NCUA Proposes to Curb Abusive Associational Common Bond Practices

The National Credit Union Administration (NCUA) Board has issued a proposed rule to amend its associational common bond after aggressive ABA advocacy alerting the agency to numerous associational common bond violations at federal credit unions (FCUs).

NCUA wrote: "In an attempt to expand their potential FOMs beyond appropriate limits, however, a few FCUs have begun forming their own associations and adding independent associations to their FOMs that may not fully satisfy the intent of the associational common bond rules."

The NCUA board has proposed to clamp down on associations formed for the primary purpose of expanding FCU membership. The proposed rule states that "if the association has been formed primarily for the purpose of expanding credit union membership..., then the analysis ends and the association is denied inclusion in the FCU’s FOM."

Also, NCUA is concerned that the current totality of the circumstances test may not be sufficiently filtering out those groups that do not meet the associational common bond requirements. NCUA is expanding the totality of the circumstances test by adding an additional criterion regarding corporate separateness between the associational group and the FCU.

The factors NCUA will consider to establish corporate separateness include:

• Their respective business transactions, accounts, and records are not intermingled;
• Each observes the formalities of its separate corporate procedures;
• Each is adequately financed as a separate entity in light of normal obligations reasonably foreseeable in a business of its size and character;
• Each is held out to the public as a separate enterprise; and
• The group maintains a separate physical location, which does not include a P.O. Box or other mail drop or on premises owned or leased by the FCU.

Also, as part of applying the totality of the circumstances test, NCUA stated it ould examine "whether an FCU enrolls a member into an association without the member’s knowledge or consent. If an FCU enrolls members who do not knowingly and voluntarily join the association then this will reflect negatively on the association’s qualification for FCU membership, as it appears that the members do not truly support the goals and mission of the association."

However, the rule will allow an FCU to pay a member’s associational dues if the member has given consent.

Furthermore, NCUA noted that it is currently reviewing several associations. NCUA stated that "[i]f any of these associations no longer meet the totality of the circumstances test or an association is not operating according to their official bylaws in a way that impermissibly affects credit union membership, NCUA will remove the association from the FCU's FOM."

Read the proposed rule.