Debbie Matz, Chairman of the NCUA, has put credit unions on notice: “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.” That’s the opening sentence from a letter Matz sent to federal credit unions on September 3.
The 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, often one with limited- or no connection to the credit union’s true field of membership.
Mainstream publications have picked up on this message, as evidenced by articles listing federal credit unions perceived to have “open” membership.
“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,” Matz continues in her letter. “This gives the false impression that there are no restrictions on joining a federal credit union, which is not the case.”
The 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.
Matz says she issued the letter to remind credit unions of the laws concerning common bond requirements, regulatory requirements for accuracy of ads, and the consequences of failing to comply with these requirements.
Common Bond Requirements
Section 109(b) of the Federal Credit Union Act limits federal credit union membership to three basic types: single common bond, multiple common bond, and community.
A single common bond credit union consists of persons related by their occupation, (i.e., their place of employment or trade, industry or profession), or related by their association (i.e., place of worship or affiliations).
A multiple common bond credit union consists of more than one group of persons related by either their occupational or associational affiliations.
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:
- Whether members pay dues
- Whether members participate in the furtherance of the goals of the association
- Whether the members have voting rights
- Whether the association maintains a membership list
- Whether the association sponsors other activities
- The association’s membership eligibility requirements
- The frequency of meetings
Section 740.2 of NCUA’s Accuracy of Advertising rule prohibits any advertising or representation that is inaccurate or deceptive. Advertisements that include language to the effect that “anyone can join” or “membership is open to everyone” — without any qualifying language — can give the impression that the single- or multiple common bond requirements do not apply. When this occurs, the NCUA says the ads are inaccurate or deceptive.
Consequences for Breaking the Rules
The Federal Credit Union Act affords the NCUA a broad array of supervisory and administrative tools that it can use to enforce the law and its own rules. Depending on the severity of non-compliance, the NCUA may initiate a supervisory contact, require a federal credit union to sever its relationship with an associational groups used as loopholes to expand field of membership, and/or issue a cease and desist order.
The NCUA says the tool it chooses will depend on a variety of factors including the magnitude of the violation, available remedies, and the extent of the credit union’s cooperation.
The Politics of Advertising and Taxes
In 1998, Congress passed The Credit Union Membership Access Act effectively granting community-wide charters to America’s financial co-ops. Credit unions have been running ads confidently declaring that they are “open to everyone” and “anyone can join” ever since, much to the dismay of bankers.
The American Bankers Association (ABA) has been gunning for credit unions for over 25 years now. They think credit unions should be forced to surrender the federal tax exemption they enjoy, and community charters are the cornerstone of their argument. The ABA asserts that credit unions offer the same services as banks, and if they can serve everyone like banks do, they should face the same tax burdens as well.
The timing of Matz’s letter could be seen as possible hedge against bankers’ attacks. For much of 2013, the ABA has pursued an aggressive campaign to put credit unions on equal footing tax-wise. This aggressive blitz forced CUNA to respond with its own big lobbying push, “Don’t Tax My Credit Union.” Credit unions are obviously concerned about preserving their tax exempt status. Industry leaders probably feel that Congress will be less likely to take action if the NCUA is seen enforcing the common bond requirement.
Earlier this year, the California Department of Financial Institutions (DFI) told credit unions they are prohibited from running advertisements state that “everyone can join” or “all individuals can join.” The DFI described the use of such statements as “impermissible advertising.”
“Stating that ‘everyone can join’ or that ‘all can join’ the credit union incorrectly suggests that the common-bond requirement of § 30.51 does not apply,” the DFI says. In other words, just because a credit union has a community charter does not mean they are “open to the public.”