Court Will Rule On Credit Unions Lawyers: Lower Court’s Decision ‘Threatens Survival’ Of Industry

The Supreme Court agreed Monday to review a lower-court ruling that sharply limits the membership of federally chartered credit unions.

The federal agency that regulates credit unions, urging the justices to hear the appeal, warned that the decision “threatens the survival” of credit unions.

The ruling makes it harder for small credit unions to compete and “threatens nationwide instability and losses in the credit union industry affecting millions of persons,” Clinton administration lawyers told the justices.

They said 3,600 credit unions serving 32 million people and holding $376 billion in loans, deposits and member shares would be endangered.

The case is being closely watched by the banking industry, which has found itself in competition with credit unions for consumer banking services like car loans, mortgages and checking accounts and which brought the legal challenge to the new policy.

Compared with banks, credit unions charge significantly less for credit cards (an average of 5 percentage points), automobile loans (1 to 1.5 points) and personal loans (1.5 to 2 points), according to a recent Consumer Federation study. Credit unions provide 22.3 percent of all automobile loans in the nation.

But the banking industry said the expansion of credit unions, which do not pay federal taxes, is illegal and unfair.

The Depression-era statute that established credit unions limited memberships to “groups having a common bond of occupation or association” or to “groups within a well-defined neighborhood, community or rural district.”

For nearly 50 years the “common bond” language was interpreted by federal regulators as limiting each credit union to the employees of a single company.

But faced with having to bail out credit unions of small companies that were failing in the recession of the early 1980s, the National Credit Union Administration reinterpreted the Federal Credit Union Act to permit separate employee groups to join together in one credit union.

As long as the employees within each separate group had a “common bond” with one another, multi-employer credit unions met the legal definition.

The new policy, the NCUA explained, would open credit unions to groups of workers too small to form their own credit unions, allow credit unions to benefit from economies of scale, and protect members against economic slumps or closings of single plants.

But the banking industry won a major court victory last July, when Judge Douglas Ginsburg wrote for a federal appeals panel in Washington that the policy betrayed the purpose of Congress when it established credit unions in 1934.

That purpose, according to Ginsburg, was to unite members of a credit union in a cooperative venture by requiring “that a single common bond be shared among all members.”

A federal judge then barred credit unions from enrolling new members. But the Supreme Court later suspended the judge’s order. The justices expect to rule during their next term beginning in October.