WASHINGTON–NCUA Chairman J. Mark McWatters has sent a response to a letter from Sen. Orrin Hatch (R-Utah) who in January sent a letter to the agency questioning the validity of the credit unions' federal tax exemption.
In his response, McWatters told Hatch, who is chairman of the U.S. Senate Committee on Finance, that any changes to the CU tax exemption would have a “detrimental effect on the credit union system and increase losses to the Share Insurance Fund, which could ultimately fall to U.S. taxpayers.”
Both credit union trade groups had praise for the McWatters’ response.
As CUToday.info reported here, Hatch wrote to McWatters, “I am concerned that the credit union industry is evolving in ways that take many credit unions further from their original tax-exempt purpose. Referring to moves by NCUA in recent years to relax field-of-membership constraints, to allow for expanded business lending and to consider alternative capital use, Hatch added, “While these may be worthwhile pursuits, they should give us pause and cause a reflection on the core mission of credit unions and their tax-exempt purpose.”
'Matters of Taxation Reside With Congress'
In response, McWatters said in the letter, “The federal tax exemption referred to in your letter is provided to federal credit unions under section 122 of the Federal Credit Union Act (the FCUA). Matters of taxation reside with Congress and are beyond the purview of the National Credit Union Administration. Accordingly, we have focused our response on the effects the elimination of the federal tax exemption could have on the safety and soundness of the National Credit Union Share Insurance Fund and the credit union system.”
McWatters said the NCUSIF currently insures deposits at credit unions representing more than $1.3 trillion in assets across all states and U.S. territories.
“As part of its own due diligence, the NCUA has performed a careful analysis of what, if any, impact eliminating the current federal tax exemption would have on the credit union system and the safety and soundness of the Share Insurance Fund,” wrote McWatters.
“The analysis revealed that, without also eliminating the field of membership restrictions, member business lending restrictions, investment capital restrictions, investment authority restrictions, and other restrictions imposed under the FCUA, eliminating the tax exemption would almost certainly create a safety and soundness issue for the Fund that could ultimately fall to U.S. taxpayers. In other words, a safety and soundness issue would most likely arise if credit unions are not offered a level playing field with other taxed depository institutions, including an option to make something akin to an S corporation election for purposes of taxation. Credit unions would need an appropriate transition period to incorporate any such changes into their business models so as to serve their members in a seamless manner.”
McWatters continued by touching on the reasons credit unions have a tax exemption, including from most state taxes, and noted that “stringent structural limitations” put in place by Congress are what make the tax exemption “appropriate.”
Responses to 6 Questions
McWatters’ letter also responds to the six specific questions that Hatch asked, including:
- How does the NCUA examine associations that form a part of a credit union’s field of membership to verify that they promote a meaningful affinity and bond among members, and to ensure that they don’t exist solely to expand a credit union’s field of membership?
- What data does the NCUA retain on associational charters that have been rejected for not meeting the NCUA’s associational common bond policies?
- What data does the NCUA retain on community charters that have been rejected for having too broad of a geographic field of membership?
- What recommendations does the NCUA make and what policies do they enforce regarding credit unions offering services outside of their tax-exempt purpose?
- How has the NCUA considered the issue of public disclosure of executive compensation since the GAO recommendation in 2006?
“In summary, we believe that eliminating the credit union tax exemption, without also eliminating the statutory restrictions on credit unions, would almost certainly have a detrimental effect on the credit union system and increase losses to the Share Insurance Fund, which could ultimately fall to U.S. taxpayers,” concluded McWatters. “Moreover, we believe the regulatory changes and allowances you reference in your letter are all consistent with the requirements of the FCUA and the spirit of the President’s Executive Order on regulatory relief.”
The full copy of the McWatters’ letter can be found in CUToday.info’s The Gov here.
Trade Groups Respond
In response to the McWatters’ letter, NAFCU’s EVP of Government Affairs and General Counsel, Carrie Hunt, said, “The NCUA has thoroughly responded to Chairman [Orrin] Hatch's inquiries, with specifics laying out how the loss of the credit union tax exemption would impact credit unions and the American taxpayer. NAFCU appreciates Chairman Hatch's interest in performing the Senate Finance Committee's oversight role and we look forward to working with Congress to focus on issues critical to the credit union industry and our members."
CUNA CEO Jim Nussle said in response, “We appreciate Senate Finance Committee Chairman Hatch and NCUA Chairman McWatters’ exchange of letters related to the credit union tax status and NCUA’s implementation of the Federal Credit Union Act. America’s credit unions are proud of the service they provide consumers, small businesses and communities, and we welcome the dialogue and awareness.
“Chairman Hatch asked very reasonable questions related to our tax status and various NCUA actions and procedure,” continued Nussle. “In response, Chairman McWatters correctly states that Congress has conveyed the credit union tax status based on credit unions’ structure as not-for-profit financial cooperatives and their mission to promote thrift and provide access to credit for provident purposes. We are confident that credit unions earn this status every day through the service to their members and communities.
“Chairman McWatters letter also demonstrates that NCUA is appropriately implementing the Federal Credit Union Act and fulfilling its mission to ‘provide, through regulation and supervision, a safe and sound credit union system, which promotes confidence in the national system of cooperative credit.’ Everyone should share the goal of enhanced consumer and small business access to credit unions.
“Credit unions' vision is that consumers and small businesses choose credit unions as their best financial partner,” concluded Nussle. “Credit unions will continue to work with Congress and NCUA to ensure that all have access to safe and affordable financial services from member-owned, not-for-profit credit unions.”