ABA v. NCUA: the legality of expanded fields of membership for credit unions

August 21, 2017

Commercial Litigation Alert

Author(s): Tina B. Solis, Seth A. Horvath

A federal district court in Washington, DC, is poised to decide an important dispute over the legality of an NCUA regulation expanding federally chartered credit unions’ permissible fields of membership.


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:

  • Combined Statistical Area: Up to 2.5 million people in a “combined statistical area” recognized by the Office of Management and Budget (“OMB”).
  • Core-Based Statistical Area: Up to 2.5 million people in a “core-based statistical area,” an OMB-designated area that includes an urban core and one or more adjacent counties, even if the core is excluded from a credit union’s field of membership.
  • Adjacent Area: Up to 2.5 million people in an area adjacent to the perimeter of a single political jurisdiction, qualifying combined statistical area or qualifying core-based statistical area.
  • Rural District: Up to 1 million people in an area where either at least 50 percent of the population resides in units the United States Census Bureau designates as “rural” or the population density does not exceed one hundred persons per square mile.

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:

  • Combined Statistical Area: It creates a new statistical category that defines a community to include a combined-statistical area, or portion thereof, of up to 2.5 million people.
  • Core-Based Statistical Area: It eliminates the requirement that communities defined by a core-based statistical area must include the core area.
  • Adjacent Area: It permits the addition of an “adjacent area” to a single political jurisdiction, qualifying combined statistical area, or qualifying core-based statistical area, subject to a population limit of 2.5 million people, if a charter applicant can convince the NCUA that the adjacent area qualifies as part of the local community.
  • Rural District: It increases the population limit for a “rural district” from a quarter million to one million people and eliminates the previous alternative measure of such a district as one not exceeding 3 percent of the population of the state in which the majority of residents live.

The lawsuit

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:

  • Failed to explain why combined statistical areas and core-based statistical areas without their cores are “well-defined local communities.”
  • Failed to explain why a single “well-defined local community” can include areas adjacent to the community simply because there is some interaction between individuals on either side of the community boundary line.
  • Failed to explain why an area with a population of up to 1 million people that includes an entire state, or an entire state and a portion of an additional state, is a single “rural district.”

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.

Cross-motions for summary judgment

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:

  • Combined statistical areas and core-based statistical areas are not “well-defined local communit[ies]” within the meaning intended by Congress. Under Section 1759(b)(3) of the CUMAA, a credit union may serve only one community, and it must be truly “local,” not spread out across a geographic area encompassing multiple unrelated communities.
  • An adjacent area is, by definition, not part of a “well-defined local community.” The Rule’s requirement that an applicant submit evidence of common interests or interaction among residents on both sides of the adjacent area’s boundary line does not rectify this defect. There is likely to be some interaction between individuals on either side of almost any geographic boundary. That interaction is not enough to establish that an area adjacent to “a well-defined local community” is part of that community.
  • A “rural district” must be both rural and relatively small. The Rule impermissibly expands the limits of a “rural district” by quadrupling the numeric limit of such a district’s population from a quarter million to one million. Among other things, this expansion encompasses entire states, including sparsely populated ones with predominantly urban populations.

In defense of the Membership Rule, the NCUA’s briefs argue:

  • Congress granted the NCUA broad authority to set community credit unions’ fields of membership. The agency’s interpretation of the relevant legislation is entitled to substantial deference.
  • A “local” community need not be a particularly small one. For example, in daily usage, it is common for a newspaper to have a “local” section that covers an entire metropolitan area with millions of residents, for the residents of such an area to refer to their “local” sports teams or cuisine or for federal law to set “local” pay scales based on expansive metropolitan areas.
  • The expanded geographic areas encompassed by the Rule remain capped at 2.5 million residents for combined statistical areas, core-based statistical areas and adjacent areas and 1 million residents for rural districts, limitations reasonably within the NCUA’s regulatory discretion.
  • The ABA’s challenge to the Rule’s adjacent-area provision is not ripe for review. Resolving whether the FCUA permits the NCUA to allow a community credit union to add an adjacent area to its charter would be much more appropriate in the context of a challenge to a specific expanded community charter. In that situation, a court would have before it specific evidence documenting the characteristics of the applicant’s proposed expanded community area.
  • The ABA’s contention that a “rural district” must be relatively small has no basis in the FCUA’s text. Moreover, the Rule does not dramatically expand the limits of a “rural district.” Before the Rule was adopted, the 3 percent state-population measure already permitted rural districts with populations well in excess of a quarter million people. In fact, under the Rule’s precursor, the NCUA approved eight credit unions serving rural districts with an average population of 536,646.

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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