Unprecedented Credit Union Debt Offering Bolsters Urgent Need For Congressional Oversight

A new National Credit Union Administration rule that allows the largest credit unions to partner with private institutional investors and use subordinated debt to exploit taxpayer subsidies to credit unions is off to a fast start.?

?Truliant Federal Credit Union’s $50 million issuance represents the tax-exempt industry’s largest issuance and its first to receive an investment-grade rating, and it likely will contribute to acquisitions of taxpaying community banks. With this new policy allowing private institutional investors to reap greater gains off the credit union tax exemption, this risky rule change is yet another reason for Congress to investigate the NCUA’s expansionist policies and the industry’s increasingly misplaced tax subsidy.?

Subordinated Debt Rule?

Approved in December 2020 and effective at the start of this year, the NCUA rule allows subordinated debt instruments to count toward qualifying credit unions’ risk-based net-worth requirement. While low-income credit unions are already permitted to issue subordinated debt, the rule authorizes roughly 285 complex credit unions representing $730 billion in assets to raise capital from outside investors.?

While this is advantageous news for the largest, most expansion-oriented credit unions, the NCUA’s rule is yet another example of the agency expanding credit union powers well beyond the limits justifying the industry’s tax exemption. The rule undermines credit unions’ mutual ownership structure, allows outside investors to exploit the credit union tax subsidy, and fuels runaway growth of an industry that has increasingly abandoned its founding mission to serve people of modest means.?

Increased leverage and commercial lending inexperience amid a low-rate environment is a recipe for disaster for an industry that continues to relax its acceptable business models, all in the name of fueling growth. In fact, the NCUA’s earlier proposed rule describes credit unions previously using subordinated debt irresponsibly, including poor due diligence, inadequate cost-benefit analyses, premature and excessive concentrations, and lack of responsiveness to mounting losses.?

Relaxed Restrictions?

?The subordinated debt rule is just the latest in a series of NCUA rules designed to relax the restrictions originally put in place by Congress to justify the credit union tax exemption.??

The agency last fall approved a rule expanding the permissible services and activities of credit union service organizations — corporate entities that are owned by credit unions but are not subject to credit union laws and regulations. Over the objections of NCUA Chairman Todd Harper, the agency’s board voted to allow these privately owned and often for-profit businesses to do anything federal credit unions can.?

The year before, the NCUA finalized a rule allowing credit unions to include suburbs of metropolitan areas in their fields of membership while cutting out their urban cores. The rule — which was enacted after the Supreme Court declined to hear legal challenges against it — would also define entire states and major metro centers as “rural” districts, making a mockery of statutory membership restrictions.?

The NCUA rules changes are accompanied by a surge in credit union acquisitions of community banks — with more than one-fifth of these transactions coming since 2019. These acquisitions eliminate locally based lenders that have led the U.S. economic recovery during the pandemic, cut regulatory safeguards for low- and moderate-income consumers due to the credit union Community Reinvestment Act exemption, reduce the tax base, and raise questions about the continued justification of a tax exemption that allows credit unions to make inflated purchase offers well above the acquired banks’ book values.?

Policy Implications?

?Now with credit unions hitting the ground running to make the most of the NCUA’s latest expansionist rule, it is time for Congress to hold hearings to investigate credit unions’ tax exemption and acquisitions of community banks.?

As North Carolina Bankers Association President and CEO Peter Gwaltney told American Banker, cooperatively owned, tax-exempt credit unions tapping into investor capital to finance their growth should be a “triggering event for taxation at the federal level.”?

To fully understand and address these issues, Congress should:?

• Hold hearings to review NCUA rulemakings, the credit union tax exemption, and how these policies fuel acquisitions of community banks.?
• Request a Government Accountability Office study on the evolution of the credit union industry and NCUA supervision.?
• Consider an “exit fee” on credit union-community bank acquisitions to capture the value of the tax revenue that is lost once the business activity of the acquired bank becomes tax-exempt.?

?Congress granted credit unions a tax exemption to serve people of modest means — not to lure and enrich institutional investors and buy taxpaying community banks. It is long past time for lawmakers to exercise oversight of the NCUA, consider the full impact of the credit union tax subsidy, and respond accordingly.