Key House Banking Committee members threatened Wednesday to block a new policy designed to ease credit union membership limits.

"We ought to slap down these regulations and tell them to go back to the drawing board," Rep. Douglas K. Bereuter, R-Neb., told the three members of the National Credit Union Administration's board.

"When Congress clearly says to you what we want, you are supposed to do it."

Rep. Marge Roukema, R-N.J., House Banking's financial institutions subcommittee chairwoman, and Rep. John J. LaFalce, the ranking Democrat on House Banking, joined Rep. Bereuter in knocking regulators for violating the intent of the credit union law enacted last August.

The law let occupation-based credit unions accept members from unrelated companies, a right they lost in a 1996 court battle with the banking industry. Lawmakers contend the law was not designed to create massive credit unions. However, some claimed Wednesday that the NCUA's Jan. 1 rule feeds the growth of large credit unions at the expense of small ones. During a financial institutions subcommittee hearing, the lawmakers also criticized the NCUA for too broadly defining who may join a credit union through a relative. Finally, they said the agency did not follow the law's mandate that companies should affiliate with credit unions that are geographically nearby.

"I personally feel betrayed," said Rep. LaFalce of New York, who warned that credit unions could undermine their good standing on Capitol Hill and renew questions about their tax-exempt status. "I don't think you realized what you have unleashed with your arbitrary and capricious regulations."

The two NCUA board members who voted for the rule flatly denied that it strays from the law, and several lawmakers on both sides of the aisle defended them.

"We all knew the language we used in that bill was not easily definable," said Rep. Paul E. Kanjorski, D-Pa. "We have ably appointed regulators. ... Let them do their job." He suggested follow-up hearings no earlier than midyear for lawmakers to better gauge the rule's impact.

The Credit Union Membership Access Act gave Congress two months to intervene after the NCUA promulgated this rule, so lawmakers face a March deadline. However, Congress only has the power to block certain provisions, including the NCUA's definition of which "immediate family or household" members are eligible for membership.

Rep. LaFalce criticized the NCUA for letting grandparents, step- brothers, and half brothers who do not live with a member to join a credit union. And he complained that relatives of potential members would be permitted, too.

The New York Democrat also said the NCUA should have defined how far away groups that want to join a credit union may be. The agency said it would define "reasonable proximity" on a case-by-case basis. "Boy, have you distorted what I clearly expressed when I inserted those words," Rep. LaFalce said, striking his desk once.

Rep. Roukema predicted the rule would spark more litigation in the long- running dispute between the credit union and banking industries. Indeed, the American Bankers Association has sued the NCUA and has asked the U.S. District Court for the District of Columbia to issue a preliminary injunction to stop credit unions from accepting new members under the rule.

To bolster its request, the ABA gave the court a transcript of the NCUA's Dec. 17 board meeting, during which agency Chairman Norman E. D'Amours explained why he voted against the rule. His quotes support the ABA's argument that the rule discourages the formation of small credit unions.

The rule, Mr. D'Amours said, "makes it harder rather than easier for credit unions with fewer than 3,000 members to form their own credit unions as I think we're required to do by the legislation."

Testifying Wednesday, Mr. D'Amours defended the regulation as legally sound. "These provisions are clearly bad policy, but ... I also believe they will survive judicial review," he said.

Mr. D'Amours expanded on his objections, saying the rule imposes too much paperwork on potential credit unions with fewer than 3,000 members to prove they would be economically viable.

But board members Yolanda T. Wheat and Dennis Dollar said these credit unions must be more closely monitored because they fail more often.

"Better that I be here today ... answering questions about our economic viability standards than to be here three years from now answering questions about why we chartered so many fledgling credit unions without necessary support to succeed" and caused taxpayer bailouts, Mr. Dollar said.

Since the rule took effect Jan. 1, the NCUA has allowed 338 occupation- based credit unions to add 978 firms with 76,139 potential members. More than 900 of those have no more than 200 employees.

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