Use of the Word Bank

I'm regularly contacted by bankers about credit unions using the terms bank or banking in their marketing and advertising materials.

Credit Union Journal (paid subscription) is reporting on an interesting legal development in Vermont that could have broad implications for state chartered credit unions across the country.

The Vermont Department of Financial Regulation has filed a notice of intent to issue a Cease and Desist Order to Vermont State Employees CU to stop using words such as “bank” and “banking” in its marketing material and advertisements. The state regulator told the credit union that those words are reserved for banks only.

The notice of intent stated that Vermont State Employees CU was in violation of 8 V.S.A. § 14103. The statute states:

No person shall advertise or put forth any sign as a bank, banking association, or trust company, or in any way solicit or receive deposits or transact business as a bank, banking association, financial institution or trust company, or use the words "bank," "banking association," or "trust company" or other similar sounding word or name unless it is a financial institution reporting to and under the supervision of the commissioner or is authorized to conduct such business in this state under federal law, or unless the commissioner approves the activity or word or name used in writing after giving due consideration for whether the activity, word or name will confuse or mislead the public as to the nature of the business of the entity. However, this section shall not prevent an individual, as such, from acting in a trust capacity. (Added 1999, No. 153 (Adj. Sess.), § 2, eff. Jan. 1, 2001.)

At this time, Vermont State Employees Credit Union is the only target of the proposed cease and desist order. The credit union is appealing the proposed enforcement order.

If the Department's findings are upheld, Vermont State Employees CU must immediately cease using the terms "bank", "banking association" and "trust company" and similar sounding words. In addition, if the credit union continues to use such words after the cease and desist order becomes effective, it could be subject to $15,000 fine for each occurrence and other penalties.

Moreover, if this enforcement order becomes effective, it would impact how other Vermont state chartered credit unions communicate with their members. This could also impact state chartered credit unions in other states with similar statutes.

However, the state law will not apply to federal credit unions operating in Vermont. In a March 12, 2004 legal opinion letter, NCUA preempted federal credit unions from a Minnesota law restricting the use of the terms “bank,” “banker,” or “banking” in advertising.

The Department of Financial Regulation wrote that it is aware on NCUA's legal opinion, but points out that state law does not permit state chartered credit unions to use these terms or expressions. "Such a result is not unexpected given the dual chartering system."