So, You Want to Expel Some Members?

At last week’s NCUA board meeting, the board acted very much like a parent giving their kid keys to the car for the first time.

On the one hand, everyone generally understands and supports the need to increase the ability of credit unions to expel violent, abusive and disruptive members. After all, similar powers already exist in many states and are used to ensure that staff is not mistreated or put in harm’s way.

On the other hand, the board is clearly concerned that some credit unions may use their increased powers to expel more members than they should. Consequently, as you move to implement the notice and bylaws provisions provided by the NCUA, you should be mindful of the dichotomy of the plain language of the statute and the NCUA’s interpretation of congressional intent.

President Biden signed the Credit Union Governance Modernization Act into law in March 2022. It gave the NCUA 18 months to develop regulations permitting credit unions to expel members with a simple two-thirds vote of the board of directors as opposed to requiring a special meeting of the entire membership. Congress specified four areas in which members could be expelled for cause: Causing a material loss; violations of membership agreements; causing substantial disruption of operations; and fraud, attempted fraud, other illegal behavior, or dangerous or abusive behavior, such as physical or verbal abuse of members or staff.

Crucially, the statute now permits credit unions to expel members for conduct that would have typically been dealt with through the credit union’s limitation of services policy. In last week’s meeting, the board stressed that expulsion should not be viewed as a replacement for existing limitation of services policies, but instead should be used in rare circumstances. Again, this is not something that you would necessarily infer from either the statute or a reading of the regulations without reference to the preamble.

The regulations finalized by the NCUA last week provide credit unions with a model bylaw amendment to implement the expulsion authority and a model notice for credit unions to put members on notice of these changes as required by the statute. The NCUA is allowing credit unions to incorporate the notice into their account agreements, but remember, as with any other account agreement amendment, existing members have to be made aware of these changes.

The statute does not include a baseline standard that must be satisfied in order for a member to be expelled. However, the preamble stresses:

Consistent with certain statements in the legislative history, use of the authority under the Governance Modernization Act should be rare and used only for egregious member behavior.

What type of issues does this raise for your credit union as it considers when and if to expel members, particularly when the member’s actions do not involve abusive behavior? Under the statute, credit unions can expel members for “a substantial or repeated violation.” In the final regulation, the NCUA requires credit unions to provide members a warning stating, “an initial notice is necessary to ensure members are aware that they may be expelled for repeated, non-substantial violations.” Furthermore, repeated violations must occur within a two-year period. Again, this reflects the concern of the board to ensure that credit unions maintain their cooperative member-owned ethos and provide access to members of modest means.

There is nothing unusual about individual policymakers trying to influence the way in which regulations are ultimately interpreted. At the end of the day, won’t the preamble fade into the background and the plain language of the regulation prevail? Probably not. At least in the short term, the NCUA will be actively involved in influencing how this new power is being exercised.

First, expulsion records will have to be maintained for six years, and you should assume they will be reviewed by examiners. Chairman Todd Harper also urged credit unions to periodically assess their practices to ensure they are not having a disparate impact on the membership. Most importantly, your members must be provided notice of their ability to contact the NCUA if they are being treated unfairly. Specifically, the model notice provided to members informs them that, “You may submit any complaints about your pending expulsion or expulsion to NCUA’s Consumer Assistance Center if the complaint cannot be resolved with the credit union.”

So what does all of this mean for your credit union? Utilizing this newfound authority involves much more than voting to amend your bylaws and providing notice of this policy change to your membership. Properly implemented, you should consider the circumstances under which you will use this policy and understand that, from the NCUA’s perspective, expulsion should be a last resort.

And just one more thing to keep in mind: In order to properly implement these regulations, your credit union should draft procedures to ensure that you provide adequate notice to members facing expulsion and properly conduct hearings when they are requested.

Henry Meier is the former General Counsel of the New York Credit Union Association, where he authored the popular New York State of Mind blog. He now provides legal advice to credit unions on a broad range of legal, regulatory and legislative issues. He can be reached at (518) 223-5126 or via email at henrymeieresq@outlook.com.