NCUA Cracking Down on “Open to All” Federal Credit Unions

The NCUA has sent a letter to federal credit unions warning them about advertising that says anyone can become a member. The issue of “open membership” has been talked about for several years. In 2010 a New York Times article reported on this issue and the history of how large credit unions like PenFed evolved into an open membership. It took awhile, but the NCUA is responding. Perhaps the bankers have forced the NCUA to crack down. The bankers are currently fighting hard to end credit union tax exemptions, and bankers have been using this issue as one of the reasons why the tax exemption should end. Below are some excerpts of this NCUA letter:

If your credit union is advertising that anyone, without limitation, is able to become a member of your credit union, then you may be in violation of federal law and regulation.

Some overly aggressive marketing campaigns by federal credit unions to facilitate membership through associational groups are providing consumers with misleading information about single and multiple common bond membership requirements.

NCUA is particularly concerned about advertising by federal credit unions stating their fields of membership are “open to anyone.” Several recent examples of such overly expansive advertising focus on becoming a credit union member by first joining a particular association.

The letter explains the details of the requirements for associational common bond. This a membership “back door” that many credit unions have used to make it easy for anyone to join.

NCUA rules, specifically the Chartering and Field of Membership Manual, explain the requirements for the associational common bond. NCUA determines whether a group satisfies the associational common bond requirements based on a “totality of the circumstances” test, which has the following seven factors:

1. Whether members pay dues;
2. Whether members participate in the furtherance of the goals of the association;
3. Whether the members have voting rights;
4. Whether the association maintains a membership list;
5. Whether the association sponsors other activities;
6. The association’s membership eligibility requirements; and
7. The frequency of meetings.

NCUA’s Office of Consumer Protection has begun conducting quality control reviews of federal credit unions that may be improperly using associations to sign up members without a common bond.

Can the credit unions that have been known to be open to all satisfy the above factors in the eyes of the NCUA? One important thing to note is that this letter only applies to federal credit unions (those with federal in their names). These are the credit unions that have the NCUA as their primary regulator. Credit unions that are state-chartered may not have to worry about the NCUA coming after them. However, their state regulators may choose to follow the NCUA on this.

Most of these seven factors don’t seem to be black and white. If the NCUA is lenient in its interpretation of these, it may not affect the federal credit unions that have been careful in how they allow association members to join. The only one that can cause some credit unions problems may be the first one, “member pays dues”. I’ve seen cases in which the credit union offers to pay for the first year dues for the association in the credit union membership application. I could see the NCUA objecting to these cases.

Even if this doesn’t end the “back door” membership, credit unions may make it more difficult and more expensive to join through an association to ensure compliance with the NCUA. This is bad news for savers who want as many deposit account options as possible.

In the section of the letter titled consequences of non-compliance, I don’t see any mention that individual members could be thrown out of the credit unions. It may only affect people who want to join the credit union. If that’s the case, you may want to join some all-access credit unions now while the back door is still open. You can see the list of credit unions open to anyone. We’ll have to keep an eye on these credit unions. Please leave a comment if you see any credit unions remove associations from their fields of membership. Hopefully, we won’t see this list shrink.

Finally, I find it interesting that the NCUA’s Office of Consumer Protection is conducting quality control reviews on this issue. Too bad this office didn’t help us any when a federal credit union chose not to honor its early withdrawal penalty on existing CDs. This issue seems to be much more relevant to consumer protection than associational common bonds.