High Court Restricts Credit Union Membership


The Supreme Court ordered the nation’s nonprofit credit unions Wednesday to limit their membership to individuals within a single company, community or occupation.

Citing the Depression-era law that created these lending cooperatives, the high court said only people who have a “common bond” of work or community may enroll in a federally chartered credit union.

The 5-4 decision strikes down a 1982 federal regulation that allowed many of these local unions to expand into multi-state financial institutions with hundreds of thousands of members.

Last year, 71 million Americans belonged to a credit union, more than double the number in 1991. Because these associations pay no taxes, make no profits and are controlled by volunteer boards, they can offer somewhat higher interest rates for their savers and lower costs to borrowers.


Bank officials fiercely fought the recent rapid expansion of credit unions as illegal and unfair, a battle that culminated in Wednesday’s resounding victory in the Supreme Court.

“These are not Mom and Pop operations,” said the American Bankers Assn. and four other banking groups. “Today’s decision stops the unbridled expansion of large credit union conglomerates that are more interested in a free ride than a free market.”

Credit union leaders condemned the ruling. It “puts credit union membership in jeopardy for Americans who work for companies with less than 500 employees,” the National Assn. of Federal Credit Unions said in a statement.

For those who now save in or borrow from a credit union, the decision is not likely to have an immediate or direct impact. However, unless Congress reverses the limit set by the court, workers may find it hard to join a credit union in the future.


It takes several thousand workers to form a functioning credit cooperative, industry officials say, and many employees of small firms have used the liberalized 1982 rules to enroll in large credit unions in other industries.

For example, the AT&T; Family Credit Union, which was challenged by the bankers, began by serving phone workers in North Carolina. In the last decade it has grown to 112,000 members, including workers from a major tobacco company, a utility, an auto supply chain and a television station.

The ruling will affect the 340 federally chartered credit unions in California, which has 735 credit unions.

Armed with Wednesday’s ruling, the banks could ask a federal judge here to force credit unions to drop members who do not work for the main company. As many as 10 million members could be affected, the credit union industry said.

But officials on both sides of the dispute agreed that is unlikely.

Instead, Congress is now likely to take up the issue and decide whether to lift the restrictions on credit union membership.

“We absolutely expect Congress will act to fix this problem,” said David L. Chatfield, president of the California Credit Union League based in Pomona. “Unless Congress acts, people who work in small business will be locked out of credit unions.”

House Speaker Newt Gingrich (R-Ga.) announced this week that he supports a change in the law to protect credit unions, and House Banking Committee Chairman James A. Leach (R-Iowa) said he will hold hearings on a bill early next month.


“It is inconceivable to me that Congress will allow millions of Americans to be kicked out of the financial institutions of their choice,” Leach said. “We will not allow this to happen.”

Credit unions date to the Great Depression, when many banks were unwilling or unable to make small loans to workers. Congress passed the Federal Credit Union Act in 1934 to encourage nonprofit lending cooperatives. Congress said their membership “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.”

That provision remains unchanged. However, in 1982, when savings and loan institutions were collapsing and many corporations were downsizing, federal regulators liberalized their rules. The National Credit Union Administration, the agency charged with enforcing the 1934 law, said a credit union could enroll multiple groups of employees who shared a “common bond.”

The banking industry challenged this liberal regulation as a violation of the 1934 law.

Initially, a federal judge ruled that banks had no standing to make the challenge. But the U.S. Court of Appeals here not only reversed that ruling but also struck down the regulation.

The high court affirmed that decision on both counts in the case of National Credit Union Administration vs. First National Bank & Trust, 96-843. The law’s common-bond restriction is “meaningless,” wrote Justice Clarence Thomas, if a single credit union can enroll members from dozens of separate groups. He was joined by Chief Justice William H. Rehnquist and Justices Antonin Scalia, Anthony M. Kennedy and Ruth Bader Ginsburg.

Meanwhile, in a case closely watched in Alaska, the court ruled unanimously that a village owned by Alaskan natives is not “Indian country” under tribal control.

Congress revoked the native claims in 1971, the court said in Alaska vs. Native Village of Venetie, 96-1577.


The Athabascan Indian tribe fought to gain authority over hunting and fishing, law enforcement and environmental regulations in an area about the size of Delaware. If the court had ruled in the tribe’s favor, other Alaska tribes may also have been granted jurisdiction over tens of thousands of acres.

Times staff writer Kathy M. Kristof in Los Angeles contributed to this story.

* Q & A: Could you be forced to give up your membership? D8