In a major win for credit unions, the D.C. Circuit has largely reversed a ruling that would have prevented credit unions from promulgating rules greatly expanding the field of membership, that is, the persons eligible to join a specific credit union. Separately, the National Credit Union Administration (NCUA) has likewise eased rules on hemp-related businesses, granting credit unions greater power to do business in this rapidly growing area.

What happened

The battle over credit union competition with traditional banks is a long-standing one. Banks have long questioned whether credit union so-called “field of membership” rules were too lax, and credit unions have countered that they need even greater expansion for a variety of reasons. 

In 2016, the NCUA adopted a final rule addressing community common-bond credit unions, which are limited to “[p]ersons or organizations within a well-defined local community.” Pursuant to the agency rule, it declared a “well-defined local community” to include up to 2.5 million people in a “combined statistical area,” up to 2.5 million people in a “core-based statistical area” and areas adjacent to well-defined local communities. The agency also increased the population cap for rural districts to 1 million people.

As we earlier reported, the American Bankers Association (ABA) objected, arguing that the rule flew in the face of congressional intent and historic practice, violating the Administrative Procedures Act in the process. The new rule would result in competitive injury to its member banks because credit unions would be allowed to serve larger areas and greater numbers of customers pursuant to the new definitions, the ABA told the court.

A district court judge sided with the ABA, vacating significant portions of the rule after deeming them to be based on unreasonable agency interpretations of the Federal Credit Union Act (FCUA).

But after considering the FCUA’s text, purpose and legislative history, cognizant that Congress expressly delegated certain policy choices to the NCUA, the D.C. Circuit reversed and sustained a majority of the rule.

The federal appellate panel noted tension between the statute’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, while a larger pool of members can keep the credit union afloat but members must maintain some form of relationship with each other.

With the rule’s amended definition of a combined statistical area, the NCUA managed to strike the appropriate balance, the court said, and the adoption of a 2.5 million-member community was reasonable. The ABA’s concerns that the definition would result in general, widely dispersed regions or a narrow, multistate strip were “too conjectural,” the court held.

As for an increased population cap for rural districts, the panel again found the rule’s definition reasonable. Nothing about the 1 million person cap prevents the rural district from resembling the countryside, the court said, and the ABA failed to proffer evidence that established a particular historic trend from which the new rule diverged.

However, the court sided with the ABA with respect to the eliminated core requirement for local communities based on core-based statistical areas, agreeing with the plaintiff that the NCUA failed to address concerns about gerrymandering and that credit unions could create their own community of exclusively higher-income members.

While directing the district court to enter summary judgment in favor of the NCUA on the first two issues, the D.C. Circuit remanded the eliminated core requirement of the rule for further explanation. The battle is not over, as the ABA is expected to seek further review, either by en banc consideration or by certiorari to the Supreme Court.

Hemp services: In other NCUA news, the agency published a regulatory alert on lawfully operating hemp businesses. The Agriculture Improvement Act of 2018 removed hemp from Schedule I of the Controlled Substances Act as of December 20, 2018. Production of hemp products will be legal as soon as the U.S. Department of Agriculture (USDA) issues regulations and guidelines to implement the statute.

Pending the forthcoming regs, the agency provided interim guidance intended to help credit unions better understand what they should consider in providing financial services to lawfully operating hemp businesses.

Credit unions must have Bank Secrecy Act and anti-money laundering compliance programs commensurate with the level of complexity and risks involved, incorporating appropriate due diligence procedures for hemp-related accounts and filing any necessary Suspicious Activity Reports (SARs), the NCUA said.

SARs are not required to be filed for the activity of hemp-related businesses operating lawfully, provided the activity is not unusual for the business, the agency added, but credit unions “need to remain alert to any indication an account owner is involved in illicit activity or engaging in activity that is unusual for the business.”

“Lending to a lawfully operating hemp-related business is permissible,” the NCUA wrote. “Many credit unions have a long and successful history of providing services to the agriculture sector. Hemp provides new opportunities for communities with an economic base involving agriculture.”

To read the opinion in American Bankers Assoc. v. National Credit Union Administration, click here.

To read the NCUA’s interim guidance on serving hemp businesses, click here.

Why it matters

Despite the mixed result, the D.C. Circuit decision is a decisive victory for credit unions, as the court found multiple provisions of the rule to be lawful and granted the NCUA the “rare” opportunity to explain itself on remand in lieu of vacating the provision that failed to pass judicial scrutiny.

With regard to hemp businesses, the NCUA’s interim guidance is a step in the direction of providing banking services to marijuana-related businesses, with the agency promising to provide additional guidance on the subject once the USDA’s regulations and guidelines are finalized. That said, credit unions must take care to understand the relevant state’s laws, regulations and agreements under which each hemp-related business member operates, and should be prepared to adapt their ongoing due diligence and reporting approaches to any risks specific to an individual hemp business.