Mr. Chairman and Members of the Committee, I am Bruce Jolly, an attorney practicing in the
Washington Office of the law firm of Shook, Hardy & Bacon L.L.P. I have been asked by the
Committee to review the legal issues raised by and likely consequence of the recent decision of
the Supreme Court in National Credit Union Administration v. First National Bank & Trust Co.,
et al., 118 S.Ct. 927, 1998 WL 75036 (U.S. Dist. Col.)(1998).
The Court, on February 25, 1998, by 5-4 vote, held that the banking industry had standing to
challenge the 1982 decision of the National Credit Union Administration (NCUA) interpreting §
109 of the Federal Credit Union Act (12 U.S.C. § 1759), the field of membership provisions.
That statutory provision requires that Federal credit union membership be limited to groups
having a common bond of occupation, association or to groups within a well-defined
neighborhood, community, or rural district. The Court's decision on the merits found invalid the
NCUA interpretation in Interpretive Ruling and Policy Statement (IRPS) 82-1 which allowed a
single Federal credit union to serve the employees of multiple employers even though not all
employers were engaged in the same industrial activity.
I regard this opportunity to appear today as a great privilege. This is an issue I have followed
with keen interest. My professional career as an attorney has included employment with the
American Bankers Association, The Independent Bankers Association, and of the Credit Union
National Association. My practice includes representation of both banks and credit unions as
well as a variety of other credit grantors.
My testimony, as suggested in the Committee's invitation, addresses the current status of the
Court's decision, the analysis of the various cases leading up to the Court's decision, the
potential impact on consumers if credit unions are forced to expel existing members or are not
permitted to accept new members from within the multiple fields of membership permitted under
the NCUA's ruling, the legal alternatives available to the National Credit Union Administration
in light of these Court decisions and the potential impact of various remedies available for the
A. STATUS OF CASE. If I may begin with a simple statement. There is an urgent need for
clarification by the Senate and House of the scope of § 109 of the Federal Credit Union Act.
Credit union members need to know whether they can continue to use their present credit union
or may join one of the 3500 affected by the Supreme Court's decision. At least once a day one
of our clients asks whether they should convert to another form? There is a lot of confusion that
review of the 1934 statute's language can resolve - one way or the other.
Supreme Court Decision. The Supreme Court's decision in National Credit Union
Administration v. First National Bank & Trust Company, et al., Id. (February 25, 1998), is an
unambiguous determination that the 1982 interpretation by the National Credit Union
Administration permitting a single credit union to include within its membership occupational
groups which were not similar is impermissible. [For ease of reference, this may also be called
the ATTF case] The Court's holding left no doubt that the language of 12 U.S.C. § 1759 did not
permit inclusion of dissimilar occupational common bonds under one Federal credit union
Merger of Troubled Institutions/State Chartered Credit Unions. I assume that the bankers will
not challenge the authority of the National Credit Union Administration to continue to merge
unlike common bonds of occupation in an emergency situation where the merger will prevent a
loss to the National Credit Union Share Insurance Fund (SIF). Further, the decision applies only
to Federal credit unions. Therefore, the forty-eight state acts are not directly affected by the
decision. Even so, there clearly may be collateral impact on state laws, such as New York's,
which include substantially similar language or are ambiguous.
District Court Action. The decision of the Supreme Court leaves in the hands of the District
Court for the District of Columbia primary responsibility for the implementation of the remedy
that it deems appropriate under the circumstances. I have shortened the history of the case here
to arrive at the discussion of the current status.
On October 25, 1996 the District Court, on remand from the Court of Appeals for the District of
Columbia, forbade the addition of (1) occupational groups to existing credit unions unless the
group to be added was similar to the "core" bond of the Federal credit union joined, (2)
prevented the addition of new members from non-core groups admitted under the NCUA policy
and (3) left open the question as to whether existing members admitted through non-core groups
had to be expelled and the field removed.
Judge Thomas P. Jackson in open court on October 31, 1996 clarified his Memorandum and
Order of October 25, 1996. He ruled that members could continue to be accepted from groups
previously added sharing a common bond but that no new members could be added from groups
that didn't share a common bond with the core field of membership.
On December 24, 1996, the Court of Appeals stayed a portion of Judge Jackson's ruling to
permit credit unions to continue to admit members from groups that did not share a common or
core sponsorship with the original field of membership of the credit union, if the additional field
of membership had been added prior to October 25, 1996. New non-emergency, non-core
additions were not permitted to Federal credit union charters under any circumstance.
The Court of Appeals Order specified that the parties were to brief their relative positions as to
the partial stay of the enforcement of the Order within 14 days after any Supreme Court ruling.
