[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
REVIEW OF CREDIT UNION TAX EXEMPTION
=======================================================================
HEARING
before the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
NOVEMBER 3, 2005
__________
Serial No. 109-38
__________
Printed for the use of the Committee on Ways and Means
_____
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COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
E. CLAY SHAW, JR., Florida CHARLES B. RANGEL, New York
NANCY L. JOHNSON, Connecticut FORTNEY PETE STARK, California
WALLY HERGER, California SANDER M. LEVIN, Michigan
JIM MCCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan JIM MCDERMOTT, Washington
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. MCNULTY, New York
PHIL ENGLISH, Pennsylvania WILLIAM J. JEFFERSON, Louisiana
J.D. HAYWORTH, Arizona JOHN S. TANNER, Tennessee
JERRY WELLER., Illinois XAVIER BECERRA, California
KENNY C. HULSHOF, Missouri LLOYD DOGGETT, Texas
RON LEWIS, Kentucky EARL POMEROY, North Dakota
MARK FOLEY, Florida STEPHANIE TUBBS JONES, Ohio
KEVIN BRADY, Texas MIKE THOMPSON, California
THOMAS M. REYNOLDS, New York JOHN B. LARSON, Connecticut
PAUL RYAN, Wisconsin RAHM EMANUEL, Illinois
ERIC CANTOR, Virginia
JOHN LINDER, Georgia
BOB BEAUPREZ, Colorado
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana
DEVIN NUNES, California
Allison H. Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
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converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
---------- 7
Page
Advisories announcing the hearing................................ 2
WITNESSES
National Credit Union Administration, the Honorable JoAnn
Johnson, Chairman; accompanied by Robert Fenner, General
Counsel........................................................ 6
Internal Revenue Service, Tax-Exempt and Government Entities
Division, Steven T. Miller, Commissioner....................... 17
U.S. Government Accountability Office, Financial Markets and
Community Investment, Richard J. Hillman, Managing Director.... 22
______
American Bankers Association, and First National Bank of Waverly,
Jeff L. Plagge................................................. 116
America's Community Bankers, and Litchfield Bancorp, Mark E.
Macomber....................................................... 130
Credit Union National Association, and Greater El Paso's Credit
Union, Harriet May............................................. 93
Independent Community Bankers of America, and Security Bank,
Dyersburg, Tennessee, David E. Hayes........................... 124
National Association of Federal Credit Unions, and Navy Federal
Credit Union, Vice Admiral Cutler Dawson, retired.............. 80
National Community Reinvestment Coalition, John Taylor........... 174
National Credit Union Administration, the Honorable Norman E.
D'Amours....................................................... 164
Tulane-Loyola Federal Credit Union, Constance Kennelly........... 183
University of Nebraska-Lincoln, College of Business
Administration, Gordon V. Karels, Ph.D......................... 168
SUBMISSIONS FOR THE RECORD
Ayers, Walter, Virginia Bankers Association, Glen Allen, VA,
statement...................................................... 197
Bartlett, Steve, Financial Services Roundtable, statement........ 205
Becker, Fred, National Association of Federal Credit Unions,
Arlington, VA, letter.......................................... 200
Chatfield, David, California Credit Union League, Rancho
Cucamonga, CA, letter.......................................... 201
Dawson, Cutler, Navy Federal Credit Union, Vienna, VA, statement. 199
English, Phil, U.S. House of Representatives, statement.......... 207
Gillespie, Donald J., A.M. Community Credit Union, Kenosha, WI,
letter......................................................... 207
Gittens, Lane, West Haven, UT, letter............................ 210
Headlee, Howard, Utah Bankers Association, Salt Lake City, UT,
letter......................................................... 210
Heller, Thomas, Orlando, FL, statement........................... 211
Kerslake, Dale, Cascade Federal Credit Union, Kent, WA, letter... 211
Mica, Dan, Credit Union National Association, Washington, DC,
letter......................................................... 212
Minnesota Bankers Association, Edina, MN, statement.............. 216
Oemichen, William, Wisconsin Federation of Cooperatives/Minnesota
Association of Cooperatives, Madison, WI, letter............... 219
Slach, Harold, Port Orchard, WA, statement....................... 220
Woodard, Thad, North Carolina Bankers Association, Raleigh, NC,
letter......................................................... 220
REVIEW OF CREDIT UNION TAX EXEMPTION
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THURSDAY, NOVEMBER 3, 2005
U.S. House of Representatives,
Committee on Ways and Means,
Washington, DC.
The Committee met, pursuant to notice, at 10:44 a.m., in
room 1100, Longworth House Office Building, Hon. Bill Thomas,
(Chairman of the Committee), presiding.
[The advisory and revised advisory announcing the hearing
follow:]
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
October 27, 2005
No. FC-15
Thomas Announces Hearing on Review of Credit Union Tax Exemption
Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways
and Means, today announced that the Committee will hold a hearing
titled, ``Review of Credit Union Tax Exemption.'' The hearing will take
place on Thursday, November 3, 2005, in the main Committee hearing
room, 1100 Longworth House Office Building, beginning at 10:00 a.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only. Invited
witnesses will include representatives from the U.S. Government
Accountability Office, the Internal Revenue Service, the National
Credit Union Administration (NCUA), as well as academic experts and
other interested parties. However, any individual or organization not
scheduled for an oral appearance may submit a written statement for
consideration by the Committee and for inclusion in the printed record
of the hearing.
BACKGROUND:
In 1934, the Federal Credit Union Act (FCUA) (P.L. 73-467) was
signed into law, establishing a charter for Federal credit unions.
Three years later, Congress provided for statutory tax exemption for
Federal credit unions. At the time when the FCUA was enacted, there
were approximately 2,350 credit unions operating in the United States
with approximately 450,000 members and assets of $50 million. At the
end of 2004, there were 9,483 credit unions with about 86.9 million
members and assets totaling more than $674 billion dollars.
There are varying explanations for why Congress granted tax-exempt
status to credit unions. The most recent explanation can be found in
the Credit Union Membership Access Act in 1998 (P.L. 105-219), where
Congress stated in its findings that credit unions are tax-exempt
because they ``are member-owned, democratically operated, not-for-
profit organizations generally managed by volunteer boards of directors
and because they have the specified mission of meeting the credit and
savings needs of consumers, especially persons of modest means.''
Under current law, Federal credit unions are tax-exempt under
section 501(c)(1) of the Internal Revenue Code (IRC). In order for a
Federal credit union to be recognized as tax-exempt it needs to be
chartered by the NCUA. State credit unions are tax-exempt under section
501(c)(14) of the IRC. This provision requires that the credit union
not have capital stock, and that it be organized and operated for
mutual purposes and without profit.
Credit unions are limited under their authorizing legislation both
in terms of who they may serve and the services they offer. However, as
credit unions have grown over time, they have been allowed to expand
their range of services and their fields of membership. Some have
questioned whether these changes in the credit union industry mean that
many credit unions do not serve the goals for which the tax exemption
was granted.
The hearing will examine the following issues:
The history of and Congress' rationale for providing tax
exemption to credit unions;
Whether credit unions are serving the goals intended with
their tax-exempt status;
The use of the tax benefit by credit unions; and
Changes in the credit union industry, including the
growth in credit union membership and services.
In announcing the hearing, Chairman Thomas stated, ``This hearing
continues the Committee's examination of the tax-exempt sector. When
credit unions were granted their tax exempt status, they provided an
important benefit to people of modest means. Credit unions have been
statutorily tax-exempt for almost 70 years now, and it is important
that Congress understand whether there is a strong justification for
the tax exemption. Congress has an obligation to ask questions to
ensure that the country is receiving something in exchange for the
benefit of tax exemption.''
FOCUS OF THE HEARING:
The hearing will examine the legal history of the tax exemption for
credit unions, to determine whether credit unions are serving the goals
intended with their tax-exempt status.
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ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
November 03, 2005
No. FC-15-Revised
Change in Time for Hearing on Review of Credit Union Tax Exemption
Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways
and Means, today announced that the Committee hearing titled, ``Review
of Credit Union Tax Exemption,'' previously scheduled for 10:00 a.m. on
Thursday, November 3, 2005, in the main Committee hearing room, 1100
Longworth House Office Building, will now be held at 10:30 a.m.
All other details for the hearing remain the same. (See Full
Committee Advisory No. FC-15, dated October 27, 2005).
Chairman THOMAS. If we could ask our guests to find seats,
please. Today, the Committee continues its series of oversight
hearings on the tax-exempt sector. At this hearing we will
focus on the tax-exemption provided to Federal and State credit
unions. Credit unions have been statutorily tax-exempt for
almost 70 years. Today, they have approximately 87 million
members and combined assets of more than $674 billion. Yet,
their tax status has received little scrutiny from Congress. In
fact, this is the Committee's first hearing in 20 years devoted
exclusively to credit union tax-exemption. Based upon e-mails
sent around, newspaper articles generated and statements made,
it appears as though some people think it is an affront to have
the Committee ask the people who receive a benefit from the
taxpayers of this country to come in and answer a few
questions. They have even gone to the extent of apparently
setting up a countdown calendar on how long I am going to
remain chairman and how long they need to hunker down.
Mr. RANGEL. How did that turn out?
Chairman THOMAS. Several credit unions--far longer than you
ever wanted it to, Charlie.
[Laughter.]
Mr. RANGEL. I just asked.
Chairman THOMAS. I just answered. We are going to hear over
and over that Federal credit unions were created in 1934, and
then received their tax-exempt status in 1937. But what I
really want to do, since many people do not remember the
banking structure from 1934 and 1937 and what it looked like at
that time, that was the era in which the industry was examined
and credit unions were established, because, no question, based
upon the statute, Americans of modest means had difficulty
obtaining credit at that time. Over the last 70 years, however,
the financial service industry as a whole, and credit unions
specifically, have changed a great deal. That is why it is
important to periodically revisit the field and see if what did
apply continues to apply. Or in evolving, in meeting those
changing needs, the evolution, in fact, makes sense to the
taxpayers who provide a very generous subsidy.
If you examine what a credit union was when it first
started and look at what credit unions are today, especially
those that are the newest in emerging credit unions, you find
out that you can have a credit union which is called the
Congressional Federal Credit Union but supplies credit to a
retail restaurant, to Legal Seafood, and to a law firm called
Akin Gump, notwithstanding the fact it is called a
``congressional credit union.'' When you deal with community
charters, whatever local means, I find it somewhat amazing that
a credit union can be chartered to have as its local community
the county of Los Angeles, which has a population greater than
42 States in the country. While the original credit unions
offered limited services, many modern credit unions offer a
wide variety of services. Increasingly credit unions are
offering business loans to members, and through some
affiliates, credit unions offer services that seem to be quite
unrelated to their original mission. For example, health and
dental insurance, automobile sales, or even pet insurance.
So, as we begin to look at this, one of the concerns I have
is not so much, although we will inquire, about the question of
what is it that they do to continue to get the tax-exempt
status. For example, when we examined nonprofit hospitals, we
found that at one time they were required to provide services
to the poor. That was eliminated sometime ago--hospitals are
not even required to do that. However, I do think it should be
noted that the original statement from the thirties offering
people of modest means financial services was restated as
recently as 1998 in legislation. So, that seems to be an
ongoing theme. The concern that I have in today's world, as
many of us were shocked in terms of things that were occurring
in the corporate world, are focused primarily on the question
of transparency, accountability, verifiability, the sorts of
things that taxpayers if they were sitting here today would
want to know to determine whether or not they are getting their
money's worth in terms of not just the activities or the
services that credit unions provide, but the way in which they
are run, who gets the benefits, to what extent they have a
comfort level that the accounting procedures are aboveboard,
and match up to some of the new accounting procedures that
Congress has passed on to entities that pay taxes. So, that is
really the direction that Congress ought to engage in once
every two decades. With that, I recognize the gentleman from
New York for any statement he would like to make.
Mr. RANGEL. Thank you, Mr. Chairman. Seventy-five years
ago, a great concept came into being, and as a result of that,
the lives of people have improved throughout the United States
and, indeed, throughout the world, because 75 years ago,
Charlie Rangel was born, and he certainly has made a
difference.
[Laughter.]
Mr. RANGEL. Of course, at the same time credit unions were
created, and so those were two great things that happened 75
years ago. It seems as though that they provided a great
service to many people, and right here at Wright Patman I see
the long line of members who are anxious to receive services
here. I, like the chairman, welcome these positive, motivated
hearings to see what we can do to improve the quality of
service that we render. So, it is very interesting that
hospitals would be on the same line of interest to the Chair
that is the not-for-profits. But we do hope that at the end of
this administration, if the public does not provide the service
and we have not-for-profits providing the service, that
something would be left for those people that are not among the
powerful as relates to their lobbying interests. So, Mr.
Chairman, let me thank you for openly having these hearings so
that at least those of us who appreciate the great work that
hospitals are doing and the credit unions are doing, we are
able to let our constituents know the direction in which you
are going. I reserve any other comments I might have.
Chairman THOMAS. I thank the gentleman. Our first panel
today consists of the Honorable Mrs. Johnson, who is the
Chairman of the National Credit Union Administration (NCUA);
Steven T. Miller, Commissioner in the Internal Revenue Service,
who has visited with us before; and Richard J. Hillman, who is
the Managing Director, Financial Markets and Community
Investment, U.S. Government Accountability Office, who has
visited with us as well. Each of you has submitted written
testimony, and it will be made a part of the record, without
objection. The Chair and the Members look forward to hearing
from each of you present the information you have, in any
manner you see fit in the time that you have available to you.
Let's start with Chairman Johnson and move across the panel.
STATEMENT OF HON. JOANN JOHNSON, CHAIRMAN, NATIONAL CREDIT
UNION ADMINISTRATION, ALEXANDRIA, VIRGINIA, ACCOMPANIED BY
ROBERT FENNER, GENERAL COUNSEL, NATIONAL CREDIT UNION
ADMINISTRATION
Ms. JOHNSON. Chairman Thomas, Ranking Member Rangel, and
Members of the Committee, on behalf of the National Credit
Union Administration, thank you for the opportunity to be here
today to present NCUA's views on the credit union tax-
exemption. The NCUA acknowledges the support of this and
previous Administrations, and also of Congress, favoring the
continued tax-exemption for credit unions as important public
policy. The NCUA's primary mission is to ensure the safety and
soundness of federally insured credit unions. We fulfill this
mission by examining, regulating, and insuring all Federal
credit unions. In coordination with the State regulators, we
participate in the supervision of federally insured State-
chartered credit unions. As credit union cooperatives,
federally insured credit unions vary in size. However, their
cooperative structure and purpose is identical. They are
strongly capitalized and present minimal risk to the National
Credit Union Share Insurance Fund, the Treasury, and ultimately
the American taxpayers. The Share Insurance Fund has never
required taxpayer support. It is from this perspective that we
have reviewed the implications of the debate over continuing
the credit union tax-exemption.
Credit unions are today, as they were at their inception in
the United States, member-owned, democratically controlled--
that is, one member, one vote, and a volunteer board--tax-
exempt cooperatives, fulfilling their mission of serving the
credit and savings needs of consumers, especially those of
modest means. This structure, begun as a financial service
provider for the working Americans, remains intact today as
credit unions fulfill their purpose of serving a broader base
of American consumers, especially those of low and moderate
income, even as both credit unions and other financial
institutions have adapted to consumer demand for improved
delivery of financial services. It is through this cooperative
structure that the credit union system provides billions of
dollars in annual benefits to consumers. The structure supports
the incentive of credit unions to provide affordable services
to their consumer owners rather than to maximize profits to
outside investors or stockholders.
Though credit unions comprise only 6 percent of federally
insured institutions' assets, essentially the same level since
1992, the effect of this minimal competition also assures
better rates and services for users of all financial
institutions. Critical to this discussion, it is the agency's
view that credit unions are fulfilling their mission of serving
persons of modest means. Over 1,000 credit unions exist
specifically for the purpose of serving designated low-income
fields of membership. Additionally, 640 Federal credit unions
as well as many State-chartered credit unions have added
underserved areas to their fields of membership. Industry-wide,
savings and loan balances in credit unions are lower than in
other institutions. Credit unions make a higher percentage of
their HMDA-reported loans to low- and moderate-income borrowers
than do other institutions. These and other facts reported in
my written statement demonstrate that credit unions are
actively fulfilling this aspect of their mission. Credit unions
have modernized their methods of delivering services. This has
been appropriate. It has been necessary for their survival, and
it is consistent with the principle that those of modest means
should not be restricted to modest services.
Also important to this analysis is the fact that credit
unions build capital only by setting aside a portion of their
earnings. Taxation threatens to diminish that sole source of
capital, resulting in changes that could undermine the
continuation of the cooperative credit union system. When
subjected to the additional expense of taxation on net worth in
conjunction with the limitations on membership and powers, it
may be difficult to justify retaining a cooperative credit
union charter. A likely response, especially for larger credit
unions, will be to convert to bank charters. The present
structure is successfully serving 84.5 million credit union
members and empowers many Americans, especially those outside
the financial mainstream, to be introduced to the financial
services marketplace. It is the same success that argues most
strongly for the retention of this important statutory mandate
if a viable financial alternative is the desired result. Due to
their unique cooperative structure and in the interest of
maintaining it, credit unions have had tax-exempt status since
1917. This status was affirmed and formally codifies for
Federal credit unions in 1937 and reaffirmed by Congress in
both 1951 and 1998. In 2001, the Treasury department reviewed,
along with several other issues, the credit union tax-
exemption. The resulting report offered now administrative or
legislative changes regarding the exemption.
The original justification for tax-exempt status remains
valid. federally insured credit unions provide billions of
dollars of benefits annually to all consumers, not just credit
union members, by assuring that competitive rates are offered
in the financial marketplace. Congress should carefully
consider these facts in determining whether to repeal the
credit union tax-exemption. Thank you for the opportunity to
participate on the panel, and I will be happy to address
questions. Thank you.
[The prepared statement of Ms. Johnson follows:]
Statement of Hon. JoAnn Johnson, Chairman, National Credit Union
Administration, Alexandria, Virginia, accompanied by Robert Fenner,
General Counsel, National Credit Union Administration
Chairman Thomas, Ranking Member Rangel and Members of the Ways and
Means Committee: on behalf of the National Credit Union Administration
(``NCUA''), thank you for the opportunity to be here today to present
the Agency's views on ``A Review of the Credit Union Tax Exemption.''
NCUA recognizes and supports this and previous Administrations' and
Congressional policy favoring the continued tax exemption for credit
unions as important public policy.
NCUA's primary mission is to ensure the safety and soundness of
federally insured credit unions. It performs this important public
policy function by first examining and insuring all Federal credit
unions, and second, in coordination with the state regulators,
participating in the supervision of federally insured state chartered
credit unions. In its capacity as the administrator for the National
Credit Union Share Insurance Fund (``NCUSIF''), NCUA provides oversight
and supervision to approximately 8,800 federally insured credit unions,
representing over 96 percent of all credit unions and 84.5 million
credit union members. As credit union cooperatives, federally insured
credit unions vary in size; however, their cooperative structure and
purpose is identical. They are strongly capitalized and present minimal
risk to the NCUSIF, the Treasury and ultimately to the American
taxpayers. The NCUSIF has never required taxpayer support.
Especially important to this discussion on credit union tax
exemption is the Federal law that specifies strict system capital
(``net worth'') standards known as Prompt Corrective Action. By law,
written and overseen by the Financial Services Committee, federally
insured credit unions are alone among insured financial institutions in
how they can build and maintain net worth. Specifically, they are
limited to using only their retained earnings to meet their statutory
capital requirements. Taxation threatens to diminish that sole source
of capital by reducing the ability to generate net income and cause
other adverse changes. Eventually, as credit union net worth ratios
decline to levels that require additions to retained earnings in order
to meet statutory and regulatory capital requirements, taxation may
result in behavior modifications that could undermine the continuation
of the cooperative credit union system.
Any consideration of repealing the credit union tax exemption
should include a very careful analysis of the effects on the public
policy benefits of the credit union system. From our standpoint as the
insurer of member share accounts and the safety and soundness regulator
for federal credit unions, NCUA believes that a thorough analysis leads
to the firm conclusion that the tax exemption is sound Congressional
policy and should remain in place if Congress desires to preserve the
cooperative structure most capable of providing financial services to
people of modest means.
In 2001, the Treasury Department reviewed, along with several other
issues, the credit union tax exemption. The report offered no
administrative or legislative changes regarding the exemption.\1\
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\1\ U.S. Department of the Treasury ``Comparing Credit Unions and
other Depository Institutions'' (January 2001).
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The billions of dollars in annual consumer benefits provided by
credit unions are derived by the credit union structure being member
owned, democratically controlled, tax-exempt cooperatives. This
cooperative structure supports the organizational incentive of credit
unions to provide affordable services to their consumer owners, rather
than to maximize profits to outside investors or stockholders. Though
credit unions comprise only a small segment of the financial services
marketplace, approximately six percent of federally insured
institutions' assets, the effect of this minimal competition assures
better rates and services for users of all financial institutions.
The cooperative structure has remained unchanged since the
inception of credit unions in the United States as financial
cooperatives for working Americans, and, most importantly, it remains
intact today as credit unions fulfill their purpose of serving a
broader base of American consumers, especially those of low and
moderate income. It is a structure that has remained unchanged as other
financial intermediaries have entered the consumer financial services
market, and as both credit unions and others have adapted to consumer
demand for change in the methods of delivery of financial services.
Review of this issue leads NCUA to conclude that repeal of the tax
exemption may have consequences not intended by Congress, including
altering the delivery of financial services to a broad range of
Americans.
