Financial Institutions Eye Credit-Union Ruling


A Supreme Court ruling last week limiting the membership of credit unions jolted the nation's financial community and underscored the edgy relationship between credit unions and banks.

Although the potential effects of the decision on Ventura County's financial community and its customers should be minimal, local bank and credit union officials were stirred by the issue.

In a 5-4 ruling last week, the nation's top court ordered credit unions to contain membership to clients within a single occupation, company or profession.

The decision went back to the original 1934 Federal Credit Union Act, under which credit unions were founded, and voided a 1982 regulation that allowed the nonprofit financial groups to expand beyond those constraints.

About 20 million of the country's 70 million credit union members could be affected by the ruling.

Locally, reaction was mixed.

"We're very disappointed in the decision, and we're very anxious to see what the implementation of the district court will be," said Ron McDaniel, president and chief executive of the Point Mugu Federal Credit Union, which serves about 30,000 members.

"Credit unions have 2% of the market share--what else do the bankers want?" McDaniel said. "Basically, they're trying to penalize us for being successful for what we were chartered to do."

The Point Mugu credit union was founded in 1948 to serve civil service employees at the naval base. With the 1982 law expanding the field of membership, the credit union began accepting employees from other local businesses, including Procter & Gamble Co. and Kinko's.

As military bases began to close, credit union officials decided to apply to the National Credit Union Administration for a charter to serve all of Ventura County. That charter took effect in January 1997.

Although the recent Supreme Court decision does not affect the county charter, the American Bankers Assn. and the California Bankers Assn. have sued the credit union administration challenging that charter. The case is pending.

In McDaniel's opinion, the bankers are suing because they want the nonprofit credit unions to be required to pay taxes, as do the banks.

Not having to pay taxes, along with additional cost savings, helps the credit unions provide better rates.

"They're trying to use this red herring to say the playing field is not level, but they have a lot of opportunities and advantages that we don't have," McDaniel said.

"[Credit unions] don't believe that we need to have outside stockholders, and we don't believe we need to compensate a board of directors," he said. "At the same time, we are giving up access to the stock market. So there are other things to talk about other than taxation."

Banks are allowed to invest in the stock market, but credit unions are not.

If credit unions lose potential clients--and are forced to drop current members--banks undoubtedly will be the beneficiaries.

Tony Kourounis, president and chief executive of the newly founded California Oaks State Bank in Thousand Oaks, said he is pleased with the Supreme Court's decision.

"If in fact the decision is upheld as is, then it's a tremendous boon to community banks, which now have the opportunity [to gain customers who] have been going to credit unions because the rates are better," Kourounis said.

"I think the biggest problem the banking industry has had with the credit-union approach to providing a financial product has always been a different tax structure for what they do," he said. "The inequity was their ability to do things without the tax."

Bob Hamilton, president and chief executive of Los Robles Bank of Thousand Oaks, said he would be satisfied if the larger credit unions paid taxes and the smaller community organizations remained tax-free.

As it stands, he said, Los Robles Bank does not have much direct competition from credit unions.

"When we opened this thing, we intended to be a niche bank--we serve the business community," he said. "Eighty percent of our business is the business community and 20% is retail, and that's what credit unions are after. If they pay taxes like we do, it won't be any great problem--if they compete with us, they should pay taxes."

But the impact of the court ruling would be negated if the Credit Union Membership Access Act, proposed federal legislation aimed at protecting credit unions and their expanded membership, becomes law.

Carol Harris, president and chief executive of the 30,000-member Ventura County Federal Credit Union, has high hopes for passage of the bill, HR 1151, now before Congress.

"We had 2.4 million signatures and petitions in Washington of people who wanted to make a statement that they wanted to continue to be served through local credit unions," said Harris, who added that the court ruling will have little effect on her credit union. "We do have plans to go forward and modernize the law and restore our rights to serve the American public."

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