A federal district court in Washington, DC, is poised to decide an important dispute over the legality of a National Credit Union Administration (NCUA) regulation expanding federally chartered credit unions’ permissible fields of membership. The lawsuit is the latest chapter in the decades-long rivalry between community banks and credit unions.
In American Bankers Association v. National Credit Union Administration, a prominent trade association for the US banking industry has challenged the NCUA’s 2016 final rule on membership eligibility for federally chartered credit unions (Membership Rule or Rule). The Rule interprets Section 1759(b)(3) of the Credit Union Membership Access Act (CUMAA), which authorizes the NCUA to charter community credit unions with membership consisting of “[p]ersons or organizations within a well-defined local community, neighborhood, or rural district.”
Under the new Rule, each of the following geographic areas satisfies Section 1759(b)(3)’s field-of-membership requirement:
The American Bankers Association (ABA) seeks to invalidate the Membership Rule under the federal Administrative Procedure Act (APA), claiming that the Rule exceeds the scope of the NCUA’s regulatory authority and is arbitrary and capricious. The NCUA, for its part, claims that the Rule is entitled to substantial deference under the agency’s broad rulemaking authority. At its core, the dispute arises from the historic tension between credit unions’ push for expanded membership and lending opportunities and banks’ objection to those efforts based on credit unions’ existing financial benefits as tax-exempt entities.
This month, the parties finished briefing their cross-motions for summary judgment on the APA claims alleged in the ABA’s complaint. The court’s ruling, which is expected sometime later this year, will have significant consequences for credit unions’ growth as they continue competing with community banks for depositors.
Section 1759(b) of the Federal Credit Union Act (FCUA) authorizes the NCUA to charter three types of credit unions distinguished by their fields of membership: (1) single common-bond credit unions, (2) multiple common-bond credit unions and (3) community common-bond credit unions.
Section 1759(b)(3) of the FCUA, as amended in 1998 by the CUMAA, limits a community credit union’s field of membership to “[p]ersons or organizations within a well-defined local community, neighborhood, or rural district.” Congress did not define “local community” or “rural district,” nor did it impose any size or population limitations on those terms. Rather, under Section 1759(g)(1) of the FCUA, Congress empowered the NCUA to “prescribe, by regulation, a definition for the term ‘well-defined local community, neighborhood, or rural district.’”
Since the CUMAA’s enactment, the NCUA has promulgated several rules (1998, 2003, 2010 and 2013) to address Section 1759(b)(3)’s requirements. The agency’s initial approach was to require each charter applicant to provide a “narrative summary” supporting its contention that the area it intended to serve was a “well-defined local community” or qualifying “rural district.” But as time passed, the agency abandoned this approach in favor of bright-line rules that were more easily administrable.
In December 2015, the NCUA issued a notice of proposed rulemaking announcing its intention to expand the field of membership for community credit unions. After a period of public commentary, it adopted the Membership Rule in its current form. As mentioned above, the Rule does the following:
In its lawsuit against the NCUA, filed in December 2016, the ABA argues that if the NCUA’s rulemaking efforts are allowed to stand, community banks will suffer a serious competitive disadvantage as community credit unions dramatically expand their fields of membership over large geographic areas. The complaint alleges that the Membership Rule is arbitrary and capricious because the NCUA:
The complaint also alleges that the NCUA exceeded its statutory authority under the FCUA by adopting a rule with these characteristics. It seeks a declaratory judgment that the Membership Rule is invalid and an injunction prohibiting the NCUA from approving the expansion of any federal credit union’s field of membership under the Rule.
These are not easy lawsuits to win, as previously discussed in relation to another APA lawsuit against the NCUA dismissed earlier this year. (See ICBA v. NCUA: the legality of relaxed restrictions on non-member business lending.) Federal courts are, by law, deferential to administrative rulemaking—particularly where, as here, there was significant deliberation before promulgating the Membership Rule. This deference bodes well for the NCUA. But, as worth repeating, courts and judges are unpredictable. And each component of the Membership Rule will be examined individually for compliance with the APA’s standards.
Between March and August 2017, the ABA and the NCUA briefed their cross-motions for summary judgment on the claims alleged in the ABA’s complaint.
The ABA’s briefs argue:
In defense of the Membership Rule, the NCUA’s briefs argue:
The ABA’s lawsuit hinges entirely on questions of law under the APA. Therefore, the district court’s ruling on the parties’ cross-motions for summary judgment will likely resolve the entire case on the merits.
Nixon Peabody will continue to monitor this litigation and provide you with periodic updates.
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