Expelliarmus! NCUA Issues Final Rule on Member Expulsion

At Thursday's meeting of the NCUA Board, the Board voted unanimously to approve the Final Rule on an additional avenue for member expulsion. The rule comes after Congress’s passage of the Credit Union Governance Modernization Act in March of 2022, which gave the NCUA 18 months to develop a policy by which a member of a federal credit union may be expelled for cause by a two-thirds vote of a quorum of the FCU's Board of Directors. After issuing a proposed rule late last year and gathering feedback, the NCUA has now issued the final rule, which will be effective 30 days after publication in the Federal Register.

The Final Rule is complicated, and there's a lot to the process. Over the next few weeks we'll be breaking it down piece by piece. Today we'll be going over the eligibility aspect: what member behavior qualifies them for expulsion under this new process, and what doesn’t? Let's dive in.

What does a member have to do to be expelled?

This new process can only be used to expel members "for cause." The Rule defines “for cause” as:

• A substantial or repeated violation of the membership agreement of the credit union;
• A substantial or repeated disruption, including dangerous or abusive behavior, to the operations of the credit union; or
• Fraud, attempted fraud, or conviction of other illegal conduct in relation to the credit union.

The Rule provides some additional details on these criteria to help credit unions determine if a member's behavior falls into one of these buckets.

Substantial or repeated violation of the membership agreement

The key word here is or, meaning either one substantial violation, or multiple, repeated non-substantial violations can qualify.

To be a repeated, non-substantial violation, a credit union must first provide written notice to the member stating the specific nature of the violation or conduct and that if the violation or conduct occurs again, the member may be expelled from the credit union. Then, that conduct or violation must be repeated within two years after having been notified.

So here's the non-substantial violation process:

Non-substantial violation by the member --> Written warning to the member --> Same violation or conduct by the member within two years = eligible for expulsion.

If a violation is deemed substantial, a warning letter is not required - the member would be immediately eligible for the expulsion process.

This, of course, raises the next question: what qualifies as a "substantial" violation? The Board solicited feedback on this from commenters, and ultimately chose to leave that determination up each FCU. They felt that these determinations are often very fact-dependent, and prescribing a universal policy applicable to all FCUs would be difficult. They did, however, provide their view on the following situations raised by commenters which they do NOT view as warranting member expulsion.

• A member failing to keep accounts secure, for example, writing their PIN on the back of their debit card. The NCUA Board does not feel this warrants expulsion, and would instead recommend limiting services and access to debit cards.
• A member filing bankruptcy, or a member who comes to a credit union after being forced out of a bank. The NCUA Board views these as sources of potential harm to the FCU, but not actual disruptions or violations.

The Board is intentionally giving FCUs discretion to make their own determinations based on the facts of each situation.

Substantial or repeated disruption, including dangerous or abusive behavior

The Final Rule contains some additional language on what does and doesn't qualify as dangerous or abusive behavior.

It clarifies that dangerous or abusive behavior includes "violence, intimidation, physical threats, harassment, or physical or verbal abuse of officials or employees of the credit union, members, or agents of the credit union." Additionally, dangerous or abusive behavior includes:

• Actions while on credit union premises or otherwise related to credit union activities, and through the use of telephone, mail, email, or other electronic method;
• Behavior that causes or threatens damage to credit union property; or
• Unauthorized use or access of credit union property

Some examples of behavior that would NOT, by itself, qualify as dangerous or abusive include:

• Expressions of frustration with the credit union or its employees through elevated volume and tone;
• Expressions of intent to seek lawful recourse, regardless of perceived merit;
• Repeated interactions with credit union employees; or
• Filing a complaint with the NCUA or another regulatory agency or law enforcement

Finally, the rule notes that members who are employees or former employees of the FCU cannot be expelled for any protected whistleblower activities.

An important note here is that the Final Rule does not require that the behavior take place on credit union premises. The Board acknowledged that threats or abusive behavior can take place on social media, over the phone, or even something like a member stalking a credit union employee to another location. As a result, they crafted the rule so that any conduct that is dangerous or abusive and related to the credit union's activities, regardless of the location of the conduct, may be grounds for expulsion.

However, this does not include violent crime or dangerous behavior that is unrelated to the credit union's activities. For example, a credit union finds out one of their members was arrested for robbing a different bank, this fact alone would not make that member eligible for expulsion from the credit union, because the behavior is unrelated to that credit union's activities.

In the Supplementary Information, the Board elaborated that while racist, sexist, personally insulting, or otherwise offensive language is grounds for limiting access to FCU employees or expulsion, members who are upset, frustrated, or otherwise agitated with an FCU should not be expelled on that basis alone. The Board believes context is important, and a case-by-case determination will have to be made.

Fraud, attempted fraud, or conviction or other illegal conduct in relation to the credit union.

When writing the Rule, the NCUA Board considered whether they should define fraud or attempted fraud, but ultimately decided not to. They recognized the complexity of situations and chose to leave this for the FCU to determine. They do make clear that a conviction is not necessary for fraud or attempted fraud. A conviction is only necessary for "other illegal conduct in relation to the credit union."

That's all for today, but don't worry - there's plenty more left to unpack! What kind of notice does a member get? How is the hearing conducted? Can they appeal? Do we have to amend our bylaws? Is there a simpler way to do this?

Stay tuned!