A likely response to taxation, for many credit unions, would be to
convert to bank charters. It may be difficult to justify retaining a
cooperative credit union charter, with the associated limitations on
membership and powers in conjunction with higher capital requirements,
when subjected to the additional expense of taxation. The history of
the mutual thrift industry and recent developments in the credit union
system demonstrate there are financial incentives for management to
convert their cooperative charters to bank charters. The probable
effect of taxation would be to accelerate these conversions. The
remaining credit unions subject to taxation will also likely seek
expanded authorities and the removal of currently imposed limitations
to offset the expense of taxation. The combined effect of these trends
would clearly threaten the existence of the cooperative not-for-profit
credit union system.
The tax-exempt status of credit unions has enabled these
institutions to provide Americans from all walks of life to have
greater access to affordable financial services. The present structure
is successfully serving 84.5 million credit union members and empowers
many Americans, especially those outside the financial mainstream, to
be introduced to the financial services marketplace. It is this same
success that argues most strongly for the retention of this important
statutory mandate if a viable financial alternative is the desired
result.
It is because of their unique cooperative structure, and in the
interests of maintaining it, that credit unions have had tax-exempt
status since 1917. This status was affirmed and formally codified for
federal credit unions in 1937, and reaffirmed by Congress in both 1951
and 1998. The original justification for tax-exempt status remains
valid, and should not be changed if Congress wishes to maintain a
financially sound, cooperative credit union system.
CREDIT UNIONS ARE UNIQUE
Credit unions are distinguishable from other financial
institutions in their structural and operational characteristics. As
the U.S. Treasury Department noted in their 2001 study of credit
unions:\2\
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\2\ Id. at 6-7 (January 2001) (citations omitted) (emphasis added).
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Many banks and thrifts exhibit one or more of the following five
characteristics; but only credit unions exhibit all five together.
First, credit unions are member-owned, and each member is entitled
to one vote in selecting board members and in certain other decisions.
Although other mutual institutions are also member-owned, voting rights
are generally allocated according to the size of the mutual member's
deposits, rather then being ``one member, one vote.''
Second, credit unions do not issue capital stock. Credit unions
create capital, or net worth, by retaining earnings. Most credit unions
begin with no net worth and gradually build it over time.
Third, credit unions rely on volunteer, unpaid boards of directors
whom the members elect from the ranks of membership.
Fourth, credit unions operate as not-for-profit institutions, in
contrast to shareholder-owned depository institutions. All earnings are
retained as capital or returned to the members in the form of interest
on share accounts, lower interest rates on loans, or otherwise used to
provide products or services.
Fifth, credit unions may only accept as members those individuals
identified in a credit union's articulated field of membership.
Generally, a field of membership may consist of a single group of
individuals that share a common bond; more than one group, each of
which consists of individuals sharing a common bond; or geographical
community. A common bond may take one of three forms: an occupational
bond applies to the employees of a firm; and associational bond applies
to members of an association; and a geographical bond applies to
individuals living, working, attending school, or worshipping within a
particular defined community.
While credit unions provide many of the basic services that one
would expect from a depository institution, including share (deposit)
accounts, share draft (checking) accounts, personal loans, auto loans,
mortgages, and small business loans, Congress limited the permissible
activities of federal credit unions in many areas.
These limitations serve to illustrate the very real differences
compared to other depository institutions. These include, among other
things, limitations on lending and investment authorities, rates of
interest they may charge, constraints on capital, and field of
membership restrictions.
In addition to their distinctive structure and services, the basic
role of credit unions is also very different from that of banks and
thrifts. Most importantly, credit unions, unlike banks, are not
motivated by profit or the desire to maximize the investment of their
stockholders. Rather, credit unions focus on the mission of serving
their members and enabling them to receive loan and share (deposit)
rates on favorable terms. Pursuant to the Federal Credit Union Act, a
federal credit union is specifically defined as ``a cooperative
association organized--for the purpose of promoting thrift among its
members and creating a source of credit for provident or productive
purposes . . .'' \3\
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\3\ 12 U.S.C. 1752(1).
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Throughout the history of credit unions in the United States,
credit unions have been one of the first sources of financial services
to working people. Many credit unions established their first offices
within faith-based organizations, association halls, steel mills,
factories, military bases, and other work places, providing basic, and
later expanded, financial services to those not within the mainstream
of the financial marketplace. In many instances, credit unions had been
the only alternative to payday lenders, pawn shops, or loan sharks.
As industry and the economy changed, communities expanded through
improved transportation, and social and associational organizations
waned in the United States, credit unions necessarily adapted in order
to continue to fulfill their mission of providing cooperative financial
services.
With various industries shuttering their plants, credit unions
relocated their offices outside of the work locations in order to
continue serving their members. Many of these members, victims of plant
closings and job losses in a shifting economy, became small business
owners, with credit unions willingly providing the first source of
capital to their venture. Many of these small business owners could not
provide the same benefits received from large industrial companies, but
still pursued the opportunity of providing the benefit of credit union
ownership and financial service to their employees.
Credit unions, like all financial institutions, have evolved to
meet the basic financial needs of their members. Credit unions provide
the financial services now available due to changing and improving
technology while remaining true to the cooperative structure. They have
successfully provided these services without abandoning their unique
structure as member-owned, democratically controlled cooperatives. An
underlying tenet to these advances was, and continues to be, the belief
that those of modest means should not be restricted to modest services.
HISTORY OF THE CREDIT UNION TAX EXEMPTION
The cooperative nature of credit unions was the original basis for
the credit union tax exemption. Importantly, credit unions have not
abandoned this statutory mandate.
When credit unions first appeared in this country they were purely
creations of state law, and thus, until the passage of the Federal
Credit Union Act in 1934, there were only state chartered credit
unions. When a federal income tax was first passed, credit unions were
not specifically exempted from tax, although other classes of
organizations conducted for the mutual benefit of individuals were
exempted. Credit unions received tax-exempt status in 1917, pursuant to
an administrative ruling issued by the U.S. Attorney General. In his
ruling, the Attorney General found that the tax exemption for these
other organizations extended to credit unions as they ``are organized
and operated for mutual purposes and without profit.'' \4\
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\4\ 31 Op. Atty. Gen. 176 (1917).
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With the passage of the Federal Credit Union Act in 1934, the
federal credit union charter was created. Though the Act did not
specifically create a tax exemption for this new federal charter, the
Attorney General's ruling was extended to effectively provide an
exemption. This exemption, however, did not apply to the taxation of
federal credit unions by states in which the credit union is located.
States could tax federal credit unions as long as the tax was in the
same manner and did not exceed the rate imposed on other domestic
banking corporations.\5\
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\5\ Pub. L. No. 467, c. 750, 48 Stat. 1216 (June 26, 1934).
---------------------------------------------------------------------------
In 1937, the Federal Credit Union Act was amended to create a
specific tax exemption for federal credit unions.\6\ In his testimony
in support of the tax exemption, the Governor of the Farm Credit
Administration (who supervised federal credit unions at the time)
stated:
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\6\ Pub. L. No. 416, c.3, 4, 51 Stat. 4 (December 6, 1937).
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Many States tax domestic banking corporations in relation to their
share capital. In view of the fact that federal credit unions may not
accept deposits, their share capital represents a much greater
proportion of their total resources than is the case in other financial
institutions. Experience with Federal credit unions since the passage
of the original act indicates that such taxation, therefore, places a
disproportionate and excessive burden on them. Furthermore, these
credit unions are mutual or cooperative organizations operated entirely
by and for their members and in view of this fact it is appropriate, we
feel that local taxation should be levied on the members rather than
the organization itself.\7\
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\7\ Testimony of Governor Meyer, Farm Credit Administration before
a Subcommittee of the Committee on Banking and Currency, U.S. Senate,
75th Cong., 1st Sess. (May 11, 1937).
---------------------------------------------------------------------------
A Report from the U.S. House of Representatives delineated two
reasons for ultimately granting federal credit unions a tax exemption.
First, they found that taxing credit unions on their shares (deposits)
in the manner that banks are taxed on their capital shares places a
disproportionate and excessive burden on credit unions, because credit
union shares function as deposits. Second, they found that credit
unions are mutual or cooperative organizations operated entirely by and
for their members.\8\
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\8\ H.R. REP. NO. 1579, 75th Cong., 1st Sess. P.2.
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Pursuant to the changes made in 1937 the Federal Credit Union Act
currently exempts all federal credit unions from:
. . . all taxation now or hereafter imposed by the United States or
by any State, Territorial, or local taxing authority; except that any
real property and any tangible personal property of such Federal credit
union shall be subject to Federal, State, Territorial, and local
taxation to the same extent as other similar property is taxed.\9\
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\9\ 12 U.S.C. 1768.
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Thus, federal credit unions were exempted from most, but not all
taxes. This is the current state of the tax exemption for Federal
credit unions.\10\
---------------------------------------------------------------------------
\10\ This section of the Federal Credit Union Act was amended in
1959, however, the changes did not affect this particular part of the
section.
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For many years credit unions were not the only depository
institutions exempted from taxation. Among others, mutual savings banks
and savings and loan associations were also exempted. In 1951, Congress
found that mutual thrifts had essentially lost the essence of their
mutuality. Accordingly, mutual savings banks and savings and loan
associations lost their tax exemption. However, the exemption for
federal credit unions was left intact, and expresses statutory tax-
exempt status was afforded to state-chartered credit unions,
essentially affirming that credit unions remained true to their
cooperative nature.
In 1998, the tax treatment of credit unions was again affirmed. The
Credit Union Membership Access Act of 1998 stated the findings and
intent of Congress with respect to the tax exemption:
Credit unions, unlike many other participants in the financial
services market, are exempt from Federal and most State taxes because
they are member-owned, democratically operated, not for profit
organizations generally managed by volunteer boards of directors and
because they have the specified mission of meeting the credit and
savings needs of consumers, especially persons of modest means.\11\
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\11\ Pub. L. No. 105-219, 112 Stat. 913 (August 7, 1998).
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CREDIT UNIONS' MARKET SHARE HAS REMAINED CONSTANT
More diversified fields of membership in both multiple group and
community charters means that individual credit unions are more
diversified in their loan assets and therefore present less risk to the
NCUSIF. This is contrasted with the historical predominance of single-
employer common bonds, which increased safety and soundness problems in
the credit union system in the 1970s when numerous industrial companies
failed and their ``single sponsor'' credit unions followed suit as
unemployed members defaulted on their loans.
Moreover, recent trends in field of membership expansions,
including both conversions to community charters and expansions by
adding underserved areas, allow credit unions to do a better job of
fulfilling their historic and important mission of serving persons of
modest means. Thus, recent field of membership trends have both reduced
risk in the credit union system and enabled credit unions to better
fulfill their statutory purpose.
With this success, however, credit unions are not gaining market
share at the expense of banks and thrifts. In 2004, federally insured
credit unions held merely six percent of total financial industry
assets; essentially the same level since 1992. While the percentage of
industry assets held by smaller banks and thrifts is declining, this
decrease did not result in an increase in market share for credit
unions. The combined assets of all federally insured credit unions as
of December 31, 2004--$647 billion in total--are less than the total
assets of any of the three largest banks as of December 31, 2004.\12\
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\12\ Source: http://www.fdic.gov. As of December 31, 2004, JP
Morgan Chase Bank, N.A. had $967.3 billion in assets, Bank of America,
N.A. had $771.6 billion in assets and Citibank, N.A. had $694.5 billion
in assets.
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(Image not available)
Source: FDIC financial call report data, NCUA financial call report
data
Along with a limited market share, the size of the credit unions
within the system remains small. Average and median asset size of
federally insured credit unions--as of June 30, 2005--reflects an
average asset size of $75.5 million and a median asset size of less
than $12 million in assets.
All Federally Insured Credit Unions (FICUs)
As of June 30, 2005
----------------------------------------------------------------------------------------------------------------
% of % of
# of FICU Total Assets Total
----------------------------------------------------------------------------------------------------------------
<$10 Million 4,097 46.2% 15,396,929,628 2.3%
----------------------------------------------------------------------------------------------------------------
$10-$50 Million 2,810 31.7% 66,684,864,271 10.0%
----------------------------------------------------------------------------------------------------------------
$50-$100 Million 774 8.7% 54,445,882,179 8.1%
----------------------------------------------------------------------------------------------------------------
$100-$500 Million 922 10.4% 198,115,394,051 29.6%
----------------------------------------------------------------------------------------------------------------
$500 Million-$1 Billion 155 1.7% 105,889,848,338 15.8%
----------------------------------------------------------------------------------------------------------------
$1-5 Billion 97 1.1% 166,321,482,089 24.8%
----------------------------------------------------------------------------------------------------------------
>$5 Billion 6 0.1% 62,861,279,695 9.4%
----------------------------------------------------------------------------------------------------------------
Total 8,861 100.0% 669,715,680,251 100.0%
----------------------------------------------------------------------------------------------------------------
CREDIT UNIONS ARE SERVING PEOPLE OF MODEST MEANS
Federal credit unions were formed during the height of the great
depression to provide working people with access to affordable
financial services through a cooperatively owned financial institution.
This type of financial institution provided workers an opportunity to
save a portion of their wages and have access to reasonably priced
loans for ``provident and productive purposes.''
Credit unions have not deviated from their original structure and
purpose, providing their members with an opportunity to improve their
financial well-being through share and loan products designed to meet
their financial needs in an ever changing financial and economic
environment. The ability to meet the statutory purpose is dependent on
a number of factors, including diversification of fields of membership.
Recognizing the difficulty credit unions encounter in serving a
greater proportion of low and moderate income members Congress, in
1970, established authority for low-income designated credit unions to
accept non-member share deposits. This authority, which by NCUA
regulation is available to credit unions who serve a majority of
members with a median household income at or less than 80% of the
national median household income, provides qualifying credit unions
with an ability to raise share deposits from outside of the credit
union's membership to support further lending, products and services to
their members.
Currently, approximately 12% of credit unions have received this
designation from the NCUA. These more than 1,000 credit unions are
providing their members the financial services identified as best
meeting their needs at an affordable cost.
Since 1994, NCUA regulations have authorized all Federal credit
unions to add underserved areas to their fields of membership, using
the terminology ``low income communities.'' In 1998, the Credit Union
Membership Access Act was passed which authorized multiple group
chartering previously overturned by the Supreme Court. In this Act,
Congress recognized the authority of multiple group credit unions to
serve ``underserved areas'' and established a specific definition for
that term. For consistency, NCUA regulations were revised to apply this
terminology to all credit unions when adding low income areas in need
of service. Since 1999, more than 650 federal credit unions have added
1,406 underserved areas to their fields of membership. This
authorization has allowed credit unions to serve low and moderate
income areas and facilitate affordable financial services to
individuals who often have been left behind to predatory lenders. Many
of these credit unions are of a sufficient asset size to provide these
underserved areas with improved and an expanded array of financial
products and services at reasonable costs.
NCUA has also done much to encourage credit unions to serve the
unbanked and those of low and moderate income. NCUA's Access Across
America Initiative promotes the benefits of the low-income designation
for eligible credit unions and encourages credit unions to make use of
the ``underserved area authority.'' Also, NCUA established in the mid-
1990s the Economic Development Specialist (``EDS'') position to further
credit union service in low-income and underserved areas. In 2001, the
NCUA Board established a national small credit union program initiative
and centralized the EDS position to the newly created Office of Small
Credit Union Initiatives. Presently there are 15 EDS positions
dedicated to working with groups interested in chartering credit unions
and those credit unions serving or interested in serving members in
underserved areas. This office also conducts workshops throughout the
nation that provide smaller credit unions with best practices,
potential service opportunities, and technical assistance on operations
and staff training.
Based on recent financial information collected by the NCUA in our
quarterly call reports, average and median share deposit and loan
balances in the credit union system demonstrate credit unions are
serving members who hold low share deposit and loan balances. Of
greater significance is the comparison of average and median share
deposit and loan balances between low-income designated credit unions
and the total population of federally insured credit unions. In
general, average and median balances in federally insured credit unions
mirror those in low-income designated credit unions.
Average and Median Credit Union (CU) Share Deposit Balances
As of June 30, 2005
----------------------------------------------------------------------------------------------------------------
All
All Federally Insured CUs Share Share Money Share IRA/ Other All
Deposits Drafts Market Certificates Keogh Shares Shares
----------------------------------------------------------------------------------------------------------------
Average Balance 3,293 2,491 23,127 17,320 11,110 40,440 3,279
----------------------------------------------------------------------------------------------------------------
Median 2,916 2,028 21,034 13,186 9,866 824 2,905
----------------------------------------------------------------------------------------------------------------
Low-Income CUs
----------------------------------------------------------------------------------------------------------------
Average Balance 2,417 1,818 23,645 15,476 10,797 1,738 2,354
----------------------------------------------------------------------------------------------------------------
Median 2,126 1,558 20,249 12,135 10,003 695 2,086
----------------------------------------------------------------------------------------------------------------
All Community CUs
----------------------------------------------------------------------------------------------------------------
Average Balance 3,037 1,969 22,198 14,881 10,371 3,034 2,999
----------------------------------------------------------------------------------------------------------------
Median 2,891 1,764 21,191 13,461 9,527 807 2,863
----------------------------------------------------------------------------------------------------------------
Average and Median Credit Union (CU) Loan Balances
As of June 30, 2005
----------------------------------------------------------------------------------------------------------------
Other Other All
All Federally Insured CUs Loans/ Credit Unsecured New Used 1st Real Other
Leases Card Loans Vehicle Vehicle Mortgage Estate Loans
----------------------------------------------------------------------------------------------------------------
Average Balance 8,046 1,466 2,659 13,930 8,217 79,620 27,561 8,221
----------------------------------------------------------------------------------------------------------------
Median 7,089 1,344 2,287 14,074 8,142 66,809 24,836 6,162
----------------------------------------------------------------------------------------------------------------
All Low Income CUs
----------------------------------------------------------------------------------------------------------------
Average Balance 6,327 1,256 2,293 13,679 7,396 49,818 26,387 7,637
----------------------------------------------------------------------------------------------------------------
Median 5,800 1,150 1,999 13,919 7,371 42,085 22,950 5,253
----------------------------------------------------------------------------------------------------------------
All Community CUs
----------------------------------------------------------------------------------------------------------------
Average Balance 8,732 1,420 2,415 14,592 8,216 72,277 26,443 8,341
----------------------------------------------------------------------------------------------------------------
Median 8,124 1,302 2,169 14,592 8,152 61,779 24,588 6,630
----------------------------------------------------------------------------------------------------------------
The discrepancy between federally insured credit unions and low-
income designated credit unions on average and median first mortgage
balances seems to indicate federally insured credit unions make larger
loans. However, based on data gathered from the Census Bureau's
American Housing Survey for the United States completed in 2003, the
median mortgage loan balance is $82,010 for all occupied residential
units compared to the $66,809 reported for median mortgage loan
balances for federally insured credit unions. This information shows
federally insured credit unions holding smaller balanced first mortgage
loans. Collectively, the data supports the conclusion federally insured
credit unions grant many smaller-balanced loans and are, therefore,
serving members requesting lower balanced loans.
Home Mortgage Disclosure Act (``HMDA'') data also reflects the
continued focus of credit unions on making credit available to
borrowers of low and moderate means. As shown in the following table
containing 2003 HMDA data, credit unions deny fewer loans to both
minority and white borrowers than other financial institutions.
Although serving a smaller market base, credit unions focused on
reaching out to all segments of their membership.
Home Mortgage Disclosure Act (``HMDA'') data also reflects the
continued focus of credit unions on making credit available to
borrowers of low and moderate means. As shown in the following table
containing 2003 HMDA data, credit unions deny fewer loans to both
minority and white borrowers than other financial institutions.
Although serving a smaller market base, credit unions focused on
reaching out to all segments of their membership.
2003 HMDA Data Mortgage Denial Rates
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White Tot Min Am Ind Asian Black Hisp Joint Other N/A Total
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
OCC Applications 6,373,248 1,931,002 33,509 377,521 532,776 632,830 221,805 132,561 1,086,700 9,390,950
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1,091 Denial Rate 12.1% 21.8% 25.0% 12.0% 28.5% 25.6% 12.5% 18.2% 18.0% 14.9%
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
FRB Applications 1,916,573 511,367 6,794 89,451 155,796 183,974 50,648 24,704 353,173 2,781,113
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
565 Denial Rate 9.1% 18.1% 19.7% 10.1% 22.2% 21.0% 9.3% 15.2% 14.8% 11.6%
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
FDIC Applications 1,859,365 403,427 7,108 78,147 111,072 143,839 41,755 21,506 248,342 2,511,134
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2,587 Denial Rate 10.1% 19.7% 20.6% 12.8% 27.6% 19.5% 11.8% 17.5% 19.8% 12.7%
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
OTS Applications 2,993,023 968,616 10,435 236,263 227,144 345,828 96,002 52,944 637,048 4,598,687
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
674 Denial Rate 10.3% 17.7% 18.5% 13.3% 22.0% 19.1% 12.0% 17.7% 17.0% 12.8%
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NCUA Applications 685,145 161,138 3,656 24,851 51,469 43,925 30,013 7,224 138,853 985,136
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1,920 Denial Rate 5.5% 13.2% 11.6% 7.5% 18.0% 15.2% 6.5% 12.6% 11.5% 7.7%
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
HUD Applications 5,825,625 2,883,838 46,476 330,703 893,277 1,005,229 255,504 352,649 3,045,896 11,755,359
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1,181 Denial Rate 19.6% 26.4% 30.5% 15.0% 31.2% 21.8% 17.6% 42.7% 29.5% 23.9%
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
National Applications 19,652,979 6,859,388 107,978 1,136,936 1,971,534 2,355,625 695,727 591,588 5,510,012 32,022,379
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
8,018 Denial Rate 13.5% 22.5% 25.6% 13.0% 28.1% 22.1% 13.8% 32.6% 24.0% 17.2%
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
In fact, as reported in the 2005 National Community Reinvestment
Coalition paper, ``Credit Unions: True to Their Mission?'', HMDA data
for calendar year 2003 shows that credit unions made a higher
percentage of single family mortgage loans to low and moderate income
borrowers (24.2% compared to 23.2%) than banks. In addition, credit
unions significantly increased home purchase loans to low and moderate
income borrowers to 28.3% of their loan portfolios at 2003 from 23.6%
at 2001, while bank lending in this area stayed relatively constant
(28.6% in 2001 and 28.9% in 2003).
