ABA v. NCUA: a split decision on expanded fields of membership for credit unions

April 17, 2018

Commercial Litigation Alert

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

A federal district court in Washington, DC, issued a split decision on the National Credit Union Administration’s rule expanding federally chartered credit unions’ permissible fields of membership. The much-anticipated ruling sided partly with community banks and partly with credit unions. An appeal by both sides seems likely. This alert discusses the key implications.


Credit unions are organized, in part, around the concept of community relationships. But what does it mean to be a community? And what leeway does the National Credit Union Administration (NCUA) have to define what “local community” and its statutory counterpart, “rural district,” mean?

A federal district court in Washington, DC, recently addressed these questions in American Bankers Association v. National Credit Union Administration, issuing a split decision on the NCUA’s rule expanding federally chartered credit unions’ permissible fields of membership (Rule or Membership Rule). The much-anticipated ruling, heavy with discussions of demography and lexicography, sided partly with community banks and partly with credit unions. An appeal by both sides seems likely.


The Rule’s history

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 Credit Union Membership Access Act (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.’”

Following the CUMAA’s enactment, the NCUA 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 regulated.

The amended Membership Rule

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 currently at issue.

Under the Rule, each of the following categories was deemed to satisfy Section 1759(b)(3)’s field-of-membership requirements:

  • Combined statistical area: Up to 2.5 million people within any contiguous portion of a “combined statistical area” recognized by the Office of Management and Budget (OMB). For example, a contiguous portion of the Washington, DC–Baltimore–Arlington combined statistical area, with fewer than 2.5 million people, would fall within this category.
  • 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. For example, a combined portion of Arlington, Virginia, and Bethesda, Maryland, with fewer than 2.5 million people, would fall within this category, even without including the Washington, DC, area at the “core” of Arlington and Bethesda.
  • Adjacent area: Up to 2.5 million people in an area adjacent to and including part of a single political jurisdiction, qualifying combined statistical area or qualifying core-based statistical area. For example, a credit union serving Bethesda, Maryland, could add adjacent Chevy Chase, Maryland, to its field of membership.
  • 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. For example, the entire State of Wyoming would qualify as a “rural district.”

The lawsuit

In December 2016, the American Bankers Association (ABA), a prominent trade association for the US banking industry, challenged the Membership Rule’s validity in federal court. The ABA sought to invalidate the Rule under the federal Administrative Procedure Act, claiming that the Rule exceeded the scope of the NCUA’s regulatory authority and was arbitrary and capricious. The ABA expressed concern that, under the Rule, community banks would suffer a serious competitive disadvantage as community credit unions dramatically expanded their fields of membership over larger geographic areas. The NCUA, for its part, claimed that the Rule was entitled to substantial deference under the agency’s broad rulemaking authority.

The district court’s decision

In a lengthy opinion embedded with various territorial maps, the district court traced the statutory and regulatory history of the FCUA’s field-of-membership requirements, parsed the meanings of “local community” and “rural district,” and examined a series of hypothetical fields of membership allowed by the Rule to determine whether its provisions exceeded the NCUA’s rulemaking authority. The “interpretive question” identified by the court was “whether the terms local community and rural district [could] reasonably be thought to encompass the scope that the NCUA [had] given to them.”

Ultimately, the court declared that two of the Rule’s provisions exceeded the NCUA’s statutory authority under the FCUA: (1) the provision that automatically qualified a combined statistical area, or a contiguous portion of one, with fewer than 2.5 million people as a “local community” and (2) the provision that increased to 1 million people the population limit for a “rural district.” The provisions regarding core-based statistical areas and adjacent areas were upheld.

The key to understanding the district court’s decision is the examples it used to analyze each provision of the Rule.

Combined statistical areas

The district court first held that a contiguous portion of a combined statistical area with 2.5 million or fewer people cannot automatically qualify as a “local community” under the FCUA. The court likened this category to a daisy chain, where contiguous areas “are linked to their neighbors but have nothing to do with those at the other end of the chain.” It used the example of a thin rectangular strip stretching from Doylsesburg, Pennsylvania, in the north to Partlow, Virginia, in the south. (See Map #1.) Even though residents of Doylesburg and Partlow live about 200 miles from each other—a three-and-a-half-hour drive—they would fall within the same 2.5-million-person rectangle in a combined statistical area. This, according to the court, stretched the definition of “local community” too far.

