NTU Calls Congress to Enact Reforms

In a July 16 letter to Chairman Crapo (R - ID), Ranking Member Brown (D - OH), Chairwoman Waters (D - CA), and Ranking Member McHenry (R - NC), the National Taxpayers Union (NTU), the nation's oldest taxpayer advocacy organization, called on Congress to enact serious reforms before raising the member business loan (MBL) cap for credit unions to address the economic crisis stemming from COVID-19.

NTU wrote that "Congress has a responsibility to demand enhanced transparency from the credit union industry, examine potential abuses that run counter to an institution’s tax-exempt purpose, and strengthen membership rules."

Specifically, the NTU is urging the Congress enact the following reforms:

• to require federal credit unions to file Form 990s;
• to subject federal credit unions to Unrelated Business Income Tax;
• to ensure tax parity with other financial institutions; and
• to address field of membership concerns.

NTU believes that these reforms would strike "a reasonable balance between increasing credit union [business] lending capacity and accountability, transparency and fairness."

NTU stated that it would oppose any legislation to increase the MBL cap, if these reforms are not addressed.

Read the letter.

NCUA Board Upholds FOM Expansion Denial

The National Credit Union Administration (NCUA) Board upheld the denial of a credit union's field of membership (FOM) expansion by the agency's Director of the Office of Credit Union Resources and Expansion (CURE).

As background, an unnamed multiple common bond credit union on January 25, 2019 requested CURE to add the local chapter of an unnamed association to its FOM. CURE on April 5, 2019 notified the credit union that it was deferring action and requested additional information, including whether the local the chapter has a physical location within reasonable proximity of the credit union’s service facility. On May 6, the credit union provided additional narrative and information documenting the chapter's existence and location. On October 29, 2019, CURE denied the FOM expansion request.

There were two reasons for the denial. First, CURE concluded that the local chapter did not exist as a separate legal entity and did not meet the reasonable proximity test. Second, because the group had more than 16,000 members, the group must demonstrate its inability to form its own credit union. CURE stated that the information provided was insufficient to substantiate the group’s claim.

The credit union appealed the denial to the NCUA Board.

In its appeal, the credit union submitted additional evidentiary support and information documenting the local chapter’s existence and the chapter's inability to form its own credit union.

However, the NCUA Board on May 21 affirmed the decision of CURE noting that this new information was not available to CURE during either its initial analysis or its resubmission analysis. The NCUA Board further stated that this Decision and Order does not preclude the credit union from submitting a new FOM expansion request to provide additional, updated information for CURE’s consideration.

Read more.

NCUA Should Revise Its Time Period Metrics for Measuring Performance

The National Credit Union Administration (NCUA) uses average time period metrics by which to measure its performance.

For example, the agency sets the goal of resolving troubled credit unions as within an average of 24 months of an initial CAMEL downgrade or making a determination on a completed field of membership application as within the average of 60 days.

Instead of setting the goal as averages, NCUA should set the goal as resolving troubled credit unions within 24 months or making a determination on a completed field of membership application within 60 days.

NCUA currently reports the average time period for resolving problem credit unions or processing field of membership applications; but the agency should also report the median time for these metrics, as averages can be deceptive.

The agency ought to report the number and percent of credit unions that met the agency's goals. The Federal Deposit Insurance Corporation (FDIC) discloses this information, as part of its transparency and accountability initiative.

In addition, NCUA should set a time period goal for making a determination on completed merger applications. I would suggest 60 days, which is the goal set by the FDIC.

Should FOM Be Eliminated?

After the Supreme Court ruled in favor of NCUA's field of membership rule, the credit union lobby is calling for the end to any membership restrictions for credit unions.

Jim Nussle, President and CEO of the Credit Union National Association, in a recent op-ed called for Congress to eliminate the field of membership (FOM) requirement for credit unions.

Nussle argued that FOM has gone the way of the horse and buggy. He stated that common bond was a tool used to establish the credit-worthiness of members. But today FOM has been replaced by sophisticated modern tools that assess the ability of borrowers to repay their debts.

However, Laurie Stewart, President and CEO of Sound Financial, in an op-ed stated that relaxing field of membership rules is yet another move by the credit union industry and its regulator to create an unlevel playing field between tax-exempt credit unions and taxpaying community banks.

