Utah bankers and the American Bankers Association may take the latest round of a long-running battle against credit unions to court.
For years Utah banks have bristled as credit unions have gained market share while maintaining their tax-exempt status. State-chartered credit unions now account for 25% of all deposits held by commercial banks, thrifts, and credit unions in Utah, in part because they have had fewer limits on geographic expansion than in other states. Now three of the state's biggest credit unions have obtained federal charters from the National Credit Union Administration in the wake of a law passed March 4 by the Utah state Legislature that included a proposal to tax credit unions whose field of member-ship reaches beyond one county.
Utah's banks had pushed for the legislation and are gearing up for a legal fight. "We always knew that this was a two-stage kind of battle," said Howard Headlee, the Utah Bankers Association's president.
Legislature Was First Goal
The first goal, Headlee said, was to lobby the legislature to pass the law, which curtails the tax-free growth of state credit unions. Utah law now puts credit unions in two classes. Institutions that market to members in multiple counties could be liable to taxation starting in 2005 (just how much they would pay has yet to be determined over the next two years by a state-appointed task force). Credit unions that only seek members in one county would remain tax-exempt. Now the banks want to persuade Congress-or the courts-that interpretations of the 1998 Credit Union Membership Access Act by the NCUA, the credit unions' federal regulator, have gone too far, Headlee said.
Bankers say tensions escalated after March 27, when the NCUA issued revised regulations that relaxed some restrictions on fields of membership. "If Congress can't rein in the executive branch and uphold the 1998 law, the only other option is to go to the judicial branch," Headlee said.
His group and the American Bankers Association are considering filing a lawsuit, he said. As in previous skirmishes, like one in 1998 that went to the U.S. Supreme Court, Utah banks are less worried about credit unions that identify fields of membership as employees of a certain company or trade than about credit unions' seeking geographic fields of membership that can comprise several adjacent counties. Bankers argue that credit unions have gone beyond the federal rule against serving members outside a "well-defined local community."
"We've taken the position, if you're serving a specific group, you're a credit union," Mr. Headlee said.
An ABA spokeswoman confirmed that it is exploring its legal options. She would not elaborate. For their part, the state-chartered credit unions argue that changes to the state's credit union laws, changes prompted by pressure from banks, have hampered their service to members and forced them to seek federal charters. In 1999, for instance, a Utah bill passed after bankers won a lawsuit against a few of Utah's largest credit unions that limited the opening of new branches by state-chartered institutions whose membership field covered more than one county.
Declining Value of State Charter
"We believed, for the last number of years, our charter was substandard to the federal one," said Scott Earl, the president of the Utah League of Credit Unions. "The actions of the last legislative session were a clear signal that the state charter was not going to improve in the near future."
He predicts that more credit unions in the state will convert. The latest developments in Utah have not surprised industry representatives on either side of the debate. Even before the legislative session opened, two state-chartered credit unions applied for federal charters.
Fred Nydegger, senior vice president of governmental affairs at the $1.2-billion Mountain America Credit Union, one of the three Utah credit unions that received federal charters in early May, said Mountain America had spent two years researching and preparing a possible application.
"We told the legislature that if we continued to lose services every time a taxation bill was introduced, we wouldn't be part of that," he said. "This year credit unions lost the ability to issue business loans altogether."
A Look At The Converted
To make the conversion to federal charter, Mountain America and the other two groups -America First Credit Union and Goldenwest Credit Union-had to relinquish parts of their field of membership. (Unlike Utah law, federal law requires institutions to pick between community- or geography-based, association- based, and employee group-based charters.) Mountain America, in populous Salt Lake County, chose the select-employee group designation.
But the other two, both based in the Weber County city of Ogden, asked for and received approval for a six-county community charter they said was linked by a common transportation council.
Therein lies the dispute. Headlee says the six-county field of membership goes beyond the parameters of a well- defined local community, as it ranges from rural Tooele County west of the Salt lake, over two mountain ranges to the exclusive ski resort town of Park City. But the NCUA board had already approved that six-county field of membership on April 24 in a 2-to-1 vote after the $164-million Tooele Federal Credit Union had applied for an expanded field of membership. That approval set a precedent for the May approvals of the three large credit unions.