stood until March 11, when the ABA filed a request that the Supreme Court consider the case.

In its appeal, the ABA asked the high court to rule that the agency does not have the broad discretion the board said it does.

“Once an agency is freed from the necessity of adhering to the reasonable range of meaning of the terms actually adopted by Congress and signed into law by the President, it effectively ceases to execute the laws and instead exercises a Humpty-Dumpty-like authority to make law,” the ABA said.

Five entire states each qualify as a rural district, the ABA said.

As might be expected, credit union groups said they were disappointed with the ABA’s decision to appeal the lower court ruling.

“It is unfortunate to see the bankers devote so many resources to restricting the financial options of American consumers,” CUNA President/CEO Jim Nussle said.

“Banks’ continued opposition to modernizing credit unions’ Field of Membership rules is an indication of their hostility toward credit union growth and competition,” B. Dan Berger, NAFCU president/CEO, said.

“As a credit union system, we remain undeterred by the bankers’ relentless legal maneuvers,” CUNA Mutual Group President/CEO Robert N. Trunzo said.

Responses to the ABA’s petition for the Supreme Court to hear the case are due by April 10.