By Rebeca Romero Rainey
After decades of aggressive transformation at growth-obsessed credit unions and acquiescence by their captive federal regulator, ICBA this week launched a nationwide campaign calling on policymakers and the public to “Wake Up” to the risky practices, costly tax subsidies, and irresponsibly lax oversight of these tax-exempt financial firms.
ICBA and community banks have long opposed the credit union industry’s unwarranted federal tax subsidy and the National Credit Union Administration’s attempts to drastically increase the powers of tax-exempt credit unions beyond their statutory limits. The time has come for policymakers to stop pressing the snooze button and do something about it.
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, credit unions are virtually indistinguishable from taxpaying 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.
As the credit union industry has evolved, the taxpayer subsidy has grown. The congressional Joint Committee on Taxation last year tallied the tax subsidy at roughly $10 billion through 2022 — an annual cost to taxpayers of nearly $2 billion and rising. And unlike locally based community banks, savings and loans, and mutual institutions, credit unions are exempt from Community Reinvestment Act rules that assess whether financial institutions are meeting the needs of low- and moderate-income communities.
These tax and regulatory subsidies are an outdated, taxpayer-funded competitive advantage for credit unions, particularly as their federal regulator continues finding new ways to increase the powers of the industry it is charged with regulating. The NCUA has advanced rules expanding credit unions’ commercial lending authority, ignoring statutory restraints on membership, and allowing these entities to use their tax subsidy to raise capital from outside investors.
Most recently, the NCUA 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. The proposed rule, approved on a 2–1 vote over the strong opposition of NCUA board member Todd Harper, would delay the effective date by more than two years. The vote follows a one-year delay approved in October 2018 that exempted an additional 1,000 institutions under $500 million in assets.
In his dissent, Harper noted that risk-based capital rules went into effect for banks in 2014 and cited a recent credit union scandal related to New York City taxi medallions as a warning against lax oversight. In that case, which was exposed by The New York Times, irresponsible lending dominated by half a dozen credit unions led to financial ruin for thousands of families as well as a series of tragic taxi driver suicides. “We are forgetting the past repeatedly, just like characters in Groundhog Day,” Harper said.
Meanwhile, the financial services sector’s tax and regulatory disparities are further illustrated in the growing trend of large, taxpayer-subsidized credit unions buying up smaller community banks. According to S&P Global data on the 19 acquisitions of the past year, the total assets of acquiring credit unions was $47.3 billion, while acquired community banks totaled $4.9 billion. These transactions alone amount to a loss of roughly $2.2 million annually in income taxes, according to Federal Deposit Insurance Corp. data. This should concern all taxpayers, considering every credit union purchase of a community bank diminishes tax revenues, further solidifies the encroachment of a publicly subsidized sector of the financial services industry, and decreases the portion of the industry subject to Community Reinvestment Act oversight.
Former NCUA Chairman and current board member Mark McWatters admitted last year that the industry’s fund insuring credit union deposits would be at risk without taxpayer subsidies. This admission raises questions about the management of the fund, underscoring the need for Congress to review this sizable taxpayer handout.
ICBA’s “Wake Up” campaign will encourage policymakers to open their eyes to the threats posed by these financial firms’ abandonment of their founding mission facilitated by their captive federal regulator. The campaign will feature legislative and regulatory proposals, comprehensive research, grassroots advocacy campaigns, and customizable resources to help community banks continue the call for policymakers to review this industry’s unjust, taxpayer-funded annual subsidy.
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. The rest is history. It is long past time for policymakers to wake up to the new realities of the credit union industry and subject it to the same level of scrutiny for the sake of our nation’s consumers and economic well-being. This is not the time to press snooze.
Rebeca Romero Rainey is president and CEO of the Independent Community Bankers of America.
