FIGHT BACK : CREDIT UNIONS IN LIMBO DUE TO LEGAL ACTION BY BANKS.

Byline: David Horowitz 

Years ago, when I first joined the credit union where I worked, it was a modest operation. It offered savings accounts and car loans, but the principal attraction was that payments could be deducted automatically from my paycheck, which made setting some money aside each month relatively painless. As time went on, our credit union expanded, offering several different types of loans, free traveler's checks and a variety of other services.

Today, many credit unions have become full-service banking institutions, offering their members not only low-cost loans but checking accounts, credit cards and ATM access. They are banks in everything but name, and conventional banks don't like the competition.

As nonprofit organizations, credit unions enjoy special tax and regulatory advantages over conventional banks. They also have lower operating and advertising costs. And because credit unions usually have access to their members' paychecks, their risk of default on loans is lower than the banks'. Those savings are passed on to members in lower rates on loans and higher rates on savings - rates the bank can't match.

It's easy to see why the banks consider the playing field tilted in favor of the credit unions. According to the Federal Credit Union Act of 1934, membership in credit unions was supposed to be restricted to ``groups having a common bond of occupation or association or to groups within a well-defined neighborhood, community or rural district.'' As long as the credit unions served only their own ``core'' memberships, there wasn't much the banks could do about it.

In 1982, the National Credit Union Administration allowed small businesses to join existing credit unions for the benefit of their employees. Some credit unions grew enormously as outside groups continued to join, and today, 70.2 million Americans are credit union members.

Banks saw their chance and filed suit, claiming that such expansion violated the ``common bond'' language of the 1934 law. They finally succeeded last July, when a federal appeals court ruled in favor of the banks and ordered credit unions not to accept members from outside their original ``core'' groups - such as employees of the same company.

In November, in spite of the court's ruling, the NCUA went ahead and approved the expansion of 31 credit unions. That brought the issue back to an angry federal judge, who voided the applications and accused the agency of conspiring with the credit unions to circumvent the court's ruling.

All of this leaves the future of many credit unions and their membership in doubt. The court could order an industrywide restructuring, which would affect at least half of the nation's 7,000 federally chartered credit unions (the nation's 1,700 state-chartered credit unions are not involved). Some 10.5 million people who joined expanded credit unions after 1982 could be expelled and forced to take their business elsewhere.

That would be good news for the banks, but it would cause a major disruption among credit unions and a costly inconvenience to those people who would no longer have access to low-cost credit union services. A credit union trade group says 3,700 consumers are already being turned away by credit unions every day because of the court's ruling. The NCUA is appealing the court's ruling.