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Credit Union Regulation
 Issue
Bank-like credit unions need to choose to return their focus to the traditional credit union mission or choose to become a mutual savings bank.
Position Statement
Bank-like credit unions have significant competitive advantages relative to traditional credit unions and community banks. The goal is to have these institutions return to their original credit union mission or become subject to the same regulatory, supervisory, and tax requirements as banks.
To facilitate this effort, credit union expansionism must be contained by eliminating abusive field-of-membership approvals and by blocking the credit union industry's legislative goal of greater—and riskier—lending authority and weaker capital standards. If expansionist efforts by credit unions are successful, little incentive will remain for a credit union to switch to a mutual savings bank charter. There will also be little ability to stop the continued growth of these expansion-minded credit unions.
Ultimately, the objective is to have these new breed credit unions choose between becoming a mutual savings bank or remaining as a traditional credit union with both the benefits and limitations associated with the credit union charter. Credit unions that want to become a mutual savings bank should be allowed to do so without unnecessary interference from the National Credit Union Administration (NCUA).
Explanation
Bank-Like Credit Unions
Credit unions are a $757 billion industry that earned nearly $5.6 billion for the 12 months ending in June 2007, but paid nothing in taxes. Over the next ten years, the credit union tax exemption will cost the federal government nearly $19 billion. In addition to enjoying this free ride, credit unions do not have to meet the community reinvestment obligations imposed on banks and savings institutions. Mutual savings banks are structured in a manner similar to credit unions. They have no stockholders, are owned and governed by their members, but mutual savings institutions lost their non-tax status in 1952 and have been paying taxes ever since.
Congress chartered credit unions in 1934 to serve persons of modest means. In return, credit unions were exempted from taxation. However, credit unions are not required to demonstrate that they are fulfilling this statutory mandate. In fact, in November 2006 the Government Accountability Office (GAO) reported for the second time in three years, "that credit unions lagged behind banks in serving low- and moderate-income households." The GAO study was supported by a 2005 study performed by that National Community Reinvestment Coalition that also found banks do a better job of serving people of modest means than do tax-exempt credit unions. Credit unions should be required to adhere to their mandate to serve persons of modest means, periodically tested through verifiable measures. Congress exempted credit unions from taxation to aid them in serving persons of modest means. However, the NCUA and the credit unions they regulate have failed to document their service to people of modest means. During testimony before the House Ways and Means Committee in November of 2005 NCUA Chairman JoAnn Johnson testified that the NCUA did not collect such information. Collection of such information in a verifiable format is important and must be done.
Over the years, two distinct credit union industries have emerged. The first group consists of credit unions that adhere more closely to their statutory mission. The other is an aggressive and fast growing group of credit unions that have large fields of membership, maintain extensive branch networks, and offer products virtually identical to community banks while tending to serve higher income people. Yet, these bank-like credit unions are still exempt from taxes and are not required by their regulator to focus on their mandate to serve people of modest means. Currently both Massachusetts and Connecticut have CRA requirements for state chartered credit unions. Examinations for CRA compliance in these states show that banks are doing a better job of complying than credit unions.
Credit union conglomerates often hide behind the small credit union image to preserve their government advantages. Many credit unions have formed subsidiaries known as credit union service organizations (CUSOs) that have contributed significantly to the dramatic growth of expansive, complex credit union activities. CUSOs offer sophisticated products, such as trust and investment services. CUSOs also provide non-traditional financial services, such as real estate brokerage, pre-paid legal service plans, and travel agency services. Income generated from bank-like products and non-traditional financial services, such as the activities that credit unions offer through CUSOs, should be reported to the Internal Revenue Service (IRS) and be subject to taxation. Credit unions are using CUSOs as a loophole to evade charter restrictions.
Furthermore, the IRS has been auditing state chartered credit unions with respect to unrelated business income. To avoid unrelated business income taxation, a credit union product or activity must meet the mission of either promoting thrift or providing low cost credit to credit union members. On January 15, 2008, Community First Credit Union (Appleton, Wisconsin) sued the IRS to obtain a $54,000 refund of taxes paid on income from three insurance products that are subject to the unrelated business income tax. ABA believe that when credit unions offer products to nonmembers or offer services that are beyond their chartered purpose, the income derived from these activities should be taxed.
During the November 2005 House Ways and Means Committee hearing on credit union taxation, Chairman Bill Thomas (R-CA) called for "transparency, accountability, and verifiability" from the credit union industry. Many of his concerns were confirmed by the November 2006 GAO report, which found that there is little transparency in the credit union industry. The GAO found, for example, that "for not-for-profits, the disclosure of such information helps support oversight of these tax-exempt entities. However, unlike most other tax-exempt organizations, federal credit unions are not required to provide IRS with Form 990s that contain publicly disclosed information such as executive compensation." Additionally, many state credit union regulators file consolidated Form 990s for credit unions they regulate, effectively shielding individual credit unions from the scrutiny and accountability that Form 990 was intended to provide. Congress must eliminate the Form 990 exemption provided to federal credit unions, and the IRS should abolish the group return exception. The exemption prevents necessary transparency of credit union compensation and corporate governance.
Credit Union Charter Choice
Many credit unions in recent years, desiring to build additional capital or expand their product offerings, have sought to convert to mutual savings banks. However, the NCUA has imposed formidable bureaucratic roadblocks to these efforts. The NCUA's conversion regulations mislead credit union members and present unnecessary hurdles for those institutions seeking to switch to a mutual savings bank. The requirements also conflict with the mutual to stock conversion rules established by the OTS and frustrate the will of Congress expressed in recent legislation that the conversion process be fair and accessible.
Three times in the past three years the NCUA has promulgated rules targeted at preventing credit union conversions. These rulemakings have often come in reaction to a successful conversion. Each one of the new rules creates new roadblocks and hurdles for credit unions wishing to become mutual savings banks, while at the same time empowering dissidents organized and financed by the protectionist credit union activist groups. Despite statements to the contrary, the NCUA's actions demonstrate that the agency is philosophically opposed to charter choice.
Going forward, credit unions must be required to make an affirmative choice. They will either have to adhere to the requirements associated with a traditional credit union charter, or they must choose to become a mutual savings bank.
Contact for further information: Keith Leggett (202) 663-5506.
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