The latest round of the controversy between for-profit banks and non-profit credit unions ended recently when the U.S. Congress approved legislation that preserves the ability of credit unions to include diverse employment groups under the umbrella of one credit union.
The legislation was drafted after a U.S. Supreme Court ruling that credit unions had exceeded their authority by including more than one employee group in their membership. Previous legislation had required that members of a credit union have a common bond such as employment.
Charles Elliott, president and CEO of the Mississippi Credit Union System, said the bill that overwhelmingly passed in Congress means credit unions will be able to continue doing business as they have in recent years.
“It will ensure that everyone who is a credit union member now will be able to retain their membership,” Elliott said. “It will allow credit unions to continue to take in employee groups of less than 3,000 employees. One credit union can serve multiple employee groups with each employee group having its own common bond. But all of the employee groups in one credit union do not have to share the same common bond. That was the issue in the Supreme Court.”
The Mississippi Bankers Association along with other banking groups across the country had opposed the legislation on the grounds that the credit unions were overstepping their bounds by including groups without common bonds in the same credit union.
The Supreme Court lawsuit regarded an effort by AT&T to organize a credit union which would have included in its membership anyone who owned a telephone. The court ruled that wasn`t what was intended by the credit union legislation.
The banker`s position was that if credit unions were allowed to violate the requirement of a common bond, then credit unions should have to pay taxes and come under the same safety and soundness requirement of banks. Bankers claim credit union`s tax exemptions provide an unfair competitive advantage, and that the government loses at least a billion dollars per year in tax revenue because of the exemption.
One concern by bankers regarded credit unions having fewer safety and soundness requirements than banks, which the bankers feel creates the potential for problems if a downturn in the economy results in a large number of foreclosures such as were seen when a huge bailout of the savings and loan industry was required.
But Elliott said the credit unions will only be allowed to make small business loans to members, not incorporated businesses. And he said that member business loans only make up about 1% of the credit unions` assets.
“The size of the business loans are small enough that a bank is not interested in them,” Elliott said.
The legislation will cap at 12.25% the maximum amount that any credit union can have in member business loans. The remainder of loans are personal loans such as for purchasing automobiles.
“Prior to the passage of this legislation, there was no maximum on the number of business loans a credit union could have,” Elliott said. “So, there are additional safeguard that Congress has put in place that will ensure the continued safety and soundness of credit unions. Along those lines, we have letters from the President and the Treasury Secretary, and both of them say the same thing: credit union business lending does not produce a safety and soundness concern.
“I think that Congress realizes that credit unions play a very important role in the lives of their members. Congress realizes that credit unions as competitors to other financial institutions is good for consumers, and that the credit union not-for-profit structure will in fact improve the financial well-being of their member owners.”
Elliott said the legislation benefits employees of small businesses because previously membership of 2,000 to 3,000 was needed to charter a credit union. Now smaller employer groups can also benefit from credit union membership.
“The big thing is that it allows employees of small businesses to be able to join credit unions, and 98% to 99% of business in U.S. employ less than 3,000 people,” he said.
Elliott said credit unions represent only a small fraction of the nation`s financial assets, about 2.1%.