Bank Industry Wins Court Battle Against Credit Unions

Banks have won a key court battle against credit unions that could force millions of Americans out of the lower-cost financial organizations.

However, the National Credit Union Administration, which regulates credit unions, said it plans to appeal the U.S. District Court ruling, handed down late Friday, to the Supreme Court.

In the ruling, Judge Thomas Penfield Jackson said the credit union administration is not permitted to allow occupational federal credit unions to admit members who do not share a single common bond of occupation.

If the ruling stands, “it will destroy credit unions,” said Marc Schaefer, president of the AT&T; Family Federal Credit Union in Winston-Salem, N.C., which was involved in the case.

“One hopes that it will give us a fair shot to get back the customers that have been stolen from us for all these many years,” said Michael Crotty, deputy general counsel at American Bankers Assn.

“If the members that have been illegally added to credit unions are no longer going to be served by those credit unions, it seems logical that they would resort to our industry for serving their financial needs,” he said.

The ruling affects 3,500 credit unions nationwide. At issue is a practice started in the early 1980s under which the NCUA allowed credit unions to take in members from various industries if a company or plant that employed many of the credit union’s members was in financial trouble.

“If that church, that plant, that military base went out of existence, then the people who were members of that credit union stood in danger of losing their credit union and their financial services,” NCUA Chairman Norman D’Amours said.

“So the NCUA back then decided to allow them [credit unions] to take in other groups in order to continue existing,” he said.

In 1990, the American Bankers Assn. and five banks sued the NCUA for allowing AT&T;’s credit union in Winston-Salem to grow to encompass 150 disparate employee groups nationwide.

The bankers said the practice violated the 1934 Federal Credit Union Act and that lawsuit was decided in favor of the bankers. But the bank association filed a new suit in October as the credit union regulator continued to approve unrelated fields of membership.

Credit unions, unlike banks, are nonprofit organizations and generally offer lower rates on loans and higher rates on savings. Banks contend credit unions have regulatory and tax advantages that allow them to undercut banks.

The credit union regulator plans to ask the judge for a clarification of the order and to delay its implementation. It also will ask the Supreme Court to review the decision, D’Amours said.

The ruling would force $9-an-hour furniture workers to find other, more expensive ways to meet their financial service needs, AT&T;’s Schaefer said.

One issue that remained unclear was whether credit unions would have to force out current members who work at other businesses. That and other issues will be discussed at a meeting with the judge on Dec. 4.

“At that time we are hoping he will not take the next step and say that these 3,500 credit unions have to divest,” a spokeswoman for the credit union group said. Such an order would affect more than 15 million people, she said.