Stewart wrote: "“Eliminating the field of membership requirement is a gross perversion of the mission and purpose of credit unions as conceived by Congress in 1934."

In fact, Congress in 1998 re-affirmed that "a meaningful affinity and bond among members, manifested by a commonality of routine interaction, shared and related work experiences, interests, or activities, or the maintenance of an otherwise well-understood sense of cohesion or identity is essential to the fulfillment of the public mission of credit unions."

Stewart further argued that if credit unions want to act like banks, they should operate under the same rules, regulations and regulators as banks do.

In my opinion, if the field of membership requirement is an anachronism, so is the credit union tax exemption.

NCUA to Reinstate Rural District for 18 CUs Impacted by ABA Lawsuit

The National Credit Union Administration (NCUA) announced that it will reinstate rural districts for 18 credit unions that were removed by the American Bankers Association (ABA) lawsuit.

This action was based upon the United State Supreme Court denying ABA's appeal to review the D.C. Circuit Court of Appeal’s decision on the NCUA’s field of membership rules.

The NCUA’s Office of Credit Union Resources and Expansion will contact these 18 credit unions by July 10, 2020, to confirm the reinstatement. No further action will be required for these credit unions.

For any federal credit union with a rural district field of membership application in limbo during the litigation period, the NCUA will resume processing these applications, immediately. The NCUA will also begin accepting new rural district field of membership applications, immediately.

A proposed area would generally qualify as a rural district if it has well-defined, contiguous geographic boundaries, and the total population of the proposed district does not exceed one million. A rural district must also meet the criteria that either more than 50 percent of the proposed district's population resides in census blocks or other geographic units that are designated as rural by either the Consumer Financial Protection Bureau or the United States Census Bureau, or the district has a population density of 100 persons or fewer per square mile.

Read more.

Certiorari Denied in ABA's Appeal regarding NCUA's FOM

The Supreme Court on June 29 denied to hear an appeal of the American Bankers Association lawsuit against the National Credit Union Administration regarding the agency' field of membership (FOM) rule.

ABA Urges Supreme Court to Restore Limits on Chevron Deference

The American Bankers Association (ABA) on June 8 filed its reply brief urging the U.S. Supreme Court to review a lower court ruling in the association’s challenge of the National Credit Union Administration’s 2016 field of membership rule.

In August, a three-judge panel of the D.C. Circuit Court of Appeals upheld much of rule while remanding a portion related to redlining concerns. The court will grant ABA’s petition if four of the nine justices vote to accept the case.

In appealing, ABA argued that the D.C. Circuit’s decision “stretches Chevron deference past the breaking point” in ruling that NCUA could define a “local community” as a combined statistical area inhabited by up to 2.5 million people or define an entire state as a “rural district.” Under the Supreme Court’s Chevron doctrine, courts defer to administrative agencies’ interpretation of statutes they administer where Congress has not specifically addressed the question at issue.

In its reply brief, ABA said that NCUA sought to “dodge the issue” of Chevron deference. The association argued that the case does in fact present the question of whether an express delegation of definitional authority expands an agency’s discretion at Chevron step two, and that agencies are not granted “vast discretion” simply because of express delegation. “The Court should grant review and restore appropriate limits on Chevron deference,” ABA said.

Read the reply brief.

Some CUs Could Be Hit Hard by Coronavirus Layoffs

The Wall Street Journal examined credit unions whose membership have been hit hard by the economic shutdown arising from the coronavirus.

The article noted there are a number of credit unions exposed to casinos, oil, and other industries that have been affected by coronavirus mass layoffs.

According to the Credit Union National Association, almost a third of credit unions are tied to a single employer, industry, or association. This means that these credit unions could see sudden mass layoffs in their membership.

For example, WestStar Credit Union (Las Vegas, NV) is closely tied to the Las Vegas casino industry. On March 18, all casinos were closed by an order from the governor of Nevada. The credit union reported that one in five borrowers have asked for a deferral on a car or home loan.

Provisions for loan and lease losses at WestStar went from $67,300 at the end of the first quarter in 2019 to $553,800 one year later, according to its Financial Performance Report.

Read the story (subscription required).

ABA Appeals Credit Union Field of Membership Case to Supreme Court

The American Bankers Association (ABA) last week petitioned the U.S. Supreme Court to review a lower court ruling in the association’s challenge of the National Credit Union Administration’s 2016 field of membership rule.

