When President Clinton signed the credit union bill into law two months ago, some bankers felt the industry had hit rock-bottom.

Then the National Credit Union Administration issued the first two of six proposed rules that would implement the new law. Both proposals are seen by bankers as pushing-and in some cases exceeding-the boundaries set by Congress.

For many, the fight to control credit union growth has never seemed so hopeless.

"They use elastic bands on everything they do," Thad Woodard, president of the North Carolina Bankers Association, said of the NCUA. "It reflects the imbalance in place, and the advocacy role of the regulator ... The whole process is ludicrous."

Bank trade groups are drafting comment letters on the proposed rules, but they do not expect to have much sway. In all likelihood, they say, the battle will end up where it began eight years ago: in the courts.

"If we decide that the NCUA has violated the intent of Congress and the law, we will pursue that," said American Bankers Association economist Keith Leggett.

NCUA officials dismiss the criticism. "We cannot allow the fear of lawsuits to keep us from doing our job," said Dennis Dollar, one of the agency's three board members.

But litigation may be the banking industry's trump card. When the Supreme Court concluded in February that the ABA had "standing" in the AT&T Family Federal Credit Union case-in other words, that banks had a competitive interest in the issue of credit union growth-it became permanently easier and cheaper for banks to influence both judges and NCUA rule-writers.

John F. Cooney, a partner at the Venable law firm who was involved in the AT&T case, said the first two years of the suit were spent deciding whether banks could bring the case. The ABA will never have to go through that again, he said.

That legal shortcut may come in handy. On Aug. 31, less than a month after the Credit Union Membership Act was enacted, the NCUA proposed the parameters for credit union growth and membership.

The plan made bankers howl, particularly the NCUA's definition of "community." Credit unions come in two basic types: those that draw members from specific employers or affinity groups, and those that draw members from a specific geographic area. Though Congress ordered the NCUA to limit each geographically based charter to "a well-defined local community," they let the agency define its terms.

NCUA proposed a flexible definition: Any city or county with 300,000 or less people-the average size of community charters granted in recent years- would automatically qualify, as long as the applicant had a good business plan and enough resources to serve the entire area.

The NCUA also pledged to consider even larger communities. In such cases, the agency said, applicants would have to prove that members of the community interacted with one another or shared common interests.

"We believe that the population size should clearly be scaled back," said the ABA's Mr. Leggett. He said the maximum size should be closer to 25,000.

"Even an entire state or large city wouldn't be ruled out," complained Karen Thomas, director of regulatory affairs for the Independent Bankers Association of America. "NCUA only says it would be 'difficult' for those to qualify."

Mr. Dollar defended the 300,000 threshold. He also called the 25,000 figure "ridiculously tight."

Comments on this field-of-membership proposal are due Nov. 23, and the NCUA plans to issue final rules in December.

The agency's second proposal, released Sept. 23, would limit business lending by credit unions.

Under the new law, business loans may total the lesser of 1.75 times a credit union's net worth, or 12.25% of its assets. But lawmakers grandfathered credit unions that primarily make business loans, and they instructed the NCUA to define "primarily."

Taking its cue from the Federal Reserve's definition of when a bank is primarily engaged in the securities business, the NCUA proposal would exempt any credit union with business loans that exceeded 25% of its total loan volume in any quarter since 1995.

Credit unions that did not meet the 25% threshold could also be exempted if business loans were larger than any other loan category.

The agency predicted that only about 70 of the nation's 11,125 federally insured credit unions would qualify for either exemption.

But bankers are still furious.

"NCUA basically gerrymandered a rule to make sure that most, if not all, credit unions that are above that cap are exempted," said the ABA's Mr. Leggett. "Only in their Orwellian logic could they choose that number. I would have said 50%."

For their part, credit unions are largely supportive of the proposed rules on field-of-membership and business lending. Most of the 50 or so comment letters received so far suggest that the 300,000-person ceiling on community-based credit unions is too low.

More important to many credit unions is the quick approval of the field- of-membership rule.

More than a year has passed since they could add new groups to their membership rolls, so the waiting list for approvals is enormous.

The question for banks is whether they will have any more influence over the new regulations than they did over the design of the credit union law itself.

To be sure, the Supreme Court's finding that banks have "standing" means that NCUA rule-writers will have to pay closer attention to comment letters filed by banks and their trade groups.

Failure to do so, said Venable's Mr. Cooney, would make the NCUA vulnerable in any subsequent litigation.

But the IBAA's Ms. Thomas, a regulatory attorney, is skeptical. "If the banking industry believes that the rule goes beyond congressional intent, NCUA will have an advantage in the courts," she said. "Because where the law is ambiguous, and the NCUA interpretation is 'reasonable,' the court will generally uphold the interpretation."

At the moment, anyway, the NCUA shows no signs of weakening. "I think we are acting consistent with the spirit and the letter of (the new credit union law)," Mr. Dollar said. "The banks have the right to disagree."

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