Congressional Briefing

TAX ISSUES

Credit Union Tax-Exemption The credit union federal tax-exemption is bound by the not-for-profit, cooperative nature of credit unions, not by the size of the credit union, those it serves, or the products and services that are offered. This rationale for the tax-exempt status has been ratified several times by Congress, the most recent in 1998 as part of the Credit Union Membership Access Act (CUMAA).

Although the bank lobby claims credit unions are “growing beyond their means” and should therefore pay taxes, the credit union share of total assets has remained virtually unchanged. From 1992 to 2004, credit unions’ market share has maintained a constant 6% of total assets. The annual growth of credit unions pales in comparison to that of banks, which in 2004 alone, grew by $812 billion – more than 1.2 times the total assets of credit unions! 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. Additionally, banks enjoy several other advantages over credit unions, including unfettered access to capital markets, lower capital requirements, no membership restrictions, wide authority to make business loans; and, about 2,200 banks have benefited from expanded Subchapter S treatment and no longer pay taxes at the corporate level.

President George Bush has restated his strong support for preserving the credit union tax- exempt status in a letter written to CUNA President and CEO Dan Mica. Additionally, dozens of Members of Congress have issued letters to CUNA and the state associations in support of the credit union tax-exemption. CUNA effectively defended the federal tax exemption for credit unions at a hearing before the House Ways and Means Committee on November 3, 2005. CUNA continues to oppose all attempts to subject credit unions to taxation, as well as efforts to use the tax debate to prevent credit unions from gaining regulatory relief.

REGULATORY IMPROVEMENTS

Credit unions remain the most highly regulated and restricted of all insured financial institutions, particularly after the passage of CUMAA, which imposed new, severe restrictions on credit unions in several areas. Many of the provisions under consideration in both the Credit Union Regulatory Improvements Act and the Regulatory Relief Act would help eliminate some of the worst examples of statutory micromanagement that have placed unreasonable constraints on the ability of credit unions and their boards to function efficiently and in the best interests of their members.

Credit Union Regulatory Improvements Act (CURIA) Representatives Royce (R-CA) and Kanjorski (D-PA) introduced CURIA (H.R. 2317) on May 12, 2005. The legislation closely mirrors the bill from the 108th Congress, but enhances the risk-based capital section by adding a leverage ratio and includes a provision to improve the Financial Accounting Standards Board (FASB) merger issue. CURIA contains many of the provisions in the Regulatory Relief Act; however, it also includes important additional provisions that seek to correct the unintended consequences of CUMAA.

Specifically, it will increase the limit on credit union member business loans (MBLs) from 12.25 percent to 20 percent (prior to CUMAA there were no limitations), and allow the NCUA to raise the loan cap from $50,000 to $100,000. 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 are uniquely positioned to fill the niche that is not being served by many banks. CURIA will also seek to modernize credit union capital requirements by redefining the net worth ratio to include a risk-based asset approach to Prompt Corrective Action (PCA), thereby instituting a new measurement that would improve the safety and soundness of credit unions and the safety of the National Credit Union Share Insurance Fund. CUNA testified before the House Financial Institutions Subcommittee and Senate Banking Committee on regulatory relief issues on several occasions, focusing on the CURIA provisions. CUNA urges Members to co-sponsor CURIA and correct the unintended consequences of past legislation.

Regulatory Relief Act Representatives Hensarling (R-TX) and Moore (D-KS) introduced the Regulatory Relief Act (H.R. 3505) on July 28, 2005. The legislation is nearly identical to the regulatory relief bill that passed the House last Congress, but includes two new credit union provisions relating to the Financial Accounting Standards Board (FASB) merger issue, and non-federally insured credit unions. Additionally, the bill contains new language for all financial institutions to streamline the process of filing currency transaction reports and suspicious activity reports as required by the Bank Secrecy Act, in addition to eliminating certain privacy disclosure requirements (when an institution's policies have not changed and when the institution does not share the personal information with third parties).

