ACROSS MISSISSIPPI — For decades, not-for-profit credit unions have enjoyed tax-exempt status as they emerged as legitimate contenders to banks, gaining new customers, especially as the recession caused many banks to tighten their lending policies.
The banking industry says credit unions now enjoy an unfair competitive advantage as they broaden their services while not being taxed or held to the same regulatory standards. It’s calling for Congress to end the tax-exempt status as lawmakers look at tax code overhaul.
Should that happen, it could fundamentally change how credit unions in Mississippi and elsewhere do business and affect the more than 570,000 people who belong to the state’s credit unions.
“We would go out of existence. There’s no way we’d be able to stay in business” as credit unions, warns Charles Elliott Jr., president of the Mississippi Credit Union Association.
Mac Deaver, president of the Mississippi Bankers Association, disagrees, saying it would simply create “an equal playing field.”
Credit unions have been tax-exempt largely because they traditionally serve low-income clients who can’t get standard bank loans and other financial assistance or particular groups of clients, such as military members or grocery-store employees. They offer the same general services banks do, and credit unions and their members tout lower interest rates and fees as advantages.
Greenville resident Russell Clower Jr. says he’s belonged to a grocery-affiliated credit union since 1998. Now on long-term disability, he says his credit union typically waives service charges on depositing his checks because of the physical hardship he has of visiting his local branch to do so. He says he has a credit card through his credit union that he might not have gotten otherwise.
“They give lower interest rates, lower rates on everything,” he said.
Not paying taxes, however, means credit unions have caps on membership and what they can charge for fees and interest. Credit unions are member-owned but, unlike other not-for-profits, generally aren’t funded through donations.
The banking industry is targeting in particular credit unions it feels have grown beyond their original missions by focusing on a particular region instead of client or income level, and that advertise extensively. The American Bankers Association says the federal deficit has grown since 2001 in part because credit unions haven’t had to pay a total of $20.5 billion in federal income taxes during that time.
“There are credit unions that have grown beyond recognition,” says James Ballentine, chief lobbyist for the ABA, which is pushing Congress to remove the tax-exempt status. “Some credit unions advertise, ‘If you can breathe, you can join a credit union.’ We’re saying, ‘Come on, compete with us. Just compete on a level playing field.'”
While the banking industry hasn’t singled out specific Mississippi-based credit unions, Jackson’s Magnolia Federal Credit Union seems to be the kind of firm it has in mind.
The credit union — which originated with area Veterans Affairs hospital and clinic staffers as customers before broadening to include workers at other hospitals — reworked its charter about a decade ago to take on a more geographic focus, says its CEO, Steve Pollman. Its commercials air regularly on local television stations. It currently serves about 20,000 members, mainly in Hinds, Madison, Rankin, Simpson and Copiah counties, and merged with another credit union to bring its services to Leake County and parts of Scott County.
Pollman maintains his credit union should remain tax-exempt because it hasn’t departed from its core mission of working with customers that banks won’t deal with, despite its membership and territorial growth.
“We don’t have shareholders. We can’t go out and sell stock the way a bank can to make capital improvements. The tax-exempt status allows us to be a better financial institution.”
The ABA points to Jackson’s Hope Credit Union as an example of a credit union that has “aggressively expanded,” growing from $108,000 in lending activity in 2004 to $32 million last year.
Hope CEO Bill Bynum said those numbers reflect the recession’s impact on lower-income residents’ ability to set up and maintain accounts and get loans from banks, in turn highlighting the continued need for tax-exempt credit unions. His institution took on new customers on at least a short-term basis in recent years when the towns of Utica and Edwards each lost their lone commercial bank.
He says Hope remains dedicated to its original mission to provide financial services to the financially “underserved and unserved” in Mississippi, noting more than half his customers are minorities or women, and that more than half of his customers have been turned away by banks.
“I don’t see many banks running in to those markets. During the recession, that trend has only gotten worse,” Bynum said.
Deaver says he’s not interested in taxing credit unions that remain committed to a certain income level or profession. But those that aren’t should not only be taxed but also take on the level of audits and regulation banks do, he said, especially with those regulations costing banks more in a post-bailout landscape.
“Our goal is not to put them out of business,” he said. But, “you and I, individually, paid more taxes than credit unions did last year. We have a concern with that.”
In a time where calls for general tax reform are growing, the banking industry feels it has a solid shot at bringing about significant change to how credit unions function.
Bynum says he’s confident Congress will see the need for credit unions’ services and continue to keep them tax-exempt. Pollman says his credit union should be able to continue operating if it’s taxed but may need to revisit its charter and perhaps essentially morph into a bank if that happens.
“There (shouldn’t) be separate sets of rules,” Deaver said. “Become a bank get a charter as a bank.”