Credit unions lose membership battle with banks
By Jan Lindsey and Michelle Samaad • Bankrate.com

Millions of federal credit union members could be expelled in the wake of a Supreme Court ruling Wednesday that struck down the common credit union practice of admitting people from groups not included in their original charter.

The high court decided in its 5-4 decision that the five banks that challenged the practice had standing to sue.

The National Credit Union Administration, which regulates federal credit unions, says it will ask a federal appeals court to allow it to keep all current credit union members even though Wednesday's ruling means some of them should never have been admitted, spokeswoman Lesia Bullock said.

The NCUA held firm that its interpretation of the Federal Credit Union Act of 1934 did allow a credit union to seek members outside of its original charter so long as there was a common bond between groups. But the high court disagreed, saying that the expansion that allowed employees of unrelated businesses to join existing occupational federal credit unions, violated the original provision of the act.

NCUA will appeal to retain existing members
Now the NCUA will go to an appeals court and fight for the members it gained during the expansion, Bullock said.

The American Bankers Association, which had argued the expanded membership policy violated the law, issued a statement Wednesday reiterating its position.

"While thousands of credit unions remain faithful to their original mission, others were encouraged by their regulator to play fast and loose with membership rules," ABA President William T. McConnell said. "These multi-million dollar credit union conglomerates began as special purpose entities, but have evolved into highly profitable credit union hybrids that are functionally indistinguishable from banks, yet continue to receive special tax and regulatory treatment."

McConnell also stressed what the ruling does not do.

"It doesn't limit the ability of consumers to join a credit union for which they are legally eligible," he said. "It doesn't direct credit unions to give up their cooperative structure, lower their level of service to members, or go out of business."

Credit union hopes turn to Congress
Credit union leaders are optimistic that they will win in Congress what they lost in court.

Congress is set to deliberate H.R. 1151—also called the Credit Union Membership Act. The bill proposes that "membership of any federal credit union shall be limited to one or more groups, each of which have a common bond." A common bond is defined as a common characteristic shared by members of a group.

Since the bill was introduced by Reps. Steven LaTourette, (R-Ohio), and Paul Kanjorski, (D-Pa.), on March 20, 1997, it has collected 132 co-sponsors including House Speaker Newt Gingrich (R-Ga.).

Lawmakers hope to act soon
"Although I'm disappointed by the court's interpretation of existing law, the court's decision allows the Congress to amend the law to give consumers greater choice. This is what our bill, H.R. 1151, does and why it must be passed as soon as possible," said Kanjorski in a statement.

LaTourette agreed that time is of the essence.

"Congress should work quickly to pass H.R. 1151 in order to prevent millions of credit union members from losing this valuable alternative to banks," said LaTourette.

The NCUA's Bullock said the agency is "hopeful that Congress will expedite the bill that has already been circulated."

Credit union officials ponder strategy
NCUA attorneys met behind closed doors late Wednesday morning to review the ruling.

One thing they were considering, Bullock said, was whether the high court's ruling addressed an earlier appellate court suggestion that the NCUA might be allowed to charter credit unions organized along trade, industry or professional lines.

Such an interpretation would allow, for example, teachers in an area to belong to a single credit union even though they worked for different employers.

The four Supreme Court judges who dissented from the majority opinion did so on the basis of the bank's standing to sue, not the merits of the case itself. They said the case should have been dismissed by a lower court.

-- Posted: February 25, 1998