Credit Union Rule Change Facing Fight.

If the region's federal credit unions have their way, amendments to legislation expected to be considered this week by the House Committee on Financial Services could vastly broaden their reach - heating up their competition with banks.

Through the Arlington, Va.-based National Association of Federal Credit Unions, the region's largest federal credit unions are lobbying for several controversial rule changes to the Credit Union Membership Access Act, among them the lifting of caps on business lending, allowing voluntary mergers and relaxing restrictive membership rules.

This latest effort has sparked a new war of words between bankers and credit union managers. The American Bankers Association said that credit unions are behaving too much like banks to continue as tax-exempt entities. The NAFCU countered that its 1,000 member institutions are only interested in serving the customers that banks ignore.

Kevin Lehihan, a spokesman for committee member Rep. Brad Sherman, D-Woodland Hills, said Sherman is familiar with the proposals but couldn't comment at this time. There are 8 million credit union members in California and more than 75 million nationwide. Rep. Maxine Waters, D-Los Angeles, also a member of the committee, could not be reached for comment.

"In order for credit unions to remain competitive, we are asking that Congress make these changes," said John Zimmerman, a NAFCU spokesman. "These revisions are going to allow our customers to continue paying lower prices for services and loans."

Donald Mengedoth, president of the Washington-based American Bankers Association, said that his organization would strongly oppose any changes to the law, which was passed by Congress in 1998.

"We believe that it is entirely inappropriate for the credit union industry - an industry granted tax-exempt status by Congress and thus provided with an enormous competitive advantage in the marketplace over the private sector competitors - to once again seek to expand its reach and thus its tax subsidy," said Mengedoth.

The Congressional Office of Management and Budget recently indicated that, since passage of the Credit Union Membership Access Act about two and a half years ago, the estimated aggregate amount of tax revenue that has been lost from credit unions has almost doubled to $9.5 billion from $5 billion. Mengedoth estimates that total aggregated lost revenue will grow to $23 billion over the next 10 years.

But credit union officials counter that all they're trying to achieve is a more level playing field with banks.

"The issue isn't about taxation, it's about competition," said Tom Graham, chief executive of Hughes Aircraft Employees Federal Credit Union. "I find it interesting that at the same time banks continue to expand, they are trying to restrict our growth."

The NAFCU is lobbying Congress for three key revisions to the Federal Credit Union Act, including: allowing mergers between healthy credit unions, raising the cap on commercial or small-business lending (now at 1.25 percent of the credit union's assets), and relaxing membership rules that now force organizations with more than 3,000 employees to form their own credit union, rather than sign up with an existing institution.

Southern California is home to a number of large federal credit unions. Manhattan Beach-based Hughes is California's third largest credit union (and 10th largest nationally), with $2 billion in assets and 29 branches, while McDonnell Douglas West Federal Credit Union has $500 million in assets.

Graham said that, even if Congress approves the merger and lending proposals, federal credit unions would still be at a disadvantage because they are only allowed to merge if they are on the verge of insolvency.

"The current law prohibits credit unions from making sound business decisions," he said. "Mergers are important and should be allowed as a business decision to be made by the board of directors of the institution being acquired."

Mengedoth pointed out that it has been only two and a half years since Congress, at the urging of the credit union industry, enacted new regulations. Therefore, Congress should decline to reopen the law to further expanded credit union authority, he said.