Credit Unions’ Fuzzy Math Shows Industry Is Insecure About Its Tax Exemption

ICBA has long warned against the expansion of credit union powers well beyond the limits originally established by Congress, culminating in the exploitation of the industry’s tax exemption for record acquisitions of tax-paying community banks.?

While credit unions have a history of playing fast and loose with the facts—such as $177 billion-asset Navy Federal Credit Union calling itself a community bank—they now appear willing to say just about anything to distract from the impact of the taxpayer subsidies they enjoy.?

?

Fake rates for everyone?

?In a recent letter to the editor responding to American Banker coverage of policymakers’ growing skepticism of credit unions amid their historic bank-buying spree, America’s Credit Unions claimed its industry contributes more than $2 trillion in tax revenue each year.?

For an industry that pays no federal taxes, this is a perplexing claim. As it turns out, the credit union trade group appears to be counting all the tax revenue paid by credit union members nationwide to come up with its specious figure.?

?

The truth about the tax exemption?

This budgetary creative license surely is a sign that the credit union industry is feeling insecure about the federal tax exemption for more than $2 trillion in credit union assets. Not only is this tax exemption worth nearly $4 billion per year, based on the industry’s net income, it has harmful consequences on local communities.?

While community banks contribute roughly $15 billion in tax revenue each year, credit unions have increasingly put their tax savings toward acquiring tax-paying local institutions, which can materially damage local communities. With community banks accounting for roughly 60% of U.S. small-business loans under $1 million and 80% of banking industry agriculture loans, these deals displace critical providers of capital in local communities.?

?

Regulatory breaks that don’t add up?

Further, each transaction expands the portion of the financial services industry exempt from Community Reinvestment Act requirements for lending to low- and moderate-income consumers and small businesses in local markets.?

This was originally due to credit unions’ establishment more than a century ago to serve people of modest means with a common bond, but Home Mortgage Disclosure Act data show community banks outnumber credit unions by a 2-1 margin in low-income or distressed communities and are more likely to lend in census tracts with elevated poverty and unemployment levels.?

?

Rising regulatory scrutiny?

As credit unions increasingly exploit these tax and regulatory advantages, policymakers and the public are taking note.?

After the FDIC recently approved a new statement of policy on bank mergers that for the first time explicitly states that additional scrutiny may be needed for deals involving credit unions, Federal Reserve Governor Michelle Bowman said regulatory disparities between community banks and credit unions distort competition.?

Further, Consumer Financial Protection Bureau penalties against VyStar Credit Union for harming consumers through its botched rollout of a new online banking system exemplify the risks posed by the National Credit Union Administration’s inability to examine credit union third-party service providers, as recognized by NCUA Chairman Todd Harper.?

?

Further, reports by Bloomberg, CNBC, Axios, and CNN show the news media increasingly taking notice of growing momentum for credit union policy reform, while ICBA polling conducted by Morning Consult found 61% of U.S. adults say Congress should investigate whether credit unions should be able to acquire banks.?

Time for Washington to act?

It’s time for policymakers to respond to this trend with a comprehensive federal solution. ICBA and community bankers continue calling for Congress to hold hearings on credit union policy and to consider an “exit fee” on credit union acquisitions of tax-paying banks to capture lost tax revenue resulting from these deals.?

This would not be the first time Congress has reconsidered financial institution tax exemptions. In 1951, lawmakers revoked the tax exemption for building and loan associations, cooperative banks, and mutual savings banks, finding that these institutions operated much like commercial banks and should be taxed accordingly.?

With community banks serving as the nation’s leading small-business and agricultural lenders, Congress should investigate the outdated policies driving the current acquisition trend and whether taxpayers should continue subsidizing consolidation among local institutions that undoubtedly pay taxes.?