Appeals court upholds most of credit union membership rule

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A three-judge panel of the U.S. Court of Appeals for the District of Columbia on Tuesday upheld most of the National Credit Union Administration’s contested field-of-membership rule, reversing a decision by a district court judge.

In a curious twist, however, the panel reversed District Court Judge Dabney Friedrich’s ruling upholding a provision of the rule that permits credit unions to exclude the urban cores from membership fields built around core-based statistical areas. Writing for the panel, Judge Robert L. Wilkins stated it found “merit” in the American Bankers Association’s argument the provision amounted to redlining.

Wilkins’ decision, released Tuesday afternoon, sent the urban core provision back to the district court “for further consideration of the discriminatory impact it might have on poor and minority urban residents.”

Credit union trade groups were quick to characterize the appeals court’s decision as a victory, since it results in most of the original field of membership rule being put back in play.

"The decision by the Court of Appeals soundly affirms the right of NCUA to define FOM it reasonably feels appropriate as it was directed by Congress to do so," said Rick Metsger, a former NCUA chairman who helped write the rule. "The court clearly recognized that the NCUA must stay current with an evolving financial services marketplace to meet the needs of the American consumer.”

The American Bankers Association, which appealed the rule almost immediately after NCUA approved it in December 2016, naturally played up the redlining angle.

“We agree with the court’s warning that this ‘gerrymandering’ may disenfranchise poor and minority suburban residents by making it difficult for them to receive adequate financial services, and find it concerning that NCUA would actually propose a regulatory ‘license’ to do such a thing,” ABA President and CEO Rob Nichols said Tuesday in a press release.

At the same time, Nichols professed disappointment that the appeals court ruled in favor of one provision in the field of membership rule permitting credit unions to use core-based statistical areas to define membership fields and another that increases the population limit for rural districts to 1 million from the previous 250,000.

The two largest credit union trade associations, the Credit Union National Association and the National Association for Federally-Insured Credit Unions called the decision “a big win” in a joint statement Tuesday. “This will have a positive impact for the industry’s 117 million members and American consumers who now have better access to member-owned not-for-profit credit unions,” the groups stated.

CUNA and NAFCU expressed confidence NCUA would win the urban-core issue when it is reargued. Still, the redlining controversy resurfaces at a time when NCUA Chairman Rodney Hood has been trumpeting the agency’s commitment both to supporting minority depository credit unions and providing financial services to minorities.

The decision did not include a timetable for rearguing the urban-core provision.

Ultimately, the appeals court concluded most of ABA’s arguments weren’t strong enough to surmount the broad grant of authority NCUA received from Congress to define fields of membership.

“We recognize that there may be some tension between the Act’s principal purposes,” Wilkins wrote. “A credit union with exceedingly close ties among its members is unlikely to have a large enough customer base to thrive economically. To the extent that such tension exists, the Act leaves to the NCUA to strike a reasonable balance.”

In a possible silver lining for bankers, though, Wilkins made it clear that NCUA’s decision to limit any membership fields built around core-based statistical areas to 2.5 million people gave the judges comfort in reaching their decision.

A number of credit union advocates have called on NCUA to consider increasing the limit, but Tuesday’s decision might make that tough to do.

For his part, Hood said the agency was pleased with the decision although it’s still studying the specifics.

“In the near future, we will provide guidance for affected credit unions," Hood said Tuesday in a press release.

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Field of membership Lawsuits Credit unions Redlining NCUA District of Columbia