By Ray Birch
BIRMINGHAM, Ala.—Credit unions are mistaken if they believe bankers are done with their lawsuit over NCUA’s new field of membership rules, according to Dennis Dollar, who also believes NCUA will need to act to again expand its FOM rules.
The former NCUA chairman says the industry needs to prepare for the big-pocketed financials to exhaust their resources to fight back against the recent Court of Appeals decision that largely went in favor of credit unions.
Moreover, Dollar is further contending the decision will restore balance between federal and state charters on FOM issues, and predicting NCUA will come forward with updated FOM rules within the next two years to keep pace with changes at the state level.
As CUToday.info reported, the U.S. Court of Appeals for the D.C. Circuit last week ruled in favor of almost all of NCUA’s 2016 field of membership rule in a lawsuit filed by the American Bankers Association.
Dollar, principal partner at Dollar Associates here, called the ruling a “decisive win” for NCUA and federal credit unions.
“But I expect the ABA to appeal because they have spent so much on this losing effort that they will feel obligated to their dwindling number of community bank members to play it on out to its conclusion when the U.S. Supreme Court decides not to hear their arguments after such a decisive, unanimous decision from the Appeals Court,” Dollar said.
The ABA is largely funded by their large “mega-bank members” who are not at all worried about credit union competition, said Dollar.
“Yet they ironically keep up these expensive and losing court challenges to satisfy their ever-diminishing number of community bank members who despise credit unions—at least until it’s time to sell the bank and cash out,” he said. “There is little doubt in my mind that they will appeal.”
The court, where three federal judges heard oral arguments in April of this year, ruled in the case that stemmed from an NCUA appeal a March 2018 district court ruling that had struck down portions of the expanded FOM rule approved by the NCUA board.
The court remanded the portion of the rule—without vacating it entirely—that addressed core-based statistical areas “for further consideration of the discriminatory impact it might have on poor and minority urban residents.” The provision permits credit unions to serve core-based statistical areas without serving the urban core that defines the area, an issue in the case that was the subject of questioning by the judges when the case was heard.
NCUA prevailed in its appeal of a district judge’s decision that had vacated portions of the agency’s new FOM rule related to combined statistical areas and rural districts as “local communities.” In upholding these portions, the court cited the doctrine of Chevron deference, which gives wide latitude to administrative agencies to interpret their authorizing statutes.
Ironically, the ruling was hailed not just the credit unions trade groups but also by the American Bankers Association, which called the ruling a “limited win” for its arguments in the case. The ABA noted the court’s opinion left open the possibility that certain future approvals of fields of membership based on expansive interpretations might warrant legal challenge.
“There is little doubt, in my view, that they will lose on appeal—probably without the U.S. Supreme Court even hearing a case that is easily viewed as nothing more than an attempt to stifle consumer competitive choice by challenging a rule NCUA had the full statutory authority to issue, and a rule that was well within the law,” said Dollar, who during his term at NCUA led FOM expansion efforts. “In fact, NCUA could have, and has in the past, gone further under the provisions of the same 1998 law.”
‘Very Solid Grounds’
Dollar said NCUA was on “very solid and strong legal grounds” with its 2016 FOM rules and that the agency was “well within the letter and the spirit of the Credit Union Membership Access Act of 1998.”
“The whole reason-to-be for the Credit Union Membership Access Act was to increase, not restrict, credit union membership eligibility,” said Dollar, who served on the NCUA board and testified in Congress on the 1998 credit union statutory rewrite that precipitated enhanced new FOM rules in 1999, 2003 and 2016. “We actually went further in 1999 and 2003 with our FOM rules when I was on the NCUA board than did these 2016 rules. There were no population caps or restriction of a community to either an MSA or a CSA geographical limitation in either the 1999 or 2003 rules. The 2016 rules were a significant step forward on FOM from the restrictions that had been put in place by the NCUA board in 2010, but they were still not as expansive on community charters as the 1999 and 2003 rules had been at one point in recent history.”
Not the First Time
Dollar reminded the 1999 rules were also challenged by the bankers and upheld in court, just like the 2016 rules were upheld by the Court of Appeals last week.
“The bankers sued over the 1999 rules and lost decisively,” said Dollar. “In fact, they lost so badly in court over the 1999 rules that they didn’t even try to challenge the 2003 rules that went even further. This is trade association politics 101 for the ABA and will, as it has for two decades, continue until the larger banks that are paying for these fruitless lawsuits demand that the ABA start focusing on their real threats—not the relatively steady 7% of the market that credit unions have possessed for about 25 years.”
Dollar predicted the litigation initiated by the bankers will ultimately hurt them more than help them competitively.
