Congress Should Join States in Challenging Credit Union Acquisitions of Community Banks
By Rebeca Romero Rainey
Several states have begun to fight back against the dangerous and growing trend of credit unions using their federal tax exemption to acquire taxpaying community banks. With these taxpayer-subsidized transactions diminishing access to financial services in local communities, Congress should respond at the federal level with hearings investigating this trend and the role of the credit union tax exemption.
States Leading Momentum for Policy Review
Credit union purchases of community banks — which peaked at 21 in 2019 and are on pace to surpass that total this year — are getting the attention of state policymakers because credit unions don’t pay taxes, unlike their tax-paying community bank targets. While community banks contributed over $12 billion in tax revenue in 2020, the credit union industry enjoys a tax exemption worth at least $2 billion per year and rising.
The consequences are important to local communities that rely on tax revenues. While credit unions paid nothing in federal taxes in 2020, nurses, teachers, and cashiers had a total tax liability of more than $56.6 billion, $19.8 billion, and $11.8 billion, respectively. And each purchase of a community bank increases that federal tax exemption for more than $1.8 trillion in credit union assets.
To counter the negative impact of these deals, policymakers in several states have begun responding. Mississippi enacted a law requiring acquired bank assets to remain under the control of an FDIC-insured institution. The Nebraska banking department separately ruled that only chartered financial institutions organized to do business in the state may participate in a cross-industry acquisition or merger — rejecting an attempted bank acquisition by an out-of-state credit union. And Colorado state lawmakers voted down legislation to allow credit unions to hold municipal deposits and other public funds.
Consumers Harmed by Consolidation
States are pushing back because these deals not only hamper tax revenue, but also restrict access to financial services.
For instance, these acquisitions expand the portion of the financial services industry exempt from the Community Reinvestment Act. This law requires financial institutions to lend to low- and moderate-income consumers and small businesses in their local market, but it does not apply to credit unions.
Further, these deals risk displacing a critical provider of capital to small businesses. The nation’s community banks account for roughly 60% of U.S. small-business loans and made 60% of federal Paycheck Protection Program loans to save an estimated 49 million jobs during the pandemic — outpacing credit union PPP lending by a factor of 16 to 1.
Finally, these acquisitions lack transparency, with credit union executives using their members’ savings to buy out bank owners in largely private deals. In fact, credit unions can leverage the savings from their tax exemption to make inflated offers for healthy institutions.
Credit unions were established a century ago to serve people of modest means with a common bond, but the data show they are falling short of that mission. 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 above-average poverty and unemployment, according to Home Mortgage Disclosure Act data.
Ultimately, consolidation reduces the availability of locally based financial institutions, including the traditional credit unions that are declining while larger credit unions expand. Credit unions in every asset category under $500 million lost members and loans in 2020, while those over $1 billion in assets comprise 6% of the industry but 75% of its tax exemption.
Need for Federal Action
While states have started to respond, this is a matter of national importance, and taxpayers are entitled to know more about how the subsidy they fund is being used to underwrite financial services consolidation. Congress should respond by holding hearings, requesting a Government Accountability Office study on the credit union industry, and considering an “exit fee” on these acquisitions to capture the value of the tax revenue lost once the acquired bank’s business activity becomes tax-exempt.
Meanwhile, ICBA and community bankers continue speaking out against pending House legislation to expand credit unions’ fields of membership and commercial lending powers while preserving their costly tax exemption.
There is precedent for reconsidering a financial services tax exemption. In 1951, Congress 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.
As credit union banking acquisitions continue, policymakers in Washington should join the states in investigating these deals and whether government policy should continue supporting them.
Rebeca Romero Rainey is president and CEO of the Independent Community Bankers of America.