FINANCIAL PERSPECTIVE: A View of the National Credit Union Administration v. First National Bank and Trust Company by Virginia McGuire Traditional credit unions are based on a simple concept: a closely knit group of people pool their resources and provide loans to one another. During the Great Depression, when Congress passed the 1934 Federal Credit Union Act, the focus was on workers’ living paycheck-to-paycheck or churchgoers’ wanting to help others in their congregation or local community who were down on their luck. Membership was limited to people who knew each other through work or community because loan decisions were based on knowledge of the borrowers’ character, rather than their collateral. This “common bond” was the essence of credit unions, and it defined their niche in the financial system. This niche orientation is captured in the preamble to the Federal Credit Union Act, which states that credit unions are intended “to make more available to people of small means credit for provident purposes through a national system of cooperative credit, thereby helping to stabilize the credit structure of the United States.” Many credit unions still abide by this original spirit and have been successful in meeting the needs of “people of small means.” Credit unions undoubtedly are an important component of the financial services marketplace. But for a growing number of credit unions, the unique character that defines a traditional credit union has disappeared. Changes in regulatory policies have stretched the common bond concept beyond any meaning, enabling the conglomeration of hundreds or thousands of unrelated groups within a single credit union. The average credit union has more than 23 unrelated groups in its field of membership; some include more than 1,000. Along with the erosion of the common bond, there have been changes in credit union membership. Today’s typical credit union member is no longer one of “small means.” The credit union industry’s own surveys have found that credit union members are more likely to be those with higher incomes, more education, and full-time professional jobs than are non-members. The idea that credit unions serve people of small means who share a common bond has become, for many credit unions, more myth than reality. The role of credit unions would inspire less public policy debate if it were not for one thing: credit unions receive a tax exemption amounting to nearly $1 billion annually. According to the Office of Management and Budget, at current growth rates, this government subsidy could grow to $4.5 billion over the next five years. This lost tax revenue comes at the cost of individual taxpayers, including other tax-aying depository institutions against whom credit unions directly compete. Credit unions’ unique status does not derive from their cooperative structure. Other financial cooperatives that outgrew their special charters lost their tax-exempt status long ago: mutual insurance companies in 1942; and mutual savings banks (today chartered as cooperative banks in 24 states) and mutual savings and loans in 1951. The Effect of Regulatory Decisions and Defining Congressional Intent At the heart of this case is whether Congress ever intended credit unions to include members that did not share a single common bond. Two federal appeals courts have ruled that the 1934 Federal Credit Union Act is clear in its mandate that occupational credit unions like AT & T; must include only groups sharing a single common bond of employment (the same or a related employer). Congress reaffirmed this position in 1977 when it approved limited mergers of financially troubled credit unions at the request of the National Credit Union Administration (NCUA), saying in the legislative report that, “Nothing in this provision shall be interpreted as a means for the merger of credit unions with dissimilar common bonds.” Two years later, the Office of the General Counsel of NCUA completed an exhaustive study of the legislative history of the common bond, concluding that, “it is apparent that Congress never lost sight of this critical common bond factor throughout its long history in the Act and the Act’s many changes. Congress appears not to have intended that the central characteristic of credit union organization, i.e., the limited membership within a specified group of persons, be changed” [emphasis added]. And two years after that, at a 1981 hearing on the same subject, NCUA’s chairman told Congress, “We can’t combine credit unions with unlike fields of membership.” Yet, remarkably, the NCUA made a dramatic change to its definition of “common bond” in 1982, fundamentally altering the nature of credit unions. Rather than a single common bond’s defining a credit union, NCUA began to allow an unlimited number of groups with no relationship to the original sponsor–and no common bond among them–to join the same credit union. Today, 157,000 separate groups have been added to existing credit unions, resulting in such odd combinations as chicken processors and petrochemical workers; sausage makers and steam fitters; opera companies and bowling alleys; and ministers and exotic dancers who may belong to the same credit union. Some credit unions even go so far as to poke fun at the common bond concept, with the Credit Union National Association’s own credit union advertising that anyone taller than a cartoon monkey named Murray can join. The so-called “multiple common bond” policy, coupled with the expansion of credit unions into virtually every area of business available to banks, without a corresponding change in their tax-exempt status, is what spurred the American Bankers Association (ABA) and five small North Carolina banks to sue NCUA. [There is a companion case brought by ABA, the Independent Bankers Association of America, and America’s Community Bankers against NCUA, which is pending in the U.S. District Court for the District of Columbia.] Before the Supreme Court had even finished receiving briefs in this case, the credit union industry began to hedge its bets by asking Congress to support H.R. 1151, a bill that would in effect codify NCUA’s 1982 policy. While characterized by some supporters as a minor wording change, the bill would eliminate the single common bond requirement, encouraging the unchecked growth of credit union conglomerates, which would continue to receive the same special tax and regulatory treatment as traditional credit unions. Virginia McGuire is with the American Bankers Association.