By Rebeca Romero Rainey
Federal Deposit Insurance Corp. Chairman Jelena McWilliams recently told Congress that she is concerned that local communities are losing access to banking services due to the growing trend of large credit unions buying smaller community banks.
With the growing number of acquisitions and recently the biggest credit union bank buyout yet, McWilliams’ concerns are completely justified and must be further explored by Congress.
Unlevel Playing Field
Responding to questions from members of the House Financial Services Committee, McWilliams noted that credit unions are fully exempt from federal taxes and the Community Reinvestment Act, which apply to locally based community banks, savings and loans, mutual savings banks, and virtually every other financial institution.
Acquiring credit unions are 10 times larger on average than their target community banks, suggesting McWilliams uttered an understatement when she said the “playing field might not be exactly level.”
The National Credit Union Administration’s newly proposed rule to implement a regulatory framework for these transactions indicates that policymakers have begun paying attention to this troubling acquisition trend, but it is up to Congress to truly address the problem.
Exploiting Taxpayers
With tax-exempt credit union bank purchases reaching 21 in 2019 following nine deals announced in 2018, credit unions certainly appear to be putting their $2 billion annual taxpayer subsidy to use.
Unfortunately for the people of modest means that credit unions were established by Congress to serve, no one appears to be benefitting more from the tax exemption than credit unions themselves. It’s long overdue for Congress to hold a hearing examining what exactly credit unions are now doing with their multi-billion-dollar tax subsidy.
Credit unions withhold 21 to 33 cents of every dollar in tax subsidies they receive, according to a research paper developed by my organization, the Independent Community Bankers of America. In 2018, that amounted to between $500 million and $900 million in taxpayer dollars not directed toward credit union members.
Abandoned Mission
Meanwhile, credit unions have significantly deviated from their founding mandate to serve people of modest means. Today, less than 10 percent of credit unions are physically located in an economically distressed community and only 13 percent are in low- and moderate-income areas, according to ICBA research.
Low-income individuals are more likely to receive services from a tax-paying community bank in 28 states. In low-income or distressed communities, community banks — which contributed nearly $15 billion in tax revenue in 2018 — outnumber credit unions by a 2–1 margin.
While traditional credit unions are declining, larger credit unions account for more of the tax burden. In 2017, credit unions over $1 billion comprised 6 percent of the industry but 75 percent of its tax exemption. And growth-obsessed credit unions are increasingly taking on riskier activities, such as loans for “toys” such as boats, jet skis and recreational vehicles.
Other projects — such as Pentagon Federal Credit Union’s partnership with Goldman Sachs on luxury mixed-use developments in the nation’s capital — don’t reflect the traditional credit union mission, either.
Perhaps most egregious of all, irresponsible lending related to New York City taxi medallions dominated by half a dozen credit unions led to financial ruin for thousands of families and an estimated $765.5 million in losses to the National Credit Union Administration’s Share Insurance Fund.
Lax Oversight
The NCUA itself has had a considerable role in the credit union industry’s evolution as it continues finding new ways to increase the powers of the industry it is charged with regulating. In fact, its latest proposal would allow the most complex credit unions to issue subordinated debt as an alternative form of capital, which would allow outside investors to exploit the credit union tax subsidy and could encourage even more community bank acquisitions by larger credit unions.
The NCUA also recently proposed a second delay in implementing rules requiring credit unions to hold adequate capital to protect against losses, more than a decade after the Wall Street financial crisis. In his dissent, NCUA board member Todd Harper asked if the agency is forgetting the past repeatedly, “just like characters in ‘Groundhog Day.’”
Further, the NCUA has reissued a proposed rule that would allow credit unions to include wealthy suburbs of metropolitan areas in their fields of membership while leaving out their urban cores. That came after the U.S. Court of Appeals for the District of Columbia Circuit ordered the agency to explain how its plan would prevent redlining.
While the NCUA claims legal protections will prevent illegal discrimination, the agency’s 25 yearly on-site compliance and lending exams are insufficient for an industry that serves 117 million members.
Wake Up
The credit union tax exemption dates to 1934, when Congress chartered credit unions as not-for-profit institutions to serve people of modest means with a “common bond” of occupation or association.
Today, large credit unions are virtually indistinguishable from tax-paying community and regional banks. The $1.51 trillion industry now earns billions of dollars in profits every quarter and features outsized CEO salaries while remaining tax-exempt.
Congress should wake up to this growing list of concerns. It wouldn’t be the first time lawmakers reconsidered a tax break for the financial sector.
In 1951, Congress revoked the tax exemption for building and loan associations, cooperative banks, and mutual savings banks. Policymakers ruled that these institutions operated much like commercial banks and should be taxed accordingly, and the rest is history.
With even credit union executives expressing concerns, now is the time for Congress to open its eyes to the need for credit union reforms and take action.
Rebeca Romero Rainey is president and CEO of the Independent Community Bankers of America.
