UNITED STATES OF AMERICA
BEFORE THE NATIONAL CREDIT UNION ADMINISTRATION
In the Matter of
XXXX
Field of Membership Appeal
Docket No. BD-03-24
Decision and Order on Appeal
Decision
This matter comes before the National Credit Union Administration Board (Board) as an administrative appeal under 12 C.F.R. Part 746, Subpart B. The appeal concerns the determination by the Director of the Office of Credit Union Resources and Expansion (CURE) to deny the field of membership (FOM) expansion request by XXXX (Petitioner).
Background
Petitioner is appealing CURE’s decision to deny its request to expand its FOM by adding the XXXX (XXXX), a fraternal insurance benefit society.
Petitioner is a multiple common-bond federal credit union located in XXXX, XXXX serving the needs of the XXXX community. The XXXX is a member controlled, not-for-profit fraternal beneficiary society (FBS) under section 501(c)(8) of the Internal Revenue Code. To become a member of the association, the XXXX requires an individual to obtain an insurance benefit certificate.
CURE denied Petitioner’s request to add the XXXX to its FOM in a letter dated February 8, 2024. CURE’s denial letter stated that the XXXX does not meet the associational common-bond requirements in Appendix B to Part 701 of the NCUA’s regulations, Chartering and Field of Membership Manual (Chartering Manual), because a potential member of the XXXX is required to purchase an insurance benefit certificate to become a member. Because the purchase of this insurance benefit certificate is a mandatory condition for membership in the group, CURE concluded that the XXXX has a client-customer relationship with its members and denied Petitioner’s FOM expansion request on that basis. On March 7, 2024, Petitioner requested that CURE reconsider its initial denial. CURE affirmed its initial denial on April 3, 2024. Petitioner is seeking administrative review by the Board of that determination.1 In connection with its appeal, Petitioner requested approval to present its case orally before the Board. The Board granted this request on June 20, 2024, and a hearing was held on August 27, 2024. The Board has taken the oral presentations under advisement as a supplement to the written record.
On appeal, Petitioner contends that the Chartering Manual does not prohibit the addition of the XXXX to its FOM. Petitioner argues that the Chartering Manual is ambiguous, with undefined provisions that should not preclude the XXXX’s approval. Petitioner asserts that CURE overlooked provisions in the Chartering Manual that conflict with its determination. Petitioner also alleges unfair treatment, arguing that two fraternal associations that are similar to the XXXX have previously been approved by CURE.
Issue on Appeal
The issue before the Board in this appeal is whether CURE’s decision to deny Petitioner’s FOM expansion request based on an impermissible client-customer relationship is adequately reasoned and supported by the record.
Relevant Law
Federal Credit Union Act
Section 109 of the Federal Credit Union (FCU) Act provides for three types of FCU charters: (1) single common-bond (occupational or associational); (2) multiple common-bond (more than one group, each having a common-bond of occupation or association); and (3) community.2 The FCU Act’s FOM requirements are implemented in the Chartering Manual.3
Chartering Manual
Associational Common-Bond. A single associational common-bond consists of individuals (natural persons) and/or groups (non-natural persons) whose members participate in activities developing common loyalties, mutual benefits, and mutual interests. Eligible individuals and groups are natural and non-natural person members of the association, employees of the association, and the association itself.4
The NCUA determines whether a group satisfies the associational common-bond requirements by applying a threshold test and a totality of the circumstances test.5 Under the Chartering Manual, as a threshold matter, when “reviewing an application to include an association in a federal credit union’s field of membership, NCUA will determine if the association has been formed primarily for the purpose of expanding credit union membership.”6 If so, the analysis ends and the association is denied inclusion in an FCU’s FOM. Otherwise, the NCUA will apply the totality of circumstances test7 to determine if the association satisfies the associational common-bond requirements. In this case, while Petitioner satisfied the threshold test, CURE did not apply the totality of circumstances test after identifying a client-customer relationship.