In recent years, legislative, regulatory, and policy changes have
resulted in more credit unions serving communities with low and
moderate income borrowers. In fact, NCUA data demonstrates that credit
unions are reaching out to serve low-income residents and are adopting
underserved areas into their fields of membership. Those credit unions
that have adopted underserved areas have more than doubled their
membership growth as compared to the credit union system as a whole.
As members from these areas become familiar with the products and
services offered, credit unions will likely receive more loan
applications and further improve their penetration of the low and
moderate income lending market.
NEED FOR THE CONTINUATION OF THE TAX EXEMPTION
Credit unions are tax-exempt because of their cooperative structure
and not-for-profit mission. While this cooperative structure, and not
the other limitations on powers, is what entitles credit unions to a
tax exemption, it is important to note that these limitations restrict
credit union activities compared to other types of depository
institutions. Despite these limitations, the tax exemption offers an
incentive for credit unions to remain true to their mission of serving
members of all income levels. If credit unions' tax status was changed,
credit unions would have less incentive to remain credit unions. If
these not-for-profits were to be taxed, many credit unions would
probably choose to convert to other types of institutions in order to
have expanded powers. Without credit unions, predatory lenders may
become the financial service provider by default for many Americans who
now rely on credit unions for essential credit union services.
An exodus of the larger, well-capitalized credit unions would have
a detrimental effect on the entire credit union system. These
institutions provide a support structure for the entire credit union
system, as demonstrated in the aftermath of Hurricanes Katrina, Rita,
and Wilma.
Credit unions provide support to one another through credit union
service organizations, shared branching networks, other partnership
arrangements, and credit union league supported programs. If
significant numbers of larger credit unions depart the system, the
pressures related to earnings and capital accumulation would increase
significantly for those credit unions remaining within the system. This
may result in an increase in the number of credit union failures.
Loss of critical mass of larger credit unions may also result in
the credit union system no longer being economically viable. The
largest 13% of federally insured credit unions (over $100 million in
assets) hold almost 80% of the system's assets. Conceivably, 87% of all
federally insured credit unions would remain, but these would only hold
20% of the current financial resources of the system.
The potential costs to the credit union system outweigh any
anticipated revenue gains that may be realized by taxing credit unions.
Estimates put annual tax revenue gains at between $1.2 billion to $1.5
billion annually.\13\ Using cost benefit analysis, leaving aside the
mission of serving those of modest means, the dollar return to
consumers and the economy far exceed these tax revenue estimates. One
recent study of North Carolina financial institutions estimated that
each credit union member saves $130 a year through lower loan rates,
lower fees, and higher returns on savings.\14\ If applied to all
members nationally this would equate to $11 billion in savings passed
on to credit union members.
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\13\ U.S. Department of the Treasury ``Comparing Credit Unions and
other Depository Institutions '' at 32 (January 2001); Congressional
Budget Office, ``Budget Options '' at 301 (February 2005).
\14\ The University of North Carolina at Chapel Hill, William E.
Jackson III, ``The Benefits of Credit Unions to North Carolina
Consumers of Financial Services,'' at 3 (April 2005).
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Finally, if credit unions are taxed, all consumers, not just credit
union members, will be detrimentally affected. It is estimated that by
losing the positive influence of credit unions, bank customers will pay
an additional $4 billion in higher rates, higher fees, and lower
returns on deposits.\15\ This is in addition to a decline in service
quality and convenience, reduced access to basic financial services,
and no check on the proliferation of predatory financial service
providers.
---------------------------------------------------------------------------
\15\ The American University, ``An Analysis of the Benefits of
Credit Unions to Bank Loan Customers,'' (September 2004); Idaho State
University, ``An Estimate of the Influence of Credit Unions on Bank CD
and Money Market Deposits in the U.S.,'' (January 2005).
---------------------------------------------------------------------------
CONCLUSION
Credit unions exist for the purpose of promoting thrift and
providing a source of credit for their members. Since their inception,
credit unions have been organized as democratically controlled, not-
for-profit cooperatives, managed by a volunteer board of directors
elected by and from the membership. These characteristics define the
uniqueness of credit unions that serves as the basis for their tax
exemption. All of these characteristics are as true today as they were
almost a century ago when the tax exemption was first extended to
credit unions.
As recently as 1998, Congress noted that the credit union system
began as a cooperative effort to serve the credit needs of individuals
of modest means, and that credit unions continue to fulfill that public
purpose. Field of membership policy changes since 1998, and associated
trends in charter expansions, have served to fulfill this special
mission. Credit unions of all sizes continue their tradition of
supporting one another through service organizations, shared branching
networks, participation lending, inter-credit union deposits, technical
assistance, and other methods of ensuring continuation of service to
all segments of their membership, including low and moderate income
members.
Federally insured credit unions provide billions of dollars of
benefits annually to consumers by assuring that competitive rates and
services are offered in the financial marketplace. Repeal of the tax
exemption would result in pressure on credit unions to move away from
their not-for-profit cooperative structure causing a systemic risk
throughout the system. Congress should carefully consider these
implications in determining whether to repeal the credit union tax
exemption.
Chairman THOMAS. Thank you, Chairman Johnson. Mr. Miller?
STATEMENT OF STEVEN T. MILLER, COMMISSIONER, TAX-EXEMPT AND
GOVERNMENT ENTITIES DIVISION, INTERNAL REVENUE SERVICE
Mr. MILLER. Chairman Thomas, Ranking Member Rangel, Members
of the Committee, thank you for the opportunity to address the
treatment of credit unions under Federal tax law. Our
regulatory role in this area depends upon whether the credit
union is chartered by the Federal Government or by a State. The
Service has virtually no enforcement responsibility with
respect to federally chartered credit unions. We have more but
still rather limited engagement responsibility with respect to
State-chartered credit unions. Credit unions were formed to
encourage thrift among members and to create a source of credit
at a reasonable rate of interest. Congress has stated that
credit unions are exempt from tax because they are member-
owned, democratically operated, not-for-profit organizations,
generally managed by volunteer boards of directors, and because
they have a specified mission of meeting the credit and saving
needs of consumers, especially persons of modest means. Let me
start my discussion of the tax rules with federally chartered
credit unions.
Federal credit unions were first chartered by an act of
Congress in 1934 and were exempted from tax in 1937. They are
chartered and regulated in their operation by the National
Credit Union Administration. Once chartered, they are exempt
from Federal income tax under the Federal Credit Union Act and
are treated as instrumentalities of the United States under
Section 501(c)(1) of the Internal Revenue Code. Federal credit
unions are liable for Federal unemployment and Social Security
taxes, but are not subject to the tax on unrelated business
income, which is the tax imposed on income derived from a trade
or business that is not substantially related to the exempt
purpose of an entity. Federal credit unions do not file
information returns with the IRS, nor do they apply to the IRS
for recognition of exemption. Other than employment taxes, we
have no oversight over these entities. For State-chartered
credit unions, the tax treatment is significantly different.
Favored Federal tax treatment for these entities dates from a
1916 statute. The exemption of State-chartered credit unions
from Federal income tax is now governed by sections
501(c)(14)(A). State-chartered credit unions are exempt if they
are without capital stock, are organized and operated for
mutual purposes, without profit and under a State law governing
the formation of credit unions.
State-chartered credit unions do not need to file with the
IRS for exemption, but some do. In that event, they must show
the State and date of their incorporation and that they comply
with the State law applicable to loans, investments, and
dividends. In addition, 34 States have group rulings in which
the State regulatory authority controls additions or deletions
to the group and notifies the IRS of the names and addresses of
new and departing members. State-chartered credit unions are
also required to file an annual information return with the
IRS. Like Federal credit unions, State-chartered credit unions
are liable for employment taxes; however, unlike the Federal
credit unions, they are subject to unrelated business income
tax. As part of our overall examination program for tax-exempt
organizations, we do examine State-chartered credit unions. We
currently have about 50 such examinations underway. We are
finding that not only are State-chartered credit unions
engaging in traditional core credit union activities, but many
are also engaging in a wide range of other activities,
including marketing a variety of insurance products. We are
working to determine which of the traditional activities are
subject to the unrelated business income tax.
Let me conclude. The IRS has begun to rebalance its efforts
by placing greater emphasis on enforcement. This applies across
the board, including the tax-exempt community. As we proceed in
the tax-exempt sector, we have found that some areas have
become difficult to administer because industry practice or the
industry itself has changed over decades, while the tax rules
have remained constant. The transformation of credit unions and
other financial institutions is an excellent example of this
kind of change, with credit unions offering new services and
entering new markets. We take no position on whether credit
unions should be taxable or whether the treatment of Federal
and State-chartered credit unions should be conformed. What we
can say is that, with respect to exemption, the IRS has a very
limited role. However, industry changes do raise concerns for
the IRS. As State-chartered credit unions offer new services,
we have the responsibility of determining which of them
generate taxable income. This is a factually intensive and
difficult analysis. Thank you, and we look forward to working
with you and your staff on these and similar issues.
[The prepared statement of Mr. Miller follows:]
Statement of Steven T. Miller, Commissioner, Tax-Exempt and Government
Entities Division, Internal Revenue Service
Background
Mr. Chairman, thank you for the opportunity to address this
Committee on the treatment of credit unions under federal tax law. As I
will explain, the rules governing this segment of the nonprofit
community derive from various federal and state laws, not merely from
the Internal Revenue Code. Our regulatory role is dependent upon the
nature of the credit union. Credit unions may be chartered by the
federal government or by a state. The Service has virtually no
enforcement responsibility with respect to federally chartered credit
unions. We have more, but still rather limited enforcement
responsibility, with respect to state chartered entities.
There is no definition of what constitutes a credit union in the
Internal Revenue Code. The IRS looks to the National Credit Union
Administration (NCUA), which administers the Federal Credit Union Act,
to identify federal credit unions, and to applicable state law to
identify state chartered credit unions. Notwithstanding the lack of a
uniform definition and the variations in the statutes under which they
are created, credit unions do generally share some common
characteristics. These include operation on a mutual basis by and for
the membership; ownership by the members of the shares on which
dividends are paid; officers elected by the membership with each member
having one vote regardless of the number of shares held; and the
opportunity of members to deposit funds and receive loans from the
institution. Nonmembers cannot make deposits with, or receive loans
from, credit unions.
Credit unions were formed to encourage thrift among members by
holding member funds on deposit, making loans, and creating a source of
credit at a fair and reasonable rate of interest in order to improve
the economic and social conditions of credit union members.\1\
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\1\ La Caisse Populaire Ste. Marie (St. Mary's Bank) v. U.S., 563
F.2d 505 (1st Cir., 1977), aff'g 425 F. Supp. 512 (D. N.H., 1976). See
also 31 U.S. Op. Atty. Gen. 176. In Pub.L. 105-219, sec. 2(4), 105th
Congress (1998), Congress found that credit unions are exempt from tax
``because they are member-owned, democratically operated, not-for-
profit organizations generally managed by volunteer boards of directors
and because they have the specified mission of meeting the credit and
saving needs of consumers, especially persons of modest means.''
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In general, credit union statutes (including the federal statute)
require some sort of common bond among members. This usually is based
upon working for a common employer, being employed in a similar
occupation, or residing in a specific geographic locale.\2\ The common
bond is a major factor distinguishing credit unions from other
financial institutions such as banks and savings and loan companies,
which are open for business with the general public without regard to
employment, occupation, or area of residence.
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\2\ 12 U.S.C. 1759 provides that federal credit union membership
shall be limited to groups having a common bond of occupation and
association, or to groups within a well-defined neighborhood,
community, or district. State statutes vary as to the extent of the
common bond requirement.
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Applicable Legal Framework and Interaction with Internal Revenue
Service
History and Standards for Tax Exemption--Federal Credit Unions
The federal credit union charter was created by act of Congress in
1934.\3\ Federal credit unions became exempt from tax in 1937.\4\
Federal credit unions are exempt from federal income taxes under the
Federal Credit Union Act \5\ and as a result are described in section
501(c)(1) of the Code, which refers to corporations, organized under an
act of Congress, that are instrumentalities of the United States.
Federal credit unions are chartered and regulated in operation by NCUA.
NCUA determines the standards for qualification as a federal credit
union under the Federal Credit Union Act, and determines which
applicants qualify for federal credit union status. By operation of
law, once NCUA makes this determination, federal law exempts the
organization from tax, and the IRS accepts the finding as determinative
of whether the organization is an instrumentality of the U.S.
Government for purposes of section 501(c)(1).
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\3\ Pub. L. 73-467, 48 Stat. 1216 (1934).
\4\ Pub. L. 75-416, 51 Stat. 4 (1937).
\5\ 12 U.S.C. 1768.
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In recent decades, as a result of deregulation in the industry, the
law governing federal credit unions has allowed expansion of the
services federal credit unions offer to their members.\6\ At the same
time, common bond restrictions have been relaxed to allow a wider
membership base.\7\
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\6\ Some examples of law changes to permit federal credit unions to
expand their services include changes to the Federal Credit Union Act
in 1977 (expanded savings, lending, and investment powers); the
Monetary Control Act of 1980, P.L. 96-221 (share draft accounts); and
the Garn-St. Germain Depository Institutions Act of 1982, P.L. 97-320
(expanded mortgage loan authority).
\7\ The Credit Union Membership Access Act of 1998, Pub. L. 105-
219, authorized credit unions to have multiple common bonds. The
legislation overturned the holding of National Credit Union
Administration v. First National Bnk & Trust Co., 522 U.S. 479 (1998).
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History and Standards for Tax Exemption--State Credit Unions
State chartered credit unions have existed at least since 1909, and
favored federal tax treatment dates from a 1916 statute that conferred
exemption on ``cooperative banks without capital stock organized and
operated for mutual purposes and without profit''. (39 Stat. 766). In
1917, an opinion memorandum from the Office of the Attorney General
interpreted this phrase to include credit unions.\8\ State credit
unions were first expressly designated by statute as exempt from tax in
the Revenue Act of 1951.
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\8\ 31 U.S. Op. Atty. Gen. 176.
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The exemption of state chartered credit unions from federal income
tax is governed by section 501(c)(14)(A) of the Internal Revenue Code.
State chartered credit unions are exempt if they are without capital
stock and are organized and operated for mutual purposes and without
profit. The Service's published guidance echoes the statute, adding
that an entity also must be organized and operated under a state law
governing the formation of credit unions in order to qualify for
exemption.\9\ In general, state law determines the extent of the common
bond required of the membership of a state chartered credit union.\10\
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\9\ Rev. Rul. 69-282, 1969-1 C.B. 155; Rev. Rul. 72-37, 1972 C.B.
152.
\10\ For purposes of federal tax law, the IRS is not precluded from
challenging whether an organization meets state law common bond
requirements or whether such state law requirements are adequate in
defining a credit union. But see note 18 below.
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Applicability of Unrelated Business Income Tax
As federal instrumentalities, federal credit unions remain liable
for federal unemployment and social security taxes,\11\ but they are
exempt from unrelated business income tax.\12\ State chartered credit
unions are liable for employment taxes as well, but have no exemption
from unrelated business income tax. The unrelated business income tax
is a tax on income derived by a tax exempt entity from a trade or
business that is regularly carried on and that is not substantially
related to the exercise or performance of the purpose or function
constituting the basis for the entity's exemption.\13\
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\11\ IRC 3308; IRC 3112.
\12\ IRC 511(a)(2)(A).
\13\ IRC 513(a).
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Filing and Reporting Requirements
Federal and state chartered credit unions differ in their
respective reporting requirements. Because federal credit unions are
described in section 501(c)(1), they do not file information returns
with the IRS, nor do they apply to the IRS for recognition of
exemption.\14\ They are instead responsible to the NCUA for adherence
to Federal Credit Union Act requirements.
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\14\ See Treas. Reg. 1.6033-2(g)(1)(vi); Rev. Rul. 89-94, 1989-2
C.B. 233, relating to information returns. IRC 508(a) and IRC
505(c) require designated organizations to apply for exempt status.
These provisions do not designate federal or state chartered credit
unions. Federal credit unions are subject to an independent application
process with NCUA.
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While optional, state chartered credit unions may file a notice
with the IRS to be recognized as exempt, although there is no
prescribed format. The IRS accepts a form furnished to applicants by
the Credit Union National Association (CUNA) for this purpose.\15\
Applicants must show the state and date of incorporation, and that they
comply with the state law applicable to loans, investments, and
dividends. Thirty-four states hold group rulings, in which a state
regulatory authority controls additions and deletions to the group and
notifies the IRS of the names and addresses of new and departing
members.
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\15\ Rev. Proc. 56-2, 1956-1 C.B. 1017. State chartered credit
unions may apply in order to have reliance on their exempt status with
the IRS.
---------------------------------------------------------------------------
State chartered credit unions are required to file annual
information returns with the IRS (Forms 990). The IRS received over
1360 individual forms 990 from state chartered credit unions in 2003,
the last year for which we have complete filing data. A state
regulatory authority with a group exemption ruling may file a group
return for all exempt state chartered credit unions under its control
and supervision.\16\ In 2003, 21 states out of the 34 states holding
group rulings filed group Form 990 returns, covering over two thousand
organizations.
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\16\ Rev. Rul. 60-364, 1960-2 C.B. 382.
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Examination Issues
Unless employment tax issues are present, the IRS does not examine
federal credit unions because generally there are no federal taxation
issues to be resolved.\17\
---------------------------------------------------------------------------
\17\ As with other financial institutions, however, the IRS does
monitor Bank Secrecy Act and currency transaction reporting compliance.
---------------------------------------------------------------------------
We do examine state chartered credit unions and currently have
about 50 examinations underway. These examinations all involve the
application of the tax on unrelated business income. The IRS generally
accepts the state's recognition that an organization is a credit union
and therefore we rarely challenge exemption of such organizations on
that basis. An attempt by the IRS to revoke a state chartered credit
union's exemption based upon the expansive services it offered to its
members and the sufficiency of the common bond of the organization's
membership was unsuccessful. La Caisse Populaire Ste. Marie (St. Mary's
Bank) v. U.S., 563 F.2d 505 (1st Cir.,1977).\18\
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\18\ The case presented what the IRS believed to be extremely
favorable facts for the Government. There was no written common bond
and the organization held itself out to the public as a full-service
bank. See Action on Decision 1979-41 (May 4, 1978), which indicated
that the loss of the case coupled with the expansion of the powers of
federal credit unions ``cast considerable doubt upon whether the
Service will be able to ever successfully challenge the exempt status
of credit unions.'' See also GCM 37467 (1978) for a discussion of the
A.O.D. The IRS also considered the sufficiency of a state chartered
organization's common bond in GCM 38345 (1980), without adverse action,
stating that the IRS should only challenge exemption where there is no
common bond, de facto or otherwise.
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In our examinations, we are finding that state chartered credit
unions are engaging in traditional core activities of providing savings
facilities and loans to members, as well as offering more recently
established services such as home mortgages and credit and debit cards.
We are finding that many are also engaging in a wide range of other
activities. Among these are:
The sale of optional credit life insurance and credit
disability insurance to members who obtain loans from the organization.
If the borrower dies or becomes disabled, the insurance pays off the
loan balance.
The sale of GAP (``Guaranteed Auto Protection'') auto
insurance. This pays the automobile loan balance in the event of loss
or destruction of a vehicle to the extent it exceeds the value of the
vehicle.
The sale of automobile warranties.
The sale of cancer insurance.
The sale of accidental death and dismemberment insurance.
ATM fees charged to non-members.
The sale of health or dental insurance.
The marketing of mutual funds to members.
The marketing of other insurance and financial products.
We are working to determine which of these additional activities
have a substantial relationship to the purposes and function of the
state credit unions involved, and whether amounts derived from such
activities are taxable.\19\
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\19\ A technical advice memorandum in 1995 finds income derived
from credit life and credit disability insurance to be UBIT. PLR
9548001. A series of three IRS information letters from the early
1970's took the contrary position with respect to credit disability
insurance. At this time we have thirty technical advice cases pending
involving credit union activities.
---------------------------------------------------------------------------
The IRS has asserted that an exempt membership organization engages
in an unrelated trade or business when it sells insurance products to
its members. The courts have endorsed that interpretation in multiple
cases, although no court cases to date specifically involve sales by a
section 501(c)(14)(A) credit union to its members.\20\
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\20\ United States v. American Bar Endowment, 106 S.Ct. 2426
(1986), which involved an organization described in section 501(c)(3);
Louisiana Credit Union League v. United States, 693 F. 2d 1097 (5th
Cir. 1982), a section 501(c)(6) organization; Professional Insurance
Agents of Michigan v. Commissioner, 726 F.2d 1097 (6th Cir. 1984), also
a section 501(c)(6) organization.
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Conclusion
In prior testimony before this Committee, we have discussed the
extensive growth in the tax-exempt sector in recent decades, and the
fact that there has been little change in the law governing
organizations that qualify for tax-exempt status.
One of the four enforcement objectives of the IRS as outlined in
the 5-year strategic plan published in 2004, is to deter the abuse and
misuse of tax-exempt organizations. As a result, the IRS has begun to
rebalance its efforts by increasing enforcement assets and activities
directed at the tax-exempt community in general.
As we proceed in this effort, we have found that some areas have
become difficult to administer because industry practice, or the
industry itself, has changed over the decades, while the tax rules have
remained constant. The deregulation and resulting transformation of
credit unions and other financial institutions is an excellent example
of this kind of change. The credit union industry has evolved into
something substantially different from what it was, offering new
services and entering new markets.
