Arguments Begin in Competition Case

The showdown between commercial banks and nonprofit credit unions reached the Supreme Court on Monday, and the banks appeared to emerge with a slight edge after the hourlong argument.

At issue is the banks’ challenge to the rapid expansion of credit unions since 1982.

That year, federal regulators changed the rules and allowed local nonprofit credit associations to expand their memberships nationwide.

This has been good news for consumers, say officials of the credit unions, which usually offer slightly higher rates for deposits and lower rates for loans than do commercial banks. The credit unions also avoid charging the fees that plague many bank customers.

But the banks say that this competition is unfair because credit unions do not pay taxes.

Six years ago, the banks went to court alleging that the vast expansion of credit unions violates the Federal Credit Union Act of 1934, the law that created them in the first place. During the Great Depression, Congress sought to encourage credit unions as a way to give workers and their families new chances to get loans.

The big banks, then in shaky condition, were not interested in lending to ordinary workers. The law also sought to ensure the stability of credit associations and said that their memberships “shall be limited to groups having a common bond of occupation or association, or to groups within a well-defined neighborhood, community or rural district.”

The “common bond” provision is at the heart of the legal fight.

Two lower courts have sided with the banks, ruling that federal regulators exceeded their authority when they allowed credit unions to expand their membership to multiple groups of employees.

During Monday’s argument, a bank lawyer called the AT&T; Family Federal Credit Union based in North Carolina a “$500-million tax-exempt conglomerate” whose members come from hundreds of different employers.

Several justices said that they were skeptical of the credit union’s case.

“Under your interpretation, you could have 200 million people in one credit union,” Justice Stephen G. Breyer told a lawyer defending the expansion rule. “That’s not much of a limitation.”

But the outcome is in doubt because the justices spent much of the hour arguing over whether the banks had standing to challenge the government policy.

Acting Solicitor General Seth Waxman argued that the 1934 law was passed to promote credit unions and that banks have no right to go to court invoking its provisions on their behalf.

The Justice Department is representing the National Credit Union Administration, which made the policy change in 1982. It also argues that a ruling in favor of the banks could hurt nearly 3,600 credit unions and their 32 million members.

These associations have expanded since 1982, the regulators say, and could be faced with an order to drop some of their members.

The high court is not likely to have the last word on this issue, regardless of how it rules in the case (NCUA vs. First National Bank, 96-843).

If the court rules for the banks, the credit unions say, they will press Congress to authorize the expanded membership. Similarly, if the banks lose, they say, they will press Congress to tighten the law.