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Taxation, regulation issues moving on Capitol Hill

Banks, credit unions often competing for same customers

Banking professionals are up in arms about what they say are unfair business advantages credit unions have over banks.

The debate brewing over whether credit unions should be taxed like banks has moved to Capitol Hill, particularly after the most recent White House budget estimate showed that by failing to tax credit unions in the same manner as other financial institutions, more than $7 billion in taxes will be lost from 2005 to 2009.

“We have no problem with the traditional credit unions that adhere to the common bond to serve the needs of a well-defined group of people who weren’t otherwise being served,” said Mac Deaver, executive director of the Mississippi Bankers Association. “Frankly, we’re concerned about the large ones competing directly with banks without the same taxation and regulation.”

Big numbers

In Mississippi and the U.S., credit unions outnumber banks, yet have a significantly smaller market share. As of Dec. 31, 2003, Credit Union National Association (CUNA) reported 9,568 credit unions in the U.S., compared to 9,177 banks. Total assets for credit unions totaled $623 billion, compared to $9 trillion for banks. The largest credit union had assets of $20.1 billion, an increase of 14.2% from the previous year.

In Mississippi, 115 credit unions reported assets totaling $2.4 billion, while 103 banks had assets totaling $40 billion. Keesler Federal Credit Union, Mississippi’s largest, with the second largest market share on the Gulf Coast, reported $914 million in assets at year-end, with a net income of $11.3 million.

Bankers point to the following unfair advantages they say credit unions enjoy:

• Many credit unions today look and act like banks, yet they do not pay taxes or abide by the same rules as banks. For instance, credit unions are not required to meet the credit needs of low- and moderate-income people.

• Credit unions’ regulator, the National Credit Union Administration (NCUA), has adopted policies that have expanded credit union membership beyond the limits prescribed by Congress.

• These non-taxed banks continue to receive the same tax and regulatory treatment as traditional credit unions, putting small, locally owned financial institutions at a competitive disadvantage.

• Bankers are concerned that the NCUA is promoting the expansion of large credit unions at the expense of smaller credit unions and banks.

Finding the right level

“The question being asked by banking officials is that there must be some level at which all the immunities and exemptions should not apply,” said Deaver. “But what level is that? We’re not trying to keep credit unions from competing with banks, but it makes sense to us that the credit unions should be subject to things like the Community Reinvestment Act. A GAO (General Accounting Office) study last year showed credit unions were serving a smaller proportion of lower income people than banks. Clearly, they’re competing in the area of business and consumer loans, checking accounts and other services and they’re not paying taxes. An individual pays more taxes than even the largest credit unions did last year.”

Frank Sibley, CEO of Citizens Bank & Trust in Marks, said he doesn’t know the answer, “but it’s asinine that credit unions can do what banks do without being under the same regulations.”

Patrick Keefe, vice president of communications for CUNA, said bankers “conveniently leave out the fact” that credit unions are cooperatively owned, and not for profit.

“Banks are in the business to maximize profits, and it’s perfectly legitimate because that’s the foundation upon which this country was built,” he said. “Banks don’t provide anything to their customers unless there is a profit for their shareholders. We like to say that banks maximize profits and credit unions, being not-for-profit and cooperatively owned, try to maximize service. It’s because of that that they have a tax exemption. Congress gave them that exemption in 1937 and reiterated it in 1998, which the bankers don’t like. It’s not because of the services we offer or the delivery methods, but the structure of our organization that gives us a tax exemption.”

Credit unions were formed as “credit cooperatives” in the mid-1800s in Germany, as a service to farmers. Under federal tax law, credit unions retain the “cooperative” status, and are allowed deductions not available to regular corporations, such as a deduction for dividends paid to members, and can eliminate their taxable income.

What makes sense?

“With the deficit problems we have in this country, it doesn’t seem equitable to have major corporations like Keesler Federal or any of the large credit unions not paying one red cent in taxes, not just to us as bankers, but also to me as a citizen,” said George Schloegel, CEO of Hancock Bank in Gulfport.

