By Ray Birch
WASHINGTON—The impact of a U.S. District Court invalidating two provisions in NCUA’s expanded field of membership rules will likely lead to much more red tape for credit unions, say experts.
But those sources also indicate that the agency has solid footing to appeal the decision that was handed down Thursday by Judge Dabney Friedrich in the U.S. District Court for the District of Columbia.
NCUA said it is reviewing the judge’s decision and is “considering its options” regarding the two sections of the rule vacated by the decision. The agency is also contacting credit unions whose charters will be adversely affected by the decision.
The court upheld two challenged portions of NCUA’s field of membership rule and struck down two provisions in a lawsuit filed against the agency by the American Bankers Association in late 2016. The provisions declared to exceed the NCUA's statutory authority include those that automatically qualify a combined statistical area (CSA) with fewer than 2.5 million people to be a local community and the increase to one million people the population limit for rural districts.
Judge Friedrich upheld the parts of the rule that allow federal credit unions to serve Core-Based Statistical Areas without serving the urban core that defines the area, and the ability to add “adjacent areas” to existing well-defined local communities on a case-by-case basis.
As CUToday.info reported, NAFCU, CUNA and CUNA Mutual Group in a joint statement
disagreed with the court's decision to invalidate the two provisions in NCUA’s rule, and reiterated their intent to continue to work in support of the agency's authority to issue the rule. Meanwhile, the American Banker’s Association praised the ruling.
More ‘Red Tape’
What may be the biggest outcome if the decision is not overturned via a successful appeal, is credit unions will simply have to justify more FOM expansion requests with a great deal of data collection and time spent assembling it, said Carrie Hunt, NAFCU EVP-government affairs and general counsel.
Carrie Hunt
“If this decision stands, unfortunately, it will result in more red tape for credit unions,” said Hunt. “If you look at the opinion, the judge clearly sends a message there should be extra steps to demonstrate that certain communities are local, as opposed to having NCUA’s default definition count. This extra work could unfortunately result in field of membership expansion delays for no real reason. Credit unions are going to have to go back to providing much more data for an expansion request—data that in the end will just show the same things that the default definitions show.”
But what the decision won’t likely do, in Hunt’s opinion, is force credit unions to give up any members added as a result of the new FOM rule.
“It’s possible that some credit unions could lose their expanded areas,” said Hunt referring to how NCUA may enforce the revised rule to meet the court’s ruling. “However, it’s not likely that those credit unions would lose any members they already added. So, it would just be an issue of future members. In the past, that is how NCUA has treated these situations.”
Hunt said she couldn’t estimate how many credit unions might be impacted by the ruling, but said she is aware of several NAFCU-member CUs that have had their charters expanded following the new FOM rule.
One CU’s Situation
The $537-million SeaComm FCU in Massena, N.Y., is among the credit unions that have expanded as the result of NCUA’s 2016 FOM rules.
“We have been able to expand our charter under the 2016 final rule based upon the rural district definition of up to one-million, which included the ability to serve a rural district in a state that was contiguous to our current field of membership,” said CEO Scott Wilson. “That enabled us to obtain an additional four counties, including three in the state of Vermont granted to us by the NCUA in December 2017. That said, this current proposal could be beneficial in future years if we continue to expand our retail footprint.”
An Error in Judgement
Former NCUA Chairman Dennis Dollar views the court’s ruling as a split decision, and also feels the judge erred.
“Although the ruling was essentially a draw, in my view the court erred by not considering the precedent that the federal courts established in their ruling on the 1999 rules in which they upheld what were basically much broader FOM rules in that they had no population caps at all,” said Dollar, whose company, Dollar Associates, assists credit unions in field of membership expansions, among other services. “This is the problem with population caps being included in the FOM rules at all. Although they were said to have a comparative basis when they were adopted in the 2010 FOM rule rewrite, they seemed arbitrary to credit unions when they were implemented, arbitrary to bankers when they were increased and therefore opened themselves unfortunately to subsequent arbitrary judicial interpretation as well. However, the truth is that the population caps, whether they are advisable or not, do not stand on their own.”
For example, said Dollar, the court completely missed in the rural district definition that the one-million population cap additionally requires the population density in the district to be no more than 100 persons per square mile in order to qualify.
“I don’t care how large the area, a population of less than 100 persons per square mile is rural,” insisted Dollar. “The agency was very solid in their rule because, despite the population cap increase, they maintained that significant population density test.”
Dennis Dollar
Dollar said he is perplexed by the fact the U.S. Census Bureau can use its extensive data to determine there is sufficient local interaction among the population to be considered a community in a Combined Statistical Area, “but for some reason NCUA cannot rely on that same independent federal agency’s determination when it defines a community. I think the judge missed the boat on not allowing NCUA to respect the Census Bureau’s interactive community definition but, in the same ruling, appropriately allows NCUA the discretion to combine contiguous counties outside of the Census Bureau’s CSA definition.”
Bankers Hail Decision
Meanwhile, the American Bankers Association praised the judge for striking down portions of the NCUA FOM rule, stating that the agency “further expanded the already loose fields of membership from which federal credit unions can draw their customers” in violation of rules that Congress “by statute limited to serving a single ‘well-defined local community, neighborhood, or rural district’—to serve large regions encompassing multiple metropolitan areas with populations in the millions.”
“It never made sense that an entire region could be declared a ‘local community’ or that an entire state could be declared a ‘rural district,’ and (the) ruling recognizes that fact,” said ABA President and CEO Rob Nichols in a statement. “(The) decision also affirms what we have known for years—NCUA won’t hesitate to push the boundaries of reason for the credit union industry even at the expense of taxpayers, small banks and the communities those banks serve.”
The ABA in its suit had also challenged the ability of credit unions to serve Core-Based Statistical Areas without serving the urban core that defines the area, and the ability to add “adjacent areas” to existing well-defined local communities on a case-by-case basis. Judge Friedrich upheld both of those provisions, writing that “neither [are] in excess of the agency’s statutory authority nor arbitrary and capricious.”
The ABA noted that the judge added, however, that “the approach to Core-Based Statistical Areas pushes against the outer limits of reasonableness.”
In his statement, Nichols expressed disappointment in the court’s decision to uphold these provisions, which he said would “allow credit unions to cherry pick communities and ignore serving people of modest means, which is fundamental to the original purpose of the credit union tax exemption.”
What Now?
While NCUA has yet to reveal how it may respond to the ruling, Dollar believes the agency has sufficient grounds to appeal if it feels strongly it is on solid legal ground with the final rule.
“I believe they are,” said Dollar. “This was a bipartisan proposal approved unanimously by a statute-cautious but very safety-and-soundness-oriented board that realizes credit unions cannot maintain their long-term financial viability without the ability to reasonably grow. Based upon the precedent of the federal court’s earlier ruling on the 1999 FOM rules and the strength of this rule as it relates to the letter and spirit of the Credit Union Membership Access act, I think NCUA will ultimately win on appeal if they choose to fight this very strict interpretative ruling.”