Automatic transfers of funds between savings and checking accounts at banks, savings and loan institutions and credit unions were declared illegal yesterday by the U.S. Court of Appeals here.
In a decision certain to ignite fierce lobbying for new legislation on Capitol Hill, the court said federal regulators violated banking laws in approving such transactions.
Although the court delayed the effectiveness of its order until next Jan. 1 and invited Congress to remedy the chaos that migh result by abolition of such transfers, yesterday's decision threatened to end a new device that millions of American have begun to use to conserve money in an inflationary era.
In effect, the automatic transfer regualtions have permitted consumers to earn interest on money that previously was idle in checking accounts.
A spokesman for the Federal Reserve Board said last night that as of April 4, American consumers had at least $6.26 billion earning interest in savings accounts at 351 banks that are tied to automatic transfer plans and that can instantaneously be transfered to a checking account when funds run low.
Banks first were permitted to offer such automatic transfers as of last Nov. 1, and after one month, $1.3 billion had been deposited. An American Banking Association official noted last night that institutions that invested heavily in computers to offer the new service "stand to lose lots."
Significantly, in each of the cases before the court, competitors filed suits against other financial institutions. The credit union "share draft" program of trnsferring funds was challenged by the powerful American Bankers Association, which alleged that since credit unions have no requirement of settling aside reserves against deposits, they had an unfair competitive edge.
Savings institution offerings of check-like accounts were challenged by the Independent Bankers Association, representing the nation's smaller banks, while commercial bank saving-checking transfers were attacked by the U.S. League of Savings Associations.
In reviewing all of these programs, the court said yesterday that they were flawed from the start because there was no overall national policy and each type of financial institution had won approval from its supervising agency to install such devices and again a competitive equality." The net result has been three separate types of institutions rapidly becoming identical in services "without the benefit of congressional consideration and statutory enactment," the court declared.
Specifically, the court said federal regulators - Federal Home Loan Bank Board, Federal Reserve Board and National Credit Union Administration - violated laws that prohibit payment of interest on checking accounts, in permitting the new money exchanges.
"We are neither empowered to re-write the language of statutes which may be antiquated" nor can the court make a "policy judgment" on whether such transfers serve the public interest, the decision stated.
Adm. Lawrence Connell, chairman of the Naional Credit Union Administration, said yesterday that his agency may appeal the decision. "I would hope that Congress would recognize that the 700,000 shareholders in some 900-plus credit unions approved for share drafts have expressed an interest in having the opportunity to earn interest or dividends on their transactions," he said in a telephone interview for Wiesbaden, Germany, where he was addressing the European Defense Credit Union Council.
Mark Clark, a spokesman for the U.S. League of Savings Associations in Chicago, emphasized that "we have said all along that present law does not allow automatic transfer service [by banks] . . . the decision must be made by Congress, not the Federal Reserve Board . . ."
The ABA had no formal response but a spokesman said that, on balance, banks may have come out better than other financial institutions in yesterday's decision from a competitive standpoint, because credit union accounts in many localities were "causing a hemorrhage [of deposits] from banks."