While credit union advocates are urging the National Credit Union Administration to appeal a judge’s decision to strike down portions of its field-of-membership regulation, such a move could put other aspects of the rule at risk.

Richard Garabedian, a lawyer at Hunton & Williams, said his hunch was that the NCUA would opt to appeal Judge Dabney Friedrich’s ruling, though doing so would prolong the period of uncertainty for credit unions keen on expanding their field of membership.

An appeal could also spur the American Bankers Association to keep fighting against the parts of the regulation that were upheld, including a provision that grants credit unions the ability to add “adjacent areas” to existing well-defined local communities on a case-by-case basis. The judge also upheld a provision that let credit unions serve core-based statistical areas without serving the urban core that defines the area.

“It’s a difficult question for the agency,” Garabedian said. “It certainly throws into disarray the ability to expand your field of membership while this issue is hanging out there.”

Still, credit union supporters believe there's a solid ground for an appeal.

Monique Michel, senior director advocacy and counsel at the Credit Union National Association, said Friedrich’s decision was not surprising given the tenor of her questioning during a hearing last month. “We had an idea of what was coming,” Michel said.

While Michel characterized the ruling as “very narrow,” confined to Friedrich’s concerns about what the court perceived as the agency’s lack of discretion to reject more extreme field-of-membership applications, as well as problems with the definition of a rural district, “there’s a strong legal basis from which we hope NCUA will consider appealing.”

For its part, the National Association of Federally-Insured Credit Unions has also signaled it would back an appeal. "NAFCU strongly supports all options to allow our members to grow and thrive. We continue to believe that the NCUA acted within its legal authority in issuing its regulations and would support an appeal. We are also supportive of other regulatory options."

The case against using combined statistical areas to delineate field-of-membership boundaries, as well as more expansive boundaries for rural districts, is much less clear-cut than Friedrich portrayed it, Michel said.

In the April edition of his monthly newsletter, published Saturday, former NCUA board member Geoff Bacino said he believes the NCUA will appeal Friedrich’s ruling, which was made public late Thursday.

Appeals can be drawn-out affairs, and in the meantime the statuses of credit unions whose expansion plans were impacted by the decision would remain in legal limbo. Still, the agency “almost has no choice but to wait” for the legal process to play out before revising its field-of-membership rule, Michel said.

Friedrich’s decision will also almost certainly have a chilling effect on plans the NCUA was considering to increase population limits for community-based credit unions to as much as 10 million from ther current 2.5-million-person limit, Michel added.

The NCUA released a statement Friday indicating it was “considering its options” regarding the two sections of the field-of-membership rule that Friedrich’s ruling vacated. In an email Monday, a spokesman declined to discuss the regulatory or legal steps the agency might take.

The NCUA, the credit union industry’s federal regulator, approved a revised field-of- membership rule in October 2016. The ABA filed suit two months later in U.S. District Court for the District of Columbia.

Much of the initial coverage of Friedrich’s decision stressed the ruling’s split nature. In settling the four points at issue, Friedrich, a Trump appointee who joined the bench in December, sided with the ABA on two of them, and with the NCUA on the remaining two.

But closer reading of the 39-page decision seems to reveal a more pronounced tilt in favor of the bankers. Indeed, even on points where she came down on the regulator’s side, Friedrich saw fit to inject some pointed criticism.

For instance, while she upheld a provision that permits credit unions to use portions of core-based statistical areas whose total population exceeds the agency’s 2.5-million-person population threshold to serve as the basis for a field of membership, Friedrich’s endorsement was hardly ringing.

“While these inferred social, economic, and geographic ties [that constitute the common bond between inhabitants of a core-based statistical area] may be less robust than those of a prototypical local community, they provide at least some reasonable basis for the NCUA to define local community as including areas on the perimeter of a Core-Based Statistical Area,” she wrote, before adding that “a barely reasonable interpretation is enough” to satisfy judicial requirements.

Where she agreed with the ABA, Friedrich used tougher language.

Friedrich invalidated a provision in the field-of-membership rule that permitted credit unions to establish rural fields of membership with as many as 1 million people, even if such districts stretched across state boundaries.

“Because the rule automatically qualifies areas larger than states as rural districts, even though the term commonly referred to areas smaller than a county, the NCUA’s definitional decision is unreasonable and manifestly contrary to the statute,” she stated.

Friedrich’s decision also invalidated provisions of the field-of-membership rule that automatically permit federal credit unions to use portions of combined statistical areas as well-defined local communities as long as they are contiguous and the designated region’s population does not exceed 2.5 million. Combined statistical areas are regions that include multiple core-based statistical areas.

To illustrate her point, Friedrich sketched out a theoretical region that included Doylesburg, Pa., and Partlow, Va., communities separated by approximately 200 miles.

Friedrich acknowledged her example was “extreme” but added that it met the NCUA’s standard because it was contiguous.

“If a credit union seeks to serve such an area, the NCUA has no discretion to reject the credit union’s application on the ground that the area is not a local community,” Friedrich wrote. “A definition that calls Doylesburg, Pennsylvania, and Partlow, Virginia, residents part of the same local community is not anywhere near the term’s standard meaning.”

ABA spokesman Jeff Sigmund said Monday that the two provisions Friedrich invalidated “were the most consequential because they have served as the basis for most of the credit union expansions under the NCUA’s recently amended field-of-membership rule.”

“Even where the judge upheld provisions of the rule, she did so with faint support and strong language that casts doubt on NCUA’s proposals for further expansion,” Sigmund added.

The way Garabedian sees it, “bankers came out slightly ahead, on balance. … Now, we have to see whether the NCUA will challenge the ruling.”

Ryan Donovan, CUNA’s chief advocacy officer, characterized Friedrich’s decision as a setback for consumer choice. “The banking industry led by ABA has tried to put up roadblocks to credit unions serving American consumers,” Donovan said. “They’re actively seeking to keep people out of credit unions.”

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