It is my understanding that the parties have agreed to extend that stay for 60 days to await
possible Congressional action. In other words, the parties have agreed that they would not seek
further clarification or implementation of the Supreme Court's ruling for 60 days to enable
Congress to address the definition of a field of membership of a federal credit union.
On March 10, 1998, The American Bankers Association, The Independent Bankers Association
and America's Community Bankers filed an amended complaint with the District Court stating
that they did not seek as relief the expulsion of any member admitted to a credit union through
group added to a credit union's field of membership under the 1982 interpretation by NCUA.
The current position of the litigation and its enforcement can be summarized as follows. First,
the National Credit Union Administration may not permit the addition of occupational groups to
the field of membership of a federally chartered credit union unless the occupational group to be
added would have met the criteria for such an addition established by NCUA and enforced by
NCUA prior to 1982. Second, a federally chartered credit union may continue to serve those
existing members of groups which do not share a common bond with the "core" field of
membership of the credit union. Third, a federal credit union may continue to add members from
any group approved prior to October 25, 1996, without regard to whether or not the people in the
group fit within the core field of membership of the credit union. However, this ability may be
curtailed or eliminated by the Court of Appeals of its own motion or by application of the parties
any time after the 60 day period expires. Fourth, NCUA may continue to add non-similar groups
to the field of membership of existing credit unions in emergency situations where it is necessary
to continue to provide credit union services to prevent a loss to the insurance fund. Finally,
having stated all of this, the District Court is not bound by the limited motion for relief filed by
the bankers in their March 10th amended complaint. It could, unless further restrained by the
Court of Appeals, of its own motion, order divestiture of all occupational groups added that did
share substantial identity with the "core" field of membership of the Federal credit union.
B. BACKGROUND OF THE CASE. The Supreme Court focused only on the question of
whether the banks had standing to challenge the 1982 NCUA interpretation of the field of
membership provisions of the Federal Credit Union Act and the merits of that determination.
Most of the oral argument before the Court dealt with the standing issue.
Standing. In determining that the banks were indeed within the zone of interests to be protected,
and thus finding standing to challenge the decision, the Court articulated very clearly the
legislative issue confronting Congress in 1934 and in 1998.
The issue was whether the common bond requirement in the Federal Credit Union Act was a way
of limiting who could join a Federal credit union or an organizing principle. The now familiar
excerpt from the membership provisions of § 109 of the Federal Credit Union Act, 12 U.S.C. §
1759, is as follows:
"Except that federal credit union membership shall be limited to groups having a common bond
of occupation or association, or to groups within a well-defined neighborhood, community, or
The majority felt that these were words of limitation emphasizing the word limited in their
opinion. Expansion beyond the principles of the common bond laid down in 1934 affected other
groups, caused injury and conferred standing on them to challenge the NCUA interpretation even
though their rights as banks to do the banking business for which they were chartered was not
directly adversely affected.
The dissent argued that the "common bond requirement limits a credit union's membership, and
hence its customer base, to certain groups...."1998 WL 75036 at 21. As an organizational
principle, it was not designed to protect banks from competition but to give structure to the
Federal credit unions organized under the statutes authority. Banks might be injured by the
NCUA interpretation, but Congress did not intend to protect banks from competition by enacting
§ 109 of the Federal Credit Union Act. Therefore, banks, according to the dissent, were not
within the zone of interests to be protected by the statute, citing Lujan v. National Wildlife
Federation, 497 U.S. 871 (1990). The dissent concluded that the majority position "all but
eviscerates the zone-of-interests requirement,"1998 WL 75036 at 14, and argued that it
established a right of any party seeking to overturn a federal agency decision to bring suit if they
could establish economic injury without regard to whether or not the statute was designed to
protect the group seeking legal redress.
Whether the decision in this case opens the doors to broader challenge of agency decisions and
concurrently undermines the traditional deference given to the interpretations of statute by
federal agencies remains to be seen. Resolution of that question will not change the fact that the
1982 NCUA decision was overturned by the Supreme Court. There is no further opportunity for
Merits. As to the merits, the Court having looked to the wording of § 109 of the Federal Credit
Union Act asked whether Congress had , "directly spoken to the precise question at issue. If the
intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must
give effect to the unambiguously expressed intent of Congress." Citing Chevron U.S.A. Inc. v.
Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) at 843-844.
The Court concluded the words of the statute were without ambiguity and in passing that the
legislative history, "as both courts below" had found was "extremely murky" and a "slender reed
on which to place reliance."1998 WL 75036 at 14, fn 10, citing 95 F.3d at 530. The NCUA
interpretation made the term "common bond" surplusage when applied to a federal credit union
made up of multiple unrelated employer groups and violated an established cannon of
construction requiring that similar meaning be afforded the same wording when used within the
same section of a statute. 1998 WL 75036 at 12.
