The U.S. Supreme Court recently decided a landmark case that could affect the way that you bank in the future.
The case–1st National Bank vs. National Credit Union Administration–was all about expansion. Should credit unions, which were formed and given special tax treatment to serve groups with a “common bond,–should be allowed to expand their membership dramatically beyond the scope of those who fit within that common group?
Credit unions said they should be able to open their doors to a variety of groups, allowing a single credit union to serve multiple groups with multiple common bonds. Banks, disturbed by the rapid pace of growth in the credit union industry, said credit unions should be forced to stick to their original groups.
The court ruled with the banks and has remanded the case to a lower court, where the bankers will say just how they want to proceed.
Why should consumers care? Fees. Study after study indicates that banking with a credit union saves the average consumer a bundle. Indeed, a study that was jointly sponsored by Consumer Federation of America and the Credit Union National Association found that credit union fees are about 40 percent lower than bank fees.
Another recent study maintains that consumers could save anywhere from $215 to $475 per year, depending on how they bank, by switching to a credit union.
What was this case all about and how might this decision affect you?
Q–What is this all about?
A–Banks and credit unions have been doing battle since 1982, when credit union regulators opted to vastly expand the groups of people who would be allowed to join specific credit unions. Before this point, credit unions were only available to tightly knit groups of workers who had a “common bond.”
Q–What’s a common bond?
A–Generally it meant that all credit union members worked for the same company or in the same profession.
Q–Why did credit union regulators decide to allow credit unions to expand outside of groups with a common bond?
A–Because many companies started to jettison workers in the early 1980s, which caused many credit unions severe financial distress. Suddenly, there were no new depositing members and many of the current credit union members were out of work and unable to pay on their loans. Regulators responded by allowing certain credit unions to throw open their doors to small companies that didn’t have an existing credit union; and by allowing credit unions that served different groups to merge. In the end, the “common bond” of membership all but ceased to exist.
Q–Why do the banks care?
A–Eliminating the common bond requirement allowed the credit union industry to grow at a dramatic pace. Just since 1991, the credit union industry has doubled its membership and assets, for example. A few credit unions have gotten so big that they are able to compete directly with banks by offering branch-banking services and a wide variety of loans.
However, unlike banks, credit unions are exempt from federal taxation. That allows them to offer loans at lower rates of interest and charge less for basic banking services, such as checking and saving accounts. Bankers charged that this was an unfair competitive advantage, and credit unions should either be forced to stick to their original purpose–serving people with a common bond–or start to pay income taxes.
Q–What did the Supreme Court do?
A–It said that the law that created credit unions does require a common bond of membership. Thus, credit unions must either stick to tightly knit groups or get Congress to change the law.
Q–Will I be forced to give up my credit union membership?
A–Probably not. Although bankers can ask for divestiture of members without a common bond, they have promised that they will not require current credit union members to give up their memberships.
Q–What’s the advantage to credit union membership?
A–Purely financial. Credit unions are far more likely than banks to offer free checking and savings accounts and they generally offer lower rates on loans.
Q–Are credit unions always a good deal?
A–No. While the average credit union charges less for many of the same services, some charge as much, or even more, than some banks. As with nearly all consumer goods and services, you’d be wise to shop around for the lowest rates.
Q–How do I know whether I can join a credit union?
A–Check with your employer and any professional groups that you have joined. The vast majority of credit unions are employment related and are available through companies, unions and professional trade organizations.
However, there are also a few “community” credit unions, which serve all people who live within certain geographic boundaries. You can also check with your local city council to see if your community supports such an institution.
