TAX-EXEMPT CREDIT UNIONS

Position

  • ICBA urges Congress to end the unwarranted federal tax subsidy of the credit union industry.
  • ICBA opposes expanded powers for credit unions, whether pursued by legislation or regulation, as long as credit unions remain exempt from taxation and the Community Reinvestment Act (CRA).
  • ICBA believes the National Credit Union Administration’s (NCUA’s) final “member business loan” rule violates the plain terms of the Federal Credit Union Act by allowing credit unions to exceed the member business lending cap. ICBA pursued a challenge to the rule in the United States District Court for the Eastern District of Virginia.
  • ICBA strongly rejects the NCUA’s field of membership final rule as well as its new proposal to raise the population limit for a community credit unions from 2.5 million to 10 million. The new rule and the proposal effectively remove any remaining limitation on credit union membership. Both the rule and the proposal conflict with NCUA’s statutory authority.
  • ICBA opposes any legislation or regulation that would allow credit unions to raise supplemental capital, and in effect, cease being exclusively member-owned entities – a condition of their original tax exemption.
  • ICBA supports applying CRA requirements to credit unions comparable to and with the same asset size distinctions as banks and thrifts.
  • ICBA supports the right of credit unions to convert to commercial banks without bearing greater regulatory conditions than required for national bank conversions to a state charter. ICBA encourages credit unions seeking bank-like powers to convert to bank or thrift charters.

Background

The credit union model has become outdated, and its charter, purpose and tax-exempt status should be reviewed by Congress.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. As a result, in just the last four years, the total assets of federally insured credit unions have grown by nearly $70 billion and membership has grown by more than 10 million, while the total number of credit unions has declined by over 1,000. Credit unions are also aggressively expanding into business lending. 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.

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 CRA. 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.

Commercial Lending. ICBA vigorously opposes legislation to expand commercial lending powers of credit unions. Under the Federal Credit Union Act, credit union member business loans are capped at 12.25 percent of total assets. However, there are numerous exceptions to the cap. Small Business Administration loans, as well as any small business loans of $50,000 or less, are exempt from the cap. In addition, nearly 2,000 credit unions are now completely exempt from the member business lending cap as “low-income credit unions.” Credit unions also aggregate their commercial lending capacity through the use of participation syndicates which are often marketed and serviced by large, interstate Credit Union Service Organizations or “CUSOs.”

ICBA filed a legal challenge to the NCUA’s March 2016 member business lending rule. In particular, our suit challenged provisions of the rule that exclude non-member commercial loans or loan participations from the member business lending cap. In ICBA’s view, these provisions exceed the NCUA’s statutory authority which limits the amount of business lending credit unions may engage in. The court rejected ICBA’s claims due in no small part to the Chevron doctrine which unfortunately creates additional hurdles to challenging regulatory agencies in court. ICBA will continue to explore and seek regulatory, legal, and legislative remedies to address the unfair and uneven playing field between tax-exempt credit unions and tax-paying community banks.

Field of Membership. In October 2016, the NCUA finalized a new field of membership rule which, if allowed to stand, will drastically expand the reach of tax-exempt credit unions beyond their statutory limits. The proposal will weaken numerous legal requirements designed to ensure credit unions remain focused on their fundamental mandate of serving people of modest means with a common bond. For instance, federal credit unions would be able to apply to serve much larger areas than metropolitan statistical areas or to include areas contiguous to their existing core-based statistical areas. Credit unions also would have a much easier time converting to community charters and expanding into larger geographical areas. However, after reaffirming in its final rule that the population limits for community credit unions was 2.5 million, the NCUA has now proposed that the population limit by raised to 10 million. This new proposal makes a mockery of the statutory requirement that community credit unions serve local, well-defined communities and is another example of how the NCUA has transformed itself from a regulator to a “cheerleader” for the credit union industry. ICBA strongly supports the American Bankers Association’s lawsuit challenging the National Credit Union Administration’s rule, which drastically increases the powers of tax-exempt credit unions beyond their statutory limits. ICBA will participate in the lawsuit through a friend-of-the-court brief.

Supplemental Capital. ICBA is adamantly opposed to any legislation or regulation that would allow the NCUA to issue rules allowing tax-exempt, nonprofit credit unions to raise supplemental capital and, in effect, cease being exclusively member-owned (“mutual”) entities. If the NCUA allows supplemental capital by regulation, ICBA believes that regulation would exceed the agency’s authority under the Federal Credit Union Act. Since their creation, credit unions have been mutual entities that serve their members, not capital investors. This legislation would fundamentally alter the limited, member-oriented character of credit unions – the very basis of their tax exemption. Mutual ownership is one of the few structural characteristics that distinguish credit unions from most commercial banks. Mutual ownership – along with credit unions’ original mission of serving people of modest means with a common bond among them – was the original justification for their tax exemption. Congress long ago removed the tax- exempt status of mutual savings banks and should now do the same with regard to credit unions. Supplemental capital could fund and exacerbate the recent trend of credit unions’ purchasing community banks.

Community Reinvestment Act. ICBA urges Congress to apply CRA to tax-exempt credit unions in a manner comparable to, and with the same asset size distinctions, as banks and thrifts. Multiple studies have indicated that credit unions are not meeting even the fundamental mandate of their charter to serve people of modest means; their members have higher incomes and education levels than bank customers. ICBA urges Congress to move towards more regulatory equity by applying CRA standards to all credit unions.

Charter Choice. NCUA routinely approves mergers and conversions from occupational to geographic charters that allow credit unions to serve large population bases without regard to common bond. At the same time, NCUA has made it more difficult for credit unions to convert to mutual savings bank charters. ICBA supports and encourages credit union conversions to bank or thrift charters, and supports legislation to prohibit the NCUA from obstructing these conversions.

Staff Contacts: Mark ScanlanChris ColeAaron Stetter