Ruling Favors Banks Over Credit Unions

The Supreme Court cut credit unions to size yesterday. It ruled for bankers in a turf battle with the depositor-owned financial institutions. by saying the government wrongly let credit unions enroll members beyond what federal law allows.

However, the 5-to-4 ruling is not expected to cause changes for most credit union customers. An official at the American Bankers Association (ABA) said only the biggest credit unions will be affected - those which have expanded well beyond the employees of their original corporate or industrial affiliation. The court sent its decision back to a district court to decide on remedies.

Credit unions came to the United States from Germany in the early 1900s. They were defined in Massachusetts as "a cooperative association formed for the purpose of promoting thrift among its members." Member deposits finance member loans.

The justices threw out a 15-year-old government policy that has let credit unions accept millions of new members from outside traditional membership pools.

That policy is contrary to Congress's intent as expressed in the federal law, Justice Clarence Thomas wrote for the court.

However, legislation has been proposed in Congress to retroactively authorize such expansions in credit union membership. The bill, introduced in the House, already has 137 sponsors, notes Robert Kimmett, of the Massachusetts Credit Union League.

Today's decision upholds a lower court ruling that the Clinton administration had said "threatens nationwide instability and losses in the credit union industry."

Bankers have asked a lower court to force credit unions to drop millions of members who signed up during the last 15 years under the broader membership rule. The ABA holds that credit unions have an unfair tax advantage over banks.

"Because we conclude that Congress has made it clear that the same common bond of occupation must unite each member of an occupationally defined federal credit union, we hold that the [government's] contrary interpretation is impermissible," Thomas wrote for the court.

His opinion was joined by Chief Justice William Rehnquist and Justices Anthony Kennedy, Ruth Bader Ginsburg, and Antonin Scalia.

Dissenting were Justices Sandra Day O'Connor, John Paul Stevens, David Souter, and Stephen Breyer. They contended the banks lacked legal standing to sue.

THE ruling affects almost 3,600 federally chartered credit unions that hold $132 billion in deposits from more than 32 million members. State-chartered credit unions are not affected.

Credit unions offer many of the same consumer services as banks but can make better deals on loans and savings rates because they don't pay federal taxes.

The 1934 Federal Credit Union Act says membership "shall be limited to groups having a common bond of occupation or association" or to groups in a geographical area.

In 1982, the National Credit Union Administration expanded its definition of "common bond." Small businesses that lacked enough workers to form their own credit unions were allowed to join existing credit unions, so long as each group of employees had its own "bond."

Government officials say that rule has let credit unions add to their membership rolls about 15 million people, mainly from businesses too small to form their own credit unions.

* Associated Press wire reports contributed to this story.