Our Position

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 its 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 Community Reinvestment Act 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The credit union tax exemption is based on an outdated 100-year-old law that has never been revisited. Since that time, credit unions have become larger, more complex, and bank-like in their size, powers, product and service offerings, and fields of membership – a trend that has sharply accelerated in recent years.

It is past time to bring credit unions into the 21st century, revoke their privileged status, and tax and regulate them as we do comparable financial institutions. The credit union model has become outdated, and its charter, purpose and tax-exempt status should be reviewed by Congress.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. Credit unions’ share of Paycheck Protection Program loans was 3.62 percent in 2020.

ICBA and community banks are particularly alarmed by the recent trend of credit unions acquiring banks – effectively “weaponizing” their tax subsidy and lax regulatory standards. 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 “net worth”), 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 other banks.

Credit union acquisitions of community banks and their branches have accelerated rapidly, with the last five years seeing approximately a 400 percent increase over the previous five years. 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. The federal tax exemption was designed to create access to affordable basic banking services for people of modest means who would otherwise lack it. But with these acquisitions, 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.

The most recent example of permissive regulation is NCUA’s adoption of a rule to allow credit unions to raise supplemental capital, which is a tool for outside investments in credit unions, undermining their status as member-owned cooperatives, a long-standing justification for their tax exemption. Supplemental capital will likely be a new source of funding for the acquisition of community banks.

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.

Staff Contact

Christopher Cole

Executive Vice President, Senior Regulatory Counsel

Washington, DC

Email

Aaron Stetter

Executive Vice President, Policy and Political Operations

Washington, DC

Email

Twitter

Michael Emancipator

Vice President, Regulatory Counsel

Washington, DC

Email

Related News

ICBA Launches Ad Campaign on Credit Union Tax Exemption

ICBA Press Release Banner 2020

USA Today ads highlight exploitation of credit union tax exemption

Washington, D.C. (Sept. 23, 2021) — The Independent Community Bankers of America (ICBA) this week launched a print and digital advertising campaign to inform Americans about the credit union tax exemption and its impact on financial services consolidation in local communities.

In new print ads running this week and next in editions of USA Today in Florida, Georgia, Illinois, Indiana, Michigan, Minnesota, and Wisconsin, ICBA notes the tax exemption subsidizes credit union acquisitions of local community banks. The campaign—which also will feature online digital ads in the coming weeks—directs readers to icba.org/cuhearings for more information.

“With the House Financial Services Committee holding an upcoming subcommittee hearing on banking consolidation, ICBA is reminding lawmakers and their constituents of how growth-obsessed credit unions are exploiting their tax exemption to reduce financial choices for individuals and small businesses—and reduce tax revenues at both the federal and local levels,” ICBA President and CEO Rebeca Romero Rainey said. “Congress granted credit unions a tax exemption to serve people of modest means—not to subsidize their rapid growth at the expense of local communities. After nearly a century, it’s time for another look.”

The tax exemption allows credit unions to make inflated purchase offers well above the book value of acquired community banks—while cutting regulatory safeguards for low- and moderate-income consumers due to credit unions’ exemption from the Community Reinvestment Act.

Further, every credit union purchase of a community bank increases the cost of the tax exemption because the taxable activity at the bank becomes tax-exempt. At the federal level alone, the credit union tax exemption costs taxpayers $2 billion per year and rising.

To fully understand and address this trend, ICBA is calling on policymakers to:

  • Implement an “exit fee” on these acquisitions to capture the value of the tax revenue that is lost once the business activity of the acquired bank becomes tax-exempt.
  • Hold congressional hearings on how the credit union tax exemption fuels these transactions.
  • Request a Government Accountability Office study on the evolution of the credit union industry and National Credit Union Administration supervision.

For more information, visit www.icba.org/wakeup.

About ICBA
The Independent Community Bankers of America® creates and promotes an environment where community banks flourish. ICBA is dedicated exclusively to representing the interests of the community banking industry and its membership through effective advocacy, best-in-class education, and high-quality products and services.

With nearly 50,000 locations nationwide, community banks constitute 99 percent of all banks, employ more than 700,000 Americans and are the only physical banking presence in one in three U.S. counties. Holding more than $5.8 trillion in assets, over $4.8 trillion in deposits, and more than $3.5 trillion in loans to consumers, small businesses and the agricultural community, community banks channel local deposits into the Main Streets and neighborhoods they serve, spurring job creation, fostering innovation and fueling their customers’ dreams in communities throughout America. For more information, visit ICBA’s website at www.icba.org

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