ICBA Policy Resolution: 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). These include expanded 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 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The credit union model has become outdated, and its charter, purpose and tax-exempt status should be reviewed by Congress.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 five years, the total assets of federally insured credit unions have grown by more than $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 $61 billion in September 2017, a 355 percent total increase and 27 percent annual increase.

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.” These provisions exceed the NCUA’s statutory authority which limits the amount of business lending credit unions may engage in. ICBA unsuccessfully sued the NCUA over the MBL cap and is now pursuing a legislative remedy to resolve the issue.

Field of Membership

In December 2016, the NCUA finalized a new field of membership rule which, if allowed to stand, will significantly expand the reach of tax-exempt credit unions beyond their statutory limits. The rule weakens 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. The Final Rule quadruples a rural district field of membership’s population limit—raising the area’s permissible population from 250,000 to 1,000,000. It permits a community credit union to treat an entire state as a single rural district or to concentrate its business on multiple disparate areas, even if those areas are urban in nature, within a broader region that meets the overall population and density limits set by NCUA.

This new rule 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 and its affiliated state associations have filed an amicus brief in support of the American Bankers Association’s lawsuit challenging the National Credit Union Administration’s rule.

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. The NCUA has issued an advanced notice of proposed rulemaking allowing federally insured credit unions to issue supplemental capital to meet the minimum risk-based net worth requirement.  ICBA believes that such 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 regulation 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.

Placement of Public Deposits

A number of U.S. states and municipalities allow credit unions to accept public deposits which consist of taxpayer funds. Additional states are considering legislation to authorize this practice. ICBA believes that all states and municipalities should place public deposits exclusively with tax-paying banks. Community banks reinvest deposits in their local communities. Taxes paid by community banks support vital local services. As many state and local governments nationwide struggle to sustain revenues and close budget shortfalls, they should be barred by law from placing deposits with tax-exempt credit unions that erode the tax base on which these governments depend.

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