In August, a three-judge panel of the D.C. Circuit Court of Appeals upheld much of rule while remanding a portion related to redlining concerns. The court will grant the petition only if four of the nine justices vote to accept the case.

ABA argued that the three-judge panel’s decision “stretches Chevron deference past the breaking point” in ruling that NCUA could define a “local community” as a combined statistical area inhabited by up to 2.5 million people or define an entire state as a “rural district.” Under the Supreme Court’s Chevron doctrine, courts defer to administrative agencies’ interpretation of statutes they administer where Congress has not specifically addressed the question at issue.

Chevron cannot be applied to the statute granting NCUA authority to define terms like “local community” and “rural district” in its regulations in such a way that neglects the “reasonableness” test of the agency interpretation, ABA argued, calling for the Supreme Court to hear the case and “make clear that an express delegation of definitional authority does not authorize an agency to interpret a term in ways that exceed its ordinary range of permissible meanings.”

Read the petition.

NCUA's Combination Transaction with a Non-Credit Union Proposal

The National Credit Union Administration (NCUA) on January 30 published in the Federal Register a proposed rule regarding a credit union's combination transaction with a non-credit union, including a bank.

The proposed rule provides clarity about the processes and requirements for a federally insured credit union with respect to this transaction.

The proposed rule requires NCUA's advance approval of all these transactions. In the case of federally insured state chartered credit unions, the advance approval of the state regulator is also required.

NCUA also identifies the factors that it will review regarding this transaction. Four factors involve safety and soundness issues, while the last two factors examine the impact of this proposed transaction on credit union members and potential members and whether the proposed transaction is in keeping with the credit union's mission.

The minimum amount of information to be part of an application includes the balance sheet and income statements for both institutions; a combined financial statement showing the transaction's potential impact on the credit union's net worth; information about the due diligence assessment of the proposed transaction; a delinquent loan summary; analysis of the adequacy of the allowance for loan and lease losses; and a list of the other institution's assets that would be impermissible by law.

The proposed rule requires a credit union's board of directors must vote to approve a proposed combination transaction before the credit union submits its application package. The board of directors must certify that management has explained how the transaction would affect the credit union's balance sheet and net worth and how the purchase prices was determined. Furthermore, board members must certify that they do not have a personal or pecuniary interest in the transaction.

The credit union must address how the potential members fall within the credit union's field of membership and how the credit union plans to convert potential members into actual members.

The comment period is for 60 days and must be received by March 30, 2020.

Read the proposed rule.

Appeals Court Denies ABA's Request for a Rehearing En Banc of FOM Lawsuit

Credit union trades are reporting that the U.S. Court of Appeals for the D.C. Circuit denied the American Bankers Association’s appeal for a rehearing en banc of its lawsuit regarding the National Credit Union Administration’s field of membership (FOM) rule.

ABA Says FOM Rule Seriously Flawed, NCUA Tells Appeal Court Rehearing Unwarranted

In a December 9 letter to the National Credit Union Administration (NCUA), The American Bankers Association (ABA) reiterated its strong opposition to two proposed amendments that would further expand the already loose fields of membership (FOM) from which credit unions can draw their customers.

NCUA proposed to re-adopt a recently repealed provision of its rules defining any combined statistical area as a single local community, provided it has a population of 2.5 million people or less.‌

NCUA also objected to the expansion of the population threshold to 1 million people for a rural district. ABA contended that this would allow whole states to be treated as rural districts.

NCUA also proposed to reaffirm its elimination of a requirement for credit unions serving a core-based statistical area to serve the urban core of the community, which would effectively allow credit unions to engage in redlining by allowing them to construct fields of membership consisting of wealthier suburbs without lower-income core neighborhoods.‌

ABA, which previously challenged the NCUA’s field of membership rule in federal court, noted that “these proposals are seriously flawed” and called for them to be withdrawn or significantly revised.

In a related news, NCUA on November 21 filed its response to the ABA’s petition for an en banc rehearing of its lawsuit challenging the NCUA's 2016 FOM rule.

In its en banc petition, ABA argued the three-judge panel’s decision “stretches Chevron deference beyond its limits.”

