Survival of the fittest? Banks vs. Credit Unions: the evolution of a financial battle.

WHEN SCOTT SIMPSON uses words like "evolution" and "adaptation," he's not talking about Darwin's finches, but credit unions.

As president of the Utah League of Credit Unions, Simpson says the larger credit unions have followed a natural course in becoming the large financial institutions they are today.

Bankers, however, choose different terms to describe the growth of their nonprofit and tax-exempt cousins. Howard Headlee, president of the Utah Bankers Association, calls these developments "mutations" or, better yet, "unnatural, unfair competition."

In this decade-long fight, credit unions are either the Darwinian thick-beaked finch that can open seeds that banks have failed to crack, or they are the freakish finch which has grown a third tax-exempt wing.

Between those views is the heart of the debate: Should tax-exempt companies be allowed to compete with their tax-paying counterparts? Banks say, "No." Credit unions say, "Yes."

Why? "Because credit unions improve the quality of living in the state," says Simpson. And although the claim seems a bit hyperbolic, Simpson's point appears valid. He uses an example of a four-percent-interest car loan. "Do you think there would be such a thing if credit unions didn't exist?" Simpson asks.

Even Headlee might agree. The banker's advocate explains why banks wouldn't be offering the next-to-nothing rates if credit unions weren't. "After we pay state and federal income taxes, as well as state sales tax, there is no profit on a four-percent interest loan," he says. "When banks offer such loans, they do it as a service for their customers, not to make money."

So far, it's hard to tell if anyone has profited from the decade-long fight banks and credit unions have waged in court, the state legislature and the public opinion forum. The two groups have spent millions of dollars, and instead of one party emerging victorious, the debate has merely evolved. During that 10-year process, the roles of banks and credit unions have kept changing as well.

While most of the attention has been focused on larger financial institutions, including America First, Mountain America and Zion's Bank, smaller institutions have been more affected by charter swapping and changes in the law.

Curt Doman, president of Granite Federal Credit Union, says he was forced to move to a federal charter because of "stupid rules" created in the State Legislature. "Credit unions are more regulated today than banks," Doman says. "If I'm not asking for protection from the larger credit unions, and I am in direct competition with them, what are banks so worried about? I can compete just fine."

Those who worry, focus on credit unions' steady encroachment on what has traditionally been bank territory.

Howard G. Holt, president of Brighton Bank, notes that 25 years ago car loans, home equity lines of credit and personal loans were all a large part of the banking business. "Banks were forced to change," Holt says, "and we did." Today, such loans are an insignificant amount of banks' income. But now that credit unions are offering small business loans, bankers are getting peeved.

"Credit unions have evolved to do everything banks can do, and in many cases they can do it cheaper because they don't pay taxes," Holt says.

With no room left in the market to build a niche, bankers get upset. Holt has managed to keep his bank on top by focusing on commercial real estate loans, but he still worries about credit union encroachment. "First they began taking a piece of the pie with commercial loans, but now credit unions have moved into the commercial real-estate sector," Holt says. "It is something we do better than credit unions because we have been doing it for years, but if the system is left unchecked for five to ten years, who knows what could happen."

Ed Leary, Utah Commissioner of Financial Institutions, says of the past ten years, "The debate appears to have gone full circle." Bankers won the first round in 1998, when Third District Judge William A. Thorne ruled that state-chartered credit unions must operate only in a single county. The lawsuit, filed by the Utah Bankers Association in 1993, had a five-year run including a trip to the Utah Supreme Court. The suit contested credit unions' right to expand throughout the state. The ruling overturned a 1983 decision by the state commissioner of financial institutions that interpreted the law as allowing credit unions to expand their traditional fields of membership beyond one county and beyond the employees of a single organization or company.

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When credit unions lost the court fight, they moved forums hoping to win the battle in the legislature. A citizens' initiative petition, signed by 104,000 credit union members, asked the Legislature to reverse the judge's decision. In a surprise move, bankers and credit union operators reached an agreement, quietly settling one of the most contentious issues of the 1999 legislative session. Under the agreement passed by the state House and Senate, credit unions weren't forced to close any branch offices, and they weren't asked to pay more state taxes either. The agreement restricted the expansion of credit unions on a geographic formula and capped their business loan capability at $250,000.

At the time, bankers were saying that big, nonprofit credit unions were out to harm the banking industry and weren't paying their fair share of taxes, which support Utah school kids. Credit unions, through a massive TV ad campaign, painted the debate as a David vs. Goliath issue: the small credit unions versus big-business banks.

But it was only a matter of years before banks and credit unions were back at the capital fighting again. Taking swings at House Speaker Marty Stephens, the Utah League of Credit Unions accused the Republican from Farr West--a banker by profession--of wanting to impose a new tax on credit unions and their members.

Banks had launched an earlier media attack on two credit unions, Mountain America and America First, accusing the tax-exempt unions of acting like banks, especially when their business seemed to increase uncontrolled.

In the 2003 Legislature, Rep. Jeff Alexander, R- Provo, sponsored legislation that would tax 30 percent of credit unions' net income. Once again, the end result was a compromise that put limitations on credit unions' business lending and established a legislative task force to study credit union issues, including the possibility of imposing future taxes.

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Emerging with tattered feathers, many credit unions flew to the protection of the federal government. Abandoning their state charters for less-restrictive federal ones, many of the state's credit unions have chosen a new route. Under the federal charter, credit unions' membership may include anyone who lives, works, worships or attends school in a county where the credit union is already established. The state charter restricts credit union membership to those living within county borders.

Now the debate appears to be in the hands of Congress, with many of the state's credit unions now under federal regulations. In mid July, Headlee met in Virginia with other bank leaders from across the country to discuss how to get Congress to address the issue. In Holt's eyes, the potential congressional battle is a "blessing" enabling the federal government "to deal with the issue once and for all."

Simpson believes Congress will see through to the "greed of bankers" and protect credit union members. Bankers hope Congress lops the third wing from the credit unions and forces them to stop acting like banks, or at least tax them like banks.

Jake Parkinson is a Salt Lake-based freelance writer.