A federal court decision this week could force regulators to dismantle about 2,000 credit unions for illegally broadening their membership policies.
The ruling, handed down Tuesday by the U.S. Court of Appeals for the District of Columbia, would require federal credit unions to adhere to a single "common bond."
If the decision holds up, it could affect credit unions that have a majority of the industry's $306 billion of assets. More than 65% of credit union members belong to these institutions that accept workers from more than one company.
The National Credit Union Administration will appeal the outcome. The regulatory agency's general counsel, Bob Fenner, declined to discuss the decision Wednesday, but NCUA released a statement vowing "to pursue every possible avenue to review and reverse."
NCUA Chairman Norman D'Amours and Executive Director Karl Hoyle were on vacation this week and could not be reached for comment.
Banking representatives hailed the ruling.
"This begins the process of leveling the playing field between banks and credit unions," said Donald G. Ogilvie, executive vice president of the American Bankers Association, which joined five banks in the test case against AT&T Family Federal Credit Union, which serves employees of 150 companies nationwide.
But credit union lawyers contended that the decision is narrow, applying only to Winston-Salem, N.C.-based AT&T Family.
"This is certainly a significant decision and somewhat of a setback," said Steven R. Bisker, an Alexandria, Va., lawyer who represents credit unions. "But is it a tremendous victory for banks that don't want to compete with credit unions? I don't think so."
Brenda Furlow, acting general counsel at the Credit Union National Association, said the ruling invites the NCUA to redefine the meaning of "common bond" to permit many employee credit unions to pass muster.
Banks and credit unions have battled for more than a decade over who is eligible is join a credit union. Credit unions have sought to expand by broadly interpreting "field of membership" requirements, while banks have tried to restrict who can join these tax-exempt institutions. The credit unions won most of the lawsuits - until this week.
In the 12-page ruling, Judge Douglas H. Ginsburg wrote for a unanimous court that members of a credit union must share a common bond. He did not define what constitutes such a bond, but he rejected the argument that an institution can have members from unrelated companies.
Still, Judge Ginsburg did not slam the door on multiple-group credit unions. NCUA could rewrite its rules to allow "all workers in the same trade" to be members of a single credit union. This would allow, for example, one institution to serve all the universities or convenience stores in a town.
Banking industry officials said it would be nearly impossible for NCUA to change its definition of common bond after more than 50 years.
As a consequence of the ruling, a U.S. District Court must now dismantle AT&T Family, Mr. Ogilvie said. Also, NCUA must order other credit unions to shed their multiple-employee groups, he said, warning that the ABA would sue the agency if it fails to act.
Ms. Furlow at the Credit Union National Association said the battle is far from over. CUNA, which along with NCUA was a defendant in the case, has not decided whether it will ask the appeals court to reconsider or appeal directly to the Supreme Court.
Ms. Furlow noted that a similar case is pending before a federal appeals court in Cincinnati. A decision there in the credit unions' favor would create a conflict, increasing the chances that the Supreme Court would take the case.
That said, banking and credit union officials agreed that the dispute would eventually be decided by Congress. Ms. Furlow said she can't imagine lawmakers would allow NCUA to force credit unions to shed millions of members.
"The silver lining may be that Congress may be moved to clarify the Federal Credit Union Act to prevent the bankers from denying the consumer access to credit union membership," AT&T Family said in a statement Wednesday.
"We hold that Congress' intent was to allow groups of employees, each sharing a common bond within their own occupational or associational sponsor, to join together in one credit union."