Background Leading Up to the 1982 NCUA Interpretation. As others have done, it is
appropriate to review the history leading up to the 1982 NCUA interpretation. In 1934, a credit
union pioneer, Roy Bergengren and Boston philanthropist, Edward A. Filene, banded together to
convince Congress to adopt the Federal Credit Union Act.
At the time of enactment, the United States was in the midst of tremendous economic turmoil
and embarked upon the statutory codification of the banking laws which largely shape financial
institutions today. Banks provided only limited service to consumer interests. Credit for the
common man and woman was not readily available from banks and the now ubiquitous checking
account did not exist.
Not unlike the ability of cooperatives to meet the need for power and telephone service in rural
communities, the credit union provided an alternative to the unregulated and often confiscatory
forms of credit which were then available to the working person. The cooperative form of saving
and lending at the state level had survived the ravages of the great depression and offered an
attractive alternative to the forms of credit available to the average American consumer at the
The battle for a Federal Credit Union Act, however, was not without its opposition. In fact, only
that portion of the Federal Credit Union Act that provided for chartering for individual
institutions organized under the provision of the now existing § 1759 was adopted. More than
forty years had passed before Congress adopted measures creating a central bank for credit
unions similar to the ones proposed as a separate title of the Federal Credit Union Act in 1934.
The growth of consumer credit after World War II found in credit unions a willing and available
source to which consumers began to flock. In the late '60s and early '70s, legislation was
enacted to modernize the credit union system, establish a separate regulatory agency and
ultimately an insurance fund for the shares in credit unions.
Changes were occurring in the industrial base of the economy as well. The certainty that a
company which employed a particular individual would be a part of a lifelong relationship,
which was unquestioned through our parent's generation, fell apart. The industrial base that
provided great strength to the credit unions organized along occupational common bonds
changed dramatically, whether through merger, obsolescence, bankruptcy, in some cases
deregulation or changing market demand.
Credit unions began to mature during this period. Larger personal loans, credit cards, mortgage
loans and share drafts were all authorized in legislation many of the members of this Committee
oversaw, whether in the House or Senate. The dark cloud of high interest rates also visited
credit unions in the period immediately preceding the 1982 ruling by NCUA. I remember
distinctly March 1980 when overnight federal fund rates exceeded 25% per day.
Although credit union portfolios, primarily shorter term loans, reset more rapidly than most bank
and thrift holdings, the reluctance of the volunteer boards to adjust rates sometimes affected the
speed of recovery and forced NCUA to look closely at the options available as plant closings,
liquidity pressures and the newly created SIF were sorely tested.. The testimony delivered by
others recalls the staggering challenge that faced federally-insured credit unions and the
regulatory agency responsible for their safety and soundness.
More to the point, the recently created insurance share insurance fund was sustained only by
annual premiums and approximately three years of retained earnings. Where a plant closed,
relocated or a corporate sponsor sought bankruptcy protection, the credit union in New York,
Ohio, Indiana, Illinois or Pennsylvania was faced with the possible default of hundreds, perhaps
even a majority of members with loans. The SIF could not, in my opinion, have withstood the
imminently foreseeable need to fund liquidations and support assisted mergers.
One apocryphal example demonstrates the operation of NCUA's pre-1982 field of membership
policy and its potentially disastrous effect. If a major tire manufacturer's plant in Akron Ohio
closed, it might cause 2,500 employees to lose their jobs - at least if they remained in Akron.
The credit union from which they borrowed would, of course, have an unprecedented number of
loan delinquencies and charge-offs. The credit union next door which fabricated steel used in
automobiles remained healthy and strong. Although on the face of it, it would be a logical
candidate for merger, the healthy credit union made automobile parts, not tires and, the merger
would not have been permitted until the merging credit union moved so far down the road toward
failure that it was in fact too late. And, where strong industry allegiance was involved, e.g.,
Ford and Chrysler, sponsoring employers would not consider supporting a merger between credit
unions serving their employees or the employees of their subsidiaries.
In 1982, there were two possible solutions. NCUA and credit unions could ask for federal
funding of the SIF to bring the level of the fund up to a minimum considered prudent or, NCUA
could fund the SIF from credit union resources and examine other ways to avoid liquidation.
Unquestionably, time was of the essence and a reexamination of the NCUA field of membership
authority was one approach that was an obvious possibility. In fact, my name, as Washington
Counsel, appears on CUNA's letter suggesting such a course of action.
The credit union industry chose to find a non-federal way to resolve what was, in no uncertain
terms, a daunting task. First, it supported the reexamination of the common bond principle to
allow non-similar fields of membership to merge (voluntary and emergency) into stronger credit
unions. Second, the credit unions agreed with NCUA to put one percent (1%) of their insured
shares directly into the SIF. The process of consensus building on the approach among credit
unions was critical and by 1984, largely completed without significant legislative involvement.
