Quit Picking on the Little Guys

Find yourself turning to your office or neighborhood credit union in search of a friendly face? Turned off by your bank’s niggling extra charges for dealing with your money? Well, you’re not alone, much to the alarm of the banking industry. Claiming unfair competition from the nonprofit credit unions, banks have filed a series of lawsuits to challenge federal and state rules that have allowed credit unions to expand their memberships in recent years.

Credit unions hardly pose a major competitive threat to banks. They do provide a needed and increasingly popular alternative. Need was the reason for creating credit unions during the Great Depression; Congress passed the Federal Credit Union Act of 1934 to ensure that low-paid workers, shunned by banks, could obtain bank-like services at reasonable rates.

Membership was limited to “groups having a common bond of occupation or association, or to groups within a well-defined neighborhood, community or rural district.” In recent years, the National Credit Union Administration and the states, including California, have relaxed membership requirements for credit unions, in part to accommodate changes resulting from corporate downsizing and consolidations.

Fighting the expansion, bankers have filed 13 suits in 10 states over the last six years. Credit unions have prevailed in several of those suits. Banks won for the first time in July, when a federal judge issued an injunction sharply curtailing the ability of nationally chartered credit unions to sign up new customers, ruling that the credit union administration’s expansion of memberships violated the “common bond” language in the 1934 law.

In response, the federal agency last month adopted a new definition of “common bond” that included employees working for different companies but in similar industries. The same judge then threw out that revised definition, which he said had been set forth by a “rogue federal agency.” Now a credit union trade group and the Justice Department are joining an appeal in the case.

The banks, meanwhile, are feeling pressed on other sides. Competition is forcing them to seek federal permission to sell insurance, mutual funds and other financial services. But it’s not the credit unions that have cut pieces out of the pie of profits. There are 12,340 credit unions nationwide (767 in California), which have assets of $318 billion. That compares to $4.3 trillion for banks and $2.8 trillion for mutual funds. Nonprofit credit unions are the little guys. In fairness, Big Banking should give them some breathing room.