Legal Fray: Credit Unions Vs. Banks

WHAT do the Boston Symphony Orchestra, the United States Congress, and the Portuguese community in Cambridge, Mass., have in common? Their members have access to credit unions - not-for-profit financial cooperatives that offer the same services as banks to members joined by a common bond: occupation, community, or association. Commercial banks don't like the competition from these tax-exempt counterparts, which have been growing faster than banks over the last decade.

Last week, the American Bankers Association (ABA) filed suit against the National Credit Union Association (NCUA) in Washington, D.C., district court, charging them with disregard for the ``common bond'' requirement of credit unions. At issue is the AT&T family credit union in North Carolina, which recently added members from employees at unrelated corporations: Duracell Battery Company and Coca-Cola Bottling Company.

``This case is just part of a larger pattern that has been fairly standard practice for NCUA over the past several years,'' says ABA spokesman Brian Muys. ``We want to nip this common bond erosion in the bud.'' Across the country, 15,000 credit unions hold accounts for some 56 million Americans. Almost one-fourth of all credit unions consist of more than one group.

The lawsuit follows a period of strong growth for credit unions: their assets have risen at a faster rate than those of banks and savings-and-loan institutions, rising steadily at 12 percent a year for the last decade, (with the exception of 1989, when growth slowed to 7 percent), according to the Credit Union National Association (CUNA) in Madison, Wis.

Although credit unions do not pose a major threat to the commercial banking industry, holding only 6.4 percent of all US household savings, they have generally offered higher interest on savings and lower rates on loans than commercial banks.

``Our members, especially community banks, find it increasingly difficult to compete on this basis. We need to level the playing field,'' Mr. Muys says.

For several years, the ABA has tried unsuccessfully to get Congress to remove the tax exemption for credit unions. If the wealthiest credit unions (those with assets in excess of $10 million) were taxed, the federal government would reap $10 billion a year, Muys says.

The ABA also wants to see federal insurance funds of credit unions combined with those of banks and thrifts.

``Why are banks concerned about our `common bond' issue? They have their own problems,'' says CUNA spokesman Jerry Karbon. He notes that a 1982 regulatory change allowed consolidation of dissimilar credit unions in two cases: when companies go out of business, or when new companies have too few members.

`THE playing field is not level, but it is certainly not tipped in favor of credit unions. It's tipped in favor of banks,'' Karbon says.

Banks do a lot that credit unions can't: issue stock to raise money; make loans to commercial business, to developing countries, and for leveraged buyouts. Credit unions use deposits to offer loans to members to buy homes or cars.

Still, a recent General Accounting Office (GAO) study found that credit unions are more profitable than banks and thrifts.

``Credit unions run a very lean shop. You don't see perks for executives, like limos for the president,'' says Rob Kimmett of the Massachusetts Credit Union Association Inc., representing 300 institutions in the state. Most credit unions elect their officers, who work as volunteers.

The Bay State was the first to pass a law allowing credit unions, after the first American credit union opened in 1909 in Manchester, N.H., for French garment workers unable to get credit.

``Back then, people of average means and immigrants had no access to credit. Commercial banks did business only with businesses or wealthy people,'' Mr. Kimmett says. Credit unions allowed immigrant groups to pool their resources, and give loans to needy members.

The GAO and US Department of Treasury will issue a report early next year assessing the entire financial services industry. Even if changes are suggested for credit unions, it may be tough to get Congress to take action.

``We're up against very stiff opposition,'' Muys says. ``Congress has its own credit union.''