Case Overview, Credit Union Regulation - Field of Membership Issues

This document provides background information and summarizes the debate over credit union membership. The links to the left will lead you to public documents that we have found.

           Credit unions were created to provide average, working Americans with low-cost banking services. Traditionally they were organized around specific workplaces: the employees of a government agency or a small college might organize one to provide themselves with such basic needs as a checking account or a savings account. The great advantage over a regular bank or savings and loan is that credit unions, by law, are nonprofits. Thus, they don't have pay out money to shareholders. They save in costs, too. For example, members of their boards of directors are not paid, and as nonprofits they do not pay taxes. Since credit unions can only serve their defined constituency--those at a particular workplace--their marketing costs are generally low. As a result credit unions can offer a little bit more interest on savings instruments and charge a little bit lower interest rate on loans than can banks.

           A major issue that emerged over the years is the expansion of credit union memberships, capitalization, and scope of services. Credit unions began to expand beyond a single site to multiple workplaces. The trade associations for credit unions began to encourage parties that came to them for help in forming new credit unions to instead affiliate with one that was already up and running in the same community. Over time, some credit unions became large financial institutions instead of the small "mom and pop" operations that are the engaging public image of these organizations. The increasing size of some credit unions has allowed them to expand the breadth of their lending and to offer services similar to banks. By one estimate, for example, 95 percent of large credit unions offer their customers credit cards.

           Not surprisingly, conventional banks cried foul. More accurately, small banks cried foul. (A large bank, like Citigroup, is focused on very large loans, ancillary businesses, and markets, in the U.S. and abroad. The scale of what they do is such that even large credit unions cannot compete.) But small banks, says one trade association lobbyist, "really care about credit unions because they're in a town" [competing against them]. As a lobbyist for banks complained, at this point the credit unions "can do everything, in essence, that commercial banks can do."

           The banks attacked in court and prevailed in NCUA v. First National Bank & Trust Co. A major focus of the litigation was what the banking industry saw as increasing permissiveness by the federal regulatory agency, the National Credit Union Administration (NCUA), in granting existing credit unions permission to expand to include new workplaces. In this way the banks hoped to keep credit unions small and, thus, to limit their services. This victory in the courts was eroded, however, by a law subsequently enacted by Congress that offered some guidelines on the size of new constituencies that can be absorbed by existing credit unions. The ambiguity of the congressional guidelines gave the NCUA the discretionary authority to define them more precisely. The banking industry again attacked the rules issued by the NCUA in court, but this time most of their arguments did not prevail. At the time of our interviews the NCUA was contemplating a further set of rules designed to further specify the matter of credit union expansion through the absorption of new workplaces or constituencies.