110th CONGRESS, LEGISLATIVE ISSUES A - Z

March 2007

"Credit unions are growing beyond their means"

Credit unions’ share of total assets held in U.S. depository institutions has remained virtually unchanged for the past fifteen years. From 1992 through the end of December 2006, credit unions’ market share has maintained a roughly 6% of total assets (6.2% at the end of 2006 – Source: FDIC, NCUA, and CUNA). The annual growth of credit unions pales in comparison to that of banks. In the 12 months ending December 2006, banking institutions (banks and savings institutions) held $11.86 trillion in assets. Compare that with the $789 billion held by credit unions. In fact, the banking industry posted a record $145.7 billion profit in 2006, $11.8 billion (8.8%) more than 2005 (Source: American Bankers Association). Last year was the sixth consecutive year of record profits for the banking industry, making it more profitable than any other sector of the American economy. In contrast to the banking sector, credit unions have never needed a taxpayer bailout, have higher capital levels than banks, and have consistently weathered economic downturns—even the Great Depression—with very few failures.

"Credit unions are morphing into huge financial institutions and should have the same tax liabilities as banks"

A credit unions’ federal tax-exempt status is based solely on the structure of the credit union, not the asset size, field of membership or products and services that are offered. As pointed out by the Treasury and Congress in their findings accompanying the Credit Union Membership Access Act of 1998, credit unions are unique financial cooperatives that exist to serve their members, not to make a profit. Credit unions’ earnings are returned to members in the form of lower loan rates, higher interest on deposits, and lower fees. Large credit unions provide the same member benefits that small credit unions do. Even the largest credit unions generally have unpaid volunteers as directors and tend to pay their CEOs a fraction of what bank CEOs make.

"Credit unions don’t pay taxes and have an unfair competitive advantage"

Credit unions do pay taxes – payroll taxes, sales taxes and property taxes. Congress exempts credit unions from federal income taxes because of their not-for-profit, cooperative structure. Banks enjoy several other advantages over credit unions, including unfettered access to capital markets, lower capital requirements, no membership restrictions, and wide authority to make business loans. In addition, there are more than 2,400 Subchapter S banks – institutions that are organized to avoid corporate level taxation. By electing Subchapter S tax treatment, these banks have increased their after-tax returns by an average of 17%. And not all Subchapter S banks are small. In fact, the largest has over $11 billion in assets (Source: FDIC). Despite the bankers’ complaints of the credit unions’ charter “advantage,” there has never been a single bank conversion to a credit union.

"Large credit unions are no longer true to their mission, and are out-growing their original purpose"

Very large credit unions are among the most committed to the credit union vision and focus, and many provide services to members that no bank would ever consider (particularly as the services are not cost-effective). In fact, large credit unions serve far more members of modest means than small credit unions have the capabilities to provide. Additionally, many large credit unions are involved in community service activities and charitable organizations,and provide support to smaller credit unions. The largest credit union, Navy Federal Credit Union, serves our nation’s military, many of whom are of modest means and would not qualify for loans and services at a traditional bank.

The bankers complain that credit unions are not true to their core mission, while at the same time complaining about the expansion of community chartered credit unions into low-income, underserved areas. For 70 years credit unions were restricted to serving members based primarily on the member’s workplace. Only recently, since 1998, have credit unions had the ability to serve more people outside of defined employers and groups. However, a bank lawsuit initiated in 2005 challenging a charter expansion approved by the National Credit Union Administration (NCUA) brought credit union expansion into underserved areas to a halt.

The National Credit Union Administration (NCUA) revised its field of membership regulations on June 22, 2006, to limit the addition of financially underserved areas within the field of membership of federal credit unions only to credit unions with multiple common-bond charters. The action effectively prohibits 56% of federal credit unions with single-group and community charters from extending credit union services to lower-income areas and groups that are not adequately served by other traditional financial institutions. It would also preclude over 200 credit unions that currently serve some 800 underserved areas throughout the nation from serving new underserved areas or communities in the future.

"It’s an unfair advantage for a $100 million community bank to have to compete with a $100 million credit union"

When evaluating two very different types of financial institutions based on asset size, it is necessary to look at comparable statistics, not the extreme of one industry vs. the other. The average bank size in the US is $1.36 billion, while the average credit union size is only $84 million.

"Credit unions should not be allowed to expand their powers and compete with small community banks in offering business loans"

There were no statutory limits on credit unions’ member business lending until 1998. In fact, credit unions have engaged in member business lending since their inception. The Small Business Administration issued a study in March 2005 and found that the growth in bank consolidations was leading to a decline in access to credit for small business owners. Credit unions should be able to meet the needs of their membership, as they are uniquely positioned to fill the niche that is not being served by many banks. In reality, smaller community banks have more to fear from fast-growing mega-banks than from credit union competition: While credit union market share has remained about 6% since 1992, FDIC-insured institutions with over $1 billion in assets control over 88% of that industry’s market share! Who is the real threat to small community banks?

"Increasing business lending is inconsistent with the historic mission of credit unions"

There were no statutory limits on credit unions’ member business lending (MBL) until 1998. At that time, arbitrary limits were put in place, but these limits are not based on safety and soundness considerations. According to a U.S. Treasury Department study, credit union business lending is more regulated than other financial institutions. In addition, credit union participation in this economic activity is quite limited. In 2005, the dollar amount of MBLs held by credit unions was less than one percent of the total commercial loans held by U.S. depositories. In fact, raising the MBL limit for credit unions would benefit many small businesses. A February, 2004 Small Business Administration study concluded that growing consolidation in the banking industry has shown that “credit access had been significantly reduced for small businesses.”

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