Credit Unions, Regulators Draw Rebuke From Federal Judge

The legal brawl over who can join credit unions grew more heated Wednesday, with a federal judge suggesting that he might be dealing with a “rogue federal agency” and ordering it to rescind 31 recent credit union expansions.

U.S. District Judge Thomas Penfield Jackson accused the National Credit Union Administration of acting in collusion with industry groups to adopt rules that evade his order restricting credit union membership.

Jackson said he was considering referring the case to the U.S. attorney’s office to see if federal laws had been broken. “I think the allegations are extremely serious,” Jackson said during a hearing.

Attorneys for the federal agency defended the regulators’ conduct and new membership rules and said they were following the guidance of a previous appeals court ruling.

“All I can say, categorically, absolutely: There was no collusion,” Norman D’Amours, the agency’s chairman, said after the hearing. “What we did is customary regulatory practice.”

Jackson denied requests by the credit union agency, the Justice Department and two credit union trade groups to suspend all or part of his Oct. 31 order preventing credit unions from signing up members who aren’t part of their “core” charters--such as employees at a single company or members of a trade group.

But he didn’t take the step most feared by credit unions: ordering an estimated 10.5 million people who joined credit unions under expanded membership rules in recent years to leave them and seek banking services elsewhere. He did take that action for 31 expansions that occurred after the agency eased eligibility rules Nov. 14.

The judge’s rebuke is the latest development in a six-year court fight between banks and credit unions, the nonprofit institutions that provide 70.2 million people with checking accounts, loans and other services at a lower cost than banks.

The 1934 Federal Credit Union Act limits membership to “groups having a common bond of occupation or association, or to groups within a well-defined neighborhood, community or rural district.”

The credit union administration expanded that definition in 1982 to allow small businesses, which alone lacked enough workers to form viable credit unions, to join existing credit unions. Bankers sued, and they finally succeeded in July, when a federal appeals court in Washington said such expansion violated the “common bond” language in the 1934 law.

The appellate court sent the case back to Jackson, who ordered the agency in October not to permit expansions that were beyond a credit union’s core membership.

Jackson’s ire during Wednesday’s hearing was focused on the agency rules adopted Nov. 14 that expanded the definition of who can join a credit union based on a person’s occupation or community. Jackson closely questioned credit union lawyers about their conversations with regulators before the rule’s approval, which occurred without prior public comment because of what the agency described as “emergency” conditions.

Jackson voided the 31 expanded charter applications the agency approved under the new rules. The judge said the rules were “adopted collusively with the specific intent to circumvent the terms of the injunction.”

“I don’t know if you represent a rogue federal agency here,” Jackson said to one agency lawyer.

The agency said it took emergency action because it believed credit unions’ safety and soundness could be harmed by the court order, since millions of consumers potentially would be denied credit union membership, affecting the industry’s viability.

An agency spokeswoman said she couldn’t immediately provide a list of the 31 institutions affected by the judge’s order.