Pre-Approved Groups. The Chartering Manual specifies twelve types of associational groups that the NCUA automatically approves as satisfying the associational common-bond requirements without the need for further review.8 For example, among others, fraternal organizations or civic groups with a mission of community service whose members have voting rights, and organizations having a mission based on preserving or furthering the culture of a particular national or ethnic origin are pre-approved associational groups. Only regular members of an approved group are approved, however. Honorary, affiliate, or non-regular members do not qualify.9
Client-Customer Relationship. The Chartering Manual specifies that associations based primarily on a client-customer relationship do not meet associational common-bond requirements. Health clubs, including YMCAs, are an example of a group not meeting associational common-bond requirements. However, having an incidental client-customer relationship does not preclude an associational charter as long as the associational common-bond requirements are met. For example, a fraternal association that offers insurance, which is not a condition of membership, may qualify as a valid associational common-bond.10
Discussion
Based on the Board’s independent review of this case, CURE’s denial of Petitioner’s FOM expansion request is reasonable and supported by the record. A detailed analysis follows.
On appeal, Petitioner alleges two primary errors. First, Petitioner argues that CURE incorrectly determined that the Chartering Manual precludes the addition of the XXXX to Petitioner’s FOM. Second, Petitioner alleges unfair treatment, pointing to two FBSs that “share the same legal and organizational requirements” as the XXXX that have been approved by CURE as permissible associational groups for other credit unions.
“Based Primarily on a Client-Customer Relationship”
Petitioner argues that CURE failed to adequately address several points Petitioner raised in its deferral response and its request for reconsideration regarding ambiguities and inconsistencies in the Chartering Manual’s associational group requirements. Specifically, Petitioner asserts CURE’s review dismissed or ignored Petitioner’s points that the Chartering Manual: (1) does not define a client-customer relationship; (2) states the XXXX qualifies as a single associational common-bond; (3) only allows regular members of an approved group; and (4) states fraternal organization members must have voting rights.
CURE’s review of the XXXX’s website11 and the group’s bylaws found that the purchase of an insurance benefit certificate is a condition for membership in the XXXX. The XXXX’s bylaws, Article II, Section 10, state:
Section 10 – Classes of Members
There shall be three (3) classes of membership of [the XXXX] namely; Member, Juvenile Member and Honorary Member. A Member shall mean any individual who has an XXXX benefit certificate in force including individuals holding paid-up certificates, individuals on any non-forfeiture option and holders of all annuities. An Honorary Member is a Member who has an ordinary life matured certificate and attained the age of 95. An Honorary Member shall have all of the same rights and privileges as a Member. A Juvenile Member is an individual who is insured by [the XXXX] and under the age of sixteen (16) years of age.
The Chartering Manual does not permit associations based “primarily” on a client-customer relationship. Having an “incidental” client-customer relationship is not prohibitive for associational groups, but the other associational common-bond requirements must be met. Notably, the Chartering Manual specifically states: “[A] fraternal association that offers insurance, which is not a condition of membership, may qualify as a valid associational common-bond.”12
Petitioner concedes that the XXXX requires individuals to obtain an insurance benefit certificate for membership but argues the Chartering Manual “does not define what is a client-customer relationship or what that entails.” Petitioner asserts that the Chartering Manual is unclear as to whether such relationship is premised on the transaction or the legal or organizational structure of the entity, or whether it is for-profit or member owned and controlled. Petitioner posits that it would be reasonable to define a “client-customer relationship” as one in which an individual purchases a good or service from a profit driven entity and the relationship ends at the point of acquisition or contract completion.
Petitioner also notes that the Chartering Manual does not define “primarily” and argues that the XXXX’s long history of service to XXXX XXXX people since its founding is “based primarily on service to the XXXX people in this country, and not the purchase of insurance.” Petitioner asserts that the XXXX’s many fraternal programs for its members—including student loans and scholarships, advocacy, youth programs, social and community activities, and humanitarian aid—demonstrate a commitment and level of support to its membership “that would not come from a mere client-customer relationship.” Further, like a credit union, the XXXX is member controlled and not-for-profit and the group “started the XXXX fraternal insurance program to help and provide the XXXX people and immigrants with a measure of financial security and protection.” Petitioner contends that the lack of a clear definition in the Chartering Manual for associations based primarily on a client-customer relationship and CURE’s failure to further define it should not preclude the addition of the XXXX to its FOM.