The impetus for the 1982 change in the field of membership policy by NCUA was not to
simulate growth. It was to preserve, in the most cost effective way, the new federal
insurance fund and Federal credit unions in particular.
Notwithstanding the substantive legal issues raised by the 1982 NCUA interpretation, too little
credit is given to this innovative demonstration of a federal - private partnership. With hindsight,
legislative clarification might have been desirable then, but in the same period of change --
authority for share drafts and opposition to withholding at source occupied considerable energy
and effort. With those battles concluded, the S&L and bank crisis took center stage and a
question over just who might join a particular credit union didn't seem terribly important.
Federal credit unions realized that many new employment opportunities were being created by
small employers which sought credit union services as a benefit, but absent 500 employees,
could not obtain a charter from NCUA. The 1982 interpretation permitted these employers to
align themselves with existing credit unions. The only other way to offer Federal credit union
services to employers with less than 500 employees was and is to convert to a community
charter. There has been a reluctance to take this step because Federal credit unions have been
able to follow core sponsor groups to new locations through the occupational form and, in
reality, the occupational base does provide a strength to the concept of membership that has not
been lightly discarded.
Growth, not entirely due the addition of unrelated SEGs occurred in the wake of IRPS 82-1 and
with growth resistance from "competitors" arose.
Challenge to Credit Union Fields of Membership is Not New. The first significant challenge of
which I am aware came in North Carolina well before the action filed in 1990. The North
Carolina Bankers Association unsuccessfully challenged the field of membership of the state
chartered credit union serving state, county and municipal employees. They then unsuccessfully
challenged (in Federal court in Raleigh, NC) NCUA's approval of a federal charter to serve
federal employees in the state on the basis of the close operating relationship with the same credit
union they had attacked under state law. Finally, in 1990, yet another group of North Carolina
banks and the American Bankers Association brought the action in the District Court for the
District of Columbia which was resolved by the Supreme Court's decision on February 25, 1998.
Consequently, the Court of Appeals and the Supreme Court are on solid ground when they
conclude that despite the passage of more than eight years from the 1990 filing of the suit against
AT&T and the 1982 NCUA interpretation of the field of membership provisions of the Federal
Credit Union Act, the issue had not been ignored.
Standing. Coming from a background with the Independent Bankers Association, where each
new initiative in the branching arena was tested in Federal District Court, I was intimately
familiar with the sensitivity of the banking industry to competitive concerns. A challenge to the
NCUA interpretation of § 109 was completely foreseeable. Further, having spent not an
inconsiderable amount of time evaluating, articulating and defending the IBAA's challenges to
the various branch banking issues raised by the decisions of the Comptroller of the Currency, I
was more than familiar with the standing questions raised at the highest court by the parties to
the AT&T litigation. Nor was I surprised by Justice Scalia's comment about the bankers
standing during the oral argument. He is an important voice on the issue of access to the Federal
courts standing. He said something to the effect of , "If it doesn't exist here, when does it
The Meaning of Common Bond. Eventually, the Supreme Court had to approach the very issue
the bankers had been pursuing for more than a decade - were the words of § 109 of the Federal
Credit Union Act correctly interpreted by NCUA in IRPS 82-1? The Court did not have to
consider whether the interpretation saved taxpayers money or permitted members of credit
unions which would have failed from losing services. It measures the actions taken by a federal
agency against the yardstick of Congressional enactment and determines whether those words,
crafted in 1934 include the meaning ascribed to them in 1982.
The Supreme Court simply and unequivocally said the words of § 109 did not permit the
construction given to them in 1982 by the National Credit Union Administration. The Court
concluded that "NCUA's current interpretation of § 109 is contrary to the unambiguously
expressed intent of Congress...." 1998 WL 75036 at 14.
C. A BRIEF OVERVIEW OF THE HISTORY OF THE CASE.
1. First National Bank & Trust Co. v. National Credit Union Administration, 772 F. Supp. 609
(D.D.C. 1991). AT& T Family Federal Credit Union (ATTF) began as a credit union serving the
employees of a Western Electric subsidiary in Winston-Salem, North Carolina. As noted by the
Supreme Court, the 1982 interpretation enabled ATTF to add Lee Apparel Company, the Coca-Cola Bottling Company, the Ciba-Geigy Corporation, the Duke Power Company and the
American Tobacco Company to its field of membership. 1998 WL 75036 at 4.
These new members clearly did not belong to the same occupational group as the employees of
AT&T (there are many separate credit unions serving AT&T subsidiaries throughout the United
States) located in Winston-Salem, NC. Nonetheless, the District Court held that despite claims
of competitive injury, the purpose of the statute enacted in 1934 was to "establish a place for
credit unions within the country's financial market, and specifically not to protect the
competitive interest of banks." 772 F. Supp. at 612. The court also found the banks were not
"suitable challengers" under the controlling standing cases for the District of Columbia.
