As a result of the passage of SB 269, a number of changes to California’s Credit Union Law (Cal. Fin. Code §14000, et seq.) went into effect on Jan. 1, 2022. These changes were designed to modernize and strengthen the state charter. Changes include, but are not limited to:

• Expanding the permissible grounds for expulsion and updating the procedures for expulsions and appeals;
• Modernizing the provisions related to withdrawals from membership; and
• Amending some of the duties and clarifying compensation, insurance and other provisions related to members of an audit committee (§14556).
  
  

While a number of SB 269’s changes can be easily implemented by updating relevant policies and procedures, others will require an examination of the credit union’s bylaws to determine the extent to which amendments are needed in order to implement the new rules. Unlike federal credit unions, state licensed credit unions do not have a set of model bylaws that must be followed, so specific language will be unique to each credit union.

Expulsion from Membership

The permissible grounds for expelling a member can often be found in Article III of the credit union’s bylaws. There may be separate provisions governing expulsions for failure to cure inactive status and expulsions for cause, with specific procedural steps sometimes located in Article VI. Prior to SB 269, California Credit Union Law allowed the board of directors to expel a member for the following causes:

(a) Conviction of a criminal offense involving moral turpitude;

(b) Failure to carry out contracts, agreements, or obligations with the credit union; or

(c) Refusal to comply with the provisions of this division or of the bylaws.

SB 269 amended Financial Code §14456 to add the following additional cause for expulsion, which should be reflected in the bylaws:

(d) Abusive, threatening, or harassing behavior toward credit union staff, volunteers, or members, or the abuse of credit union systems or property.

Unlike other expulsions for cause, SB 269 permits an expulsion for the above cause to take effect immediately, without advance notice or an opportunity to be heard, if the board of directors or its designee determines that immediate expulsion is reasonably necessary for the protection of the credit union or its staff, volunteers, or members. However, written notice must still be provided to the member within five business days after the effective date of the expulsion. There are also updated appeal procedures applicable to all expulsions for cause, including replacing the right to appeal an expulsion to the membership at a special meeting with a right to appeal to the board of directors. To take advantage of these changes, relevant bylaw provisions will need to be amended, along with internal policies and procedures.

The board may now delegate expulsion authority to a membership committee or an executive committee pursuant to a written membership plan adopted by the board. A membership committee is a body now defined by the statute for purposes of admitting persons to membership as well as expulsions. A member’s right to appeal an expulsion to the board may not be delegated by the board to another body to hear.

Withdrawal from Membership

Often, bylaws will contain a limited discussion of what it means to withdraw from membership. With SB 269, Financial Code §14807 was amended to address members who fail to cure inactive status and members with escheated accounts.

The credit union has long had the ability under Financial Code §14811 to place on inactive status a member who has no outstanding obligations with the credit union and whose share account is below the amount established by the bylaws. This is typically addressed in Article III of a credit union’s bylaws. Prior to SB 269, a member placed on inactive status who did not take steps to return to active membership would still technically need to be expelled from membership in order to be removed from the membership rolls. SB 269 amended §14811 to provide that a member who fails to take steps necessary to be removed from inactive status may be deemed to have voluntarily withdrawn from credit union membership. This does not mean that a credit union is now authorized to simply remove inactive members from the membership rolls. It is a permissible policy decision that requires first transferring the member to inactive status and providing specified notice pursuant to new §14811(d). The overall process should be reflected both in policy and the bylaws, including: (i) when and how a member will be placed on inactive status; (ii) providing the required notice; (iii) when and how a member may be removed from inactive status; and (iv) the permissible cure period (a minimum of 90 days) before the member will be deemed to have withdrawn.

Amended Financial Code §14807 provides that a member whose funds have been remitted to the Controller’s office for purposes of escheat shall be deemed to have voluntarily withdrawn from membership. Unlike being placed on inactive status, this is an automatic change in status that does not involve specific advance notice other than the notice requirements associated with identifying and remitting unclaimed property. Notwithstanding, the fact that this circumstance will be deemed a voluntary withdrawal should be reflected in the bylaws.

Audit Committee Provisions

For credit unions who have adopted, or are considering adopting, an audit committee in lieu of a supervisory committee, there are several changes implemented by SB 269.

Financial Code §14409 now clarifies that a member of the audit committee is prohibited from receiving compensation for services as a member of the committee and §14410 clarifies that the credit union must obtain a bond or insurance coverage for an audit committee member. To the extent these points are addressed in the bylaws, they should be updated.

Additionally, Financial Code §14556 was amended with regard to the specific duties and authorities of the audit committee, authorizing the committee to:

(a) Suspend at any time by unanimous vote, at a meeting called for that purpose, the credit committee, or any member thereof, or the credit manager, or any member of the board of directors, or any officer; and

(b) By a majority vote, call a meeting of the members to consider any violation of the Credit Union Law or the bylaws, or any practices of the credit union which, in the opinion of the committee, are unsafe or unauthorized.

It also confirms the ability of committee members to be appointed or removed by the board of directors and that the Commissioner of the Department of Financial Protection and Innovation has authority to direct the board to remove an audit committee member. If the credit union utilizes an audit committee, the duties and responsibilities of the committee should be specified in the bylaws in much the same way as they are for a supervisory committee.

What Credit Unions Should Know

Credit unions are encouraged to consult with legal counsel to discuss any questions they may have regarding the new opportunities created by SB 269 to ensure that bylaw language is updated and compliant, and that applicable statutory requirements are met. While the 2017 repeal of §30.105 of the California Credit Union Regulations removed the requirement for the Commissioner to pre-approve bylaw amendments, amendments will still be reviewed as part of the examination process and credit unions must be careful to keep an accurate record of all amendments approved by the board and be cognizant of changes that might trigger the need for membership approval, such as converting to or from an audit committee.

Article by Tom Wolfe, Managing Partner of Moore Brewer Wolfe Jones Tyler & North.