Compliance Update with Amy K

The organizational design for each credit union begins with their bylaws; each credit union has the responsibility to maintain a current and complete set. 

Credit Union Bylaws
Intro: The bylaws form the foundation of how the credit union functions. Failing to follow them puts the board, and the credit union at risk.

The basic organizational design for each credit unions begins with its bylaws. Both North Dakota state chartered credit unions and federal credit unions derive their basic operational instructions from their adopted bylaws. Bylaws provide important direction to credit unions on a variety of matters, from how someone qualifies to be a member, timing requirements for meeting notices, to loans to members and many other matters that impact credit union operations and governance.

As discussed in the NCUA Examiner’ Guide, Chapter 18, “Each credit union board adopts a set of bylaws, under which the credit union operates… Thus, the credit union has the responsibility to maintain a current and complete set of its own bylaws. The bylaws function as a contract between the credit union and its members.”

Under ND state law, applicants seeking to organize a credit union must, among other things, prepare and execute proposed bylaws for the general governance of the credit union consistent with North Dakota state law. NDCC 6-06-02 Similarly, once a Federal Credit Union (FCU) is formed and approved, the new credit union’s board of directors receive a signed charter and standard bylaws. A federal credit union's bylaws must conform to, and cannot be inconsistent with, any provision of its charter, the Federal Credit Union Act, the NCUA's regulations, or other laws or regulations applicable to the credit union's operations.

Beyond permanently retaining a copy of this foundational document, as required by Appendix A to Part 749, of NCUA Rules and Regulations. Credit unions must follow their adopted bylaws. 12 CFR 701.2, clearly provides that “Federal credit unions must operate in accordance with their approved bylaws.”

Consequences for not following the credit union’s adopted bylaws can be dire. In a worst case scenario, the Federal Credit Union Act, section 1766(b)(1) grants the National Credit Union Administration board with the power to “suspend or revoke the charter of any Federal credit union, or place the same in involuntary liquidation and appoint a liquidating agent therefor, upon its finding that the organization is bankrupt or insolvent, or has violated any of the provisions of its charter, its bylaws, this chapter, or any regulations issued thereunder.”

With regard to FCUs, NCUA Legal Opinion Letter, published March 29, 2013, further explained that, “NCUA incorporated the FCU Bylaws into its regulations in 2007, in part to clarify NCUA's authority to take action on bylaw violations. At that time, NCUA stated that incorporating the bylaws into its regulations would give NCUA the ability to take action on bylaw violations not only when related to safety and soundness, but also when "a bylaw violation poses a threat to fundamental, material, credit union member rights." NCUA has full authority to interpret and enforce the FCU Bylaws. State law has no role where the FCU Bylaws are clear and unambiguous. However, NCUA may choose to defer to state law on certain issues where the FCU Act and FCU Bylaws are silent or sufficiently ambiguous to warrant state law consideration. In this instance, the FCU Bylaws clearly and unambiguously provide that in-person voting is required at a meeting called to consider removal of a director.”

Both FCU and ND state chartered credit unions may adopt amendments to their bylaws, however, the credit union must be mindful of the necessary regulatory steps that need to be taken to properly amend the bylaw. Credit unions also need to be mindful of issues that can arise when attempts are made to piecemeal old and new bylaw provisions together. For example, issues can arise when adopting new sections but failing to adopt the entire article dealing with the section, or trying to keep old bylaws provisions and adopt new sections which may create inconsistent or conflicting language within the bylaws.

North Dakota Century Code 6-06-04 provides the steps a ND state chartered credit union must take to amend its bylaws. If the bylaws provide for amendments by the board of directors, such amendments require an affirmative vote of two-thirds of the authorized number of members of the board of directors of the credit union at any duly held meeting of the board, if the members of the board have been given prior written notice of said meeting and the notice contains a copy of the proposed amendment or amendments. If the bylaws provide for amendments by the membership of the credit union, such amendments require an affirmative vote of two-thirds of the members present and voting at a duly called regular or special meeting of the membership, providing the members have been given prior written notice of said meeting and the notice contains a copy or summary of the proposed amendment or amendments.

With regard to ND state chartered credit unions, no amendment of the bylaws becomes effective, until approved in writing by the state credit union board.

Instructions for FCUs to amend bylaws can be found in Appendix A to Part 701. As discussed in the instructions, the FCU Bylaws contain provisions allowing FCU boards to select from an option or range of options or to fill in a blank. The “fill-in-the-blank” provisions are changes to the FCU's bylaws. Thus, they require a two-thirds vote of the FCU's board of directors. As long as the board selects from the permissible options, the FCU does not need to submit the change to the NCUA for its approval.

The NCUA considers any change to the FCU Bylaws that is not a “fill-in-the-blank” provision or part of a range of options to be a bylaw amendment that requires the NCUA approval. The procedures for approval of a bylaw amendment require that the FCU submit its request to the Office of Credit Union Resources and Expansion (CURE). The request needs to include the section of the FCU Bylaws to be amended; the reason for, or purpose of, the amendment; an explanation of why the amendment is desirable and what it will accomplish for the federal credit union; and the specific wording of the proposed amendment.

The CURE Office will advise the credit union within 60 days if it approved the proposed amendment. If CURE does not reach a decision within 60 days, the proposed amendment is considered to be denied unless CURE requests an extension of time from the federal credit union and the credit union agrees to such a request. If the CURE office denies the request the credit union can appeal the decision.

If CURE reaches an adverse decision or CURE fails to render a decision within the agreed timeframe, the credit union may appeal that decision in accordance with the procedures set out in subpart B to part 746 of this chapter. If CURE fails to render a timely decision, within thirty days it must provide the FCU with a written notice of its failure to render a timely decision and a statement of any concerns that CURE has with the bylaw amendment request.

​Remember - Credit unions need to know where their adopted bylaws are, this is an item of permanent record retention. Credit unions also need to be following their adopted bylaws – review the bylaws, know what they require and/or what they prohibit. If the bylaws need to be updated, make sure the credit union is complying with either state law if ND state chartered credit union, or NCUA rules and regulations if a FCU, when making any amendments to the bylaws. Also, be sure to carefully review any potential amendments so they do not conflict with existing bylaw provisions and are consistent with the FCU Act, NCUA rules and regulations, and state law in the case of ND state chartered credit unions.

As always, DakCU members may contact Amy Kleinschmit with any compliance related questions or concerns. 

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