2. First National Bank & Trust Co. v. National Credit Union Administration, 988 F.2d 1272
(D.C. Cir. 1993), cert. denied, 510 U.S. 907 (1993). The Court of Appeals reversed the District
Court. It agreed that the Congress in 1934 did not intend to shield banks from competition and
therefore were not "intended beneficiaries" of § 109 of the Federal Credit Union Act. However,
applying the prudential standing cases Investment Company Institute v. Camp, 401 U.S. 617
(1971), and Clarke v. Securities Industry Assn., 479 U.S. 388 (1987), the appellate court
concluded that the banker's interests were sufficiently congruent with the interests of § 109's
intended beneficiaries to make the bankers suitable challengers to the NCUA's chartering
decision. The remand was a direction to the lower court to reach a decision on the merits.
3. First National Bank & Trust Co. v. National Credit Union Administration, 863 F. Supp. 9
(D.D.C. 1994). On remand, the District Court examined whether Congress had spoken directly
to the precise question - whether the same common bond of occupation must unite members of a
federal credit union composed of multiple employer groups. See, 863 F. Supp. at 12. It found
the language of § 109 ambiguous and without clear direction on the issue presented and granted
NCUA's motion for summary judgment. It did not explore the question of the reasonableness of
NCUA's 1982 interpretation because the bankers had not "seriously argued" that the
interpretation was unreasonable.
4. First National Bank & Trust Co. v. National Credit Union Administration, 90 F. 3d 525
(D.C.Cir. 1996). On July 30, 1996, the Court of Appeals for the District of Columbia again
reversed the District Court. It found that the District Court had not correctly applied the first step
of ChevronU.S.A., Inc., v Natural Resources Defense Council, Inc., 467 U.S. 837
(1984)(Chevron requires a two step analysis to ascertain (1) whether the Congress had spoken
directly to the precise question of the statute's intent, and if so, apply the law. If not, (2)
whether the interpretation was reasonable.). According the appellate court, Congress had
unambiguously indicated that the same common bond must unite members of a federal credit
union which was composed of members of multiple employer groups. See 90 F.3d at 527.
In a line of reasoning adopted by the Supreme Court, the Court of Appeals concluded that
"because the concept of a 'common bond' is implicit in the term 'group,' the term 'common
bond' would be surplusage if it applied only to the member s of each constituent 'group' in a
multiple-group federal credit union." See 90 F.3d at 528. As noted elsewhere in this testimony,
the opinion also stated that NCUA's interpretation of the word "groups" in § 109 as it applied to
occupational and associational fields of membership was not interpreted to permit "community
credit unions" to include multiple geographically defined credit unions in the same common
bond. The inconsistent interpretation of the same word in the same section was, according to the
Court of appeals, a further flaw in the NCUA decision reflected by IRPS 82-1.
5. Memorandum and Order of the U.S. District Court for the District of Columbia, October 25,
1996. Constrained by the holding above and moved by other factors evident in the order, the
Judge Jackson foreclosed further additions to Federal credit union fields of membership absent
common ownership of the sponsor group to be added, e.g., a newly acquired subsidiary,
similarity of occupational group with the core field of membership or an emergency situation.
Except for the partial stay of the Order entered by the Court of Appeals for the District of
Columbia on December 24, 1996, no new members could be added from non-core groups added
to a Federal credit union's field of membership under NCUA IRPS 82-1.
The Court of Appeals decision and the Memorandum and Order entered by the District Court left
little for the National Credit Union Administration to do but to appeal to the Supreme Court.
6. National Credit Union Administration v. First National Bank & Trust Co., et al., 118 S.Ct.
927, 1998 WL 75036 (U.S. Dist. Col.)(1998) (February 25, 1998). As noted, the Supreme Court
adopted the approach taken by the Court of Appeals. It found that the bankers were within the
"zone of interests" to be protected by the field of membership provisions of the Federal Credit
Union Act. The majority of five justices concluded that § 109 limits the markets a Federal credit
union may serve thereby conferring on the bankers "prudential standing under the APA
(Administrative Procedure Act) to challenge the NCUA's interpretation." Id. at 6. The court
noted that "[B]ecause federal credit unions may, as a general matter, offer banking services only
to members, ... , § 109 also restricts the markets that every federal credit union can serve.
Although the markets need not be small, they unquestionably are limited.... Thus, even if it
cannot be said that Congress had the specific purpose of benefitting commercial banks, one of
the interests 'arguably ... to be protected' by § 109 is an interest in limiting the markets that
federal credit unions can serve." Id. at 9.
