Banks Win Court Fight Against Credit Unions
Soaring banks fees, coupled with soaring bank profits, have sent consumers searching for savings alternatives. Thanks to a recent Supreme Court ruling, the search just got tougher.Credit unions, a low-fee alternative to banks, suffered a setback last month as the Court, in a 5-4 ruling, sided with banks who sued to limit credit union membership. Under the ruling, 10 million Americans could be dis-enrolled from their savings institution of choice.Here's how it happened: credit unions are member-based institutions. Since 1982, the National Credit Union Administration (NCUA), charged with regulating the industry, has allowed credit unions to expand their membership. Rather than just serving a single group, for instance the employees of a single corporation, they could encompass two or more unrelated groups.The Court's ruling, however, says the NCUA misinterpreted federal law, and that all members of a credit union must have a single common bond. The decision is quite a gift for the banks. While credit unions represent only 2 percent of the finance industry, ongoing expansion would have provided some attractive competition -- credit unions tend to charge lighter fees for checking services and credit cards. The banks say that credit unions have an unfair competitive advantage; after all, credit unions, as not-for-profit cooperatives, don't pay taxes; they're also not subject to the Community Reinvestment Act (CRA), which forces banks to put dollars back into their immediate communities.Credit union defenders say there's a reason for this. "Banks got caught not serving their whole customer-base," says Bill Hampel of Credit Union National Associates (CUNA), a Washington, DC-based trade group. "That is why CRA was imposed on them to compensate for that."Credit unions, he argues, are by definition supporting their customer base. "They cannot take funds out of the community that represents their membership," he told the "News Reporter". "They can only accept deposits and make loans back to their field of membership. They can't go and make loans to hydro-electric projects in China or shopping center construction."Who Gets a Choice?How large that membership can get is exactly what the banks -- and Supreme Court Justice Clarence Thomas in his majority decision -- are concerned about.Right now 73.8 million Americans are members of credit unions, and CUNA estimates that another 70 million were eligible -- that is, until the Supreme Court decision. It takes at least a few thousand members for a credit union to be viable. So employees of a small firm, with just a few hundred workers, could never successfully form one -- unless they linked up with a larger group. But that practice -- joining together two separate groups in a single credit union -- is exactly what is now prohibited under the terms of the Supreme Court decision.Since some 62 percent of Americans work for small businesses, many consumers will now find their choices in the financial marketplace even more restricted than before. And potential credit union members won't be the only ones to suffer, according to Ed Mierzwinski of U.S. PIRG, a national consumer group. Competition from credit unions forces "fee-gouging banks to temper their thirst to charge even higher fees," he says. "Unless Congress acts to overturn the court ... all Americans will be punished with higher bank fees."Just such an effort is underway in Congress. HR 1151, a bill to re-write federal credit union law to allow continued membership expansion, was being debated in the House Banking Committee as the "News Reporter" went to press.Sidebar OneCredit UnionsWhat's a Credit Union?Credit unions are cooperative financial institutions that accept savings from and make loans solely to their members.Who runs it?Credit unions are administered by a volunteer board, elected by members on a one person-one vote basis. The members are those that have deposited money with the credit union.What's the advantage?Because credit unions, as not-for-profits, do not pay taxes, and because they do not have to pay dividends to stockholders, they are able to charge less in banking fees. Can anyone join?No. Most credit unions are organized to serve people in a particular community, employees of a particular company, or members of a particular organization or association. A recent Supreme Court ruling would limit each credit union to serving a single group.