Petitioner’s arguments have some degree of merit but are ultimately unpersuasive. Indeed, the Chartering Manual prohibits associational groups “based primarily on a client-customer relationship” but does not further define that term. However, the Chartering Manual also explicitly states that a fraternal association that offers insurance may qualify as a valid associational common-bond, only if the purchase of insurance “is not a condition of membership.” Although the former “based primarily” element in the Chartering Manual could be open to interpretation, the latter “not a condition of membership” element is unambiguous and clearly applies to the case at hand. According to the XXXX’s bylaws, “A Member shall mean any individual who has [a] benefit certificate in force.” Moreover, Petitioner concedes that the purchase of insurance is a mandatory condition of membership in the XXXX. Accordingly, irrespective of any ambiguities Petitioner points to with respect to the meaning of “primarily based on a client-customer relationship,” the XXXX falls squarely within the plain meaning of that latter restriction because holding an insurance benefit certificate is a condition of membership.
Similar Groups
Petitioner also alleges unfair treatment from CURE by pointing to two similar FBS groups: XXXX and XXXX. Petitioner argues that both FBSs are similar to the XXXX and have been approved by CURE as permissible associational groups,13 but they do not meet the Chartering Manual’s associational group requirements regarding membership.
Under the Chartering Manual, fraternal organizations and organizations having a mission based on preserving or furthering the culture of a particular national or ethnic origin qualify as pre-approved associational groups. However, the “NCUA only approves regular members of an approved group. Honorary, affiliate, or non-regular members do not qualify.”14
Petitioner contends that according to the membership rules for both the XXXX and XXXX, neither organization considers individuals that do not obtain insurance to be regular members. Instead, non-insured individuals are designated as “associate” members.15 Petitioner argues that potential members are not required to purchase insurance to join the XXXX or XXXX, but those non-regular “associate” members do not qualify for inclusion in an FOM, and they are not permitted to join the credit union per the Chartering Manual.
Under the Chartering Manual, “fraternal organizations or civic groups with a mission of community service whose members have voting rights”16 are pre-approved, but Petitioner argues the term “voting rights” is undefined and ambiguous. Petitioner notes that the XXXX and XXXX each place restrictions on the voting rights and governance eligibility for associate members as compared to regular members who purchase insurance. While all members of the XXXX and XXXX are eligible to purchase insurance, those who do not obtain insurance are non-regular associate members that do not have full voting rights. Petitioner argues that the Chartering Manual is unclear on whether those restricted rights qualify as “voting” rights under the pre-approved associational group criteria and should not preclude the addition of the XXXX to its FOM.
Petitioner’s arguments on this point have two weaknesses. First, Petitioner presents evidence to show that the “vast majority” of the XXXX and XXXX members choose the option to purchase their insurance products,17 but this only demonstrates that the vast majority of those FBS groups’ members are regular voting members eligible for inclusion in a credit union’s FOM. Petitioner does not present any other evidence to overcome CURE’s determination that XXXX and XXXX are distinguishable from the XXXX because those associations do not require the purchase of an insurance benefit certificate or insurance policy to join. Thus, Petitioner has not met its burden18 of showing inconsistent treatment.
Second, even if the Board were to fully accept the Petitioner’s arguments with respect to similar FBS groups, it does not follow that Petitioner’s FOM expansion request should therefore be approved. Petitioner argues that “based on the Chartering Manual, the XXXX and XXXX members that do not purchase insurance from them are not eligible to join a federal credit union as they are not regular members and they do not have full voting rights. As a result, it should not preclude the XXXX’s addition to [Petitioner’s] FOM.” Irrespective of CURE’s treatment of similar FBS groups, however, Petitioner’s suggested remedy is unwarranted because the XXXX still does not meet the associational group requirements under the Chartering Manual because the purchase of insurance is a condition of XXXX membership.
Conclusion
Based on the Board’s independent review of this case, CURE’s denial of Petitioner’s FOM expansion request is reasonable and supported by the record. The Board finds that in making its determination, CURE correctly applied the associational common-bond requirements under the FCU Act, Part 701 of the NCUA’s regulations, and the Chartering Manual.