The dissent strongly criticized the approach taken in the majority opinion. It argued that every
litigant who establishes an injury in fact will automatically satisfy the zone-of-interests
requirement, rendering the zone-of-interests test ineffectual. Id. at 14 (emphasis supplied). It
compared the result with other prior cases in which standing was not found and concluded that,
in fact, under the test established by the majority opinion, those cases would now be decided
differently, citing Lujan v. National Wildlife Federation, 497 U.S. 871 (1990). Whether this
follows is of concern to the courts but not of importance to the future of the common bond
concept for Federal Credit Unions.
D. POTENTIAL IMPACT OF SUPREME COURT DECISION ON CONSUMERS. What
is a Common Bond? As discussed above, the Supreme Court decision hinged on the standing of
the bankers to challenge the 1982 decision of the National Credit Union Administration (IRPS
82-1). Although cast in terms which have meaning far beyond that single set of facts, like
"zone of interests" and "interests 'arguably ... to be protected' by statute", 1998 WL 75036 at 14,
the real focus was on the intent of § 109 of the Federal Credit Union Act.
Were the words in the section designed to limit those who might join a Federal credit union
(majority at 9), or were they the statement of an "organizational principle" (dissent at21).
The majority concluded that these words were "limit the markets that credit unions can serve,"
thereby giving the lower courts and bankers an opportunity to order NCUA to unscramble the
egg. Id. at 9. That is, the lower court could, if it were so inclined, order NCUA to require the
divestiture of all fields of membership that were added after the 1982 IRPS # 82-1 to a
continuing Federal credit union's if the addition was not the result of (1) an emergency situation,
or (2) one which shared a readily identifiable common thread with the continuing credit union.
Unscrambling the Egg. The chaos an order to completely unscramble the egg would create is
obvious. Virtually every employee working for an employer with less than 500 employees
would risk losing credit union services. That may well cover the vast majority of fields added
under the 1982 policy.
Credit unions facing a particularly difficult time are those which have had an original sponsor
"disappear" whether through merger, bankruptcy, plant relocation or technological obsolescence.
They may be quite healthy but can not find a "core" field of membership. It no longer exists.
I worked with a credit union in Florida which, facing the prospect of the trucking company it
served declaring bankruptcy after deregulation, built its capital to 18% of shares and added select
employee groups to offset the potential loss of the sponsor. It was as prepared as it could be for
the change. Although it still serves members of the original bond, what does it do now, if it at
some point must divest these additional groups?
Things Change. The ruling leaves unanswered a host of other troubling questions. Two
examples are offered. A common thread would exist under both the Court of Appeals decision
and that of the Supreme Court where the employee group was owned by a common corporate
sponsor even though engaged in a different line of manufacturing, e.g., hotel operation and food
preparation - Marriott. Likewise, the municipal employees of several jurisdictions might band
together in a single Federal credit union although the sponsoring employers would be both
politically and economically distinct.
Each meets the Supreme Court's test for an occupational common bond. The line drawn,
however, does not provide guidance in the event Marriott sells the food service unit or one of the
municipal units is merged into a different governmental unit with its own Federal credit union.
Must the existing members lose their membership in Marriott's credit union. Why?
That illustration highlights the use of the common bond concept as one of limitation. As the
Wall Street Journal or the business section of any daily newspaper illustrates, things change and
the rules, whether established in 1934 or 1998 have to allow sufficient room to accommodate that
Is there a Number of Employees of an Employer that Should Trigger a Separate Credit Union.
Occupational based fields of membership work when there is a level of support from the sponsor
employer. There are some companies which don't have credit union services that may be large
enough to support a credit union. It is much easier to work with an existing credit union which
can provide a full array of financial services to the employees from the outset.
Should a separate credit union be required? At what size? And would it be possible for existing
credit unions to provide necessary services under contract to facilitate the organization of these
credit unions. Absent clear authority, I would expect a further challenge by the bankers to such
Bankers Draw a Practical Line. The amended complaint March 10, 1998 asking that any relief
that the District Court might grant not include any requirement that any member be expelled from
his or her credit union offers limited relief for existing members of Federal credit unions. It does
not eliminate the need for a clear statement of Congressional policy on the permissible scope of
Federal credit union membership because the court is still being asked to preclude a credit union
from adding new members from fields of membership added under the 1982 NCUA
interpretation of § 109 of the Federal Credit Union Act. District Court Judge Thomas Pennfield
Jackson's October 25, 1996 Memorandum and Order and confirming October 31, 1996
statements in open court make clear the that Federal credit unions "cannot continue to enroll
new members who are members of disparate groups." Transcript at 3, line 6.
The Court of Appeals on December 24, 1996 stayed enforcement of the portion of the order
which prevented the addition of new members from "disparate groups." The future of that partial
stay is once again in the hands of the Court of Appeals. As noted earlier, the original order
required the parties to brief the status of the stay within thirty (30) days of the Supreme Court's
resolution of the petitions for certiorari. As noted above, I understand that the parties have asked
that the further proceedings be postponed for 60 days.