“NCUA has often allowed fear of banker litigation to make them even more restrictive in application than their own rules authorize them to go on FOM,” suggested Dollar. “Now that the ABA has challenged the NCUA’s FOM rules with everything they have and still have come up short in court, hopefully NCUA will become even more confident in the statutory authority behind their own rules and begin to implement them as they were intended to be implemented.”
Dollar believes the biggest benefit of the court decision would be “restoring some balance” between federal charter and state charters on FOM issues.
“The 2016 rules were intended by NCUA to help return some competitiveness to the federal charter with many of the states that have become much more flexible and expansive on FOM than their federal counterparts,” said Dollar. “That was beginning to happen after the 2016 rules went into effect until the earlier court decision, which was overturned last week on appeal, put everything on hold.”
Over the past several years the state charters in most states have been much more flexible than NCUA on FOM issues, said Dollar, noting his consulting firm has worked on over 20 federal to state charter conversions in the past five years.
“Each of them, without exception, was driven by the tighter federal FOM approach and the more welcoming FOM options at the state level,” he said.
This imbalance on FOM application has had an impact on larger credit union mergers and even CU purchases of banks, Dollar believes.
“If you look at the top 10 largest credit union mergers over the past four years, 80% of the continuing credit unions in the larger mergers has been a state charter,” said Dollar. “Why? Because many states have allowed larger FOMs and accommodated the consolidation of both merging credit union FOMs when NCUA would not. The results have put federal charters at a distinct disadvantage on larger credit union mergers—perhaps not when smaller credit unions merge, but certainly when larger credit unions with larger FOMs are involved.”
The Value of ‘Memberization’
Dollar said a similar issue also comes into play for bank purchases by credit unions.
“To make a bank purchase work, a credit union must be able to qualify the bank customers as credit union members through their FOM,” explained Dollar. “State charters with more flexibility on FOM have been able to make this ‘memberization’ process much more of an easy process than have many federal charters—especially those without associational SEGs within their multiple common bond federal charter.”
Dollar pointed to statistics from the National Association of State Credit Union Supervisors that show 24 of the last 29 credit union bank purchases have been by state chartered credit unions.
“The imbalance has been in place between the federal and state charter on FOM for almost a decade now,” said Dollar. “And it has manifested itself in the growth numbers, the merger numbers and the bank purchase numbers. Something was definitely needed to put FOM back in balance at the federal level or the dual chartering system would suffer.”
“NCUA did the right thing with its 2016 rules,” continued Dollar. “Now that the courts have upheld them, NCUA has a chance to really strengthen the federal charter.”
The Response from States
He also predicts that many states will expand their approach to FOM in response.
“I’m a huge fan of dual chartering,” said Dollar, a former Mississippi state legislator. “Good regulatory approach can be as contagious as a bad regulation often is. I expect the state regulators and, where needed, state legislators to continue to enhance the state charter as NCUA eventually starts re-implementing their 2016 rules.”
Maybe not all states, but most have parity laws and many states even go beyond mere parity with NCUA, noted Dollar.
“I expect that ongoing movement toward more FOM options to continue because every safety and soundness regulator, whether state or federal, recognizes that credit unions cannot maintain financial stability and long term viability if they cannot diversify their FOM, have managed growth and achieve sufficient economies of scale to compete,” said Dollar.
New Rules Coming
Dollar even predicted NCUA will come forward with a new and updated FOM rule within the next two years in order to stay relevant with the changes taking place at the state level.
“It is ironic that by the time NCUA gets around to implementing their 2016 FOM rules after this legal action, the need for further modernization will be required,” said Dollar. “Technological delivery of service is making a NCUA’s current definition of service facility obsolete. States are already coming around on not requiring a branch within 25 miles of an employer, association or geographic area to be served. That is the next area the federal charter is going to fall behind if NCUA doesn’t stay updated with their rules and interpretations.”
FOM Rules Obsolete?
Will field of membership rules ever become obsolete, as NASCUS President Lucy Ito recently suggested in a CUToday.info story here.
“Because eliminating FOM would require an act of Congress and because the bankers will go to the boards to fight against its elimination, I think the likelihood of Congress jumping into that fire is fairly minimal in the foreseeable future,” said Dollar. “I think Congress is more than glad to give NCUA the authority, as they have done and as the courts have validated, to keep the FOM rules more modernized and relevant to the changing marketplace. NCUA just has to keep up with the states that are often operating under broader authorities and have shown a greater willingness to stay ahead of the FOM curve.”
The 2016 rules, now upheld by the courts and eventually validated when banker appeals are thrown out, will help bring some balance to the FOM landscape for federal credit unions, said Dollar.
“But FOM is as dynamic as the marketplace, and safety and soundness is impossible to maintain without crucial growth options for more members, increased member service and greater economies of scale,” said Dollar. “FOM is at the center of that essentiality for credit unions.”