Credit unions reel from ruling in Fed case

CNY Business Journal (1996+), Nov 25, 1996 by Hadley, Mark

Banks have finally won a round in their battle to slow the growth of credit unions in the U.S., and the credit . unions are angry and more than a little nervous.

The battle was fought in the U.S. District Court of Appeals in Washington, D.C., and the issue was interpretation of the Federal Credit Union Act of 1934, which, bankers say, required that credit unions serve only membership groups that share a substantial common bond, such as working at the same company or affiliation with the same organization. The credit unions' interpretation of that requirement has expanded dramatically in recent years, to the point where many credit unions have been recruiting businesses to join and offer their employees membership,

That interpretation has been upheld in several federal-court cases around the country in recent years, but in the July ruling by the Court of Appeals in a suit filed by First National Bank, of Winston-Salem, N.C., against the AT&T Family Credit Union in North Carolina. in which three of 10 judges on the court reviewed a decision, the appellate court ordered the case sent back to the District Court in Winston-Salem. N.C. for action.

There, Judge Thomas Penfield Jackson decided to take drastic action in putting the appellate court's ruling into effect. He ordered federally chartered credit unions to stop adding sponsoring groups (employers whose employees can become members) unless the employers meet the definition of "common bond." That would mean that all the members would have to work for the same employer or do the same kind of work -- such as teachers, hospital workers, or Chrysler employees, for example.

Judge Jackson also ruled that the credit unions could no longer enroll members from current sponsoring organizations which don't share the original "common bond" that the credit union was formed to serve.

The American Bankers Association (ABA), the Independent Bankers Association of America (IBAA), and the American Community Bankers (ACB) are relishing Penfield's action, which they say is simply enforcing the 1934 Federal Credit Union Act as it was written.

The credit unions, represented by the National Association of Federal Credit Unions, the Credit Union Association, and the Credit Union National Association, plan to appeal the appellate court's ruling and Judge Jackson's action.

Charles M. Whitney, president of the New York State Credit Union League (NYSCUL) calls the decision "a stunning blow to Americans' financial freedom." And that is an indication of the tack that the credit unions will take in working to rally public support to their cause. While local credit-union representatives note that public sentiment is not likely to have any impact on the appeal, mustering support now could give the credit unions momentum for pushing for legislative action, should they lose in their bid to have the case heard by the U.S. Supreme Court.

Mark Pfisterer. president and CEO of the Up State Federal Credit Union reports that the Federal Credit Union Administration, the federal agency regulating credit unions, is seeking a stay against enforcing the injunction. The credit-union associations are preparing to present their appeal to the Supreme Court as quickly as possible in order to get on the high court's 1996-1997 docket, according to Brenda Furlow. general counsel of CUNA.

While the associations have 90 days from the time of Judge Jackson's action to file their appeal, giving them until late January 1997 to prepare, Furlow adds that that would make it impossible to have the case decided during the court's current term.

Pfisterer notes that there is another similar case pending in the U.S. District Court in Cincinnati, Ohio. If that court rules in favor of the credit unions, Pfisterer believes it will enhance the likelihood of the Supreme Court hearing the case, in part because the ruling in the AT&T Family Credit Union case would contradict rulings in three other cases. In earlier cases from Montana and Utah district courts, the judges ruled that the banks had no standing to file the suits.

"Based on what has appeared in print from the Cincinnati case, it seems that the three judges who have looked at the case are leaning toward seeing this as a turf battle, and apparently they also don't believe the banks have a standing for their suit," Pfisterer reports.

The credit unions are certainly hoping that he is right. If he is not, however, credit unions are going to find continued growth difficult, and, indeed, may be facing a sharp decline in their membership and their asset and deposit base, according to Raymond Curtin, president and CEO of Empire FCU.

"We have been looking at our current membership and have found that there is still room to grow with our current members by building up the services that we already offer them or adding new services," Curtin says.

Pfisterer, however, fears that the banking associations are going to seek to have the judge's order applied retroactively.

"Right now, the court and the judge have said that we can continue serving our existing membership base, but if the banks seek to have the order applied retroactively, that means that all select employee groups [employers] and their employees would have to give up their credit-union relationships. We would have to notify everyone who is not part of the original sponsoring group to move their accounts, pay off their car and mortgage loans, and arrange financing somewhere else," Pfisterer warns.