Impact. If the partial stay is lifted, in those Federal credit unions whose "core" field of
membership no longer exists, the credit union's death warrant is signed. It will no longer be
able, in current form, to add any new members. I can not determine the number that would be so
affected, but I suspect NCUA may be able to do so. Clearly, the numbers would be higher in
states where the industrial base eroded in the economic turbulence of the late 70s and early 80s,
e.g., northeast and Midwest.
Other Federal credit unions whose "core" sponsor still provides employment within the
community served will see a gradual erosion of membership. But of greater consequence,
employers whose new and existing non-credit union member employees are denied membership
will eventually withdraw support, whether in the form of automatic payroll deposit or space in
buildings. This is a very serious reality. Occupationally based credit unions are supported by
employers because they do provide a benefit, even if it is just in limiting the time it takes to cash
a paycheck or cash a personal check.
The ability to provide an employer supported credit union helps solidify a workforce. For
example, my parents are preparing to move into a continuing care facility. It has about 500
residents and about 200 employees. Many of its employees are new immigrants to the United
To stem the turnover rate, the facility has established a "university" employing the residents to
teach the employees everything from English to high school math. But what captivates the
facility is the possibility that it can sponsor a credit union for the employees to use for their
lending and savings needs. It could serve as a training ground for family finances and perhaps,
eventually, even the first home.
My parents are net savers but the convenience of a financial institution on premises would be
clear. Ideally, a board, credit and supervisory committees composed of both the residents and the
employees would create a better situation for all involved. All but one, as required by the
Federal Credit Union Act, would be volunteers.
The concept, though sound, can not get off the ground because the facility, seeking just this type
of benefit, sought out and was added to the field of membership of an existing credit union.
Now, with the potential lifting of the stay, new residents and employees would not be able to join
the credit union which has the facility within its field of membership and the facility, even if it
did get the blessing of NCUA and the credit union in whose field it now is included, would be
hard pressed to support the level of services that would make the effort worthwhile to the
residents and employees.
As I was preparing for this hearing, I received a call from a government employee based credit
union located in a middle Atlantic state. They were asking advice on whether they should
continue to spend money to support and grow the member base that they had added in a low
income designated community which NCUA had approved before the October 25, 1996 District
Court order took effect. They simply did not know and I could not tell them whether they would
be able to keep this field within their common bond.
To summarize, it is my belief that the ruling, if unchanged by legislation, will not stimulate the
formation of new Federal credit unions. There simply aren't that many employers with more
than 500 employees without their own occupationally based credit union. For credit unions
which added fields under the 1982 NCUA IRPS, there will be a gradual winding down of
involvement with those credit unions that may no longer add new employees or members from
those fields. Finally, there will be significant pressure to convert to either a community based
charter or another form of ownership.
E. LEGAL OPTIONS REMAINING FOR NCUA. It is important for NCUA to proceed
cautiously in dealing with the challenges that confront it in light of the Supreme Court's
determination that the 1982 interpretation of § 109 of the Federal Credit Union Act was invalid.
It may not have the chance to do so.
If the Court of Appeals lifts the partial stay on the District Court's order and the District Court
requires the expulsion of members who are not part of the "core" common bond and who joined
the credit union while the stay was in effect, NCUA will be faced with sorting through each of
the fields of membership added since 1982 and determining (1) whether the field was within the
credit union's "core" field or not, and (2) ordering the credit union to stop serving those member
whose non-core field was added.
If the Court of Appeals makes the stay permanent or, directs the District Court to enter its own
order in conformity with the stay, the immediate enormous dislocation and urgent need for
alternative approaches to membership may be avoided. Nonetheless, the inevitable transition
summarized above will commence.
In the broadest fashion, NCUA has three alternatives. The first would be to authorize common
bonds along occupational lines, e.g., teachers, government workers and so on. The Court of
Appeals suggested that such a construction might pass muster under Chevron -- "Indeed, the
agency might define an occupational group differently, e.g., all workers within the same trade...."
90 F.3d 525 at 529. The Supreme Court intimated the same result when it stated that
"[A]lthough these markets need not be small, they are unquestionably limited" in discussing the
fact that a Federal credit union serves members, not the general public. 1998 WL 75036 at 9. A
limitation on size could, but need not, be administratively determined by a demonstrated ability
to serve these groups using technology, physical locations and shared facilities.
A practical and cautionary note is offered here. So long as the purpose of § 109 of the Federal
Credit Union Act is viewed in terms of limiting membership, any alternative which may exist is
subject to challenge. Challenge because, as the Supreme Court recognized, one occupational
common bond could be fashioned to which the "employees of every company in the United
States" would be included. Id. at14. Where to draw that line is the task.