We take no position on whether credit unions should be taxable or
whether the treatment of federal and state chartered credit unions
should be conformed. What we can say is that with respect to exemption,
the IRS has a very limited role. However, industry changes have raised
issues. As the services provided by state chartered credit unions
expand, we have the responsibility of determining which of them
generate income that is subject to the unrelated business income tax.
This is a factually intensive and difficult analysis.
We appreciate the opportunity to provide this Committee with
information. We have previously testified in support of a thorough
review of the nonprofit sector, and this hearing is a welcome part of
that review.
We look forward to working with you and your staff on these and
similar issues.
Chairman THOMAS. Thank you, Mr. Miller. Mr. Hillman?
STATEMENT OF RICHARD J. HILLMAN, MANAGING DIRECTOR, FINANCIAL
MARKETS AND COMMUNITY INVESTMENTS, U.S. GOVERNMENT
ACCOUNTABILITY OFFICE
Mr. HILLMAN. Chairman Thomas, Members of the Committee, I
am pleased to be here today to discuss issues regarding the
tax-exempt status of credit unions. My prepared statement today
includes discussion on: one, the historical basis of the tax-
exempt status and arguments for and against taxing these
institutions; two, information on the extent to which credit
unions offer services that are distinct from those offered by
banks of comparable size; and, three, information from prior
work assessing available information on the extent to which
credit unions are serving low- and moderate-income individuals.
The basis for continuing tax-exemption of credit unions,
although not often articulated in legislation over the years,
appears to be related to the perceived distinctness of credit
unions and their service to people of modest means. More
specifically, unlike banks, credit unions are member-owned,
democratically operated, not-for-profit organizations generally
managed by volunteer boards of directors, and these
institutions have a specific mission of meeting credit and
savings needs of people of small or modest means.
Arguments for taxing credit unions centered on creating a
level playingfield among financial institutions. Recent growth
of the credit union industry is often cited as support for the
argument that many credit unions now compete more directly with
banks. Proponents of taxing credit unions also point to the
potential revenue associated with repealing the tax-exemption
with the Federal agencies estimating over $1 billion in
potential annual revenues. Those in favor of taxation also
question the extent to which the tax subsidy provided to credit
unions is being used to serve people of modest means,
especially in comparison with peer group banks. Opponents of
taxation argue that credit unions remain distinct, both
organizationally and operationally, from other financial
institutions. Opponents also point out that taxation could
jeopardize the safety and soundness of credit unions since
their net worth or capital levels are restricted to retained
earnings only. Opponents also note that other depository
institutions do have opportunities for tax relief such as S
corporation status.
As part of further addressing this issue, I would like to
provide two slides and some contextual information on the size
of the credit union industry and its distribution of assets, as
well as to provide trend information on the changes in credit
union membership. As of December 2004, the Federal Government
chartered about 62 percent of the slightly more than 9,000
credit unions. Figure 1, shown on the screens, illustrates
institution size and asset distribution in the credit union
industry. The top bar reflects that as of December 31, 2004,
the 4,255 smallest credit unions, those with $10 million or
less in total assets, constituted nearly half of all credit
unions, but only 2.5 percent of the industry's total assets.
Conversely, the 98 credit unions with assets over $1 billion,
which is the shortest bar at the bottom of the figure, held 33
percent of the total industry assets, but represented just 1
percent of all credit unions. In an earlier 2003 report, we
noted that as of December 31, 2002, there were just 71 credit
unions with assets over $1 billion, and figures through June
2005 indicate that there are now 103 credit unions with over $1
billion in assets. So, the size of credit unions continues to
grow. Despite this growth, the credit union industry remains
much smaller than the banking industry, with credit unions
representing around 6 percent of the total assets of both
industries.
As the credit union industry has evolved, the historical
distinction between credit unions and other depository
institutions has continued to blur. Since 1992, the number of
credit unions has declined, but total assets of the industry
have grown. The consolidation in numbers and concentration in
assets have resulted in two distinct groups of credit unions: a
few relatively large credit unions providing a wide range of
services that resemble those offered by banks of similar size,
and a number of smaller institutions that provide basic
financial services. Among the more significant changes that
have occurred in the credit union industry over the past two
decades have been the weakening or blurring of the common bond
that traditionally existed between credit union members. Credit
union membership may be based on one of three types of common
bond: a single bond, which is typically employer or occupation
based; multiple common bonds, which allow for more than one
single bond within an institution; and community bonds, which
are comprised of persons or organizations within a well-defined
local community, neighborhood, or rural district.
The next figure, shown on the screens, provides additional
information on the percent of assets of federally chartered
credit unions by bond type. While multiple-bond credit unions
have constituted on average slightly under 50 percent of all
credit unions since 2000, they represented 57 percent of credit
union assets. This chart also shows that the percent of
community bond credit unions has more than doubled since 2000,
growing from 9 percent of federally chartered credit unions in
2000 to 19 percent by the end of 2004. The steepest growth of
the assets in federally chartered credit unions also comes from
community bonds, which comprise about $92 billion in assets at
the end of 2004. In conclusion, the movement toward
geographically based fields of membership and other expansion
of the common bond restrictions, in conjunction with expanded
lines of financial services, have made credit unions more
competitive with banks. These changes have raised questions
about the extent to which credit unions are fulfilling their
perceived historical mission of serving individuals of modest
means, yet limited comprehensive data are available on the
incomes of credit union members.
In prior work on the credit union industry, our assessment
of available data suggested that credit unions served a
slightly lower proportion of households with low and moderate
incomes than do banks. To the NCUA's credit, it has established
a low-income credit union program and an underserved program
that are intended to provide increased services to low- and
moderate-income individuals and underserved areas. However,
NCUA currently does not collect comprehensive data such as the
overall income on individuals benefiting from these programs to
allow for definitive conclusions about the information on
incomes that the membership serves. As a result, we recommended
in 2003 to NCUA that it develop more tangible indicators to
determine whether credit unions have provided greater access to
credit union services in underserved areas. The NCUA has yet to
adopt any indicators but says it has established a working
group to study credit union success in reaching people of
modest means. Mr. Chairman, this concludes my prepared
statement. I would be pleased to respond to any questions you
or the other members may have at the appropriate time.
[The prepared statement of Mr. Hillman follows:]
Statement of Richard J. Hillman, Managing Director, Financial Markets
and Community Investment, U.S. Government Accountability Office
Mr. Chairman Thomas and Members of the Committee:
I am pleased to be here today to discuss issues regarding the tax-
exempt status of credit unions. Credit unions are the only type of
financial institution currently exempt from federal income taxes.\1\ As
we have noted in a prior testimony before this Committee, the size of
the tax-exempt sector has grown in recent years in both the number and
assets of institutions.\2\ Today's hearing on issues related to the
credit union tax-exempt sector is timely in light of current and
projected fiscal imbalances and renewed emphasis on accountability and
governance in both the corporate and nonprofit sectors. A comprehensive
examination could help determine whether exempt entities such as credit
unions are providing services that are commensurate with their favored
tax status, and whether an adequate framework exists for ensuring that
these entities are meeting the requirements for tax-exempt status. The
information that I am providing today is based primarily on prior work
completed on the credit union industry and on ongoing work underway for
this Committee.\3\
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\1\ Qualified financial institutions can elect to avoid federal
corporate income tax as Subchapter S corporations (S-corporations). S-
corporation tax status mainly allows small, closely held corporations
meeting certain requirements to elect to eliminate corporate-level
taxation. S-corporation shareholders are taxed on their portion of the
corporation's taxable income, regardless of whether they receive a cash
distribution. For more information on S-corporations, see GAO, Banking
Taxation: Implications of Proposed Revisions Governing S-Corporations
on Community Banks, GAO/GGD-00-159 (Washington, D.C.: Jun. 23, 2000).
\2\ GAO, Tax-Exempt Sector: Governance, Transparency, and Oversight
Are Critical for Maintaining Public Trust, GAO-05-561T (Washington,
D.C.: Apr. 20, 2005), and GAO, Nonprofit, For-Profit, and Government
Hospitals: Uncompensated Care and Other Community Benefits, GAO-05-743T
(Washington, D.C.: May 26, 2005).
\3\ GAO, Credit Unions: Financial Condition Has Improved, but
Opportunities Exist to Enhance Oversight and Share Insurance
Management, GAO-04-91 (Washington, D.C.: Oct. 27, 2003) and GAO, Credit
Unions: Reforms for Ensuring Future Soundness, GAO/GGD-91-85
(Washington, D.C.: Jul. 10, 1991).
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Based on your request, I will discuss:
the historical basis for the tax-exempt status of credit
unions;
arguments for and against the taxation of credit unions,
including estimates of the potential tax revenues from eliminating the
tax-exempt status of credit unions;
the extent to which credit unions offer services that are
distinct from those offered by banks of comparable size;
the extent to which credit unions are serving low- and
moderate-income individuals, including relevant programs of the
National Credit Union Administration (NCUA) that target these
individuals; and
the extent to which credit unions are required to report
or make public certain information such as executive compensation and
assessments of their internal controls for financial reporting.
In summary, we found that:
The basis for continuing tax exemptions for credit
unions, although not often articulated in legislation over the years,
appears to be related to the perceived distinctness of credit unions
and their service to people of modest means. Congress originally
granted tax-exempt status to credit unions in 1937 because of their
similarity to other mutually owned financial institutions that were tax
exempt at that time. While the other institutions lost their exemption
in the Revenue Act of 1951, credit unions specifically retained the
exemption. The legislative history on the 1951 act did not articulate a
rationale for the continued exemption of credit unions. However, more
recent legislation (the Credit Union Membership Access Act of 1998 or
CUMAA) states that credit unions are exempt from taxes because ``they
are member-owned, democratically operated, not-for-profit organizations
generally managed by volunteer boards of directors, and because they
have the specified mission of meeting the credit and savings needs of
consumers, especially persons of modest means.'' \4\
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\4\ See Public Law 105-219 (Aug. 7, 1998), 112 STAT. 914. The
Federal Credit Union Act of June 26, 1934 refers to ``make more
available to people of small means credit for provident purposes.''
While these statutes have used ``small means'' and ``modest means'' to
describe the type of people who credit unions might serve, these terms
are not defined in the statutes.
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Recently, arguments for taxing credit unions have
centered on creating a ``level playing field'' among financial
institutions in terms of taxation, referencing the notable recent
growth of the credit union industry to support the idea that credit
unions compete more and more directly with banks. Proponents of taxing
credit unions also point to the potential revenue associated with
repealing the tax exemption. There is also some debate regarding the
extent to which credit unions are serving people of modest means,
especially in comparison with small banks. In response, opponents of
taxation have argued that credit unions remain distinct--both
organizationally and operationally--from other financial institutions,
and that taxation would jeopardize the safety and soundness of credit
unions by adversely impacting their net worth or capital levels, which
are restricted to retained earnings. Opponents also note that other
depository institutions do have opportunities for tax relief as S-
corporations. Federal estimates of the potential tax revenues fall
within a somewhat narrow range--$1.2 billion to $1.6 billion annually--
while nongovernmental sources have produced higher estimates of up to
$3.1 billion annually.
As the credit union industry has evolved, the historical
distinction between credit unions and other depository institutions has
continued to blur. The number of credit unions declined between 1992
and 2004, although the total assets of the industry have grown. As of
2004, credit unions with more than $100 million in assets represented
about 13 percent of all credit unions and 79 percent of total assets.
The consolidation in numbers and concentration of assets has resulted
in two distinct groups of credit unions: a few relatively large
institutions providing a wide range of services that resemble those
offered by banks of the same size, and a number of smaller credit
unions that provide basic financial services. For example, the loan
portfolios of larger credit unions tend to hold more mortgage and real
estate loans, resembling those of similarly sized banks. Smaller credit
unions tend to carry smaller loans such as car loans. Additionally,
larger credit unions tend to offer a range of products and services
similar to those offered by banks.
As credit unions have become larger and begun offering a
wider variety of services, the issue of whether these institutions are
serving households with low and moderate incomes has become a matter
for debate. Yet, limited comprehensive data are available on the income
of credit union members. In prior work on the credit union industry,
our assessment of available data--the Federal Reserve's 2001 Survey of
Consumer Finances and other studies--suggested that credit unions
served a slightly lower proportion of households with low and moderate
incomes than banks.\5\ To NCUA's credit, it has established programs
that are intended for low-income individuals and underserved areas.
However, NCUA does not collect comprehensive data such as the overall
income of individuals benefiting from these programs to allow
definitive conclusions about the membership served.
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\5\ GAO-04-91.
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Most credit unions are not specifically subject to
reporting requirements that would disclose information on executive
compensation or assessments of internal controls for financial
reporting--information that can enhance public confidence in tax-exempt
entities. Publicly available financial reports reflect, and support,
strong governance and transparency--essential elements in assuring that
tax-exempt entities operate with integrity and effectiveness and
maintain public trust. For example, public disclosure of revenue and
expenses, such as the compensation of officers and directors, enhances
transparency. However, most credit unions do not individually file the
Internal Revenue Service (IRS) form that would provide such
information--Form 990, Return of Organization Exempt from Income Tax--
because of exclusions and group filings.\6\ Further, as we noted in a
2003 report, credit unions with assets over $500 million are not
subject to internal control reporting requirements applicable to banks
and thrifts under the Federal Deposit Insurance Corporation Improvement
Act (FDICIA), which are similar to the reporting requirements of public
companies affected by the Sarbanes-Oxley Act of 2002.\7\ As we
suggested in 2003, making credit unions of $500 million or more subject
to the FDICIA internal control reporting requirements would provide a
commensurate tool to NCUA and appropriate state regulators to ensure
that credit unions establish and maintain internal control structure
and procedures for financial reporting purposes.
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\6\ Most tax exempt entities annually must file a Form 990 with the
IRS. Form 990 is publicly available and contains various revenue and
expense information, including compensation data for officers,
directors, trustees, and key employees.
\7\ GAO-04-91.
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Background
Credit unions have historically occupied a unique niche among
financial institutions. Credit unions differ from other depository
institutions because they are (1) not-for-profit entities that build
capital by retaining earnings (they do not issue capital stock), (2)
member-owned cooperatives run by boards elected by the membership, and
(3) tax-exempt. Like banks and thrifts, credit unions have either
federal or state charters. Federal charters have been available since
1934, when the Federal Credit Union Act was passed. States have their
own chartering requirements. As of December 2004, the federal
government chartered about 62 percent of the slightly more than 9,000
credit unions and states chartered the remainder. Both federally and
state-chartered credit unions are exempt from federal income taxes,
with federally chartered and most state-chartered credit unions also
exempt from state income and franchise taxes.
Another distinguishing feature of credit unions is that they may
serve only an identifiable group of people with a common bond. More
specifically, credit union membership may be based on one of three
types of common bond: single, multiple, or community. For example, a
group of people that share a single characteristic, such as a common
profession, could constitute the ``field of membership'' for a single-
bond credit union. Field of membership is used to describe all the
individuals and groups, including organizations, which a credit union
is permitted to accept for membership.\8\ More than one group having a
common bond could constitute the membership of a multiple-bond credit
union. And, persons or organizations within a well-defined community,
neighborhood, or rural district could form a community-bond credit
union. Further, credit unions can offer members additional services
made available by third-party vendors and by certain profit-making
entities with which they are associated, referred to as credit union
service organizations (CUSO).\9\
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\8\ See GAO/GGD-91-85 for additional background on the history of
NCUA and state field of membership regulatory policies.
\9\ A CUSO is a corporation, limited liability corporation, or
limited partnership that provides services such as insurance,
securities, or real estate brokerage, primarily to credit unions or
members of affiliated credit unions. Credit unions can invest up to 1
percent of their capital in CUSOs. CUSOs must maintain a separate
identity from the credit union. See 12 C.F.R. Part 712 (2003).
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Rationale for the Historical Tax Exemption of Credit Unions
The tax-exempt status of credit unions originally was predicated on
the similarity of credit unions and mutual financial institutions;
however, while Congress did not always cite its reasons for continuing
this exemption, recent legislation mentions the cooperative structure
and service to persons of modest means as reasons for reaffirming their
exempt status.\10\ The Revenue Act of 1913 exempted domestic building
and loan associations (now called ``savings and loans''), and mutual
savings banks not having a capital stock represented by shares, from
federal income tax.\11\ Further, the Revenue Act of 1916 exempted from
taxation cooperative banks without capital stock organized and operated
for mutual purposes and without profit.\12\ However, credit unions were
not specifically exempted in either of these acts. Their tax-exempt
status was addressed directly for the first time in 1917, when the U.S.
Attorney General determined that credit unions closely resembled
cooperative (mutual savings) banks and similar institutions that
Congress had expressly exempted from taxation in 1913 and 1916.
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\10\ Internal Revenue Code section 501(c) describes 28 categories
of organizations that are exempt from federal income tax. State credit
unions are exempt in a category by themselves under section
501(c)(14)(A). Federal credit unions are exempt under section
501(c)(l). Section 501(c)(l) exempts certain corporations that have
been organized under an act of Congress, designated as
instrumentalities of the United States, and that are exempt from tax by
the Internal Revenue Code or by certain congressional acts.
\11\ Public Law 63-16.
\12\ Public Law 64-271.
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The Federal Credit Union Act of 1934 authorized the chartering of
federal credit unions. The stated purpose of the act was to ``establish
a further market for securities of the United States and to make more
available to people of small means credit for provident purposes
through a national system of cooperative credit, thereby helping to
stabilize the credit structure of the United States.'' The 1934 act did
not specifically exempt federal credit unions from taxation. In 1937,
the act was amended to exempt federal credit unions from federal tax
and limit state taxation to taxes on real and tangible personal
property.\13\ Two reasons were given for the exemption: (1) that credit
unions are mutual or cooperative organizations operated entirely by and
for their members; and (2) that taxing credit unions on their shares,
much as banks are taxed on their capital shares, places a
disproportionate and excessive burden on the credit unions because
credit union shares function as deposits.\14\
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\13\ Public Law 416.
\14\ H.R. Rep. No. 75-1579, at 2 (1937).
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The Revenue Act of 1951 amended section 101(4) of the 1939 Internal
Revenue Code to repeal the tax-exempt status for cooperative banks,
savings and loan societies, and mutual savings banks, but it
specifically provided for the tax exemption of state-chartered credit
unions.\15\ While the act's legislative history contains extensive
discussion of the reasons why the tax-exempt status of the other mutual
institutions was revoked, it is silent regarding why the tax exempt
status of credit unions was not also revoked.
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\15\ Public Law 80-183.
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The Senate report accompanying the Revenue Act of 1951 stated that
the exemption of mutual savings banks was repealed in order to
establish parity between competing financial institutions.\16\
According to the Senate report, tax-exempt status gave mutual savings
banks the advantage of being able to finance growth out of untaxed
retained earnings, while competing corporations (commercial banks) paid
tax on income retained by the corporation. The report stated that the
exempt status of savings and loans was repealed on the same grounds.
Moreover, it stated that savings and loan associations were no longer
self-contained mutual organizations, for which membership implied
significant investments over time, risk of loss, heavy penalties for
cancellation of membership or early withdrawal of shares, and in which
members invested in anticipation of becoming borrowers at some time.
Instead, investing members were simply becoming depositors who received
relatively fixed rates of return on deposits that were protected by
large surplus accounts, and borrowing members dealt with savings and
loans in the same way as other mortgage lending institutions.\17\
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\16\ S. Rep. No. 82-781 (1951).
\17\ While both banks and thrifts were subject to federal corporate
income tax after 1951, some special provisions served to reduce their
tax liability relative to corporations in other industries. Over time,
Congress scaled back many of these provisions, including special
deductions for additions to bad debt reserves.
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More recently (in 1998), CUMAA amended the Federal Credit Union Act
to, among other things, allow multiple-bond federal credit unions under
certain circumstances (such as a general limitation on the size of each
member group to 3,000 members).\18\ In addition, CUMAA reaffirmed the
federal tax exemption of credit unions, despite contentions that
allowing multiple-bond credit unions would permit credit unions to
become more like banks. Specifically, the findings section of CUMAA
stated:
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\18\ Public Law No. 105-219.
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Credit unions, unlike many other participants in the financial
services market, are exempt from Federal and most State taxes because
they are member-owned, democratically operated, not-for-profit
organizations generally managed by volunteer boards of directors and
because they have the specified mission of meeting the credit and
savings needs of consumers, especially persons of modest means.
Arguments for and against Taxation of Credit Unions
At various times, the executive branch has proposed taxing credit
unions, generally endorsing the creation of a ``level playing field''
among financial institutions in which organizations engaged in similar
activities would be taxed similarly. Proponents of taxation contend
that larger credit unions compete with banks in terms of the services
they provide. Proponents also have questioned the extent that credit
unions have remained true to their historical mission of providing
financial services to persons of modest means. In response, opponents
of the taxation of credit unions have argued that credit unions remain
distinct organizationally and operationally from other financial
institutions, providing their membership with services they would not
receive from other institutions. Opponents also have argued that
taxation would hinder the ability of credit unions to build capital
(which is restricted to retained earnings), jeopardizing their safety
and soundness. Finally, opponents have argued that other depository
institutions, particularly smaller banks, also have opportunities for
tax and regulatory relief such as S-corporation status.\19\ Some
studies have attempted to quantify potential tax revenue from repealing
the tax exemption, with estimates ranging from $1.2 billion to $3.1
billion, depending on the fiscal year considered, tax rates used, and
other underlying assumptions.
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\19\ See GAO, Banking Taxation: Implications of Proposed Revisions
Governing S-Corporations on Community Banks, GAO-00-159 (Washington,
D.C.: June 2000).
