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Credit Union Competition - OBA Position

Credit Unions – Summary of OBA's Position

Oklahoma bankers generally have no objection to traditional credit unions that stick to the original purpose for which they were given special tax and regulatory treatment: serving low- to moderate-income consumers who have some realistic and meaningful connection to one another. Large credit unions that seek to serve anyone and everyone should be treated like other similar financial institutions – and should be required to contribute their fair share of taxes to help pay for homeland security, national defense and the administration of both federal and state government.

Background

In 1934 Congress authorized the chartering of federal credit unions to serve persons of modest means. These financial cooperatives enabled people not otherwise eligible for credit from traditional financial sources and who were connected to each other in some realistic and meaningful manner – usually through a common employer – to save with and borrow from one another.  In return, all credit unions were exempted from federal income taxes, and federal credit unions were exempted from all state taxes except real and personal property taxes. 
In addition, credit unions are exempt from most banking regulations, including the Community Reinvestment Act. Moreover, there is no requirement that they demonstrate they are fulfilling the statutory mandate for which they were given special tax status.
In November 2006 the Government Accountability Office (GAO) reported for the second time in three years, "that credit unions lagged behind banks in serving low- and moderate-income households." The GAO study was supported by a 2005 study performed by the National Community Reinvestment Coalition which also found banks do a better job of serving people of modest means than do tax-exempt credit unions.  

Large Credit Unions – At The Heart of Bankers' Focus

Large credit unions – those in excess of $250 Million in total assets – pretend to be something they're not – small, “Mom and Pop” financial cooperatives who are merely trying to accommodate their “members”.  They try to hide behind the “small” credit union image so they can continue to enjoy their tax-exemption and other benefits.
·         They assert that they are “not-for-profit” entities, without clarifying that “not for profit” is a tax status, not a way of doing business. Think about it: if credit unions set out to forego making a profit, then – like any business – they would quickly fail;
·         Large credit unions assert that their 'members' are 'owners', which implies they hold something of value. The assertion is yet another shibboleth; the only thing credit union customers “own” are their own deposits. 
   o   Credit union 'members' have no financial responsibility for the credit union's health,like making capital injections when needed;
   o   'Members' cannot transfer their “ownership” to another party or use it as collateral for any purpose;
   o   They cannot sell their 'membership' for a profit, pass it to their heirs or include it on their financial statement. 
   o   'Members' do have a voice in electing directors, who are in turn responsible for management of the credit union. But in truth, management directs the affairs of larger credit unions, not the other way around, because they have the necessary expertise to do so.
 
·         Credit union advocates assert that credit unions return their earnings to their 'members'. This is yet another shibboleth. 
   o   It's true that credit unions pay interest to their member-customers – just like banks and savings associations, and it's also true that some credit unions occasionally distribute some earnings to their 'member'-customers in the form of a dividend;
   o   Beyond that, however, credit unions retain their earnings as the only method they have for building capital. That capital is then used by the credit union to grow and expand. Thus credit unions are able to build capital on a tax-free basis and compete directly with tax-paying entities for all lines of banking business.
 
·         Credit unions assert they serve their “members” not their “shareholders” without acknowledging that the concept of “membership” implies some element of exclusivity. There is nothing “exclusive” about many 'membership' requirements.
       o   When federal credit unions were authorized, a “membership” which was exclusive made sense. But large credit unions have simply outgrown it. 
   o   In today's world you can legitimately qualify for membership in some credit unions simply by being a living, breathing human being. Or you can qualify by living or worshiping in a statistical metropolitan area of more than $1.2 Million people.
   o   The point is there is no meaningful “exclusivity,” and no discernable difference between today's large credit union 'member' or a bank's 'customer.' Simply calling customers 'members' does not make them such. 
 
·         Credit unions argue that Subchapter “S” banks receive essentially the same tax treatment as do credit unions. This is false.
     o   The tax treatment of credit unions and Subchapter S banks would be the same if credit unions distributed their earnings. They do not. 
  o   As noted earlier, the majority of credit union earnings are used to build capital on a tax-free basis and, thus, enhance credit union growth.
  o   The Subchapter “S” shareholder pays taxes on the entity's earnings. No one pays taxes on behalf of the credit unions.
 
·         Many credit unions have formed subsidiaries known as credit union service organizations (CUSOs) that have contributed significantly to the dramatic growth of expansive, complex credit union activities.
   o   CUSOs offer sophisticated products, such as trust and investment services.  
   o   CUSOs also provide non-traditional financial services, such as real estate brokerage, pre-paid legal service plans, and travel agency services.
   o   Credit unions use CUSOs as a loophole to evade charter restrictions.  More troubling, unlike bank regulators, NCUA does not have the authority to examine third-party vendors.
 
·         In recent years a number of larger credit unions have converted to a mutual savings bank charter, in order to facilitate capital growth and product expansion. The National Credit Union Administration – credit unions' principal regulator – has tried to block these efforts at every turn by imposing bureaucratic roadblocks that are expensive to overcome.
   o   The NCUA serves more as a cheerleader for credit unions than it does as a regulator
       o   Every credit union that converts to a mutual savings bank charter will no longer be required to support the NCUA through an annual assessment – a fact that's usually overlooked in any discussion about why NCUA tries to block these conversions;
   o   In their efforts to block credit union conversion by creating regulatory barriers, the NCUA misleads credit union members and presents unnecessary hurdles for those institutions seeking to switch to a mutual savings bank.
   o   The requirements also conflict with the mutual to stock conversion rules established by the OTS and frustrate the will of Congress expressed in recent legislation that the conversion process be fair and accessible.
   o   Mutual savings banks are structured in a manner similar to credit unions. They have no stockholders, are owned and governed by their members, but mutual savings institutions lost their non-tax status in 1952 and have been paying taxes ever since
 
Large, bank-like credit unions have significant competitive advantages over traditional credit unions and Oklahoma's community banks.  The goal of the OBA is to have these institutions subjected to the same regulatory, supervisory, and tax requirements as banks. Banks have no fear of competition as long as everyone is subject to the same rules.  

Conclusion

Credit unions will soon be a Trillion Dollar, tax-exempt industry. Many credit unions have simply outgrown their original purpose that justified favorable tax treatment, and it's causing everyone else to pay more in taxes. 

Over the next ten years, the credit union tax exemption will cost the federal government nearly $19 Billion. That's money the rest of us will have to pay in order to contribute to what will soon be a $2 Trillion deficit, support our national defense, Homeland security, and pay our teachers, police and fire departments. 

Credit unions of a certain size and product mix – those that are indistinguishable to the general public from tax-paying banks and thrifts – should be required to convert to a mutual savings bank charter, pay their fair share of taxes and be subject to the same rules and regulations.