Financial Update (October-December 1998)
Credit Unions: What's the Fuss?
n February 1998 the U.S. Supreme Court partially settled a long-running controversy about the concept and extent of common bond limits on credit union membership. The court interpreted the Federal Credit Union Act as limiting membership to individuals sharing a single common bond — an employer, an association, or a religious, social or community organization. In the meantime, though, a new bill has been signed into law that substantially annuls the Supreme Court decision. The law grandfathers past common bonds, membership and membership eligibility while leaving credit unions' favorable tax status intact and limiting their business lending.
In an article in the Economic Review (Third Quarter 1998), two Atlanta Fed officers provide some perspective for thinking about the controversy that swirls around these issues. Aruna Srinivasan, an assistant vice president in the credit and risk management department, and B. Frank King, vice president and associate director of research, explain that credit unions' common bond requirement for membership was established to solve problems in the financial environment that were prevalent in the first half of this century. These problems included limited information about individual borrowers who could provide no security and costly procedures for collecting unsecured debt.
In the past three decades, changes in the financial environment have put pressure on credit unions and their regulators to relax their common bond limits. Developments in information technology, more professional management, financial troubles in the industry and the extension of deposit insurance to credit union shares have contributed to the broadening of common bonds.
The authors conclude that allowing past multiple common bonds to stand and leaving open the way for others has positive implications for credit unions and their customers but negative implications for their competitors, their competitors' customers and taxpayers.