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Arguments for Taxation
Unlike income retained by most other financial institutions, income
retained by credit unions is not taxed until it is distributed to
members. Thus, tax exemption allows credit unions to utilize untaxed
retained earnings to finance expansion of services. Proponents of
taxing credit unions claim that this ability to use untaxed retained
earnings provides credit unions with a competitive advantage over banks
and thrifts. In 1978, the Carter Administration proposed that the tax-
exempt status of credit unions be gradually eliminated to mitigate this
advantage and establish parity between credit unions and thrift
institutions. The Administration also argued that the relaxation of
rules regarding field of membership criteria, the expansion of credit
union powers, and the rising median income of credit union members
indicated that credit unions were no longer true mutual institutions
serving low-income workers excluded from banking services elsewhere.
In 1984, the Department of the Treasury (Treasury) report to the
President included a proposal to repeal the tax exemption of credit
unions, which also argued that the exemption gave credit unions a
competitive advantage over other financial institutions and its repeal
would ``eliminate the incentive for credit unions to retain, rather
than distribute, current earnings.'' In 1985, the Reagan Administration
proposed taxing credit unions with more than $5 million in gross
assets, but would have maintained the exemption on credit unions with
less than $5 million of gross assets, since it was reasoned that taxing
small credit unions would significantly increase the administrative
burden for a relatively small revenue increase.\20\ Similarly, in the
budget for fiscal year 1993 the first Bush Administration proposed
taxing credit unions with assets of more than $50 million.
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\20\ See the President's Tax Proposals to the Congress for
Fairness, Growth, and Simplicity, May 1985, 247-248.
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More recent arguments for the taxation of credit unions note the
strong growth rates among large credit unions, which tend to offer a
wider array of services. As a result, taxation proponents argue that
larger credit unions compete with banks in terms of the services they
provide and the households to which they provide these services. They
question both the extent to which credit unions serve people of modest
means and pass on their tax subsidy to members. While limited data are
available to evaluate the income of credit union members--which
precludes any definitive conclusion--some studies, including one of our
own, indicate that credit unions serve a slightly lower proportion of
households with low and moderate incomes than banks.\21\ We discuss
this issue in more detail later in this statement.
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\21\ GAO-04-91, p.16.
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Arguments against Taxation
Arguments against repealing the tax exemption for credit unions
assert that the exemption does not offer competitive advantages and
that it is justified by the unique services credit unions offer and by
their capital structure. As we reported in 1991, credit unions as
organizations are exempt from federal and state income taxes. However,
the income that their members receive is taxed. Members who receive
dividends on share accounts are taxed on that income, just as
depositors at commercial banks are taxed on interest income from
savings or checking accounts. If credit unions distribute all income to
shareholders and do not retain earnings at the entity level, all income
will be taxed at the individual level. In this case, credit unions
would have little tax advantage relative to taxable mutual financial
institutions, whose income is taxed once at either the individual or
entity level.
In 2005 and in previous testimonies, trade and industry groups and
private individuals presented arguments supporting the tax-exempt
status of credit unions, maintaining that tax-exempt status is
justified because credit unions provide unique services, such as small
loans, financial counseling, and low-cost checking accounts that for-
profit financial institutions are unable or unwilling to provide.\22\
They stated that taxing credit unions would lead credit unions away
from their mutual, nonprofit orientation and structure, leading to
reductions in these types of services. They also testified that
taxation would hinder credit unions in building reserves, and since
credit unions do not have the ability to raise capital through the sale
of stock, their safety and soundness would be jeopardized. They argued
that while the number of large credit unions has grown over the last 10
years, they hold a relatively small share of overall depository
institution assets. Opponents also argued that there is no clear
rationale for targeting larger credit unions because, regardless of
asset size, larger credit unions retain a distinct organizational
structure and must still adhere to limits on their field of membership
as sanctioned by Congress. Furthermore, they argued that larger credit
unions, relative to smaller credit unions, were more stable and
efficient and therefore better able to offer programs targeted to low-
and moderate-income households.
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\22\ Representatives of the Credit Union National Association, the
National Association of Federal Credit Unions, and the Consumer
Federation testified before Congress in 1985 as well as in 2005.
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Opponents of credit union taxation also have argued that other
financial institutions are not without tax privileges and tax relief.
Specifically, credit union trade organizations have pointed out that an
increasing number of banks have converted to S-corporation status and,
thereby, have avoided paying corporate income taxes. In general, U.S.
tax law treats corporations and their investors as separate taxable
entities. Corporate earnings are taxed first at the corporate level and
again at the shareholder level, as dividends if the corporation
distributes earnings to shareholders, or as capital gains from the sale
of stock. In contrast, the earnings of S-corporations are taxed only
once at the shareholder level, whether or not the income is
distributed. Corporations that elect Subchapter S status are subject to
certain restrictions on the number of shareholders and capital
structure. For example, an S-corporation may not have more than 75
shareholders, all of whom must be U.S. resident individuals (except for
certain trusts and estates) and may issue only one class of stock.
Prior to 1996, banks and other depository institutions could not elect
S-corporation status. A provision of the Small Business Job Protection
Act of 1996 repealed this prohibition.
Like credit unions, mutual thrifts are owned by their depositors
and their equity is derived from retained earnings. Mutual thrifts are
permitted a tax deduction for amounts paid or credited to their
depositors as dividends on their accounts if the amounts may be
withdrawn on demand (subject only to the customary notice of intention
to withdraw). These dividends are taxed only at the depositor level,
whether they represent interest or a return on equity, so that mutual
thrifts are taxed only on retained earnings. Further, some farmer's
cooperatives are allowed additional tax deductions for dividends on
capital stock and distributions to patrons. The earnings of a
cooperative generally flow through to the patron and are taxed once at
that level. Finally, some other similar entities, like rural electric
associations and telephone cooperatives are tax-exempt.\23\
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\23\ There are three categories of cooperatives under the Internal
Revenue Code: (1) exempt farmers cooperatives, described in section
521; (2) certain mutual or cooperative entities described in section
501(c)(12), which are exempt from taxation pursuant to section 501(a);
and (3) taxable cooperatives, governed by subchapter T of the code
(sections 1381-1388).
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Estimates of the Potential Tax Revenues from Taxing Corporations Vary
Widely Based on the Source and Underlying Assumptions
Governmental entities have attempted to estimate the potential
revenue to the federal government from repealing the tax exemption that
ranged from $1.2 billion to $1.6 billion on an annualized basis. In a
2001 report, the Department of the Treasury estimated potential revenue
between $1.2 billion and $1.4 billion annualized over the five year
period from 2000-2004, and $1.4 and $1.6 billion over the ten-year
period from 2000 to 2009, if all credit unions were taxed. More
recently, in Analytical Perspectives, Budget of the United States
Government Fiscal Year 2005, Treasury estimated the potential tax
revenue from repealing the credit union tax exemption at $7.88 billion
from fiscal years 2005 through 2009, or $1.58 billion on average
annually.\24\ However, according to Treasury officials, the 2005
Analytical Perspectives estimate did not account for any behavioral
changes in response to taxation by credit unions in contrast with
estimates from their earlier 2001 study. The Joint Committee on
Taxation in a February 2005 Congressional Budget Office report
estimated that taxing credit unions with assets greater than $10
million dollars would potentially raise $6.5 billion from fiscal years
2006 through 2010, or $1.3 billion on average annually over that five
year period.\25\
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\24\ U.S. Department of the Treasury estimates as published in
Analytical Perspectives: Budget of the United States Government, Fiscal
Year 2005, (Washington, D.C.: 2004).
\25\ Joint Committee on Taxation estimates as published in the
Congressional Budget Office's Budget Options (Washington, D.C.:
February 2005).
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Nongovernmental entities have produced estimates that tend to be
higher than the estimates generated by government agencies. A study
issued by the Tax Foundation, which was funded by the Independent
Community Bankers of America, estimated the potential revenue from
taxing all insured credit unions to be as high as $3.1 billion per year
when averaged over the 10-year period from 2004 to 2013.\26\ Another
private study conducted by Chmura Economics & Analytics for the
Jefferson Institute for Public Policy estimated the revenue from taxing
all credit unions to be $1.89 billion in 2002, when the same corporate
tax rate as banks paid was applied to credit unions (in categories
differentiated by asset size).\27\ In reviewing these studies, we note
that assumptions vary on the tax rates imposed and the response of
credit unions to the imposition of taxes (such as distributing higher
dividends, lowering loan rates, or increasing deposit rates, which
would reduce taxable income and therefore potential tax revenue).
However, large credit unions, though small in numbers, are responsible
for a disproportionate amount of the potential tax revenue as compared
with small credit unions.
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\26\ John A. Tatom, Competitive Advantage: A Study of the Federal
Tax Exemption for Credit Unions (The Tax Foundation: Washington, D.C.:
2005).
\27\ Chmura Economics & Analytics, An Assessment of the Competitive
Environment Between Credit Unions and Banks (Jefferson Institute for
Public Policy: Virginia, May 2004).
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Historical Distinctions between Credit Unions and Other Depository
Institutions Have Continued to Blur
Since 1992, credit unions have become less distinct from other
depository institutions of similar size, particularly in terms of the
products and services offered by larger credit unions. Between 1992 and
2004, the total assets held by federally insured credit unions more
than doubled, while the total number of federally insured credit unions
declined. As a result of the increase in total assets and the decline
in the number of federally insured credit unions, the credit union
industry has seen an increase in the average size of its institutions
and a slight increase in the concentration of assets. Total assets in
federally insured credit unions grew from $258 billion in 1992 to $647
billion in 2004, an increase of 150 percent. During this same period
the number of federally insured credit unions fell from 12,595 to
9,014. As of the end of 1992, credit unions with more than $100 million
in assets represented 4 percent of all credit unions and 52 percent of
total assets; as of the end of 2004, credit unions with more than $100
million in assets represented about 13 percent of all credit unions and
79 percent of total assets. From 1992 to 2004, the 50 largest credit
unions (by asset size) went from holding around 18 percent of industry
assets to around 24 percent of industry assets.
This industry consolidation contributed to a widening gap between
two distinct groups of federally insured credit unions--larger credit
unions, which are relatively few in number and provide a wider range of
services, and smaller credit unions, which are greater in number and
provide more basic banking services. Figure 1 illustrates institution
size and asset distribution in the credit union industry, with
institutions classified by asset ranges. As of December 31, 2004, the
2,873 smallest credit unions--those with $5 million or less in total
assets--constituted almost one-third of all credit unions but slightly
less than one percent of the industry's total assets. Conversely, the
98 credit unions with assets over $1 billion (up to just under $23
billion) held 33 percent of total industry assets but represented just
1 percent of all credit unions. In our 2003 report, we noted that as of
December 31, 2002, 71 credit unions with assets over $1 billion held 27
percent of total industry assets.
Figure 1: Credit Union Industry Size and Total Assets Distribution, as
of December 31, 2004
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Note: This figure depicts credit union industry distribution in
terms of the number of federally insured credit unions in a particular
asset size category and the percentage of industry assets that are held
by credit unions in that category.
As credit unions' assets have grown in recent years, credit unions
have generally shifted to larger loans such as mortgages. Between 1992
and 2004, the amount of first mortgage loans held grew from $29 billion
to $130 billion, while that of new vehicle loans increased from $29
billion to $71 billion and that of used vehicle loans increased from
$17 billion to $85 billion. In terms of the relative importance of
different loan types, we compared the growth in the amounts of various
loan types relative to credit unions' assets over the same period.
Amounts held in first mortgage loans grew from around 11 percent of
assets in 1992 to around 20 percent of assets in 2004, while amounts
held in used vehicle loans grew from just under 7 percent to slightly
more than 13 percent.
As shown in figure 2, larger credit unions generally held
relatively larger loans (e.g., first mortgage loans) than smaller
credit unions, which generally held relatively more small loans (e.g.,
used vehicle loans). Since 1992, the amount of first mortgage loans
held relative to assets has more than doubled for credit unions with
over $1 billion in assets, from around 12 percent to over 25 percent of
assets, while it has grown less than 40 percent for credit unions with
less than $100 million in assets, from around 9 percent to slightly
more than 12 percent of assets.
Figure 2: Loan Types as a Percentage of Total Assets, Smallest verus
Largest Credit Unions, 1992-2004
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
The discrepancy between smaller and larger credit unions is more
apparent through an analysis of more recently collected data on more
sophisticated product and service offerings, such as the availability
of automatic teller machines (ATM) and electronic banking (see table
1). While less than half of the smallest credit unions offered ATMs and
one-third offered transactional websites, nearly all larger credit
unions offered these services.
Table 1: Credit Union Size and Offerings of More Sophisticated Services, as of December 31, 2004
Percentage of institutions offering the following services
--------------------------------------------------------------------------------------------------------------------------------------------------------
Website
--------------------------------------------------------------------------------------------------------------------------------------------------------
Financial
Financial services Electronic
Group Services through applications
Asset range Number assets through audio ATMs for new Informational Interactive Transactional
(billions) the response loans
Internet or phone
--------------------------------------------------------------------------------------------------------------------------------------------------------
$10 million or less 7,859 $138 37.8 44.3 47.0 25.3 16.0 4.0 32.9
--------------------------------------------------------------------------------------------------------------------------------------------------------
Greater than $100 millions to $250 million 644 $102 94.7 97.4 95.0 82.1 3.7 2.2 92.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
Greater than $250 to $500 million 266 $94 98.5 98.5 96.6 89.8 0.8 1.5 97.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Greater than $500 million to $1 billion 147 $100 98.0 98.0 98.0 92.5 2.0 1.4 95.9
--------------------------------------------------------------------------------------------------------------------------------------------------------
Greater than $1 billion 98 $213 98.0 98.0 98.0 95.9 1.0 2.0 96.9
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total 9,014 $647 51.2 51.2 53.3 33.1 14.3 3.7 40.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: GAO analysis of NCUA Form 5300 data.
Note: Data are based on all federally insured credit unions filing call reports.
Despite the growth in credit union assets over recent years, the
credit union industry remains much smaller than the banking industry,
with credit unions representing around 6 percent of total assets of
both industries.\28\ For example, at the end of 2004, the largest
credit union had nearly $23 billion in assets, while the largest bank,
with $967 billion in assets, was larger than the entire credit union
industry combined.
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\28\ Credit union assets grew from $438 billion at year-end 2000 to
$647 billion at year-end 2004--an increase of 48 percent--while banking
industry assets grew from $7.5 trillion at year-end 2000 to $10.1
trillion at year-end 2004--an increase of 35 percent. Credit unions
represented 6.0 percent of the combined assets of the banking and
credit union industries as of December 31, 2004, versus 5.6 percent as
of December 31, 2000.
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Although credit unions are on average much smaller than banks,
larger credit unions and banks of comparable size tend to offer the
same products and services (see fig. 3).\29\ In particular, nearly all
banks and larger credit unions reported holding first mortgage loans,
while a majority of the smaller credit unions did not.
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\29\ Given the disproportionate size of the banking industry
relative to the credit union industry--the average credit union had $72
million in assets versus $1.1 billion in assets for the average bank at
year-end 2004--we developed peer groups by asset size to mitigate the
effects of this discrepancy. We constructed five peer groups in terms
of institution size as measured by total assets, reported as of
December 31, 2004. We further refined the sample of FDIC-insured
institutions to exclude those banks and thrifts we determined had
emphases in credit card or mortgage loans. The largest bank included in
our analyses had total assets of nearly $23 billion at year-end 2004,
and the average bank in this peer group sample had $359 million in
assets.
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Figure 3: Percentage of Credit Unions and Banks Holding Various Loans,
by Institution Size, as of December 31, 2004
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Notes: Data are based on all federally insured credit unions,
banks, and thrifts filing call reports. We excluded insured U.S.
branches of foreign-chartered institutions and banks that we determined
had emphases in credit card or mortgage loans. Credit union data on
other consumer loans may include member business and agricultural
loans. Agricultural and business loans for credit unions include both
member business loans and participation in nonmember loans.
The Extent to Which Credit Unions Serve Persons of Modest Means Is Not
Definitively Known because of Limited Data and Lack of
Indicators
While credit union fields of membership have expanded, the extent
to which they serve people or communities of low or moderate incomes is
not definitively known. In 1998, CUMAA affirmed preexisting NCUA
policies that had allowed credit unions to expand their field of
membership and include underserved areas.\30\ After the legislation was
passed, NCUA revised its regulations to enable credit unions to serve
larger communities or geographic areas. As they have become larger and
begun offering a wider variety of services, questions have been raised
about whether credit unions are more likely than banks to serve
households with low and moderate incomes. However, limited
comprehensive data are available to evaluate the income of credit union
members. Our assessment of available data--the Federal Reserve's 2001
Survey of Consumer Finances (SCF) and other studies--provided some
indication that, compared with banks, credit unions served a slightly
lower proportion of households with low and moderate incomes. Although
NCUA has undertaken initiatives to enhance the availability of
financial services to individuals of modest means, as of October 15,
2005, it had not implemented our 2003 recommendation to develop
indicators to evaluate the progress credit unions made in reaching the
underserved.
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\30\ The Federal Credit Union Act defines an ``underserved area''
as a local community, neighborhood, or rural district that is an
``investment area'' as defined by the Community Development Banking and
Financial Institutions Act of 1994. An investment area includes
locations experiencing poverty, low income, or unemployment.
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Credit Unions Can Serve More People and Larger Areas because CUMAA
Permitted NCUA to Continue Preexisting Policies That Expanded
Field of Membership
In 1998, the Supreme Court ruled against NCUA's practice of
permitting federally chartered credit unions based on multiple
bonds.\31\ Subsequently, Congress passed CUMAA, which specifically
permits multiple-bond credit unions. The act permits these credit
unions to retain their current membership and authorizes their future
formation.\32\ Figure 4 provides additional information on the percent
and assets of federally chartered credit unions by bond type. While
multiple-bond credit unions have constituted on average slightly under
50 percent of all credit unions since 2000, they tend to be larger than
the other two types of credit union bonds in terms of asset size.\33\
For example, at year-end 2004, multiple bond credit unions made up 45
percent of the total number of federal credit unions but represented 57
percent of federal credit union assets.
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\31\ National Credit Union Administration v. First National Bank &
Trust Company. 522 U.S. 479 (1998).
\32\ See 12 U.S.C. 1759(b), (d), as amended.
\33\ With the exception of the statistics provided for multiple-
bond credit unions for 1996, NCUA cannot provide us data on federal
chartering trends before 2000. However, NCUA was able to report that by
1996, about half of all federally chartered credit unions were
multiple-bond credit unions.
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Figure 4: Percent and Assets of Federally Chartered Credit Unions, by
Bond, 2000-2004
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Note: NCUA provided revised data for the year 2000 from that
previously provided for our 2003 report.
In addition to permitting multiple-bond credit unions, CUMAA
further qualifies the definition of community bond. The act adds the
word ``local'' to the preexisting requirement that community-based
credit unions serve a ``well-defined community, neighborhood or rural
district,'' but provides no guidance on how ``local'' or any other part
of this requirement should be defined.\34\ However, after the passage
of CUMAA, NCUA revised its regulations to make it easier for credit
unions to serve increasingly larger areas (e.g., entire cities or
counties). As a result, NCUA approved a community-based charter
application in July 2005 covering Los Angeles County with a potential
membership of 9.6 million.
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\34\ Pub. L. No. 105-219 101. See 12 U.S.C. 1759(c)(2), as
amended.
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Limited Comprehensive Data Are Available to Evaluate Income of Credit
Union Members
While it has been generally accepted that credit unions
historically have emphasized service to people with modest means;
currently, there are no comprehensive data on the income
characteristics of credit union members, particularly those who
actually receive loans and other services. Industry groups and consumer
advocates have debated which economic groups benefit from credit union
services, especially in light of the credit unions' exemption from
federal income taxes. As stated in our 1991 report, and still true,
none of the common-bond criteria available to federally chartered
credit unions refer to the economic status of their members or
potential members.
Information on the extent to which credit unions are lending and
providing services to households with various incomes is scarce because
NCUA, industry trade groups, and most states (with the exception of
Massachusetts and Connecticut) have not collected specific information
describing the income of credit union members who obtain loans or
benefit from other credit union services.\35\ Credit unions--even those
serving geographic areas--are not subject to the federal Community
Reinvestment Act (CRA), which requires banking regulators to examine
and rate banks and thrifts on lending and service to low- and moderate-
income neighborhoods in their assessment area.\36\ Consequently, NCUA
and most state regulators do not require credit unions to maintain data
on the extent to which loans and other services are being provided to
households with various incomes.
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\35\ The Credit Union National Association, a trade association,
collects information about the characteristics (for example, income,
race, and age) of credit union members but not specifically the income
levels of members who actually receive mortgage and consumer loans or
use other services. Also, Massachusetts and Connecticut collect
information on the distribution of credit union lending by household
income and the availability of services because their state-chartered
credit unions are subject to examinations similar to those of federally
regulated institutions. Massachusetts established its examination
procedures in 1982 and Connecticut in 2001.
\36\ CRA requires federal bank and thrift regulators to encourage
depository institutions under their jurisdiction to help meet the
credit needs of the local communities, including low- and moderate-
income areas, in which they are chartered, consistent with safe and
sound operations. See 12 U.S.C. ff 2901, 2903, and 2906 (2000). Federal
bank and thrift regulators conduct CRA examinations to evaluate the
services that depository institutions provide to low- and moderate-
income neighborhoods. However, CRA provides for enforcement only when
regulators evaluate an institution's application for a merger or new
branch, requiring that the agencies take an institution's record of
meeting the credit needs of its community into account.
