Advocacy

Tax-Exempt Credit Unions

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 Consumer Reinvestment Act.

Advocacy
ICBA Policy Resolution

Tax-Exempt Credit Unions

Position

  • ICBA urges Congress to end the unwarranted federal tax subsidy of the credit union industry and/or promote increased tax parity between credit unions and community banks.
  • ICBA staunchly opposes credit unions exploiting their tax subsidy and lax regulatory environment to purchase community banks. These acquisitions are inconsistent with Congressional intent behind credit unions’ tax exemption and warrants Congressional scrutiny.
  • ICBA implores Congress to use their oversight authority to investigate the National Credit Union Administration’s alarming failure to regulate and oversee the industry. The NCUA stands in stark contrast to the other banking agencies.
  • ICBA opposes expanded powers for credit unions—so long as they remain tax-exempt—whether pursued by legislation or regulation, such as acquisitions of community banks, commercial lending, field of membership, and supplemental capital powers.
  • ICBA supports applying CRA requirements to credit unions comparable to and with the same asset size distinctions as banks and thrifts.
  • ICBA urges states to prohibit the placement of public deposits in tax-exempt credit unions. Public entities should not support tax-exempt institutions that erode the tax base on which these entities depend.
  • ICBA supports the right of credit unions to convert to commercial banks without excessive regulatory hurdles. It should be no more difficult, from a regulatory perspective, for a bank to purchase a credit union than for a credit union to purchase a bank. 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The credit union model has become outdated, and its charter, purpose and tax-exempt status should be reviewed by Congress.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 five years, the total assets of federally insured credit unions have grown by more than $430 billion and membership has grown by more than 20 million, while the total number of credit unions has declined by nearly 1,100.

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 $78 billion in September 2019. There are now 319 credit unions in excess of $1 billion in assets. While comprising just 6 percent of all credit unions, their share of the estimated tax subsidy increased by 260 percent over the past two decades.

ICBA and community banks are particularly alarmed by the recent trend of credit unions acquiring banks – effectively “weaponizing” their tax subsidy and lax regulatory environment. In addition to their use of tax subsidized earnings, credit unions have a regulatory capital advantage in the acquisitions market: Under NCUA rules, goodwill is treated as regulatory capital (or “networth”), while banks are required to deduct  goodwill in regulatory capital calculations as an intangible asset. This differential effectively allows credit unions to outbid banks in the purchase of banks.

Credit union acquisitions of community banks and their branches have accelerated rapidly, with 2018 seeing 13 acquisitions, and 2019 seeing 21, more than four times as many as occurred just five years ago. These deals transform taxable business activity at community banks into tax-exempt activity at credit unions, thereby shrinking the tax base, not only at the federal level but at the state and local level as well.

Credit union-bank acquisitions are a perversion of congressional intent in the creation of the federal tax exemption: To create access to affordable basic banking services for people of modest means who would otherwise lack it. What’s more, with these deals, the tax exemption has become a tool of harmful industry consolidation.

Larger, out-of-market credit unions are displacing smaller, locally based community banks, creating an environment that is less competitive, has more systemic risk, and offers fewer choices for consumers and small businesses.

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 Consumer Reinvestment Act.

Banks and credit unions should operate on military bases under the same terms. (Credit unions currently operate rent-free on bases.) 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.

Finally, the NCUA must withdraw its January 23 proposal to allow credit unions to raise supplemental capital. Supplemental capital would be a tool for outside investments in credit unions, undermining their status as member-owned cooperatives, a long-standing justification for their tax exemption. If the proposal becomes final, it is likely that mega-credit unions will use supplemental capital as a war chest to fund bank acquisitions.

ICBA and the nation's community banks are calling on policymakers and the public to “Wake Up” to the risky practices, costly tax subsidies, and irresponsibly lax oversight of the nation’s credit unions. Policymakers must open their eyes to the growing threats posed by credit unions' abandonment of their founding mission facilitated by their captive federal regulator, the National Credit Union Administration.

It is long past time for policymakers to wake up to the new realities of the credit union industry and subject it to the same level of scrutiny for the sake of our nation’s consumers and economic well-being.


Staff Contacts
:    Chris Cole, Aaron Stetter, Michael Emancipator