Core-based statistical areas

The court next held that an area containing 2.5 million or fewer people within a core-based statistical area can automatically qualify as a “local community” under the FCUA, even if the area does not include the “core” (the so-called “hole” in the “donut”). By way of example, the court noted that if residents of Arlington, Virginia, and Bethesda, Maryland, are part of the same local community because of their “shared vicinity to Washington, DC,” then these “commonalities” are not affected by the absence of the DC core from a credit union’s service map—the Arlington and Bethesda residents still “share the common bond of residing in suburban DC regardless of whether DC residents are part of their credit union’s service area.”

The court did express some misgivings about the Rule’s recognition of core-based statistical areas without the core. Drawing on another example from the DC metropolitan area, it observed that even though residents of Reliance, Virginia, to the west and Lusby, Maryland, to the east live about 140 miles from each other—a drive of more than two hours—these towns could qualify as part of the same Washington, DC, core-based statistical area. (See Map #2.) The court noted, however, that these towns could “reasonably be thought to contain at least some traces of the social, economic, and geographic commonalities of a local community” since at least 25 percent of the workers in the towns’ counties share “the commonality of commuting in the DC core.” These types of “social, economic, and geographic” ties provided “at least some reasonable basis” for the NCUA to define “local community” to include areas on the perimeter of a core-based statistical area.

Adjacent areas

The court went on to analyze the Rule’s provision regarding adjacent areas, holding that a single political jurisdiction, core-based statistical area or combined statistical area, plus an adjacent area, can qualify as a “local community” if a credit union demonstrates that “a sufficient level of interaction” exists between the adjacent area and the already-served area such that the combined area meets the requirements of a “local community.” For example, a credit union serving Bethesda, Maryland, might apply to add neighboring Chevy Chase, Maryland, to its field of membership. The court posited that the NCUA’s approval of such an application would be unlikely to contradict the FCUA. This is because the Rule’s provision on adjacent areas allows for case-by-case determinations by the agency and lets it “bring its reason and experience to bear,” an arrangement with which the court found no fault.

Rural districts

Finally, the court examined the Rule’s definition of “rural district,” holding that an area of up to one million people whose population does not exceed one hundred people per square mile or whose population resides mostly in census-designated rural areas cannot automatically qualify as a “rural district.” The court focused on three examples. (See Map #3.) Under the Rule, most of Nevada, along with portions of four adjoining states, would qualify as a “rural district.” So, too, would all of Wyoming and portions of six adjoining states, despite the fact that 57 percent of Wyoming’s residents live in urban areas. The same would be true of an area consisting of portions of Texas, Oklahoma, Kansas, Colorado and New Mexico, despite the fact that this area includes the Amarillo, Texas, Metropolitan Statistical Area, which itself has more than 250 thousand people. The court concluded that because the NCUA failed to leave itself the ability to exercise discretion over rural-district applications such as these, its expansion of these areas was unreasonable and contrary to the FCUA.


The decision offers several takeaways.

First, its primary effects will be felt at the federal level. The decision applies to the NCUA’s Membership Rule governing fields of membership for federally chartered credit unions. It does not impact state-chartered credit unions, whose field-of-membership statutes are interpreted independently from the FCUA, unless state courts and regulators choose to consult federal law for guidance in developing and interpreting their own field-of-membership laws.

Second, the court was concerned with the Rule’s automatic qualification of certain areas for federal credit-union charters—what it referred to as the lack of an “escape hatch” for the NCUA to exercise its discretion to deny applications that clearly exceed the NCUA’s statutory chartering authority. Nothing bars the NCUA from developing a new set of discretionary chartering criteria for combined statistical areas and rural districts.

Third, the decision does not foreclose future challenges to individual decisions approving the addition of adjacent areas to credit unions’ fields of membership. But those as-applied challenges, should they arise, will focus on specific evidence presented to support specific applications. They will not take the form of generalized challenges to the Membership Rule’s validity.

Fourth, the Rule’s provision on core-based statistical areas, which was upheld, could influence chartering decisions in densely populated interstate urban areas that might not be accommodated by state charters. Areas such as those surrounding Kansas City, Kansas, and Kansas, City, Missouri; Philadelphia, Pennsylvania, and Camden, New Jersey; and Cincinnati, Ohio, and parts of Northern Kentucky all fall within this category. But it remains to be seen whether applicants will be inclined to rely on the Rule while the litigation is still pending.

Next steps?

Given the split nature of the district court’s decision, each side has an incentive to continue litigating the case. The parties have until April 26, 2018, to file motions to reconsider. And if no motions are filed, their notices of appeal will be due on May 29, 2018.

Nixon Peabody will continue monitoring the litigation.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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