Ruling could affect credit unions

Pauline Bell

Wednesday, Oct. 30, 1996 | 11:59 a.m.

The long-standing feud between banks and credit unions heated up this week when regulators advised federally chartered credit unions to stop enrolling members from unrelated companies.

The advisory will have an impact on Silver State Schools Federal Credit Union, but not as much as some others that have a larger membership from outside companies, said President Alan Pughes.

"It will reduce our ability to continue to serve groups counting on us for service outside of educational groups," Pughes said.

About 10 percent of Silver State's 33,000 members are from outside businesses such as medical offices, an electronics firm and a restaurant. The core membership is involved in the educational arena, he said.

The ruling won't have any effect on the 21,000-member Boulder Dam Credit Union, said manager Bill Ferrance. The Boulder City financial institution is a state-chartered organization and it also is designated as a community credit union that serves anyone who lives or works in Boulder City.

This week's advisory from the National Credit Union Administration came in the wake of a ruling in U.S. District Court last week that credit unions can't create new links with unaffiliated groups. The judge, Thomas Jackson, didn't address whether credit unions that already include unaffiliated companies could accept new members from those companies.

And, he didn't mandate revocation of existing credit union memberships by unrelated companies. He isn't likely to consider that matter until December at the earliest. In the meantime, the NCUA letter said credit unions can "continue to serve all their members."

The advisory could affect the 23 federally chartered credit unions in Nevada. The remainder of Nevada's 32 credit unions are state chartered and wouldn't be affected, said Glen Reese, consultant to the Nevada Credit Union League.

"We think it's kind of appalling. We don't think it (the decision) is well thought out. ... It has to do with the fact that banks feel credit unions ought to be taxed," Reese said.

Banks and credit unions have been at odds for about a decade as more banking customers defect to the member-owned institutions. In the past, banks have challenged credit unions' ability to issue checking accounts and lack of taxation, saying they allow the member-owned institutions a competitive advantage.

The latest ruling was counted as a victory for three banking groups which had sought nationwide application of an earlier court ruling prohibiting expansion of a credit union affiliated with AT&T Corp.

In the AT&T case, a three-judge panel on the appeals court said that every member in a job-based credit union must share a common characteristic. The court, however, ordered only a limitation on the AT&T credit union.

Jackson's ruling said the appeals court decision should apply to every credit union nationwide and ordered the NCUA not to authorize any job-related credit union to admit members who do not share a common bond with all other members.

Banks don't understand the structure of credit unions, Reese challenged. The member-owned financial institutions and their boards of directors serve without pay. All members share in the distribution of earnings which are based on deposits. Members pay taxes on the earnings. If earnings were taxed prior to being distributed, double taxation would occur, Reese explained.

Reese, Ferrance and Pughes agreed the credit unions, with 70 million members nationwide, eventually would prevail on the issue as they have on the taxation and checking account issues.

"I definitely believe that if the courts don't uphold the credit unions' position that Congress will," Ferrance said.

The NCUA and credit union representatives are planning to seek clarification of Jackson's order and then appeal the ruling, said a spokesman for the Credit Union National Association. Credit union organizations have estimated that retroactive application of the rule could cut off access to as many as 10 million potential credit union customers.

BLOOMBERG Business News contributed to this report.