ABA responds to NCUA on Credit Union Acquisition

Mr. Gerard Poliquin
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314

Dear Mr. Poliquin:

Given that the National Credit Union Administration (NCUA) has not suspended their regulatory agenda despite the stresses of COVID-19 on financial markets and participants, the American Bankers Association (ABA) is responding to a Notice of Proposed Rulemaking from NCUA, which adds to, and clarifies its regulations that allow without restrictions, any tax-exempt credit union from purchasing a tax-paying bank. First, NCUA proposes to simplify the requirements which apply to combination transactions between a federally insured credit union and another type of financial institution—namely a bank. Second, NCUA outlines that the directors of a federally insured credit union proposing an acquisition of a bank would understand the nature and consequences of the proposed transaction. The NCUA’s approval would be required for all such transactions, in addition to, state-chartered and federally insured credit unions must also obtain approval from their state regulator. ABA believes that credit unions are aggressively targeting banks for acquisition to expand their business lines and grow their field of membership outside of their chartered mandate to serve low- and moderate-income individuals. ABA urges the NCUA to establish proper regulatory guidelines for their institutions upon the assumption of liabilities or merger with another institution that is not a credit union; or alternatively, for credit unions with greater than $500 million in assets to assume a bank charter upon the acquisition of a bank’s assets and liabilities.

NCUA’s proposed rulemaking propels credit union expansion into an already competitive and crowded banking market due to unique federal benefits and a passive regulatory standard. Expressed more simply, NCUA would allow any tax-exempt credit union to purchase a tax-paying bank, a practice that is growing at an alarming rate, without imposing new restrictions. More than twice as many credit union acquisitions of banks occurred in 2019 than the previous year. While many credit union advocates would like to dismiss this trend as “typical consolidation,” the reality is that these credit unions are targeting wealthy communities, which is counter to their chartered mission and tax-favored status to serve people of modest means. Further aided by their tax advantage, credit unions are employing an acquisition strategy that outprices taxpaying banks for the same deals. According to the Federal Reserve Bank of St. Louis, “…credit unions might be willing to pay a higher price because of their favorable tax treatment.” This strategy is driven by the largest five percent of credit unions—which happen to be the largest beneficiaries of the tax subsidies—to open new markets that are neither local nor share a common bond with their existing membership.

Beyond the obvious concerns that credit unions are leveraging their tax exemption to purchase tax-paying banks, there are other troubling aspects that public policymakers need to consider:

• To expand market share and compete directly with tax-paying banks, it is the largest tax-exempt credit unions that are acquiring smaller banks.
• The acquisitions of tax-paying banks by tax-exempt credit unions are in saturated markets where there are plenty of financial services options for consumers.
• Going against the chartered mission of serving a local defined community with a common bond, many large credit unions are targeting banks outside of these defined areas, and many are in wealthy neighborhoods.
• The acquisitions of tax-paying banks by tax-exempt credit unions are designed to grow rapidly and expand to serve higher risk business lending activities.
• Large credit unions acquiring tax-paying banks should be regulated similarly to the institutions they are purchasing.

Many of the largest credit unions today do not resemble the mission-focused institutions they once were. There is an ever-growing chorus that questions the NCUA’s intentions to properly oversee and enforce regulations on a rapidly expanding number of large and complex credit unions. There is no denying that the credit union charter is unique as it conveys responsibilities to justify the tax-exempt status of these institutions. However, for credit unions to enjoy the tax exemption, they should adhere to their statutory mission to meet the needs of financial consumers of small means. Further, consumers may not realize that credit unions are not held to the same regulatory standards as other financial institutions, which is why ABA believes the largest credit unions should, at a minimum, receive the same level of regulatory scrutiny as banks.

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