The Senate Banking Committee held a mark-up on their version of regulatory relief (drafted by Senator Crapo, R-ID), which passed by unanimous consent on May 4, 2006. The Senate Regulatory Relief Act is a significantly narrower bill then the House version, and is viewed as more of a technical corrections bill. Four specific credit union provisions remain in the bill that are part of both the House Regulatory Relief Act and CURIA. CUNA urges Congress to pass all credit union specific provisions in the House and Senate regulatory relief bills and CURIA this year.

Financial Accounting Standards Board (FASB) Merger Rule The Financial Accounting Standards Board (FASB) proposed a rule in 2001 that would eliminate the current “pooling” method, and implement the “purchase” method, which would require a credit union’s equity, after a merger, to have two entries: “retained earnings” and “acquired equity.” The Federal Credit Union Act defines net worth for purposes of PCA only as “retained earnings.” Not revising the legislative definition of net worth would have a detrimental impact on the merger of two-similar sized, healthy credit unions, likely triggering PCA. Representative Bachus (R-AL) introduced the Net Worth Amendment For Credit Unions Act, H.R. 1042, in order to clarify the definition of net worth for credit unions. The House of Representatives passed H.R. 1042 by voice vote on June 13, 2005. The net worth bill is also included in CURIA and both the House and Senate Regulatory Relief Act. CUNA urges the Senate to act on this measure this year.

DATA SECURITY

A number of bills have been introduced, passed or are being drafted by six congressional committees this Congress that are aimed at protecting consumers’ personal identifying information. The House Financial Services Committee passed legislation (H.R. 3997) on March 16, 2006 that includes a narrow credit freeze provision as well as CUNA backed provisions to create a federal pre-emption and require major credit card companies to notify financial institutions when a breach has occurred, allowing financial institutions to be able to disclose the source of the breach to the consumer. The Senate Banking Committee, which is still drafting legislation, is expected to be the main vehicle for the Senate’s data security legislation. The Senate Commerce Committee bill (S. 1408), which passed out of committee in July 2005, includes a broader credit freeze provision which would allow consumers to put a “freeze” on their credit reports. The House and Senate Judiciary Committees are also working on data security bills.

CUNA supports legislation that would prohibit the retention of sensitive, identifying information by merchants and certain non-financial companies from plastic card magnetic strips that could be obtained in connection with financial transactions, including the imposition of fines for failure to comply. CUNA also supports the requirement that the breaching party (i.e., the merchant) reimburse the consumer or financial institution for any losses incurred, as well as a uniform national standard. CUNA urges Congress to incorporate credit union backed provisions in any data security legislation that moves forward this year.

INTERNATIONAL ISSUES

Remittances CUNA endorsed legislation, H.R. 749, introduced by Reps. Gerlach (R-PA) and Sherman (D- CA), would permit credit unions to offer remittance, check cashing and money order services to members and non-members within their field of membership. The legislation passed the House of Representative on April 26, 2005 by voice vote. The legislation also is included as a provision of CURIA and both the House and Senate Regulatory Relief Act. Senate companion legislation (S. 31) introduced by Senator Sarbanes (D-MD), is also supported by CUNA.

USAID Programs The World Council of Credit Unions (WOCCU) is the international trade association and development agency for credit unions, representing the interests of 43,000 credit unions in 91 countries. WOCCU is primarily funded by the US Agency for International Development (USAID) through microenterprise funding, and also receives contributions from US credit unions through CUNA, CUNA Mutual, and the National Credit Union Foundation (NCUF). Additionally, WOCCU is one of eight cooperative groups that receive funds from the Cooperative Development Program (CDP) at USAID. WOCCU uses CDP funds to expand low-cost transaction services for members (including remittances), create enabling regulatory environments, train credit union managers and directors, and extend credit union operations to difficult operating environments. CUNA/WOCCU will be advocating for a $10 million earmark for the CDP in the FY2007 Foreign Operations Appropriations Bill, as well as $225 million for microenterprise development by USAID of which $30 million be designated for the Office of Microenterprise Development.

Copyright © 2008 - Credit Union National Association, Inc.