NCUA argued the unanimous panel correctly concluded that NCUA reasonably interpreted the terms “local community” and “rural district” under Chevron. NCUA claimed that it reasonably relied on population size, commuting patterns, population density, and economic activity to determine whether an area is a “local community” or “rural district.”

NCUA argued that the three-judge panel's decision does not warrant rehearing en banc.

Read ABA's comment letter.

NCUA Board Finalized Nonmember Shares Rule, Proposes FOM Rule Implementing Court Decision

The National Credit Union Administration Board finalized its rule expanding credit unions access to nonmember and public unit shares (deposits).

According to the final rule, a federal credit union may accept public unit and nonmember shares in an amount up to 50 percent of the credit union’s net amount of paid-in and unimpaired capital and surplus, less any public unit or nonmember shares, or $3 million, whichever is greater.

The original proposal had eliminated the current alternative limit of $3 million. The Board, however, thought the elimination of the current alternative limit of $3 million would adversely impact some small credit unions.

In addition, the Board is proposing changes to its community charter regulations to align it with the August 2019 opinion issued by the District of Columbia Circuit Court of Appeals.

A federal credit union would be allowed to designate a combined statistical area or an individual contiguous portion of such an area, as a well-defined local community, provided the chosen area has a population of 2.5 million or less.

The Board added a provision to address concerns raised by the Appeals Court about potential discrimination in the field-of-membership selection process in combined statistical areas and core-based statistical areas.

Read the press release.

What Was the Value of Progressive CU's Open Charter?

The 2018 Annual Report of Pentagon Federal Credit Union (McLean, VA) has information on the value of the open field of membership charter of Progressive Credit Union (New York, NY) to Pentagon FCU.

An open field of membership charter allows anyone to join a credit union.

This open charter was transferred to Pentagon FCU after the emergency merger of Progressive CU into Pentagon FCU.

In Note 14 (Subsequent Events), Pentagon FCU reported an increase of intangible assets of approximately $108 million associated with the emergency merger.

The increase in the value of intangible assets was derived from the contractual right of Pentagon FCU to use Progressive CU's open field of membership charter.

ABA Challenges Appellate Court Decision in FOM Case

The American Bankers Association (ABA) on October 4 filed a petition for the full D.C. Circuit Court of Appeals to review its decision in the association’s challenge the National Credit Union Administration’s 2016 field of membership (FOM) rule. In August, a three-judge panel of the court upheld much of rule while remanding a portion related to redlining concerns. The request for a rehearing by the full “en banc” panel of judges is the next step in the legal process

ABA argued that the three-judge panel’s decision “stretches Chevron deference beyond its limits” in ruling that NCUA could define a “local community” as a combined statistical area inhabited by up to 2.5 million people or define an entire state as a “rural district.” The panel concluded that when a statute directs an agency to define a term through regulation, this act suggests that Congress did not intend the terms to be applied according to their plain meaning, whereas Supreme Court precedent holds that an agency’s authority “go[es] no further than the ambiguity will fairly allow.”

“Rehearing en banc is warranted to realign this Court’s Chevron jurisprudence with that of the Supreme Court,” ABA explained. Under the Supreme Court’s Chevron doctrine, courts defer to administrative agencies’ interpretation of statutes they administer where Congress has not specifically addressed the question at issue. ABA also said the decision was incompatible with judicial review under the Administrative Procedure Act and thus warranted review.

Court of Appeals Rules on FOM Rule

A federal appeals court on August 20 dismissed most of the American Bankers Association’s challenge to the Field of Membership (FOM) updates by National Credit Union Administration (NCUA).

The U.S. Appeals Court for the District of Columbia reversed District Judge Dabney Friedrich’s ruling overturning the provisions of the agency’s rule related to combined statistical areas and the increase in the population size of rural districts.

However, with the regard to the elimination of the urban-core requirement for local communities based upon a Core-Based Statistical Areas, the court recognized the potential of gerrymandered redlining. The court ordered the District Court to issue a summery judgement in favor of the American Bankers Association, but stated that the agency may be able to offer a satisfactory reason on remand.

In its decision, the court noted that Congress gave the agency wide discretion to make these policy decisions, but its authority is not limitless.

The court also stated that the plaintiff can bring an applied challenge to local communities that exceed NCUA's authority.