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Federal Reserve Board Data Suggest That Credit Unions Serve a Slightly
Lower Proportion of Low- and Moderate-Income Households Than Do
Banks
Our prior work, which included an analysis of data from the Federal
Reserve Board's 2001 SCF, suggested that credit unions overall served a
lower percentage of households of modest means (low- and moderate-
income households combined) than banks.\37\ More specifically, while
credit unions served a slightly higher percentage of moderate-income
households than banks, they served a much lower percentage of low-
income households. We combined the SCF data into two main groups--
households that primarily and only used credit unions versus households
that primarily and only used banks.\38\ As shown in figure 5, this
analysis indicated that about 36 percent of households that primarily
and only used credit unions had low or moderate incomes, compared to 42
percent of households that used banks. Moreover, our analysis suggested
that a greater percentage of households that primarily and only used
credit unions were in the middle and upper income grouping than the
proportion of households that primarily and only used banks.
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\37\ The SCF is an interview survey of U.S. households conducted by
the Federal Reserve Board that includes questions about household
income and specifically asks whether households use credit unions or
banks. It is conducted every 3 years and is intended to provide
detailed information on the balance sheet, pension, income, and other
demographic characteristics of U.S. households, and their use of
financial institutions.
\38\ See GAO-04-91, pages 19-23, for a more detailed discussion of
our analysis and limitations of the SCF data.
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Figure 5: Income Characteristics of Households Using Credit Unions
versus Banks, and Low and Moderate Income versus Middle and
High Income
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Note: We used the same income categories as used by federal
regulators in their CRA examinations.
We also looked at each of the four income categories separately. As
shown in figure 6, this analysis suggested that the percentage of
households in the low-income category that used credit unions only and
primarily (16 percent) was lower than the percentage of these
households that used banks (26 percent). In contrast, more moderate-
and middle-income households were likely to use credit unions only and
primarily (41 percent) than banks (33 percent). Given that credit union
membership traditionally has been tied to occupational- or employer-
based fields of membership, that higher percentages of moderate- and
middle-income households using credit unions is not surprising.
Figure 6: Income Characteristics of Households Using Credit Unions
versus Banks, by Four Income Categories
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Note: We found no statistical difference in the percent of upper-
income households when the ``primarily and only'' using credit union
group and the ``primarily and only'' using bank group were compared.
We also attempted to further explore the income distribution of
credit unions members by separately analyzing households that only used
credit unions or banks from those that primarily used credit unions or
banks. However, the results were ambiguous and difficult to interpret,
due to the characteristics of the households in the SCF database. For
example, because such a high percent of the U.S. population only uses
banks (62 percent), the data obtained from the SCF is particularly
useful for describing characteristics of bank users but much less
precise for describing smaller population groups, such as those that
only used credit unions (8 percent).
Other relatively recent studies--notably, by the Credit Union
National Association and the Woodstock Institute--generally concluded
that credit unions served a somewhat higher-income population. The
studies also noted that the higher income levels could be due to the
full-time employment status of credit union members.\39\ Officials from
NCUA and the Federal Reserve Board also noted that credit union members
were likely to have higher incomes than nonmembers because credit
unions are occupationally based. A National Federation of Community
Development Credit Unions representative noted that because credit
union membership is largely based on employment, relatively few credit
unions are located in low-income communities.\40\ However, without
additional research, especially on the extent to which credit unions
with a community base serve all their potential members, it is
difficult to know whether the relative importance of full-time
employment is the primary explanatory factor.
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\39\ Credit Union National Association 2002 National Member Survey
and Woodstock Institute, Rhetoric and Reality: An Analysis of
Mainstream Credit Unions' Record of Serving Low Income People (February
2002).
\40\ The National Federation of Community Development Credit Unions
represents and provides, among other things, financial, technical
assistance, and human resources to about 215 community development
credit unions for the purpose of reaching low-income consumers.
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NCUA Has Established Initiatives That Target Low-Income Individuals and
Underserved Areas
NCUA recently has established two initiatives to further enhance
the availability of financial services to individuals of modest means:
the low-income credit union program and expansion into underserved
areas. According to NCUA, its Low Income Credit Unions (LICU) program
is designed to assist credit unions whose members are of modest means
in obtaining technical and financial services. LICUs grew in number
from more than 600 in 2000 to nearly 1,000 by the end of 2004. To
obtain a low-income designation from NCUA, an existing credit union
must establish that a majority of its members meet the low-income
definition.\41\ According to NCUA, credit unions that meet this
criterion are presumed to be serving predominantly low-income members.
Also, newly chartered credit unions can receive low-income designation
based on the income characteristics of potential members.
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\41\ Section 701.34 of NCUA's Rules and Regulations defines the
term ``low-income members'' as those members who (1) make less than 80
percent of the average for all wage earners as established by the
Bureau of Labor Statistics or (2) whose annual household income falls
at or below 80 percent of the median household income for the nation as
established by the Census Bureau. The term ``low-income members'' also
includes members who are full--or part-time students in a college,
university, high school, or vocational school.
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Credit unions that receive a low-income designation from NCUA are
measured against the same standards of safety and soundness as other
credit unions. However, NCUA grants benefits that other credit unions
do not have, including:
greater authority to accept deposits from nonmembers such
as voluntary health and welfare organizations;
ccess to low-interest loans, deposits, and technical
assistance through participation in NCUA's Community Development
Revolving Loan Fund;
ability to offer uninsured secondary capital accounts and
include these accounts in the credit union's net worth for the purposes
of meeting its regulatory capital requirements;\42\ and
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\42\ A ``secondary capital instrument'' is either unsecured debt or
debt that has a lower priority than that of another debt on the same
asset. These subordinated debt instruments are not backed or guaranteed
by the federal share insurance fund.
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a waiver of the aggregate loan limit for member business
loans.
NCUA has stated that one of its goals is to encourage the expansion
of membership and make quality credit union services available to all
eligible persons. It has done so in part by allowing credit unions to
expand into underserved areas in recent years, from 40 in 2000 to 564
in 2004 (see fig. 7).
Figure 7: Credit Union Expansions into Underserved Areas, 2000--2004
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
CUMAA and NCUA's Interpretive Ruling and Policy Statement (IRPS)
03-1, the Chartering and Field of Membership Manual, allows credit
unions to include in their fields of membership, without regard to
location, communities in underserved areas. The Federal Credit Union
Act defines an underserved area as a local community, neighborhood, or
rural district that is an ``investment area'' as defined by the
Community Development Banking and Financial Institutions Act of 1994--
that is, experiencing poverty, low income, or unemployment.\43\ In
order to expand into an underserved area, credit unions must receive
approval from NCUA by demonstrating that a community qualifies as an
investment area. Credit unions must also provide a business plan
describing how the underserved community will be served. Finally,
although the underserved and LICU initiatives are intended to help
serve the underserved, NCUA does not collect data such as overall
income levels of individuals using specific credit union products.
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\43\ Quoted from NCUA Chartering and Field Membership Manual, March
2003, p.3-4 & 3-5
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NCUA Has Not Fully Implemented Our Recommendation to Develop Indicators
to Evaluate Credit Union Progress in Reaching the Underserved
Although NCUA has targeted underserved individuals and areas, in
our 2003 report on credit unions we found that NCUA had data on
potential--but not actual--membership of low- and moderate-income
individuals in underserved areas adopted by credit unions. We
recommended that NCUA use tangible indicators, other than potential
membership, to determine whether credit unions have provided greater
access to credit union services in underserved areas.\44\
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\44\ GAO-04-91, p. 83.
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As of October 15, 2005, NCUA had not adopted any indicators.
According to NCUA, it has established a working group to study credit
union success in reaching people of modest means. NCUA indicated that
the working group was exploring meaningful measures of success for this
objective, determining how to best quantify the measures with available
or readily obtainable data. The working group has also been evaluating
the impact of other regulations, such as the Privacy of Consumer
Financial Information, on the collection and use of such data.
According to NCUA officials, as of October 15, 2005, the working group
had not issued its report or recommendations.
Credit Unions Lack Transparency on Executive Compensation and Larger
Credit Unions Do Not Have to Report on Effectiveness of
Internal Controls
Most credit unions are not subject to IRS and other federal
reporting requirements that would disclose information such as
executive compensation and assessments of internal controls for
financial reporting--information that can enhance public confidence in
tax-exempt entities. Public availability of key financial information
(that is, transparency) can provide incentives for ethical and
effective operations as well as support oversight of the tax-exempt
entities. At the same time, the disclosure of such information helps to
achieve and maintain public trust.
Recognizing the importance of transparency for tax-exempt entities,
Congress made returns of the IRS Form 990 (Return of Organizations
Exempt from Income Tax) into publicly available documents. Since tax
exemptions are granted to entities so that they can carry out
particular missions or activities that Congress judges to be of special
value, the public availability of Form 990 promotes public oversight.
Most tax-exempt organizations, other than private foundations with
gross receipts of $25,000 or more, are required to file Form 990
annually. The form contains information on an organization's income,
expenditures, and ``activities'' including compensation information for
officers, directors, trustees, and key employees. IRS also uses these
forms to select organizations for examination.
However, most credit unions do not individually file Form 990. In
2002 and 2003, credit unions filed 1,435 and 1,389 Form 990s,
respectively. On August 23, 1988, IRS issued a determination that
annually filing Form 990 was not required for federal credit unions
because of their status as tax-exempt organizations under section
501(c)(1) of the Internal Revenue Code. Depending on the state, some
state-chartered credit unions file through a group filing process. For
these states, IRS receives only the names and addresses of individual
credit unions. As a result, scrutiny of the compensation of credit
union executives and other key personnel is difficult. As you are
aware, we have ongoing work in this and other areas, and we hope to
provide you with additional information on the compensation of credit
union executives and officials as part of this follow-up work.
As noted in our 2003 report, the Federal Credit Union Act, as
amended, requires credit unions with assets over $500 million to obtain
an annual independent audit of financial statements by an independent
certified public accountant. But, unlike banks and thrifts, these
credit unions are not required to report on the effectiveness of their
internal controls for financial reporting. Under FDICIA and its
implementing regulations, banks and thrifts with assets over $500
million are required to prepare an annual management report that
contains:
a statement of management's responsibility for preparing
the institution's annual financial statements, for establishing and
maintaining an adequate internal control structure and procedures for
financial reporting, and for complying with designated laws and
regulations relating to safety and soundness; and
management's assessment of the effectiveness of the
institution's internal control structure and procedures for financial
reporting as of the end of the fiscal year and the institution's
compliance with the designated safety and soundness laws and
regulations during the fiscal year.\45\
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\45\ 12 U.S.C. 1831m; 12 C.F.R. Part 363 (2003).
Additionally, the institution's independent accountants are
required to attest to management's assertions concerning the
effectiveness of the institution's internal control structure and
procedures for financial reporting. The institution's management report
and the accountant's attestation report must be filed with the
institution's primary federal regulator and any appropriate state
depository institution supervisor, and must be available for public
inspection.
The reports, with their assessments and attestations on internal
controls, allow depository institution regulators to gain increased
assurance about the reliability of financial reporting. Also as we
stated in our 2003 report, the extension of the internal control
reporting requirement to credit unions with assets over $500 million
could provide NCUA with an additional tool to assess the reliability of
internal controls over financial reporting.
Moreover, bank and thrift reporting requirements under FDICIA are
similar to the public company reporting requirements in the Sarbanes-
Oxley Act of 2002. Under Sarbanes-Oxley, public companies are required
to establish and maintain adequate internal control structures and
procedures for financial reporting; the company's auditor is also
required to attest to, and report on, the assessment made by company
management on the effectiveness of internal controls. As a result of
FDICIA and the Sarbanes-Oxley Act, reports on management's assessment
of the effectiveness of internal controls over financial reporting and
the independent auditor's attestation on management's assessment have
become normal business practice for financial institutions and
businesses.
In a letter dated October 2003, NCUA's Chairman stated that while
the Sarbanes-Oxley Act does not apply specifically to federal credit
unions, certain provisions may be appropriate to consider for some
federal credit unions. Federal credit unions are encouraged (but not
required) to consider the guidance provided and are urged to
periodically review their policies and procedures as they relate to
matters of corporate governance and auditing.
Mr. Chairman, this concludes my prepared statement. I would be
pleased to respond to any questions you or other Members of the
committee may have.
Chairman THOMAS. Thank you very much, and to determine
whether or not there are any Members who wish to inquire, the
Chair's inquiry will be withheld until the end of the Members'
responses. The Chair would recognize the gentleman from
Florida, Mr. Shaw.
Mr. SHAW. Thank you, Mr. Chairman. Ms. Johnson, in your
testimony you gave us a good overview as to the structure of
member-owned--as to credit unions. Do the members receive
complete financial statements from the credit unions such as
they would in a corporation?
Ms. JOHNSON. Members receive monthly statements, just
like----
Mr. SHAW. Now, I am not talking about their own account. I
am talking about----
Ms. JOHNSON. There is an annual report and the regular
statements on a monthly basis. The monthly financials are
posted monthly.
Mr. SHAW. All right. That is of the overall structure
itself?
Ms. JOHNSON. Correct.
Mr. SHAW. This would be reported to them. Do they get--do
accountants come in and do--CPAs come in and do opinion reports
on them?
Ms. JOHNSON. They have their regularly scheduled audit,
opinion audits. The examining from the regulator is done on a
regularly scheduled basis, typically either annually or up to
18 months. But, yes, they are required to have audits on a
regular basis.
Mr. SHAW. Does that information include salaries paid by
the credit union to the officers of the corporation, of the
credit union?
Ms. JOHNSON. We do not collect salary information
specifically. It has not been required. Federal credit unions
are not required to fill out the 990Ts, and so that information
is not gathered individually.
Mr. SHAW. Can the individual members get that information?
What I am trying to do is establish ownership rights here. Can
the individual get that information if they request it?
Ms. JOHNSON. The credit unions are managed by a volunteer
board, and the salaries, and so forth, are set by that
volunteer board, and the audit and supervisor Committee and the
board of directors take care of that part of the management. It
is set by the volunteers who are elected by the members of the
credit union.
Mr. SHAW. Thank you. Thank you, Mr. Chairman.
Chairman THOMAS. Does the gentleman from New York wish to
inquire?
Mr. RANGEL. Thank you. Mr. Hillman, with your Government
Accountability investigation, could you share with us whether
the for-profit banks--what salaries they pay to the executives
and employees?
Mr. HILLMAN. We have not gathered information on the
banking industry as part of this review, but all publicly owned
companies are required through SEC filings to provide
information on salaries of key officers and directors.
Mr. RANGEL. Ms. Johnson, do you know whether or not your
salaries are competitive or in line with the salaries that are
paid in similar institutions that operated for profit?
Ms. JOHNSON. As I said, we don't collect individual salary
information. The only bit of information I could give you, on a
recent website of one of the firms that is working on behalf of
those that are looking perhaps to convert from a credit union
to a bank charter, they do have on their website, according to
their information, that credit union CEOs are paid
approximately 57 percent less than their counterparts.
Mr. RANGEL. Well, throughout your testimony, it seems as
though you were advocating a position that credit unions should
not be taxed. Are there any reasons politically that you
believe that there is any consideration about doing that? If
so, what is it?
Ms. JOHNSON. Congressman, the rhetoric is around all the
time, I guess. I know when I served as Chairman of the Senate
Ways and Means Committee back in Iowa, the rhetoric was
happening back then as well. I believe the questions that are
asked today about the validity of the tax-exemption are very--
they are necessary. I did the same thing in my role back home.
But I would tell you that when you are looking to see whether
you are getting your money's worth for this tax-exemption, I
would assure you that you are getting a lot of bang for the
buck. If you set the stage a little bit with the bank versus
credit union stature as it is, it is important to note that
credit unions only comprise about 6 percent of the industry, of
the assets.
Mr. RANGEL. Yes, but what I am getting to is that Mr.
Miller would agree that even though the IRS does not have a
policy, that the Secretary of the Treasury has publicly stated
that he is opposed to taxing credit unions. The President of
the United States and the leader of the free world has
indicated that he opposes taxing of tax-exempt. So, who would
you think represents the concept that would threaten you
politically?
Ms. JOHNSON. Only the competition that would like to see
competition go away.
Mr. RANGEL. So, you do not feel that threat coming from the
Congress or this Committee.
Ms. JOHNSON. I have never had it expressed by a Member of
Congress, no.
Mr. RANGEL. You have not?
Ms. JOHNSON. Not directly.
[Laughter.]
Chairman THOMAS. Does the gentleman yield back the time?
Mr. RANGEL. Yes, I do, Mr. Chairman.
Chairman THOMAS. Does the gentlewoman from Connecticut wish
to inquire?
Mrs. JOHNSON. Thank you. Mr. Miller, in your testimony you
say that credit unions are not required to file the IRS forms
that most other tax-exempt entities are required to file, and I
would like you to enlarge on that. Then I would like you to
enlarge on your claim that credit unions are not subject to
internal control reporting requirements that are applicable to
banks and thrifts.
Mr. MILLER. Well, Congresswoman Johnson, as to the first
item on the filing requirements, again, we need to divide our
world between the federally chartered and the State-chartered
entities. The federally chartered entities, by reason of being
an instrumentality of the U.S. Government, do not have to file
Forms 990 with the Service, like any other instrumentality. The
States do have to file with us. Now, we received in, I think,
2003 something in excess of 1,360 Forms 990 from some States.
We also receive because we have a process that allows for the
filing of a group consolidated return, from 21 States we
receive consolidated returns, and that contained aggregate
information on another 2,000 entities. So, we do have, you
know, something in the range of 3,500 or something in the
range--of entities that file with us, 2,000 of those are filing
on a consolidated basis. I do not, unfortunately, have an
answer for you on the internal controls, but perhaps my
colleague from the Accountability Office could help out.
Mrs. JOHNSON. Mr. Hillman?
Mr. HILLMAN. Yes, the Federal Deposit Insurance Corporation
Improvement Act requires banks and thrifts with assets over
$500 million to prepared an annual management report that
contains a statement of managers' responsibilities for
preparing the institution's annual financial statements, and
for establishing and maintaining an adequate internal control
structure and procedures for financial reporting. Management
assessments are also required on the effectiveness of the
institution's internal control structures and procedures for
financial reporting. Indeed, internal auditors and external
reviewers are required to attest to management's assertion of
their internal control standards. As it relates to credit
unions, they currently are not required to provide for those
management assertions or for their external auditors to provide
for independent attestations of the effectiveness and quality
of the internal control structures. In a report that we
provided to the NCUA and to the Congress, we recommended that
the NCUA consider requiring their entities to have external
reviews of their internal control structures. Indeed, we
recommended to the Congress that they amend the Federal Deposit
Insurance Corporation Improvement Act to cause such things to
occur. That action is currently under consideration within the
Congress.
Mrs. JOHNSON. Without that, what kinds of abuses are
possible?
Mr. HILLMAN. Having a properly structured internal control
function was very important in considering recent legislation
in the Sarbanes-Oxley Act for public companies, for example,
financial statements were being prepared that were not
accurately reflecting the financial position of the entities,
and management was basically indicating that they had no
knowledge of the extent to which those numbers were accurate or
correct or could be held to any scrutiny. The Sarbanes-Oxley
Act was intended to provide managers with an affirmative
responsibility to know what their internal control structures
were and to know that the financial information that they are
providing to the public was accurate. Indeed, doing something
of that nature for credit unions is something that would make
good public policy as well.
Ms. JOHNSON. I understand that Sarbanes-Oxley provisions,
however, have been bearable for larger banks, but they are very
expensive and would be very heavy for small independent
institutions. Does your recommendation accommodate to that?
Mr. HILLMAN. You are absolutely right. There is continuous
debate going on today about the extent to which entities and at
what size ought to be providing for these internal control
assessments. The current limit is organizations with $500
million in assets and above. They are looking at raising that
level to address some burden issues with smaller organizations,
and that is a debate also taking place in Congress today.
Mrs. JOHNSON. Thank you.
Chairman THOMAS. The gentleman from California, Mr. Stark.
Mr. STARK. Thank you, Mr. Chairman. Mr. Miller, please
recognize the limitation of my understanding of the technical
differences between (c)(1)s up through (c)(50)s or (20)s or
whatever come under your purview. But based on the underlying
initial reason for granting the tax-exemption, could you give
us a little insight? I am just going to go down some that come
to my mind, and you will probably know a lot more, but
irrigation districts, municipally owned electric companies,
USAA, a reciprocal insurer, agricultural co-ops, rural electric
co-ops, on down the line. In their genesis, was there any great
difference in these types of organizations and the (c)(1)s that
I guess are credit unions?
Mr. MILLER. Well, again, Mr. Stark, the (c)(1)s are only
the federally chartered credit unions.
Mr. STARK. I understand that, but I am just----
Mr. MILLER. In terms of the cooperative nature of the
endeavor, they are all a little different.
Mr. STARK. But would you say they are all similar in the
reason they hold a tax-exemption or are tax free, from a lay
person's----
Mr. MILLER. I would say they are similar, that the rural
electric cooperatives obviously are another group of entities
that started up because there was no electricity in certain
areas of the country. Agricultural co-ops started up because of
a need for that business as well, so----
Mr. STARK. But would it be also safe to say, however long
ago many of these things started, that the initial reason for
their beginnings no longer holds true? I think that former
members of the armed services can buy their auto insurance from
GEICO or Allstate or anybody they want, and it is a question of
whether they pay more or less for it. But it may have been
difficult--when my Ranking Member got out of the service, it
may have been a different time than it is for those of us who
are younger veterans.
[Laughter.]
Mr. STARK. I am just trying to see if in our thinking, as
we review this--I do not think it has been stated, but the
banks are out to get credit unions taxed because it will make
it more difficult for them to compete. I would presume then
that my Pacific Gas and Electric would like to see the rural
electric co-ops taxed because then they would have a better
competitive edge. But is there any reason for us, outside of
the very technical differences, to think about credit unions as
distinct from all these other groups, health, education
services. There are, I guess, providers of medical care that
come under the cooperative rubric. Any reason we should sort
those out, or can we think of them as one group?
