THE decades-old legal battle between credit unions and commercial banks is entering a new round. Last week, a federal appeals court in Cincinnati heard a challenge regarding expansion of a credit union in Portland, Mich.
While a decision in that case is not expected for several weeks, credit unions won the previous round in the fight last month. United States District Judge John Pratt ruled against the American Bankers Association (ABA) and five North Carolina banks, which sued the National Credit Union Administration (NCUA), the federal agency that governs the country's 12,733 credit unions.
With $301 billion in total assets, these credit unions are tiny compared with the $3.6 trillion in assets controlled by the 10,715 commercial banks in the US. But credit unions are growing rapidly. Since 1983, US credit unions' assets have tripled.
Gail Liberman, editor of Bank Rate Monitor, a trade publication, calls credit unions ``a major threat to the banks. It used to be that banks' chief competitors were savings and loans. Now they are credit unions.''
The North Carolina lawsuit tried to restrict membership in the AT&T Family Federal Credit Union in Asheboro, N. C. Four years ago, the NCUA gave the credit union permission to expand its membership to include employees of a Duracell Inc. plant and a Coca-Cola Company bottling plant.
The bankers said NCUA's approval of the expansion violated the ``common bond'' provision of the Federal Credit Union Act of 1934. The law restricts credit-union membership to ``groups having a common bond of occupation or association, or to groups within a well-defined neighborhood, community, or rural district.''
On Sept. 15, Judge Pratt determined that while the common-bond provision was ``ambiguous,'' the NCUA's interpretation of the statute was reasonable. ``Until Congress addresses this matter,'' Pratt concluded, ``the Court will defer to the agency's interpretation of the statute at issue.''
On Sept. 23, the ABA filed an appeal of the decision. A handful of other challenges to the common-bond provision also are pending. In all, five lawsuits have been filed against the NCUA. Separately, banks in Nebraska, Utah, and Maine are asking state regulators to nullify credit-union expansions in their states.
One suit against NCUA was filed July 28 by the Texas Bankers Association and five Houston-area banks. The banks are suing over expansion of the Communicators Federal Credit Union in Houston, which was given permission by the NCUA to expand its membership to include all people over the age of 50 living within 25 miles of the facility. Like the North Carolina suit, the Texas bankers say the expansion should be disallowed because it violates the common-bond requirement.
``Credit unions are the only financial-services providers that are exempt from federal and state taxation,'' says Robert Harris, president of the Texas Bankers Association. ``If you have to compete with an entity that is not subject to federal taxation, there is an obvious competitive advantage. It's a turf war and what's driving it is the issue of taxation.''
But Bob Loftus, a spokesman for the NCUA, calls the lawsuits ``ongoing whining by banks that credit unions are giving them too much competition.''
``If banks want to compete with credit unions, let their customers run the bank,'' he says. ``Banks could have the same advantages that credit unions have if they gave up their profits and stopped paying their directors.''
The credit union concept began in medieval times when Italian farmers formed ``poverty banks.'' They became a common part of trade guilds in Europe in the 1800s, and the idea was brought to Canada in 1900. The first credit union in the US was established in 1909 in Manchester, N.H., for French garment workers who were unable to get credit.
Over the past few years, credit unions have been growing at about 10 percent a year, while banks have been struggling to recover from the failures and bailouts of the 1980s.
Recent reports show that the banking industry is enjoying a rebound, however. From April to June, commercial banks earned $11.2 billion, an increase of 8.5 percent over 1993. It was the second-best quarter ever recorded. For the first six months of 1994, US credit unions earned $1.7 billion, a decline of 12 percent from a year ago.
It is not known when the appeal on the AT&T case will be heard. ABA officials say they expect actions on the appeals over the next few months, and industry observers predict that those appeals or another challenge to the common-bond provision will ultimately be decided by the Supreme Court.