WASHINGTON–A letter to NCUA Chairman J. Mark McWatters from Senate Finance Committee Chairman Orrin Hatch (R-UT) that questions the validity of the credit unions' federal tax exemption has drawn responses from both credit unions and bank groups alike, with the latter saying it’s pleased to see someone challenging what it called the “credit union power grab.”
“I am concerned that the credit union industry is evolving in ways that take many credit unions further from their original tax-exempt purpose,” Hatch wrote in the letter, citing NCUA’s moves in recent years to relax field-of-membership constraints, to consider alternative capital use and to permit expanded business lending. “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.”
Hatch went on to express concern over “common bond requirements,” saying they seemed to “have been significantly watered down,” and also raised questions over CUs that allow members to join by paying a small fee to join an association that may not even be “operated by the credit union itself.”
“In other cases, credit unions have been established to serve the banking needs of otherwise highly paid individuals with easy access to banking services,” Hatch stated in the letter to McWatters. “This is not the ‘well-understood sense of cohesion’ that [the 1998 credit union bill] envisaged credit union members sharing.”
Finally, Hatch cited credit unions that now offer insurance, real estate brokerage and wealth management, and suggested those CUs “appear to operate in the same manner as taxable banks.” He further pointed to credit unions that have been acquiring for-profit banks and purchasing naming rights to stadiums.
Hatch asked NCUA to provide information to the committee on how the agency oversees associations for purposes of CU membership, how NCUA enforces policies related to CUs offering services outside of their tax-exempt purpose and how it oversees executive compensation and corporate sponsorships. McWatters’ response is due by April 6.
NAFCU: CUs Bring Benefits to Economy
The credit union trade groups were quick to respond.
"The credit union tax exemption has long provided tremendous value to credit union members and the overall economy of the United States," wrote NAFCU EVP-Government Affairs and General Counsel Carrie Hunt in a letter to Hatch.
"An independent study of the benefits of the exemption found that it provides a $16 billion per year benefit to the U.S. economy. Removing the tax exemption would prove detrimental to the economy over the next 10 years through: $38 billion in lost income tax revenue, $142 billion in reduced GDP, and the elimination of nearly 900,000 jobs."
Hunt's letter also goes on to reiterate NAFCU's belief that credit unions are best regulated by an independent NCUA and that the NCUA's rules and regulations are legal and in accordance with the Federal Credit Union Act.
CUNA: 'Mission Remains Unchanged'
In his letter to Hatch, CUNA CEO Jim Nussle wrote, “As the only depositor-owned, democratically controlled option in financial services, credit unions' mission is to promote thrift and provide access to credit for members, particularly those of modest means. That’s a mission they have fulfilled for more than 70 years, through multiple financial crises, and it’s a mission that remains unchanged today.
“As the prudential regulator for the credit union system, NCUA has done nothing more than ensure its rules and regulations are compatible with the modern financial services landscape, allowing credit union members and member business easier access to safe and affordable products and services, a demand that’s increasing as credit union membership continues to grow faster than the general population.
“In fact, CUNA recently completed a very rigorous statistical analysis finding that broader fields of membership unambiguously create substantial benefits to credit unions, their members and the overall safety and soundness of the financial sector,” Nussle continued. “UNA’s research also shows that community charters excel in their mission to ensure low-income populations have access to the financial system. All this comes as credit unions continue to receive high scores for outstanding member service, and as credit unions and members are an increasingly active voice working toward a regulatory environment that treats Main Street differently than Wall Street.”
Bankers: 'Credit Union Power Grab'
Meanwhile, a banker’s group is praising Hatch for addressing what it is calling a “credit union power grab.”
Following Hatch’s letter, Camden R. Fine, president of the Independent Community Bankers of America (ICBA), released a statement saying, “ICBA thanks Sen. Hatch for speaking out against the tax-exempt credit union industry, which for too long has enjoyed the benefits of competing with tax-paying community banks. Sen. Hatch’s comments echo ICBA’s belief that the credit union model has become outdated and that its charter, purpose and tax-exempt status should be reviewed by Congress.
“Credit unions were chartered by Congress to enable people of small means with a ‘common bond’ to pool their resources to meet their basic deposit, savings and borrowing needs. While some credit unions operate that way today, the NCUA has enabled others to grow their membership and their markets well beyond their statutory mission.
“Credit unions are also aggressively expanding into business lending,” Fine continued. “According to the NCUA, total business lending by credit unions ballooned from $13.4 billion in 2004 to $56 billion in September 2015, an annualized growth rate of 14 percent. As Sen. Hatch’s letter indicates, credit unions will receive a tax exemption valued at approximately $2.9 billion this year.
“Large, multi-bond and geographic-based credit unions have exceeded their statutory mission and use their tax-exempt, government-subsidized status to gain competitive advantage over taxpaying community banks. ICBA urges Congress to level the tax and regulatory playing field between community banks and credit unions. Bank-like credit unions should be subject to the same laws and regulations as banks—including taxation and the Community Reinvestment Act.”