The Chartering Manual prohibits associational groups “based primarily on a client-customer relationship” and expressly states that a fraternal association that offers insurance may qualify as a valid associational common-bond only if the purchase of insurance “is not a condition of membership.” While the Board agrees the “based primarily” element of the associational common-bond requirement is somewhat ambiguous, the “not a condition of membership” element is explicit and clearly applies to the case at hand. Under the XXXX’s bylaws, “A Member shall mean any individual who has [a] benefit certificate in force.” Therefore, the purchase of insurance is a mandatory condition of membership in the XXXX.
The Board concludes that CURE’s decision to deny Petitioner’s request to add the XXXX to its field of membership complies with all applicable legal standards.
Notwithstanding this decision, the Board recognizes that the Chartering Manual does contain ambiguities and inconsistencies with respect to the “client-customer relationship” provisions and other associational common-bond requirements that could cause confusion for federal credit unions. Accordingly, the Board directs that CURE will produce a proposal to revise the Chartering Manual to clarify and make consistent the associational common-bond requirements within 9 months of the date of this Decision and Order.
Order
For the reasons set forth above, it is ORDERED as follows:
The determination by the Director of the Office of Credit Union Resources and Expansion to deny the field of membership expansion request by XXXX is AFFIRMED, and the appeal of XXXX is DENIED.
The Board’s decision constitutes a final agency determination and is subject to judicial review in accordance with Chapter 7 of Title 5 of the United States Code.
So ORDERED this 19th day of December 2024, by the National Credit Union Administration Board.
/s/
Melane Conyers-Ausbrooks
Secretary of the Board
1 Petitioner submitted a timely notice of appeal by letter to the Secretary of the NCUA Board, received on June 4, 2024.
2 12 U.S.C. §1759(a).
3 12 C.F.R. Part 701, Appendix B.
4 Id. at Chapter 3, Section III.A.1.b.
5 Id. at Chapter 2, Section III.A.1.a. The NCUA’s most recent amendment to this part of the Chartering Manual was in 2015. See 80 FR 25924 (May 6, 2015).
6 Id.
7 The totality of circumstances test considers the following factors:
- Whether the association provides opportunities for members to participate in the furtherance of the goals of the association;
- Whether the association maintains a membership list;
- Whether the association sponsors other activities;
- Whether the association’s membership eligibility requirements are authoritative;
- Whether members pay dues;
- Whether the members have voting rights; to meet this requirement, members need not vote directly for an officer, but may vote for a delegate who in turn represents the members’ interests;
- The frequency of meetings; and
- Separateness—NCUA reviews if there is corporate separateness between the group and the federal credit union. The group and the federal credit union must operate in a way that demonstrates the separate corporate existence of each entity. Specifically, this means the federal credit union’s and the group’s respective business transactions, accounts, and corporate records are not intermingled.
8 Id. at Chapter 2, Section III.A.1.b. These groups are alumni associations; religious organizations; electric cooperatives; homeowner associations; labor unions; scouting groups; certain parent teacher associations; chamber of commerce groups; certain athletic booster clubs; certain fraternal organizations; organizations having a mission based on preserving or furthering the culture of a particular national or ethnic origin; and organizations promoting social interaction or educational initiatives among persons sharing a common occupational profession.
9 Id.
10 Id. at Chapter 2, Section III.A.1.c.
11 See XXXX.
12 12 C.F.R. §701, Appendix B, Chapter 2, III.A.1.c (emphasis added).
13 Petitioner notes that the Chartering Manual indicates the XXXX qualifies as a single common-bond and that CURE issued a charter to XXXX to serve XXXX in XXXX.
14 Id. at Chapter 2, Section III.A.1.b.
15 The XXXX designates members who purchase insurance as “insurance members” and “associate members” if they do not. See XXXX. Similarly, XXXX designates members who purchase insurance as “benefit members” and “associate members” if they do not. See XXXX.
16 12 C.F.R. §701, Appendix B, Chapter 2, III.A.1.b.
17 See Petitioner’s Notice of Appeal, p. 9.
18 On appeal, “the burden of proof to lead the Board to modify or reverse an initial agency determination shall rest solely upon the petitioner.” 12 C.F.R. §746.204(e).