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The world of banking and financial services continues to undergo tumultuous change; bank consolidation, international mergers, the sweeping away of the final vestiges of the Glass-Steagall Act separating investment and commercial banking, just to name a few. And while not as glamorous as the foregoing, traditional banking still faces competition from an increasingly powerful set of rivals; federally chartered credit unions. Indeed, these prosaic alternatives to entrenched commercial banks have now been further empowered by a federal appellate court decision that rejected a powerful banking lobby’s challenge to their growing aspirations. As this latest legal development caps an ongoing feud being played out in our nation’s courts, its ramifications for banking law are most worthy of discussion. To fully appreciate the latest chapter in this legal struggle, it is imperative to have some grasp of the underlying factors. Credit unions have a rich history, extending back to mid-19th century Europe, where they were organized around a common theme to provide credit to persons of small means. Following the European example, many states passed laws authorizing the chartering of credit unions here in America. Proving to have great resilience during the Great Depression, their modern existence is rooted in President Franklin D. Roosevelt’s New Deal. The Federal Credit Union Act, passed in 1934, provided for the establishment of credit unions and governed their operations. Such entities were recognized as cooperative associations organized under federal law for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes. Shades of Frank Capra’s vision of the Bailey Savings and Loan in the classic “It’s A Wonderful Life,” indeed. Lastly, the Depression-era codification likewise created the National Credit Union Administration (the NCUA) to supervise federally chartered credit unions, and empowered that agency to prescribe rules and regulations for their administration. While the typical credit union provided garden-variety financial services, i.e., provided safekeeping and payments of interest for deposits, made loans on more or less standard terms, its singular distinction was it strictly delimited market. For unlike a bank that could serve the public at large, albeit within its chartered territory, the potential customer base of a credit union was defined by a test of commonality. Per the statute, membership in a federally chartered credit union is limited to groups having a common bond of occupation or association, or to groups within a well-defined neighborhood, community, or rural district. [FOOTNOTE 1] Simply put, its clients had to be members of an identifiable group, such as tradespersons, teachers or union members. To be sure, while not entirely accurate, the term “credit union” is oft times linked with a labor union or its constituents. Nonetheless, in the 1980s, this began to change. Credit unions began to aggressively market their services, and increase their membership rosters. The most common vehicle for credit union expansion was the amalgamation of several unrelated “occupational group” credit unions, i.e., credit unions representing distinct memberships united by different types of occupational bonds, to combine into one, larger “multiple common-bond credit union.” Government permission to do so became official FCUA policy in 1982. Commercial banks could not help but notice this incursion into their markets, and made legal challenge. In 1998, the U.S. Supreme Court banned such diversified credit unions in its decision called National Credit Union Administration v. First National Bank & Trust Co. [FOOTNOTE 2] But the battle was not over. Later that same year, Congress overrode the high Court’s decision, and amended the Credit Union Act to specifically authorize multiple common-bond credit unions. [FOOTNOTE 3] As widely reported in the financial media at the time, the amending legislation once again cleared the path for the continued expansion of credit unions beyond their membership rosters traditionally restricted to one specified group. THE ‘CHEVRON’ TEST Undeterred, the banking industry continued its legal campaign, now culminated in the case at hand. That decision, encaptioned American Bankers Association v. National Credit Union Administration, [FOOTNOTE 4] pitted the bankers’ main trade group against the regulatory agency itself. In elementary terms, the industry’s challenge went to the propriety of the NCUA’s enabling rulemaking as promulgated after the 1998 reform legislation. For this reason, the D.C. Circuit invoked the two-part Chevron test. First enunciated by the Supreme Court in the 1984 case of Chevron U.S.A., Inc. v. National Resources Defense Council, Inc., [FOOTNOTE 5] the two-pronged inquiry is the litmus test for the judicial review of administrative agency rulemaking. Under the first part of the test, agency action will be measured by the statutory text itself, and whether or not the agency’s rulemaking comports with what Congress clearly intended. If the legislators have spoken directly to the precise question at issue, and the agency rule reflects that, then the judicial inquiry is ended. Under the second prong, only if there is silence or some ambiguity in the underlying statute will federal courts ask if the agency’s promulgation is founded upon a permissible construction of the statute. [FOOTNOTE 6] To be sure, high hurdles indeed for any party disputing the action of a federal administrative agency. Indeed, the rigors of the Chevron test proved to be the undoing of the bankers’ challenge. Among the many grounds advanced by the banking lobby, one of the first was how the agency applied statutory limits upon the membership categories of a multiple common-bond credit union. [FOOTNOTE 7] Under the agency’s rule, only persons sharing the same occupational or associational bond that defines the group were counted against the statutory limit. Other individuals, related to the primary members, may join, but are not counted towards the cap on membership numbers. Since the obvious effect of this would permit the credit unions to expand their rolls, the bankers challenged the agency’s interpretation. Here the D.C. Circuit began its rebuff of the banking industry. The Credit Union Act, in its modern form, expressly makes provision for regulated credit unions to add to their rosters family and household members related to its authorized constituents. Such persons need not share the exact occupational bonds to be members, and their inclusion does not violate legal limitations on the credit union’s size. Writing for the panel, Circuit