NCUA stated that it is reviewing the Court's decision and will provide guidance to affected credit unions in the near future.

Read the decision.

Oral Arguments Set Today for NCUA FOM Appeal

A three-judge panel of the D.C. Circuit Court of Appeals is set to hear oral arguments this morning in American Bankers Association’s ongoing legal challenge to the National Credit Union Administration’s field of membership (FOM) rule.

During the hearing, the judges will hear NCUA’s appeal of District Judge Dabney Friedrich’s ruling overturning the provisions of the agency’s rule related to combined statistical areas and rural districts. Meanwhile, ABA is cross-appealing Friedrich’s opinion upholding the provision of the rule permitting credit unions to serve core-based statistical areas without serving the urban core that defines the area—provisions the judge upheld despite calling them “troubling,” “jarring” and “a barely reasonably interpretation of the statute.”

Marketplace Radio: Relaxed Rules Spur CU Membership Growth

A story on NPR’s “Marketplace” program last night illustrated how credit unions have used ever-looser field of membership regulations to expand beyond their intended communities.

These lax membership rules have helped credit union membership to grow by almost 60 percent over the past 20 years.

The centerpiece of the story is what reporter Nancy Marshall-Genzer calls a “daisy chain” of members—a group of several young people in the D.C. suburbs with no military connection who became members of Navy Federal, the nation’s largest credit union with nearly $100 billion in assets and one with a stated mission of serving “the military community.” In this case, a four-person chain of successive roommates used Navy Federal’s household member loophole to become members.

Read the transcript.

Bill Won't Require CUs to Comply with CRA and Will Allow All FCUs to Add Underserved Areas

Legislation introduced in the House and Senate on March 13, the American Housing and Economic Mobility Act, will exclude credit unions from complying with the Community Reinvestment Act.

Section 203 of the bill, which will be known as The "Community Reinvestment Reform Act of 2019," would strengthen obligations under the Community Reinvestment Act (CRA) to provide credit to low- and moderate-income communities by extending the law to cover more non-bank mortgage companies, promote investment in activities that help poor and moderate-income communities, and strengthen sanctions against institutions that fail to follow the rules.

Jim Nussle, President and CEO of the Credit Union National Association, wrote that the bill "properly recognizes the distinctions that exist between credit unions and banks when meeting community needs."

An earlier version of this bill introduced in the last Congress would have applied CRA to credit unions that did not have a ,ow-income designation.

Section 204 of the bill will allow a federal credit union regardless of common bond type to add underserved areas. Currently, only multiple common-bond credit unions can add underserved areas. The bill would also add reporting requirements for a federal credit union adding an underserved area and require the National Credit Union Administration to annually publish certain information.

The legislation was introduced in the Senate by Senators Elizabeth Warren (D-MA), Kirsten Gillibrand (D-N.Y.), and Edward Markey (D-MA). In the House of Representatives, the bill sponsors were Representatives Cedric Richmond (D-LA), Barbara Lee (D-CA), Gwen Moore (D-WI), Elijah Cummings (D-MD), Mark Pocan (D-WI), Ayanna Pressley (D-MA), Rashida Tlaib (D-MI), Susan Wild (D-PA), Eleanor Holmes Norton (D-D.C.), Steve Cohen (D-TN), Jamie Raskin (D-MD), Ro Khanna (D-CA), Joe Kennedy III (D-MA), and Suzanne Bonamici (D-OR).

Read the text of the bill.

PenFed's CEO Admits Anyone Can Join

In a January 25, 2019 opinion piece in Credit Union Times, James Schenck, President and CEO of Pentagon Federal Credit Union (McLean, VA), acknowledged that the credit union already had nationwide membership eligibility prior to its emergency merger with Progressive Credit Union (New York, NY).

The opinion piece was in response to banking trade associations criticisms of the acquisition of Progressive CU, which had an open charter, by Pentagon FCU (PenFed).

Schenck wrote:

Despite the criticism from bankers, PenFed already had nationwide membership eligibility through our existing field of membership, as well as a presence in all 50 states as a multiple-common-bond credit union.

In other words, PenFed's CEO is admitting that anyone can join.

This admission that anyone throughout the United States can join shows that the concept of common bond has become a joke.

This is just another example as to why policymakers should end the preferential tax treatment of large credit unions like PenFed.

Read the opinion piece.