Credit Union Common Bond Ruling: NCUA v. First National Bank & Trust Co.--U.S.--(No. 96-843)
CRS Report for Congress
Credit Union Common Bond Ruling:
NCUA v. First National Bank & Trust Co.
_ U.S. _ (No. 96- 843)
M. Maureen Murphy
American Law Division
On February 25, 1998, the Supreme Court ruled that federal credit unions may not
consist of more than one occupational group having a single common bond. On April
1, the House passed H.R. 1151 (H.Rept. 105-472), which grandfathers existing credit
unions and sets standards for future multi-group credit unions. On July 28, the Senate
passed an amended version (S.Rept. 105-193), which became P. L. 105-219, having
been passed by the House on August 4. It preserves existing multiple group,
occupational common bond credit unions and restricts the initial size of a group having
that may be added to a credit union that has a different common bond. It includes Senate
Banking Committee amendments limiting credit union commercial loans and
establishing standards for prompt corrective action.
It makes no changes in the tax-exempt status of credit unions. Although the House
Banking Committee version contained provisions similar to the Community
Reinvestment Act requirements imposed on other federally insured depository
institutions, these were deleted in the Senate by a floor amendment sponsored by
In National Credit Union Administration v. First National Bank & Trust Co., U.S.
(No. 96-843, decided February 25, 1998), the Supreme Court ruled that the same single
common bond must unite members of a federal credit union organized on the basis of an
occupational common bond and rejected the National Credit Union Administration’s
(NCUA's) multiple group common bond policy as conflicting with the express language
of the National Credit Union Act. The case involves the Federal Credit Union Act, 12
U.S.C. §§ 1751 -1759k, which limits federal credit union membership to “groups having
a common bond of occupation or association, or to groups within a well-defined
neighborhood, community or rural district.” 12 U.S.C. § 1759. NCUA, defines three
permitted types of common bonds: occupational, associational, and community. Until
1982, federal credit unions formed along occupational lines consisted of the employees
of one employer. In 1982, NCUA announced a multiple group occupational credit union
Congressional Research Service ˜ The Library of Congress
policy that resulted in large, interstate, credit unions that offer banks competition for
consumer products and services.
The Court affirmed First National Bank and Trust Company v. National Credit
Union Administration, 90 F. 3d 525 (D.C. Cir. 1996), which had remanded the case to the
district court. This meant that, without legislation changing the language of the statute,
a broad order could have been issued enjoining the admission of members to any federal
occupational credit union who did not share the original single common bond of
occupation. All parties to the suit, however, asked the court to delay acting while
Congress considered legislation. Without legislation, it was feared that many of the large
credit unions already in existence would face the likelihood that their stream of new
members would slow to a trickle and, thus, their long term viability prospects diminish.
Because of their mutual form of ownership, credit unions are not subject to corporate
taxes. Not having to pay taxes, often receiving free office space and volunteer employees,
credit unions may offer consumer banking products at prices lower than banks and thrifts.
Credit unions do not come under the requirements of the Community Reinvestment Act,
12 U.S. C. §§ 2901 -2906, and, thus, are not required to meet the credit needs of their
entire community as are banks and thrifts.
P.L. 105-219 contains clauses to preserve all existing multiple bond arrangements
and permit new members to be added to all current groups. It includes provisions to curb
future growth of multiple-group credit unions—instructions to NCUA with respect to
chartering single groups where possible and providing geographic components to
affiliations. Groups of more than 3,000 would generally not be permitted to affiliate with
an existing credit union. Multiple group credit unions could extend their membership to
persons and organizations located within areas underserved by other depository
institutions. From the Senate-reported version (S.Rept. 105-193), capital standards are
prescribed—7% of net worth for a well-capitalized credit union--and a cap is placed on
commercial loans—1.75% of net worth. This limits the total amount of member business
loans over $50,000 that a well-capitalized credit union may carry to 12.25% of net worth.
Also from the version reported by the Senate Banking Committee, a sequence of prompt
corrective actions is prescribed for implementation as a federally insured credit union's
net worth declines below prescribed levels. There are also new auditing procedures and
voting requirements for a credit union to convert to a bank or thrift charter.
The legislation mandates studies on the differences between the regulatory and tax
treatment accorded credit unions and other federally insured financial institutions. It
requires the federal banking agencies to detail their progress in efforts to streamline
regulatory burdens. It also imposes a requirement that the Secretary of the Treasury
recommend, within one year, legislative and administrative action to reduce and simplify
the tax burden on small banking institutions: insured depository institutions having less
than $1 billion in assets and banks having total assets between $1 and $10 billion.
CRS Report 97-548. Should Credit Unions Be Taxed?, by James M. Bickley.
CRS Report 96-997. Multiple Group Credit Unions, by M. Maureen Murphy.
CRS Report 97-267. Multiple-Group Federal Credit Unions, by Pauline Smale.