Mr. MILLER. Well, I would hesitate to put them all in one
group, Congressman, because I do think they are different
industries and they should be looked at separately.
Mr. STARK. For tax policy, how should we look at them
differently?
Mr. MILLER. Tax policy you may be correct, they may be very
similar. But, again, if the underlying discussion here is let's
take a look to see where the industry is today, then in terms
of the Internal Revenue Service's view, that is a useful thing
because, as I have mentioned in my testimony, industries
change, the laws remain the same, and sometimes that creates
difficulties for us in administration.
Mr. STARK. I will come back at you with tax policy. I think
what I heard you say is that within all of these, the
underlying tx policy is probably the same or very similar.
Mr. MILLER. I think it is going to depend on the particular
provision and the particular code provision. And, again, I
cannot say in a general fashion that they are all the same,
Congressman.
Mr. STARK. One more try. Between (c)(1) and (c)(13), are
the tax-exempt rules pretty similar, no unrelated business, I
mean----
Mr. MILLER. Not really.
Mr. STARK. Not really, okay.
Mr. MILLER. It really depends. Along the edges they are
different. You know, the (c)(12)s, the rural co-ops, the rural
electric and rural telephone cooperatives have some very
different rules than do Federal credit unions. They go in and
out of status on an annual basis, depending on their income
sources. They are similar to credit unions in one fashion; that
is, they have expanded from their original list of public
sector. So, the rules do vary depending on the provision.
Mr. STARK. Thank you.
Chairman THOMAS. Would the gentleman yield briefly?
Mr. STARK. Sure, I would be glad to yield.
Chairman THOMAS. On that point, one of the things, I
think--sometimes Members go more deeply into these areas than
others. One of the things that I will ask you on my time, but
since it was brought up, I want you to think about, is the
argument that the (c)(1)s are instrumentalities of the United
States in which you then dismiss looking at them because of
that categorization as opposed to a 501(c)(3), which is a
charitable organization, which allows you based upon what
particular category they are in, your ability to do certain
things or not do certain things. So, when you say that you do
not do this or you do not do that, it is because of the
structure as an instrumentality, not that it should or should
not be done based upon trying to understand what is going on in
an organization. That is something that I think needs to be
discussed, and we will look at that a little bit later. But the
gentleman is right. When you looked at (c)(1)s, (c)(3)s, on
through the various (c)s, it is based upon what they are, which
then indicates the relationship between those organizations,
notwithstanding the fact they are within the 501 section, and
the IRS and the responsibilities associated with the IRS in
overseeing those particular structures. Sometimes it just
happens to be the category that they are in that they,
therefore, do not receive scrutiny and, therefore, cannot get
answers to questions that Members would ask. They do not file
990s, so you do not know certain things about them. Why?
Because they are instrumentalities of the United States. It
begins to get circular in terms of trying to get an answer
should we, not do you, and the ``should we'' is what we should
at some point pursue. The gentleman from California, Mr.
Herger.
Mr. HERGER. Thank you, Mr. Chairman. Mr. Miller, if you
could tell us just as historical background, generally the
history of the tax-exempt sector, Congress usually provided
exemption to certain entities because they were providing a
service that the government could not provide. In the case of
credit unions, could you tell us what social good or public
benefit do they provide in exchange for the exemption?
Mr. MILLER. Congressman, I think it is certainly true with
respect to many provisions in the exempt sector that there is
an underlying rationale of public good in providing general
benefit to the community at large. A little more murky with
respect to credit unions. They were based on a cooperative
structure, and the early legislative history talks about a
cooperative enterprise which is offering opportunities for
savings, opportunities for credit to those who otherwise might
not have it who have joined as members. That is sort of the
underlying rationale in the credit union area.
Mr. HERGER. Would either of the other two of our witnesses
care to comment? Ms. Johnson?
Ms. JOHNSON. Yes, Congressman, I would like to speak to the
public good because I think that is the big question here. Are
you receiving the public good in exchange for the exemption? I
can very strongly say that the 84.5 million members of the
federally insured credit unions benefit from higher rates on
their deposits. They benefit from lower fees. They benefit from
lower interest on the loans that they take out as members.
There was a study done in April of this year by the University
of North Carolina in Chapel Hill that estimated that the
members of credit unions in North Carolina save an average of
$130 a year, and if you were to multiple that nationwide, that
could be an eventual savings in the $11 billion category just
for the members of the credit unions.
But I would not stop there. There are actually benefits to
those that use the services of other financial institutions as
well. This limited competition that is in the marketplace helps
offer competitive rates for everyone. In fact, there was a
statement by a CEO of a large bank earlier this year after
their record profits were reported. He said that they would
have been higher had it not been for the credit unions because
they had to pay higher interest on their deposits. So, it is
estimated that saving the customers of other institutions may
be as high as $4 billion. I know the estimate has been given
that there may be a billion, $1.2, $1.3 billion that could be
realized in tax revenue if credit unions were taxed, but I
would offer that is far offset by the amount that is saved by
the consumer simply by having a minimal competition in the
marketplace. Credit union members do pay taxes at the ordinary
income level on the dividends they receive, just like bank
customers pay taxes on the interest they receive. The exemption
really results in a return to the local economy in far excess
of what would be realized by any tax revenue, I believe.
Mr. HERGER. Thank you.
Chairman THOMAS. Does the gentleman from Michigan wish to
inquire?
Mr. LEVIN. Thank you, Mr. Chairman. I think truth may be
somewhat relative in this area, so let me just ask Mr. Hillman,
because you have presented a number of charts, and it might be
useful for us to try to put these figures in a broader
perspective. I think there has been--at least we have seen this
where I come from--very substantial consolidation in financial
services. Indeed, most of the banks that we once knew are now
part of larger entities. So, if you look at Figure 1, for
example, in terms of industry size and total assets
distribution, do you have data, useful data, that tell what has
happened to financial services more broadly? For example, if
you had a chart like this for financial institutions other than
credit unions, what do you think that chart would show?
Mr. HILLMAN. Congressman, it would show probably different
numbers but pretty much the same pictures in terms of bars.
What you are seeing in the banking sector today is a much
more--larger groups of organizations that are much more
competitive and much more complex.
Mr. LEVIN. Also I take it--you say the bars would be the
same, but in terms of assets, I would think you might see a
different picture in terms of the size of the assets, would you
not? I mean, you would have to have a somewhat different chart
than is here.
Mr. HILLMAN. In order of magnitude, absolutely.
Mr. LEVIN. For example, there may be one, there may be more
financial institutions that have more assets than all of the
credit unions combined.
Mr. HILLMAN. Yes, that would be true. The largest banking
institution has vastly far more assets than the industry as a
whole.
Mr. LEVIN. Do you think you could supply us that?
Mr. HILLMAN. Absolutely.
Mr. LEVIN. If you would, go through the charts and just
see--there is some information here as to the types of loans,
but where you can--and I do not want you to do endless basic
research, but if you can, go through your charts one by one and
supply us with the picture in these regards as to the entire
financial services area. Because I do think--the chairman, for
example, did point out a few instances, and I do not mean to
minimize them or mimic them, but I do think rather than trying
to pick out one or two or three or a few examples, we really
need to look at the total picture as it relates to financial
services as to who is served, as to the kind of competition, as
to who does what. You cannot simply take one area without
relationship to what is going on generally in the world.
For example, it would be interesting to know what has
happened to smaller financial service entities other than
credit unions. I mean, you have a fairly large number in Chart
1 of credit unions with assets $10 million to $100 million, and
that is, roughly speaking, as I gather--I did some math--what,
about 40 percent--I do not know exactly. Maybe a third of them
are in that size category. It would be interesting to know what
it is like with other financial institutions to really get some
kind of a feel as to who is doing what where.
Mr. HILLMAN. As part of our analysis of the credit union
industry, we did run comparisons of credit unions at these
various sizes and assets to banks of--peer group banks of
comparable size. In our prepared statement that we submitted
for this hearing, on Figure 3 we provide a variety of
information about the types of products and services that
credit unions of that size provided, that peer group banks of
similar size provided. In addition, in our report in November
2003, we provide a variety of other graphics, which does
provide information comparing credit unions to banks as it
relates to products and service and as it relates to other
forms of activities.
Mr. LEVIN. Okay. So, if you would put this together in as
succinct a form as possible, will you?
Mr. HILLMAN. It would be my pleasure.
[The information follows:]
Figure 9: Assets (in billions) of Financial Institutions as of June 30,
2005
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. LEVIN. Thank you. Thank you, Mr. Chairman.
Chairman THOMAS. The Chair would say that would be very
useful, but in beginning to examine the area, I think you will
find that it just runs away from you very quickly. With banks,
one of the key attractions was the fact that you could write a
check. We created share drafts with credit unions, which are,
in essence, a check. But as we saw through the eighties and the
nineties, more and more structures like stock brokers, you can
write what amounts to a check. So, when you say financial
institutions, it is not just banks. A lot of the studies I have
seen solely use a credit union or solely use a bank. There are
very few people, I think, that are in that category of solely
doing this or solely doing that. So, I agree with the
gentleman. I think we should begin to see that kind of data.
But when you say financial institutions, you may have to define
it in a way that encompasses all of the various current
structures, just as what money has changed, what the financial
institution and services provided from them have changed.
Mr. HILLMAN. As well as my initial response to Congressman
Levin in dealing with the consolidation in the financial
services industry as a whole, there is also a significant
convergence within the financial services industry where
individual organizations are providing like products and like
services, and the competition is becoming fierce.
Chairman THOMAS. Which was not the case in 1937 or 1934
during the Depression.
Mr. HILLMAN. That is correct. Exactly right.
Chairman THOMAS. Does the gentleman from Louisiana wish to
inquire?
Mr. MCCRERY. Mr. Hillman, can you explain why Congress
revoked the tax-exempt status of mutual insurance companies,
mutual savings banks, and mutual savings and loan associations?
Mr. HILLMAN. Mutual savings banks, cooperative banks, and
savings and loan associations were originally tax-exempt. In
the Revenue Act 1951, before this Committee, Congress removed
their tax-exempt status. Committee reports that we reviewed
accompanying the legislation indicate that the mutual savings
banks were in competition with taxable financial institutions,
and the taxation, it was determined, would level the
playingfield with their competitors. Similarly, Congress found
that savings and loans were no longer self-contained
cooperative institutions, and there was little difference
between the savings and loans and other financial institutions,
and for that reason they chose to provide them with taxation.
Mr. MCCRERY. Is there a similarity today between some
credit unions and their competitive position vis-a-vis other
financial institutions and what Congress found with mutual
savings associations and so forth in 1951?
Mr. HILLMAN. Well, certainly with an increasing--the
expansive membership, you are beginning to see blurring lines
of distinction between credit unions and entities such as
these, which have a tax-exempt status.
Mr. MCCRERY. What about in terms of services offered?
Mr. HILLMAN. Services offered typically by at least the
largest credit unions tend to mirror those services offered by
peer group banks. There are, as shown, though, in our first
slide, almost half of the industry being made up of smaller
credit unions, and those credit unions continue to provide more
basic services.
Mr. MCCRERY. In your research as to the rationale for
revoking the tax-exempt status of those other entities, was
there any discussion of the relative sizes of those
institutions, any consideration given to revoking or modifying
the tax-exempt status based on size?
Mr. HILLMAN. I am not familiar with any indication that
that was a consideration, but I would be happy to take a second
look and provide that information for the record.
Mr. MCCRERY. Thank you.
[The information follows:]
Our review of the legislative history of the Revenue Act of 1951,
in particular Senate Report 82-781, did not identify any documented
discussion of institution size as a factor or consideration in the
revocation of the tax-exempt status of mutual savings banks and savings
and loan associations.
Mrs. JOHNSON. Would the gentleman yield?
Mr. MCCRERY. Sure.
Mrs. JOHNSON. Mr. Hillman, the 50-mile limit that mutual
banks have to live with, is that more or less restrictive than
the geographic limits on credit union--than the membership
limits on credit unions, would you say?
Mr. HILLMAN. The 1998 act added a term ``local'' to define
the boundaries within which a geographically based community
credit union could offer services. That act, though, did not
provide any further delineation of what was meant by that term
``local.'' So, determination of geographic boundaries or
community-based credit unions have been left up to the
interpretation of the NCUA. Those credit union decisions in
some instances have exceeded a 50-mile radius.
Mrs. JOHNSON. But isn't there a 50-mile radius that governs
mutual banks?
Mr. HILLMAN. I am not familiar with that. I would like to
do some research and provide that.
[The information follows:]
Federal savings associations (including mutual savings banks)
historically evolved as local home-financing institutions, and
limitations reflecting this evolution were initially incorporated in
the governing statutes. At one point in time, the Home Owners' Loan Act
referred to ``local'' home-financing institutions and the act generally
limited real estate lending by Federal savings associations to property
that was within fifty miles of their home offices. In 1964, the lending
area was expanded to property within one-hundred miles of the home
office. In 1970, the restriction was expanded to include property
within the state in which the home office was located or within one-
hundred miles of the home office. In the eighties, Congress began to
remove the geographic restrictions on the lending authority of Federal
thrifts. Title IV of the Depository Institutions Deregulation and
Monetary Control Act 1980 deleted the geographic restrictions on
lending authority by federal savings and loan associations.
Mr. MCCRERY. Just in the time that I have left, would
either of the other two panelists like to comment on my initial
question and the question of competitiveness and whether that
should play a role in our examination of tax-exempt status?
Ms. JOHNSON. I would, Congressman. The initial tax-
exemption was granted on the structure of the institution
itself. The structure of credit unions has not changed. It is
still that cooperative, that not-for-profit institution. There
is nothing in the statute concerning the size of the
institution, the products or services offered. If one would
want to paint the credit unions back into the corner where they
were in 1934 when they were first started for the working
population, you would be limiting to those of modest means to
very modest services. It has been necessary over the years--
consumers, credit union members demand the same types of
services that other financial institutions provide, and to not
provide those services to those who need them most I believe is
the wrong direction. I would also say that banks and credit
unions have both changed over the years, there is no question,
because both are serving their customers, are serving their
members in the best way they can. But I would also mention that
it was the credit unions that were doing the consumer lending
in the thirties, and that is now an area where banks are doing
more consumer lending as well. So, there has been a blending
going both directions. There is nothing wrong with that, in my
opinion. I think providing the best services for your members
or for your customers is what every institution strives to do.
Mr. MCCRERY. Thank you.
Chairman THOMAS. I thank the gentleman. The gentleman from
Maryland will be the final questioner prior to the Committee
recessing for a few minutes to run over and vote.
Mr. CARDIN. Let me thank you and let me thank all of you
for your testimony. I strongly believe in a competitive market
for financial services, and I was just going to ask a question
of Ms. Johnson, and you can respond or respond for the record.
You have already touched upon this. The Consumer Federation of
America found that the benefits that the credit unions deliver
to the public far exceed the costs in the report that they did,
and they cited interest rates, higher interest rates, lower
service costs for the niche in which they perform their
services within the financial community. You have touched upon
that in some of your replies. I am wondering whether you can
quantitate that more definitively as to the benefits that
credit unions are providing versus the value of the tax-exempt
status that they enjoy.
Ms. JOHNSON. The statistics that I pointed to are from some
individual studies such as the North Carolina study, and there
are other studies out there. I have no doubt that the benefits
far outweigh what the tax-exemption would bring in.
Mr. CARDIN. If you could make those studies available for
our Committee, I am sure we could get them.
Ms. JOHNSON. I would be glad to do that.
Mr. CARDIN. Any other information you have that quantitates
that would be useful for us.
Ms. JOHNSON. Thank you. I would be glad to do that.
[The information is being retained in the Committee files.]
Mr. CARDIN. Thank you. Thank you, Mr. Chairman.
Chairman THOMAS. The Committee stands in recess, probably
until noon.
[Recess.]
Chairman THOMAS. If I could ask our guests to find seats
quickly? Does the gentleman from Georgia, Mr. Lewis, wish to
inquire?
Mr. LEWIS OF GEORGIA. Thank you very much, Mr. Chairman.
Mr. Chairman, I would like to try to solicit a little more
information from members of the panel. I think when my
colleagues raised the question earlier about what is the
redeeming social value of credit unions, I think maybe Mr.
Miller or maybe someone said when it comes to tax-exemption for
credit unions, maybe it is a little murky. Ms. Johnson, maybe
you could tell the Committee, what is the real redeeming social
value of credit unions? Is there a greater need today than 40
or 50 or 60 years ago?
Ms. JOHNSON. I would be pleased to address this topic
because I think it is probably the heart of the whole issue.
The redeeming social value of credit unions is that they
provide an option for affordable financial services in the
marketplace. There are many folks today that continue to be un-
banked, and credit unions have a special mission of reaching
those of modest means, and that is an opportunity for them to
reach out. You know, as credit unions were initially formed,
they were made up of employee groups. That means people that
have jobs and that are working. So, most credit unions were
actually formed by working people. In the last few years, in
particular, credit unions have begun to take on underserved
areas, and we have low-income designated credit unions now. We
have some that have gone to community charters, which is now
allowing them to reach out into the community and reach some of
those folks that aren't necessarily the member of an employee
group but that are now eligible for membership. There are many
in the community that have to rely on predatory lenders, either
check-cashing, payday lenders, others that charge much higher
fees than credit unions. Credit unions are the only financial
institutions that are actually held to a statutory interest
rate level, a usury rate. Credit unions cannot charge more than
18 percent. Find me a payday lender that charges less than 18
percent. It just doesn't exist.
Credit unions, I think the mission is even greater today
than what it has been in the past, and though they have made
great strides over the last few years by being able to reach
out in the community, I would admit there is more to be done. I
believe, especially in this day and age, when in this economy--
in particular, I look at two of our largest credit unions, our
military credit unions. Two of the three largest credit unions
serve the military population. You show me a group of people
that are of more modest means than what our military personnel
are, and with these credit unions being able to offer financial
services at an affordable rate, I think it is one of the best
things that we can do for our military in particular at this
time. So, I think the social mission is still very much intact.
It is something that the credit unions take very seriously and
continue to look for ways that they can fulfill that mission.
Mr. LEWIS OF GEORGIA. Thank you, Ms. Johnson. Mr. Miller?
Mr. Hillman?
Mr. MILLER. Mr. Lewis, the only thing----
Mr. LEWIS OF GEORGIA. To be clear for me, was it you who
said that the tax-exemption for credit unions may be a little--
or did Mr. Hillman--may be a little murky? What do you mean?
Mr. MILLER. It was in response to the question as to what
the public benefit is of these organizations.
Mr. LEWIS OF GEORGIA. But what do you see as a public
benefit? What do you see as a redeeming social value of credit
unions?
Mr. MILLER. I can only speak to what the legislative
history talks about in the thirties, and that is that it is a
cooperative-based opportunity for people to save and to get
credit. That is, I think, the underlying premise.
Mr. LEWIS OF GEORGIA. You would not care to elaborate and
say how you really feel?
[Laughter.]
Mr. LEWIS OF GEORGIA. You are going to stick to the letter
of the law. You are not going to----
Mr. MILLER. I think, Mr. Lewis, that that is my job here,
is to stick to the letter of the law.
Mr. LEWIS OF GEORGIA. I appreciate that. Mr. Hillman?
Mr. HILLMAN. Well, the Federal Credit Union Act 1934 refers
to making credit available to people of small means as one of
the primary impetuses behind the establishment of credit
unions. More recently, the Credit Union Membership Access Act
1998 refers to serving the productive and provident credit
needs for individuals of modest means. While these terms are
used to describe the types of people who credit unions might
serve, these terms are not well defined in the statutes. The
NCUA has defined ``modest means'' or ``small means,'' to us,
anyhow, as meaning individuals who are wage earners or who must
work in order to make a living, individuals such as these who
can provide a benefit from a credit union's services.
Mr. LEWIS OF GEORGIA. Thank you. Mr. Chairman, I yield back
my time.
Chairman THOMAS. I thank the gentleman. Does the gentleman
from Michigan, Mr. Camp, wish to inquire?
Mr. CAMP. Mr. Chairman, thank you very much. Ms. Johnson,
the GAO report talked about credit unions not having the same
reporting requirements as other financial institutions, and my
question to you is if you could comment on that statement, and
then if you could also elaborate how the GAO report said the
so-called lack of transparency makes it difficult to evaluate
the effect credit unions might have on average Americans. Could
you just elaborate on what the tax-exempt status of a credit
union does for average Americans?
Ms. JOHNSON. Okay. You had kind of two parts, in responding
to the GAO and also the second----
Mr. CAMP. It is a two-part question, how the lack of
transparency--if you could comment on that statement in the GAO
report, I would like to get your opinion of that.
Ms. JOHNSON. Okay.
Mr. CAMP. The so-called lack of transparency. Then just in
general, what benefits for average Americans does the tax-
exempt status of credit unions have.
Ms. JOHNSON. Okay. Two good questions. Thank you. In
response to the question about the GAO report and the lack of
transparency, back in 1998 Congress debated very thoroughly the
suggestion or the idea of whether CRA requirements should be
required of credit unions. At that time it was reaffirmed that
there did not appear--that there was no need to put CRA
requirements on. In our work with GAO, the question has arisen
about transparency and the opportunity or the ability to really
put in hard numbers what credit unions are doing. I would
suggest that credit unions are basically CRA in action. They
are taking deposits and using those deposits to make loans to
other members that need loans. They can only serve their
members, and that is the only way the credit union will grow
and survive, is to serve those members. It is very difficult--
and we have struggled with this--whether some type of a hard
reporting is necessary. I look to the nursing home in my
hometown who, because of the burdensome regulatory requirements
had to take a full-time nurse off the nursing floor in order to
just do the paperwork. That is the danger that we run with the
credit unions, especially when almost half of our credit unions
are less than $10 million in assets.
