Credit Unions Dealt Legal Setback in Battle With Banks

American banks have won a stunning legal victory against credit unions that is being compared to mighty Goliath beating lowly David.

At issue is whether nonprofit credit unions, which provide low-fee banking services to millions of Americans, will be forced to tighten the definition of who can join, or hold accounts.

Credit unions, which traditionally restricted membership to people engaged in a similar occupation - have since the 1980s been allowed to take on customers who do not share a "common bond," such as the same job, employment at the same company, or some other shared interest.

Reversing that trend, Judge Thomas Penfield Jackson in Washington said Friday that the federally regulated credit unions may not admit members who do not share a common bond. The issue is now expected to be taken to the US Supreme Court.

If the US District Court decision is upheld, some 3,500 of the nation's 7,000 federally regulated credit unions might be forced to sever ties with millions of their members. "Some 10 million to 12 million account-holders might be affected," says Jerry Karbon, a spokesman for the Credit Union National Association Inc. (CUNA), a trade group in Madison, Wis. In all, credit unions have 71 million members.

In addition, a decline in members may mean "costs might go up for services now provided by credit unions," says Gary Schatsky, president of Independent Financial Counselors, a financial planning group based here. He says some credit unions might even be forced out of business.

For a host of reasons, not the least of which involve relatively low costs on services such as loans, checking fees, and ATM card charges, plus relatively high interest rates on savings, credit unions have become the bete noire of the US banking industry. Even as many banks have been forced into mergers and consolidations in recent years, credit unions have continued to expand, adding millions of members.

Many have been able to join because of the looser policy on membership begun in the 1980s by the federal agency overseeing credit unions, the National Credit Union Administration (NCUA).

The American Bankers Association, the main trade group for commercial banks, argues that credit unions have also benefited from special regulatory and legislative tax advantages that allow them to keep costs down - advantages that commercial banks say are unfair.

At the end of 1995, credit unions held about 6 percent of total assets held by financial institutions in the US. Commercial banks held about 80 percent of total assets.

Last week's complicated decision combined two prior court cases brought by banking groups, one involving an AT&T credit union in North Carolina. Judge Penfield issued an injunction against the NCUA to prevent its occupation-linked credit unions from adding members who do not share a "common bond."

Credit-union groups are seeking clarification of the ruling. They will meet with the District Court judge today. If the groups lose an appeal to the high court, they will attempt to win legislative backing in Congress. The ruling does not immediately affect 1,700 state-chartered credit unions.

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