Sibley pointed out that credit unions want to take away Subchapter S status from banks.

“The credit unions are trying to attack that to get the attention away from them,” he said. “It kind of makes you wonder whose children are playing with whom.”

Would adherence to common bond help?

“The field of membership, or the common bond, is where the problem comes in,” said Deaver. “For example, there’s a credit union in California with a field of membership of 16 million people in four counties around Los Angeles. That’s not much of a common bond. NCUA regulates a growing number of community credit unions that are encompassing too wide of a geographical area. For instance, there’s one in Utah that’s been approved that covers three counties. And those three counties together are larger than many states. The common bond or field of membership doesn’t mean anything anymore.”

Deaver emphasized that bankers are not attacking small, traditional credit unions.

“They’ve served well, but circumstances have changed and competition is wide open in financial services,” he said. “The bottom line is that large credit unions that have exceeded the common bond, or field of membership, need to be taxed and the problem is to figure out where that trigger occurs. One aspect that’s troubling us is that the NCUA, the federal regulator, and many of the state regulators of credit unions are acting more like cheerleaders for the credit unions than regulators. We’ve been down that road before with other financial institutions.”

When asked if the issue of membership was going beyond the scope of common bond or field of membership, Keefe laughed.

“That’s their interpretation and bankers like to interpret the law for everybody,” he said. “They say Congress had a different intent and that’s up to the courts to decide. In fact, the ABA and the Utah Bankers Association have brought suit in Utah against the NCUA. That case is being litigated now. It’s the source of endless paperwork and everything else that goes on. We can’t turn around without bankers suing us or the regulator for something. They have challenged that aspect of the field of membership requirements in the law since 1998 and they’ve lost consistently. They continue to bring suit because they think everybody else has gotten it wrong but them. We don’t buy that.

What credit unions do with their field of membership is lawful. They are following the rules implemented by the NCUA for federally insured credit unions and state governments.”

Schloegel pointed out that banks pay FDIC insurance, which is posted as an expense. Credit unions send their check to their equivalent of the FDIC, but it is posted as capital.

“Therefore, the fund that is to safeguard the protection of the credit unions is being counted twice,” he said. “It’s being counted by the people who cash the check, and again by the people who wrote the check because they’re calling it capital instead of an expense. If they get into a bind, that fund that they think they have to bail them out is only half as big as they say it is. We went through something very similar when the savings and loan industry got overextended by offering services to the general public that they weren’t competent to handle. When their fund became depleted, guess who bailed them out? The FDIC. We as banks had to bail out the savings and loan industry. I’m not saying the credit unions are going to fail, but the economy has been going up and down, and if they ever have to call on their fund, they’re going to find that only half of it is there. Is that the right way to do business?”

Keefe said credit unions don’t have Community Reinvestment Act (CRA) requirements for two reasons.

“First, the CRA was put into place because the banks were actively redlining communities back in the 1960s,” he said. “Congress called them on it and wrote into law the CRA. Credit unions haven’t exhibited the redlining activities of the banks, so they weren’t written into the law. Credit unions didn’t abuse their powers to lend to their members. They serve all their members. The other thing to point out is that not all credit unions serve a community geographically. The majority of credit unions serve any number of different kinds of membership groups, like a factory employee group or members of a parish or an occupational group. Those don’t count in terms of communities, so the way we look at it is that since they aren’t geographical communities, CRA wouldn’t apply anyway.”

Deaver said the MBA is working on a new campaign called Operation Credit Union to educate the public about the need to level the uneven playing field.

“It’s not like we’re saying there’s an evil movement going on, because there’s not,” said Deaver. “It’s just that competition from unregulated, untaxed competitors needs to be fair.”

Contact MBJ contributing writer Lynne W. Jeter at mbj@thewritingdesk.com.

About Lynne W. Jeter

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