If the NCUA objective is stated as trying to present a cooperative option to as many people as
may seek financial services in this manner, establishing community charters may be a viable
method of meeting the need. NCUA has, in recent months, responded to the need by making
such conversion somewhat less difficult. This approach is not without its pitfalls as indeed the
bankers have challenged these limits in the case now before the District Court for the District of
Columbia which argues that the Point Mugu, California grants a community charter to a
geopolitical area which is not a "community" within the meaning of § 109 of the Federal Credit
Union Act. Is it only a matter of time before the 1927 version of the Webster's New
International Dictionary is offered in evidence for the meaning of the word "community" as it
was offered to the Court of Appeals to use in defining the term "groups" in the ATTF case? 90
F.3d at 528.
The third alternative structure I can envision will undoubtedly be challenged as well. It would be
to permit chartering of Federal Credit Unions with as few as the minimum needed to survive but
liberal ability to share management, systems and services. A version of this exists in the more
than 250 shared branches that now dot the country. The economic disincentive is the complex
layering of boards, supervisory and credit committees that would be required. Ask any bank
holding company about the expense of maintaining separate structures to meet state branching
and interstate banking limitations. Moreover, each credit union so managed would be examined
by its local competitors to determine whether the separate structures were in fact fictions.
Beyond that, the option of conversion to a structure permitted under a more liberal state law is
possible. Would one state become the host for all former federal charters impacted by the
Supreme Court's interpretation of the Federal Credit Union Act, e.g., Wisconsin, North Dakota
or Delaware, through a change in their banking laws to permit a main office with "branches
where ver members could be found? Certainly the banks lined up and took advantage of such
comfortable state laws once the Marquette National Bank case made exportation of favorable
state usury laws possible.
At this point, the need for Congressional attention is apparent and welcome. At least one issue is
whether the words in § 109 are words of limitation or an organizing principle. I fully understand
that as an organizing principle, a cooperative may be quite large. For example, the Tennessee
Valley Authority or rural electric cooperatives which successfully provided power to parts of the
country where it would not have been available through for-profit sources are, in part due to their
size, somewhat controversial.
Nonetheless, there is a significant difference between a financial cooperative and a for profit
financial institution. It is a function of the nature of ownership as surely as it is of size.
Depositors never elect the board and operative committees of a for profit bank. They do each
and every year in a credit union.
I frequently teach at national banking law compliance schools. At the credit union schools, I have
made it a point over the past ten years to ask the participants what the difference is between a
bank and a credit union. The mix of participants has changed dramatically during this period.
Mergers, acquisitions and closings at the end of the last decade saw a number of extremely well
trained bank employees looking for work and joining the staffs of credit unions.
These are the best respondents. They know first hand it is not the tax status of one versus the
other. In fact, the answers quickly concentrate on two areas. Banks, they say, "are bottom line
driven" while at the credit union "its all about the people."
I explain it a little differently. When a customer goes into a bank and deposits a $5 bill into his
or her account at a bank, a debtor-creditor relationship created between the bank and the
depositor. The bank "owes" the depositor five dollars.
In the credit union, using the same $5 bill, the same person goes in and puts it into their account.
They do not become a creditor, they become a shareholder-owner of the credit union. They
have the right to vote for the board and it is the same right that all other owners have, regardless
of the number of dollars on deposit. Imagine bank depositors electing the board of directors. It
F. IMPACT OF LEGAL REMEDIES ON THE SAFETY AND SOUNDNESS OF CREDIT UNIONS. At present, NCUA may not approve the addition of new fields of membership to the field of membership of an existing Federal credit union unless the new filed shares a common occupational base with the existing Federal credit union's "core" field of membership. That remedy has been in effect since October 25, 1996. It obviously impedes growth.
If we accept the two primary remedies, expulsion of all members not within the core field of
membership of a credit union or an inability to admit new members, I am certainly not the best
person to evaluate the potential impact on safety and soundness that either remedy might have -
that is the province of the NCUA, Treasury and Congress' investigative arm - the GAO.
I really suspect, but can not prove that a wholesale expulsion would be disastrous unless it were
implemented over time. The uncertainty that exists now has credit union members unnecessarily
wondering about the safety and soundness of institutions and the system as a whole.
Limited access over time will dramatically alter the credit union industry in three ways. First,
multiple group credit unions will stagnate. The inability to add new members from presently
authorized groups will cause conversion to state charters, community organization and other
forms, including a mutual savings bank.
The alternative of a cooperative form of financial institution may therefore survive and the
adjustment may be gradual, but there will be thousands upon thousands of individuals that will
not have access to a non-profit financial cooperative. I doubt that is what Senator Sheppard had
in mind in 1934.
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