Kentucky Ruling Is Latest To Test Common Bond

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FRANKFURT, Ky. – In the latest court ruling over the long-time battle over field of membership, the Kentucky Supreme Court last week struck down a lower court ruling barring community-based charters.

The High Court ruled that even though the state statute specifically ignored community grants as legal fields of membership that “Persons who live in the same neighborhood or rural farming district do have a concrete shared interest that demonstrates a common bond.” People in a neighborhood know each other and are aware of each others’ reputations and “thus have an advantage over strangers in evaluating each others’ creditworthiness,” the state court ruled.

In a decision that threatened operations in at least six Kentucky credit unions, the lower courts had ruled that the state law describing field of membership – which was closely based on the model credit union statute that required membership be “limited to persons having a common bond of similar occupation, association or interest” – did not specify that place of residence was an acceptable criteria. In fact, when lawmakers passed amendments to the state’s law in 1984 the language describing geographic, or community, charters was absent from the statute.

After discovering the absence of the language, Home Federal Savings and Loan Association, an Ashland bank acting on behalf of the state’s bankers, sued the Kentucky Department of Financial Institutions in 2006 asserting that a community charter granted to Members Choice CU, a neighboring credit union also in Ashland, was illegal because the state law does not specifically allow for it. A state court ruled for the bankers and an appeals court affirmed the decision, even as five other credit unions that stood to lose their community charters joined the suit.

The ruling is the latest of a long list of court challenges brought by the banks over FOM, as the concept of the common bond has been diluted by vast and huge diversifications for credit unions.

In this case the state High Court ruled that even without the specific language allowing geographic FOMs, the laws “common bond” requirement still applies to communities. “Moreover,” wrote the court, “persons are linked financially since the value of one house affects the value of the others in the neighborhood. The extension of credit to a neighbor could have a direct effect on property values, since a default could lead to a foreclosure or a lien on a house. Thus, the shared interest is ultimately linked to the operation of the credit union.”

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