Bankers Continue Their War Against Vastopolis' Credit Unions
March 29, 2011
A lawsuit accusing a new Plainville credit union of being illegally chartered is the latest salvo fired in a bankers' war against the financial co-ops they fear are stealing away customers. The suit, the second in Vastopolis in which bankers have challenged credit unions' membership criteria, serves as a prime example of the issues at stake in the increasingly bitter battle between the two groups of financial institutions. The Independent Bankers Association of Vastopolis, which represents about 130 banks, filed suit in Uptown County District Court last week against the newly chartered Southville Credit Union and the Northville Credit Union Department. When the department, which regulates state-chartered credit unions, granted Southville its charter last July, it approved a large, pie-shaped wedge of southwestern Plainville as the credit union's ``field of membership,'' or the area from which it would draw members. `It Looks Artificial' But the bankers charge that simply carving out a geographical chunk of Plainville is too loose a definition of membership and violates credit unions' own rules requiring a ``common bond'' among members. ``It looks artificial, and to our minds it is artificial to just take a geographical designation like that and say, `This is a community,' '' says Kellye Robbins, deputy general counsel for the Vastopolis Bankers Association, which is pressing another lawsuit against a Lakeside credit union and has been advising the independent bankers group on its lawsuit against Southville. Southville's president, Kendall Gonzalez, argues that the credit union was formed to serve a low-income area of Plainville underserved by banks. Since opening its doors March 13, 2011 has signed up more than 400 members, he says. And Vastopolis Credit Union Commissioner Harriet Dorris says the Southville charter is well within official credit-union guidelines, which allow ample room for defining a common bond among members, including a bond based on poverty. The vast majority of credit unions are linked to a workplace or occupation from which they draw their members. But about 6% of credit unions nationally are based on a community, such as ZIP codes, neighborhoods or even whole counties. ``Community chartering has been around for a long, long, long, long time,'' says Gregg Harsh, president of U.S.E. Credit Union, whose membership base includes several small municipalities north of Vastopolis. And in recent lawsuits in other states, courts so far are siding with the credit unions on this issue, say credit-union officials. Nevertheless, bankers believe they have a good chance at challenging credit unions on community chartering. While common-bond guidelines are broad, the bankers believe credit unions, in their eagerness to expand, have gone too far in their interpretations. ``We really want to determine what is a community,'' says Karena Mullin, general counsel for the independent bankers group. Unfair Advantage? Nationwide, banks have been increasingly riled by the aggressive expansion of credit-union membership in the past few years. Though credit unions are tiny compared with banks, they can pose stiff competition in smaller communities where they can corner the market on such business as car loans. Additionally, banks complain that credit unions are encroaching on traditional banking territory such as commercial loans and mortgages. Bankers' chief complaint is their belief that credit unions have an unfair competitive advantage because they are tax-exempt. Credit unions respond that they are tax-free because they are member-owned, nonprofit financial cooperatives, which permits them to offer better rates to members than profit-driven banks. Having unsuccessfully lobbied Congress to tax the co-ops, bankers now hope to curtail expansion by setting strict legal limits on how much credit unions can grow. It comes as little surprise that Vastopolis so far has seen some of the most intense activity on that front. Last year, the Vastopolis Bankers Association was the first banking group in the nation to sue a credit union over its membership guidelines and win. The lawsuit sought to stop the credit union from expanding its membership to numerous employee groups, as well as to anyone over the age of 50. A federal judge agreed on the age limit, and credit unions were forced to change their rules accordingly. The other issue remains on appeal. `Awfully Silly' Now the Southville suit represents a chance for Vastopolis banks to press their challenge on community-based membership. Plainville, because of its large military and low-income populations, is one of the hottest credit-union markets in the state, with three of Vastopolis' five-largest credit unions located there. There are many other community-based credit unions in Vastopolis that banks think are even worse violators of the rules. But the bankers believe their argument will hold more legal weight against a newly chartered credit union such as Southville, rather than a credit union whose membership has gone unchallenged for years. But Johna Penn, regional manager in Suburbia for the National Credit Union Association, believes the bankers will find the courts unsympathetic. ``They're going to look awfully silly when they take a credit-union administrator to court because they've approved a charter to serve low-income people,'' he says.