Judge Tatel found no basis to believe that the agency’s interpretation was contrary to Congressional intent, and thus the appellate court refused to entertain this part of the litigation. Similarly, the D.C. tribunal rebuffed the bankers’ next challenge, its opposition to the so-called “grandfathering” rule promulgated in the wake of the 1998 reforms. The agency had ruled that persons who were members of a group that was part of a credit union as of Aug. 7, 1998, the date the reforms were enacted into law, could join a credit union even if they did not become group members until after that date. Adhering to point one of the Chevron test, Judge Tatel examined the underlying statutory language incorporated into the Credit Union Act in 1998. Based upon that examination, the panel found the bankers’ could not sustain a viable challenge. The 1998 changes to the FCUA, and its supporting legislative history, concurrently supported the agency’s broader interpretation, said the circuit court. The “grandfathering” proviso was indeed broadly drawn, the better to encompass not only credit union members existing on the date the amendments became law, “as well as anyone who is or becomes a member” after that effective date. As point in fact, commented Judge Tatel, the legislative history furthermore expressly stated the scope of the grandfathering clause was to permit present credit unions to continue adding new members, notwithstanding the status of those individuals prior to the reforming legislation taking effect. Finally, the D.C. Circuit turned to the last of the bankers’ legal arguments. This challenge went specifically to the agency’s chartering of “community credit unions,” as defined under the FCUA. By law, a valid community credit union is one that encompasses a well-defined community, neighborhood or rural district. The agency’s newest rule on subject extrapolated the foregoing by listing as qualifying communities those with linked political jurisdictions, major trade areas, shared facilities, shared newspapers, and other common characteristics. The bankers contended the legislators intended a more restricted approach to community credit union charters, and the agency’s rulemaking flew in the face of those limitations. “We have little difficulty rejecting this argument,” wrote Judge Tatel. First, the regulators acknowledged that Congress intended the agency to take a more circumspect and restricted approach to chartering community credit unions, and took no exception to that legislative declaration of policy. Next, the criteria for authorizing such entities was nevertheless left largely unchanged by the 1998 reforms, and the agency pledged to continue to apply these strictures stringently. Of key importance, found the court, was the fact that the new rule demanded intensive documentation and demonstrable evidence from credit unions seeking federal charters, the better to enforce compliance with the law. For these reasons, the panel concluded the agency’s rulemaking “adopt[ed] a more circumspect method for applying the community credit union criteria,” and therefore fell well within the permissible scope of Chevron‘s first prong. With further inquiry unnecessary, the circuit held in favor of the agency here as well. In view of all of these precepts of administrative law and regulation, the D.C. Circuit Court rejected the bankers’ lawsuit, and upheld the federal agency’s rulemaking in the wake of the 1998 amendments. The agency’s actions were lawful, and in fact consistent with the NCUA, as amended by the Congress only three years ago. The present regimen of administrative regulation of federally chartered credit unions was cleared to proceed. In overviewing American Bankers, we see a number of legal principles in full play. First, we have the legitimate exercise of an affected party seeking redress in our courts, where it contends it has been harmed by administrative agency action. This confirms the essential notion that the Executive Branch, when acting in the form of an administrative agency, is held in check by judicial review. More to the point, such review takes in account legislative intent, thereby providing much assurance that federal regulators honor the intentions of our duly elected lawmakers from the Legislative Branch. Second, the aforementioned judicial review continues today under the familiar and well reasoned standards of Chevron. There, the Supreme Court advanced the principled notions that any court review of administrative agency action must first ask precisely what did Congress make into law, and does the agency’s action fit within that intent as expressed by statute? If that does not resolve the precise question, federal courts may then inquire if the agency has made a reasonable interpretation of what Congress has made into law. With such guiding principles in place, consistency in judicial review of agency rulemaking is largely assured. Finally, there is the precise result of American Bankers itself. In the present tension of the financial markets, further uncertainty is not helpful. The D.C. Circuit has helped alleviate that somewhat, by eliminating this challenge to the continued expansion of credit unions. Whatever the respective strengths and weaknesses of traditional banking and federally chartered credit unions, the point remains that Congress has spoken. The bankers had rightly prevailed on their earlier challenge before the Supreme Court. Subsequently, our lawmakers then decided to veto that judicial decision by amending the underlying law. By codifying the credit unions’ legal rights to continued expansion, the agency responsible for their regulation correctly fortified their means of doing so, in a matter not at all offensive to what Congress prescribed. CONCLUSION In conclusion, the banking industry’s latest legal challenge to credit union expansion has been turned away by the D.C. Circuit. Its ability to place further obstacles in the path of expanding credit unions is now highly doubtful. Whatever the eventual economic outcome, we can be at least assured that it was reached by legal and just means within our federal court system. A. Michael Sabino is an associate professor of law at the Tobin College of Business at St. John’s University and a partner with Sabino & Sabino PC in Mineola, N.Y. ::::FOOTNOTES:::: FN1 See generally 12 U.S.C. �1759. FN2 522 U.S. 479 (1998). FN3 Credit Union Membership Access Act, Pub. L. No. 105-219, �2, amending 12 U.S.C. �1759(b). FN4 ___ F.3d ___, 2001 U.S. App. LEXIS 24186 (D.C. Cir. Nov. 9, 2001). FN5 467 U.S. 837 (1984). FN6 Chevron, 467 U.S. at 842-44. FN7 12 U.S.C. �1759(d)(1).

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