What Yesterday’s Ruling Means for CUs

August 21, 2019 at 12:01 pm 2 comments

Yesterday’s decision  by the Court of Appeals for the District of Columbia represents the most important legal victory ever achieved by credit unions. If it is upheld on appeal, not only does it give federal credit unions the flexibility they need to continue to grow, it creates an analytical framework, which, if adopted by other courts, empowers NCUA to move aggressively to protect the economic viability of the industry going forward.

In making its ruling the Court explained: “We review the rule not as armchair bankers or geographers, but rather as lay judges cognizant that Congress expressly delegated certain policy choices to the NCUA. After considering the Act’s text, purpose, and legislative history, we hold the agency’s policy choices “entirely appropriate.”

First, the ruling is important because it will allow community-chartered FCUs to grow more easily. Since the passage of the Credit Union Membership Access Act of 1998, the growth of community credit unions has been constrained by the requirement that credit union communities be well defined and “local”. In a string of decisions, the banking industry has used this language to stifle credit union expansion, culminating in field of membership restrictions so restrictive that NCUA basically deprived itself of any discretion when reviewing applications for community expansions.

NCUA relies primarily on geographic determinations devised by the OMB in analyzing community charter expansion requests. As explained by the Court, a Core Based Statistical Area comprises at least one urban cluster, or core, of 10,000 or more people and adjacent counties with substantial commuting ties to that core. Think of NYC and its surrounding suburbs. A Combined Statistical Area is a conglomerate of two or more adjoining Core Based Statistical Areas, each of which has substantial commuting ties with at least one other Core Based Statistical Area in the group. Think of the DC area.

In 2016, the NCUA recognized that its existing FOM requirements were too restrictive. It passed a series of amendments to its chartering manual that redefined the definition of a “local community”. Under these changes, a local community is one that encompasses the whole or a portion of a Combined Statistical Area so long as it does not exceed 2.5 million people. Regardless of how many people lived in the CBSA.  Secondly, NCUA concluded that a Core Based Statistical Area could house a credit union community without also serving the area’s urban center. It also allowed a community to stretch over  Finally, the NCUA also changed the definition of what constitutes a rural district.

The banks argued that in 2016 NCUA abused its discretion by giving itself the power to authorize local communities which could conceivably stretch from Maryland to Pennsylvania. They argued, and the lower court agreed, that any area larger than a county was not local.

In contrast, in its ruling, the Court held that NCUA has “vast discretion” to define what a “local” community is and that “local” does not mean small. It explained that “The NCUA sensibly reads the term “local” to mean simply that the community, regardless of shape or size, should be neither “broad” nor “general.”

Beyond its immediate operational impact, the ruling could have important consequences for future debates over what NCUA can do and why. For example, the latest line of attack on the industry is that NCUA has allowed credit unions to grow too big and that these credit unions have grown too detached from their core mission. The Court takes this argument head on: “We recognize that there may be some tension between the Act’s principal purposes: A credit union with exceedingly close ties among its members is unlikely to have a large enough customer base to thrive economically. To the extent that such tension exists, the Act leaves to the NCUA to strike a reasonable balance. Congress was well aware that a viable credit union might serve a relatively large geographical area”.

The decision is not a complete victory for the industry. Most importantly, the Court ruled that NCUA had to do a better job of explaining why credit unions should no longer be required to serve the core population centers of Core Based Statistical Areas. Furthermore, it cautioned that communities could be designed to discriminate by gerrymandering around minority communities.

Finally,, the Court also repeatedly cautioned that not every single community that might be approved under these regulations will automatically pass the legal smell test. Expect the bankers to go back to court the second they see a credit union authorized to go forward with a large expansion.

But even these negative qualifiers come with silver linings. For instance, the Court is so confident that the NCUA can justify its decision to no longer mandate that credit unions serve e core areas, it is allowing the regulation to remain in effect as NCUA works to respond to this ruling. Furthermore, banker litigation is as inevitable as is the change in seasons. While they may continue to challenge large community expansions and individual agency determinations under these new regulations, the ruling means that credit unions can start making plans for expansion with much less uncertainty.

One final note of caution. The battle has been won but the war is not over. The bankers will undoubtedly attempt to get the Supreme Court to hear this case. If they succeed in doing so, the industry, of course, runs the risk that the Court will rule against NCUA just as it did in 1998.

Entry filed under: Legal Watch, Regulatory. Tags: .

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2 Comments Add your own

  • 1. FOM Litigation Not Over Yet | new york's state of mind  |  October 9, 2019 at 9:36 am

    […] as the NCUA starts to approve charter expansions based on its recently upheld field of membership regulations, a motion filed with the Court of Appeals for the D.C. Circuit is a reminder that the litigation is […]

    Reply

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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