Federal credit unions can’t go shopping wherever they want for customers, the U.S. Supreme Court ruled Wednesday in a case that could affect where millions of Americans save and borrow money.
The 5-4 decision, written by Justice Clarence Thomas, reverses a 16-year-old federal policy that allowed credit unions to expand their membership beyond traditional groups.
It was a major victory for the nation’s banks, which claimed that not-for-profit credit unions have an unfair competitive edge.
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 their borrowers.
The ruling means that a federal credit union must limit its membership to employees of the single company that sponsors it - unless Congress responds to urgent pleas to change the 1934 law that created the financial institutions.
“This is a very nice birthday present,” said Michael Miller, president of Asheboro, N.C.-based First National Bank & Trust Co., a plaintiff in the case who turned 47 Wednesday.
The bank has been fighting for more than seven years to curb the growth of nearby AT&T; Family Federal Credit Union, whose 163,000 members include not only AT&T; workers but also soda bottlers, cigarette makers and concrete pourers.
“This means the unbridled growth of credit unions has been checked somewhat,” Miller said.
But credit union leaders claim the ruling could strangle them. They had been banking on getting members from among the 62 million people who work for companies too small those with fewer than 500 employees to start credit unions of their own. “If you can’t grow, you simply die a slow death,” said Ken Robinson, president of the National Association of Federal Credit Unions.
In fact, in the mid-1980s, many credit unions began offering membership to more than one company in order to remain healthy during a time of corporate failures, downsizing and mergers.
Since 1982, the nation’s 3,600 federally chartered credit unions have added as many as 20 million new - and now “illegal” - members in this way.
Banking leaders say they don’t plan to force any credit union members to close their accounts, although it is up to the lower courts to interpret the Supreme Court ruling.
“Our intent is not to create credit union widows or orphans,” said Monique Hanis of the Independent Bankers Association.
Wednesday’s ruling also does not directly affect the 4,600 state-chartered credit unions. But “what happens on the federal level quite often becomes the norm at the state level,” said Daniel Mica, president of the Credit Union National Association. “Everyone is watching.”
If so, the next place they will be looking is Congress.
Hearings start March 9 before the House Banking Committee on a bill to allow credit unions to expand, in effect reversing the Supreme Court decision. That bill got a boost Tuesday when Speaker Newt Gingrich, R-Ga., signed on as a co-sponsor.
Banking leaders say they welcome the hearings as a chance to show that the biggest credit unions are acting more like banks and, like banks, should pay taxes.
“Were it not for this decision,” said bank president Miller, “I don’t think we would have had as good a chance of having a thorough look at the issue.”