When it puts an end next month to what started as a semantic argument, the U.S. Supreme Court will decide whether some 17 million people across the country will lose their credit-union membership. If that happens, financial administrators warn, not only will customers--several hundred thousand of them here--have fewer choices about where to keep their money, but the financial industry will lose an important check on bank fees.
When it resumes work in January, the high court is expected to rule on how far credit unions--which, as nonprofits, are typically less expensive than banks--can extend membership. The decision will have wide-ranging implications for consumers and small businesses. "We could be forced to expel everyone who joined since 1982," explains Kevin Chandler, president of the Minnesota Credit Union Network.
The case, First National Bank and Trust Co. vs. the National Credit Union Administration and AT&T Family Federal Credit Union, centers on a clause in the 65-year-old law that created credit unions. Called the "common-bond" clause, it states that "federal credit-union 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." Up until 1982, this had been interpreted to mean that members of a credit union all needed to have the same occupation.
However, in the '80s, Chandler says, many credit unions watched as the employer or industry from which their members came went out of business. Faced with shrinking membership, the industry trade group, the Credit Union Administration, concluded that the word "groups" in the clause meant that multiple groups could join a single credit union so long as each group's members shared some common bond. Among other changes, the new policy allowed individual credit unions to admit small businesses that previously hadn't employed enough people to offer their workers credit-union services.
When the AT&T credit union adopted this policy, First National Bank and Trust Co.'s string of southern banks saw a drop in business. The bank sued in 1989, and has convinced a series of courts that the new definition of a credit union is illegal. If the U.S. Supreme Court ultimately rules in favor of the bank, credit unions across the country could have to expel every member who joined under the new rules, disallow any new groups, and return to their original policy of admitting only members from a specific occupational group. This could in turn force some credit unions out of business, says Greg Berry, vice-president of marketing for the U.S. Federal Credit Union, because the core group the credit union might have been built around might now be nonexistent.
Credit Union administrators believe the bankers' suit is motivated by greed. "They've had record profits each of the last six years," the Minnesota Credit Union Network's Chandler says of commercial banks. "Banks have 86 percent of the market in Minnesota alone and credit unions have only 6 percent. But banks are so greedy, so profit-driven that they try to drive their only little competitor out of business."
He and other credit-union advocates say that the nonprofits are the only reason bank fees haven't risen even more astronomically in recent years. Should credit unions lose the case, their administrators insist, consumers will be the victims. Big banks cost between 46 and 66 percent more than credit unions, according to a study recently published by the Minnesota Public Interest Research Group. Small banks charge less than large ones, the study concluded, while credit unions offered the best deal overall.
But to hear the bankers tell it, credit unions can afford to offer cheap accounts because of the tax exemption enjoyed by the nonprofits. This exemption adds up to a $1 billion-a-year subsidy to credit unions that is made up by all taxpayers, including banks, says Virginia McGuire, a spokesperson for the American Bankers Association. "If a credit union acts like a bank then it should be taxed and regulated like a bank," she says. "It's so ironic that credit unions talk about choice and a free market, yet what's so free market about $1 billion in subsidies per year?"
Credit unions aren't counting on the Supreme Court decision to preserve what they say is a critical low-cost substitute for banks' increasingly expensive services. In a preemptory move, credit unions have banded together to form the Campaign for Consumer Choice. The group is lobbying the House of Representatives to change the language of the Federal Credit Union Act, and has gathered support so far from some 150 representatives, including Minnesota Representatives Martin Sabo and James Oberstar. As a part of the drive, the Minnesota Credit Union Network is spearheading a petition drive at credit unions statewide.
If the court rules in the banks' favor, credit unions might succeed in convincing Congress to rewrite the 1934 law that created them to allow more than one group of members. But there's no guarantee that lawmakers would side with the organizations, especially given how little cash credit unions spend on lobbying compared to the mammoth commercial banking industry. According to the Washington, D.C.-based Center for Responsive Politics, during the '95-'96 campaign season the American Bankers Association contributed $1,298,850 to federal political campaigns. During the same election, the National Association of Federal Credit Unions spent just $66,700.
Berry likens the situation to David's battle against Goliath. With only 2 percent of deposits, credit unions are a small player in the financial world. Banks look at credit unions and see an easy target, he says. "But you know the story of David and Goliath and how that turned out. We'll have to wait and see."
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