WASHINGTON - Scoring a rare win over credit unions, the banking industry persuaded a judge here to reject liberal readings of the law requiring an institution's members to share a common bond.
In a May 31 decision, U.S. District Court Judge John H. Pratt said the National Credit Union Administration overstepped its authority when it allowed Communicators Federal Credit Union to expand its membership to anyone over 50 years old living or working within 25 miles of Houston.
In the case, brought by the Texas Bankers Association in July 1994, the judge said the agency's broad interpretation of a common bond rendered the limitation meaningless.
Using such standards, the NCUA "could allow those in their 20s or those under 40 or even left-handed individuals to join credit unions merely because people in these demographic groups allegedly share common concerns," Judge Pratt wrote in his 15-page decision. Congress never intended the NCUA to permit an "unguarded back door to credit union membership."
The proposed expansion could have exploded Communicators Federal's membership by nearly half a million people - or 13 times its current size.
NCUA General Counsel Robert M. Fenner said the agency is weighing whether to appeal.
This is the first such loss for the agency, which has won a string of common-bond cases on a separate question: whether existing, though unrelated, groups may be included in a credit union's membership base.
On that question, Judge Pratt sided with NCUA in September 1994 in the case brought by four North Carolina banks over the expansion of AT&T Family Federal Credit Union.
In the new case, #94-1650 at the U.S. District Court for the District of Columbia, Judge Pratt also supported NCUA's decision to allow Communicators Federal to add seven unrelated occupational groups. As he ruled in the AT&T case, the judge deferred to NCUA's opinion that unrelated groups - each with a common bond among its members - may be added to a credit union's field of membership.
Judge Pratt said he accepted this "multiple group policy" because courts must defer to regulatory agencies when the law is "ambiguous."
But Judge Pratt drew the line there, ruling - just a month after he heard oral arguments in the case - that NCUA may not allow credit unions to concoct a common bond.
Michael Crotty, the American Bankers Association's chief litigator, called the decision "a glorious victory" that "destroys the myth of invincibility: The government speaks, the government wins.
"Not anymore," Mr. Crotty said.
"The credit unions have been pushing the outer edge of the envelope," Texas Bankers deputy general counsel Kelly Rodgers added. "What Pratt's ruling does is define the edge of the envelope for them."
In this case, Communicators Federal set up a group called "Credit Union Link" and anyone over 50 living or working within 25 miles of Houston could join.
The judge insisted potential members have a natural association to qualify for the common bond exemption.
"An association...must have a common interest, activity, or purpose beyond that of securing access to credit unions," he wrote.
NCUA argued that people over 50 in a particular area share common concerns. But Judge Pratt disagreed.
"The NCUA has attempted to justify the addition of so large and varied a group of senior citizens on the basis of its so-called 'senior citizen/retiree' policy," Judge Pratt wrote.
In 1984, NCUA adopted a policy of encouraging credit unions to accept local senior citizens. However, Judge Pratt noted that the NCUA acknowledged then that simply authorizing federal credit unions to serve local senior citizens "may not meet the statutory requirement of an occupational or associational common bond."
Communicators Federal may not accept any new 50-plus members, but the $98 million-asset credit union will be allowed to keep the 2,500 who have already signed up. Communicators Federal's original sponsor was Southwestern Bell Telephone Co., but it now serves 93 different groups with a membership of 38,283.
Mr. Fenner praised the part of Judge Pratt's decision that upheld NCUA's authority to allow credit unions to add other unrelated groups.
"This policy is important to bring credit union service to more Americans," he said. "It is also crucial to protect credit unions and the...insurance fund by diversifying credit union membership."
The Credit Union National Association also focused on the positive news.
"The court has again recognized that the Federal Credit Union Act was drafted to encourage widespread credit service - not to protect banks from competition," said CUNA president Ralph Swoboda.
Ms. Rodgers said Texas Bankers will appeal this aspect of the decision, hoping to convince a higher court that the NCUA should not be permitting credit unions to accept unrelated groups.