The reporting requirements, if we are not careful, could
heavily outweigh any benefits from the actual reporting itself.
You are taking away from the time and the resources, in
particular, serving the people that you are supposed to be
serving. We do have a Committee working to see if we could
arrive at something that would not put the burden on the credit
union. Is there some additional data that we could collect on
the 5300 report? But, again, it has never been put forth by
Congress that a CRA-type report is needed, and at this time I
would have to agree with that. Credit unions, we believe, are
serving the very members who they are supposed to serve. Let's
see. What was the last? On the lack of transparency, it is kind
of--is it in regard to this type of reporting?
Mr. CAMP. Well, I was interested in what are some of the
filings that you do do as an institution. Certainly there are
audits, and you mentioned earlier in your testimony about
posting online. What are some of the filing requirements that
you do fulfill?
Ms. JOHNSON. The credit unions file their 5300 reports
quarterly. The credit unions themselves do CPA audits every
year. They have an annual audit and supervisory Committee
report that is also done, as I said, annually. I am not exactly
sure what type of information you or other Members of Congress
would see as the most beneficial of what type of information
you are trying to glean that you think would be the most
beneficial.
Mr. CAMP. Well, I just wanted to point out for the
Committee that there are public filings that credit unions do
engage in, and so I appreciate your going through some of
those, and that they are filed with regulators of both banking
and credit union--both parts of the financial industry. So,
thank you very much. Thank you, Mr. Chairman.
Chairman THOMAS. Thank you. Does the gentleman from
Pennsylvania wish to inquire?
Mr. ENGLISH. Thank you, Mr. Chairman. I do indeed. Chairman
Johnson, does the NCUA measure in what capacity credit unions
are serving people specifically of modest means, and if not,
can you offer an explanation of whether this would be an
administratively feasible task to take on, and in your opinion,
would such measures be helpful to Congress in making policy
decisions, as well as to consumers?
Ms. JOHNSON. Well, we know credit unions are serving
members of modest means by the very fact that they are serving
their Members. We do have some--and I am trying to find my
figures here. I have too many pieces of paper. They were some
of the stats that Chairman Thomas had actually alluded to
earlier. We know those that use only credit unions have lower
incomes and lower median wealth than those who use only banks,
and I would agree that many of us use both types of
institutions. Back home there is not a credit union that I am
eligible to join, and so back home I also--I will put in a
pitch for my local banker. But we know that credit unions are
serving those Members, and we know that those balances, the
wealth is lower, so to speak, the wealth of those members is
lower. We also know that the member business lending done by
credit unions, the average member business loan is much lower
than that of someone attaining a business loan or a commercial
loan from a bank. The average member business loan for a credit
union member is $155,000. That is much lower, that is the
average.
Mr. ENGLISH. How exactly do we know that? What is the
source and reliability of those figures?
Ms. JOHNSON. That information comes in on our 5300 reports,
which are issued on a quarterly basis.
Mr. ENGLISH. Very good. Commissioner Miller, credit unions
have, since their inception, had a mission of targeting low-
and moderate-income families, and this continues today through
programs like the Low-Income Credit Union program and the
Underserved Areas program. I, for myself, know from experience
in my district that credit unions serve people of moderate
means, and I think do a good job. It seems to me though that we
still do not have access to many statistics that show the
impact of credit unions on low- and moderate-income families on
a nationwide basis, and I just had that exchange with
Commissioner Johnson. I wonder, in your opinion, what policies
could Congress implement to either better track credit union
service to families of moderate means and to help us shape
policies that would encourage those sorts of opportunities?
Mr. MILLER. Well, Congressman, again, we have talked about
it, and we do have to divide our world into the Federal charter
versus State charter. As to tax issues, you know, we are the
tax agency, and in general, while our Forms 990 have as one of
their purposes transparency, that the public can see what these
organizations are doing, ultimately they are tax forms. With
respect to Federal credit unions we have no tax issues. It
would be purely for other purposes that we were making people
file this. With respect to State chartered, they do file Forms
990 with us. The Form 9nineties, I do not believe, at this
point probably has a meaningful impact on your inquiry here, to
be frank.
Mr. ENGLISH. In that case, may I shift, while I have time?
Mr. Hillman, same question. What policies could Congress
implement to better track precisely who is being serviced by
credit unions, whether that service is disproportionately, as
the mission indicates, to families of moderate or modest means,
and help us shape policies?
Mr. HILLMAN. We have raised this question with the National
Credit Union Administration, and they have developed a working
group to study this issue, and we encourage them to develop
more tangible indicators that would provide information on who
credit union members are actually serving. When you look at how
credit unions serve individuals, you look at the products and
services that individuals might be procuring from credit
unions. Those might be individuals who might be procuring loans
of some sorts or another. In order to make credit decisions on
those loans, there is likely to be information available within
their files in order to determine the income levels of those
individuals, and I would suggest that that would be one source
that could be explored as possibly obtaining some information
on the extent to which credit unions do serve individuals of
modest means. Second, you could perhaps also come up with a
mechanism to provide for a sampling, a stratified sample that
cuts across the population of individuals that credit unions
are serving, and indeed obtain credible, accurate information
on the membership base that credit unions serve. It is not
something that is an impossible thing to do.
Mr. ENGLISH. Thank you. Thank you, Mr. Chairman.
Chairman THOMAS. Thank the gentleman. The gentleman from
Washington wish to inquire?
Mr. MCDERMOTT. Thank you, Mr. Chairman. Since I know the
President and the Secretary of Treasury have said that they are
not interested in taxing the credit unions, the question has to
arise, why are we having this hearing? I know all the bankers
are in town, and so I believe it is a revenue question. It is a
revenue question. It could be raising revenue for a variety of
sources, but it seems to me that there is all kinds of evidence
that this issue is not something that is pressing anybody. I
really believe that the reason we are here having this hearing
is because the government is financially and morally broke.
Now, the DeLay Congress is one that has enacted a tax cut every
year in the face of budget deficits in times of war. Now they
are starting to look under rocks for revenue, and you folks are
a rock.
Last week this Committee took some revenue out of the hides
of foster children living in low-income families. Last week we
found revenue by reducing child support enforcement funding by
$20 billion. Other Committees have found money by reducing food
stamps. The Education and Work force Committee has reduced the
availability of student loans to low-income students. That is
the way the Republicans view sacrifice in a time of war, and
budget problems go after the vulnerable. They sacrifice
morality for tax cuts. The DeLay Congress pursued reckless tax
cuts and an unjust war at the same time. Instead of watching
the news from Iraq or reading the CBO budget reports and
realizing a change in course is necessary, this Congress
continues in its same folly. They are continuing to fight a war
and balance a budget on the backs of the economically
disadvantaged. It seems contradictory given the Republicans
proclaiming themselves as the party of morality and prudence.
But if you remember, last spring they launched an assault
on Social Security, the program that single-handedly lifted
millions of people out of poverty. Last week the Republicans
launched an assault against low-income people. Now today, we
have the credit unions up here. I don't know which of the co-
ops they will go after next, whether it will be the electrical
co-ops or whoever, but it is really a frontal assault on the
middle class's ability to financially make it. The co-ops came
into existence because the banks wouldn't do it, and now we
have this assault going on here. So, I have to ask the
question, and somebody has to give me some reason. How many
billion dollars are they going to get if they begin taxing
credit unions? Anybody there who has an idea or has any data, I
would like to hear it.
Mr. MILLER. Well, I guess I can start, Congressman. I think
that there are two, at least two or more revenue estimates out
there. One stems from a 2001 Treasury study, and I think over a
10-year period that was between $13 and $16 billion, and I
think more recently a CBO 2005 document, which actually
attributes the number to the joint Committee, had it at about
$15 billion, so roughly----
Mr. MCDERMOTT. Over a 10-year period?
Mr. MILLER. Ten-year period.
Mr. MCDERMOTT. I saw in the GAO report something from the
Tax Foundation. Who is that?
Mr. HILLMAN. That was a study that the Tax Foundation did
funded by the Independent Community Bankers Association of
America that estimated revenue of about $3.1 billion per year
from 2004 to 2013.
Mr. MCDERMOTT. So, that would be around 13 billion, so they
are sort of falling in the same category. Ms. Johnson, are you
aware what the revenue figure is that they are after?
Ms. JOHNSON. I will accept my colleague's--the taxation,
that is their area of expertise. However, I would say it pales
in comparison with what the consumer is going to save over
those same 10 years. We estimate that the credit union members
are going to save up to $11 billion a year just in lower rates,
lower fees, better interest on deposits. We estimate that the
banking customers are going to save 4 billion, or do save 4
billion a year. Because of the minimal competition that is
available, the banking customer also benefits. It is my opinion
that if you have a bank and a credit union in the same
community or serving the same people basically, both
institutions are better for it than if you had a single
institution there. That bit of competition is enough to make
institutions better and it is the consumer that benefits. The
money that is earned on dividends is taxed at the ordinary
income level, so those individuals do pay taxes on dividends
that they receive from their credit union accounts. The money
that is saved by the consumer and stays in the consumer's
pocket, is turned over in the economy, and hopefully a few of
them will save a bit of it.
Mr. MCDERMOTT. Thank you. Thank you, Mr. Chairman.
Chairman THOMAS. Does the gentleman want unanimous consent
to place his written statement in the record?
Mr. MCDERMOTT. Thank you very much, yes.
[The information was not received at the time of printing.]
Chairman THOMAS. The gentleman from Illinois wish to be
recognized?
Mr. WELLER. Thank you, Mr. Chairman, and appreciate the
opportunity to participate in today's particular hearing.
Credit unions are a recognizable institution in the communities
that I represent south of Chicago, and to be up front, I am a
member of a credit union, like a lot of my colleagues, and like
a lot of the staffers that are in this room as well. When I
visit the local credit union back in Morris, Illinois, the
Morris Community Credit Union, I see regular folks who are
participating and standing in line, immigrants, working people,
small business people, people in the community, that are
participate in credit unions. I know my good friend from
Washington State was trying to suggest that someone out there
is trying to take away the tax-exempt status, and I am
certainly not aware of much support for that idea. In fact, I
recall we had a vote I believe in the Congress sometime in the
last 10 years on that, and I believe less than 10 Members of
this House voted yes to take away the tax-exempt status. So, I
think that is an idea that does not have much support. What I
would really like to truly understand is exactly what does the
tax-exempt status for a credit union, what does it really mean
to the bottom line of a typical credit union, such as the
Morris Community Credit Union? And, Ms. Johnson, if you could
discuss that from the bottom line of the operations of a local
credit union, what does the tax-exempt status mean, and if it
were not there, what would the difference be?
Ms. JOHNSON. Well, credit unions are the only financial
institution that must earn their capital. They are not allowed
accesses other than some low-income designated credit unions,
don't have access to secondary capital. They are not stock-held
institutions. So, the effect of taxation on a credit union
would have behavioral changes for the management. It is because
there are other restrictions on credit unions in the products
and services and of how they can operate that though the tax-
exemption isn't a quid pro quo for the restrictions and the
exemptions, it isn't a quid pro quo. However, it is tenuous
because of the incentive that it gives the management to do the
best they can for their members. It is the members' capital. It
is the members' money. Their sole purpose is to meet the needs
of their members. It is not to meet the profit, so to speak, of
the stockholders. So, everything is poured back into the credit
union. The taxation I think would change behavior. Credit
unions are held to a higher capital standard than other
institutions. They are conservative by nature, but certainly by
taxing credit unions you are going to reduce that capital, and
credit unions would have to be thinking about raising rates,
taking in more income in order to balance that that they have
had to reduce through taxation. So, I think it is a direct
detriment to the members as far as what would happen with the
rates and benefits.
Mr. WELLER. Could you just elaborate further on the
differences between a traditional bank, which may be on one
corner, and down the street you have a credit union, and the
structure and how the tax affects either the bank versus the
structure of the credit union, of those institutions?
Ms. JOHNSON. I guess I would have to turn the taxation
issues of the banks over to my colleagues. The dividends are
taxed for credit union members, just like interest is taxed for
bank customers. Let me see----
Mr. WELLER. I was going to say, Mr. Miller, perhaps you can
help with that?
Mr. MILLER. Commercial banks, mutual thrifts and credit
unions are all taxed differently. With respect to commercial
banks and mutual thrifts, those two are taxed differently
because mutual thrifts, under some circumstances, are able to
deduct amounts that are distributed to their members, whereas
banks are not. Both of the for-profit side of this are treated
as C corporations generally, but they do have very detailed
rules on taxation depending on which way they go on that. The
credit union doesn't have that issue. Its income is tax-exempt.
Now, as I have mentioned, depending on what the activity is and
whether it is a State or Federal chartered credit union, there
may be a different tax implication there, but on their
business, general core business, they are simply not taxed.
Ms. JOHNSON. They still do pay payroll taxes, property
taxes, other taxes of that nature.
Mr. WELLER. Thank you. I see I have run out of time. Thank
you, Mr. Chairman.
Chairman THOMAS. Thank the gentleman. Gentleman from
Kentucky, wish to inquire?
Mr. LEWIS OF KENTUCKY. Yes. Thank you, Mr. Chairman. I
would just like to start out by making a comment about the
gentleman from Washington, Mr. McDermott. He seems to like to
make politically erroneous commercials from time to time here
when we are trying to do serious business for the DCCC and the
left wing, extreme left wing fringe, and I think if Mr.
McDermott would have had his way, I believe Saddam Hussein
would still be the President of Iraq, so thank goodness he
didn't have his way.
Mr. MCDERMOTT. Mr. Chairman, the gentleman is out of order.
You want to debate the Iraq war, let us start right here.
Mr. LEWIS OF KENTUCKY. I think you started.
Mr. MCDERMOTT. No, I didn't raise that. I raised your
fiscal policies----
Chairman THOMAS. The Chair has indicated that he is trying
to allow Members to make statements they wish to make. The
gentleman from Washington made a statement he wished to make.
The gentleman from Kentucky is making a statement he wished to
make.
Mr. LEWIS OF KENTUCKY. Getting back to business--and by the
way, the tax relief that we have given the American people has
allowed the deficit to drop by almost $100 billion in the last
year. So, I think that is a very credible and a very worthy
thing that we have accomplished here in Congress for the
American people. By the way, when I was a young married man in
1966, I worked for Armco Steel Company in Ashland, Kentucky,
working my way through college. I took advantage of the credit
union there. I was a member. It allowed me to purchase an
automobile, to get a low-interest loan that allowed me to have
the transportation to do what I needed to do. I believe that
what credit unions do today is still just as valid as what they
did in 1966 and before. The only change that seems to have
happened is that there is more access for people that are in
similar circumstances to what my circumstances were. I assume
that the interest rates, the loan rates, and the services and
the fees are still pretty much on par with what I experienced
in 1966. Would that be true?
Ms. JOHNSON. I believe you would find that true.
Mr. LEWIS OF KENTUCKY. I think what was provided for me was
a tremendous help in allowing me to accomplish some of the
goals that I had early in life, and I am hopeful that that is
providing the same opportunities for people today that I
enjoyed. Thank you.
Chairman THOMAS. Thank the gentleman. Gentleman from
Connecticut, Mr. Larson, wish to inquire?
Mr. LARSON. Thank you, Mr. Chairman. I have written remarks
that I would like to seek unanimous consent to revise and
extend.
Chairman THOMAS. Without objection.
[The prepared statement of Mr. Larson follows:]
Opening Statement of The Honorable John B. Larson, a Representative in
Congress from the State of Connecticut
I appreciate Chairman Thomas calling this hearing to help people
understand why it is important that these financial institutions
continue to be recognized as tax-exempt organizations in order to
ensure their services continue in our communities.
Since the economic crisis of the Great Depression, credit unions
have played a fundamental role in providing financial assistance to
people throughout the state of Connecticut and the United States. As a
financial cooperative, credit unions provide many of the same products
and services as banks and thrifts. Their unique operational structure,
however, distinguishes them from other financial institutions. Since
credit unions are owned by their membership, all the earnings are
retained as capital or are returned to the member in the form of lower
loan rates, higher rates on savings or to provide products and
services. Credit Unions have been able to provide these substantial and
valuable benefits, in part, because of the tax-exempt status they
receive from the Treasury Department.
Currently, credit unions in the state of Connecticut are required
by the Connecticut Department of Banking to maintain specific levels of
capital for security purposes. Both state and federally chartered
credit unions already pay taxes including payroll taxes, real estate
taxes and personal property taxes. In the state of Connecticut, state
chartered credit unions also pay Connecticut sales taxes as well. If
credit unions were also required to pay federal income taxes it could
hamper the ability of these institutions-to-provide sound financial
assistance and reduce credit unions' abilities to build capital,
restricting their ability to meet the needs of their current members or
add new members.
Community banks from which many of us here and our parents received
their first mortgage from or deposited their paychecks at have been one
of the cornerstones of 20th Century American community development.
However, over the last decade, most traditional community banks have
all but disappeared from our neighborhoods, bought out, debts
transferred, closed down, and turned into ATM machines on the side of
shopping centers by larger and larger regional and then national
banking conglomerates. Somewhere along the way, the `community' was
left behind. Credit Unions on the other hand have been serving their
community members for decades, and have for many filled the void that
departing community banks have left over the years.
There are still a few community banks out there, and they are still
doing good work. But comparing their operating structure to credit
unions is still comparing apples to oranges. In a struggling economy
like we find ourselves in today, the valuable financial services that
credit unions provide must be protected to ensure greater opportunities
for Americans to investment in our economy.
Mr. LARSON. Thank you, sir. Just an observation. The
history of credit unions in my State has been exemplary in
terms of the service that they provide. I know, Ms. Johnson,
you have been through this several times already in the
questioning, so I will forego all of the benefits that I
believe that are directly received on behalf of the
constituents that I serve and represent in the State of
Connecticut, and I submit my written remarks for the record,
and thank all the panelists for their attendance here this
morning and this enlightening conversation. Thank you, Mr.
Chairman.
Chairman THOMAS. Thank the gentleman. The gentleman from
Texas, Mr. Brady, wish to inquire?
Mr. BRADY. Thanks, Mr. Chairman. For 18 years before coming
to Congress I ran Chambers of Commerce in three different
communities, and in various economies, in different recessions
and boom times, I have seen how critical capital is to small
business growth in a community. There tends to be an ebb and
flow to it, times where as major banks merged, there seemed to
be a major tightening up of credit for small businesses. I have
seen somewhat a resurgence of community banks and credit unions
now offering capital to small business. I am most interested in
the role of credit unions. I want more capital to valid, solid
entrepreneurial efforts at the local level. What and how we get
there is a good debate. Can I ask each of the panelists, what
is the role of credit unions in providing capital to small
business start-ups at the community level, and how does that
role compare to that of a community bank and the larger type
banks?
Ms. JOHNSON. Many people don't realize that credit unions
were originally formed for business purposes, whether it was
agriculture, a lot of small business, but there were
commercial--small business lending was a major part of credit
unions from the very beginning. It continues to be a very
important role for credit unions to play, for small businesses
to have access to capital. We see a number of folks--take the
military, for example. When you have someone retiring from the
military after 20 years, they are just ready to begin their own
small business, and having access to that capital to begin that
small business with the credit union that they have been doing
their transactions with for perhaps their entire military
career, it makes sense for the credit union to be able to
continue to serve them. The small businesses are the heartbeat
of the economy, and credit unions have an important role to
play in that.
Mr. BRADY. Can you address--thankfully, we have far more
home-based businesses than ever before. We have far more women
and minority-owned entrepreneurs entering the market than ever
before, thank goodness. To each of the panelists, do credit
unions play a special role in meeting the needs of that new
market?
Ms. JOHNSON. Absolutely. That is where we see a lot of the
growth, especially in these underserved areas, who are in many
areas comprised of the minorities and the very people that you
are talking about. Those are the people, the women that are
perhaps coming to get the equipment for their hair salon, or
someone coming in for a vehicle for their small business.
Credit unions see a lot of that and that is a segment of their
membership that they are reaching out now to serve. I think the
whole community is better for it. There has been a sore need
for access to capital for these entrepreneurs.
Mr. BRADY. Thank you. Mr. Miller or Mr. Hillman?
Mr. MILLER. Actually, I will let Mr. Hillman handle this
one because the Service doesn't really have very much
information on that unfortunately.
Mr. HILLMAN. We have gathered information over the years
from 1992 to 2004, which shows that there is a very much a
different perspective when you look at smaller credit unions
and you look at larger credit unions. What we are seeing is
that for larger credit unions, you are seeing them much more
actively involved in first mortgage loans than that of smaller
credit unions than they have been in the past. Smaller credit
unions continued to tend to provide for a loan such as new
vehicle loans or used vehicle loans and the like, as
Congressman Lewis indicated as part of his past. As it relates
to member business loans, there is current restrictions that
credit unions have about the extent to which they can provide
those types of loans, and over the years, since 1992 through
2004, they have been a relatively small portion of the
portfolio of credit unions.
Mr. BRADY. Did you do any comparison on community banks? To
a person in the community it is hard to know who is filling
that need objectively. It is more anecdotal. Do you have any
views or studies on who is filling the need for start-ups,
home-based businesses, women-, minority-owned entrepreneurs?
Mr. HILLMAN. Not as part of this study, the credit union
history, no.
Mr. BRADY. Thank you, Mr. Chairman.
Chairman THOMAS. Thank the gentleman. Gentleman from
Colorado, Mr. Beauprez, wish to inquire?
Mr. BEAUPREZ. Thank you, Mr. Chairman. In the spirit of
full disclosure, I am a former community banker.
Ms. JOHNSON. At least you said former.
Mr. BEAUPREZ. My wife is still chairman of the board of a
bank that I still own stock in.
Ms. JOHNSON. That is fine.
Mr. BEAUPREZ. Well, thank you. I appreciate that.
[Laughter.]
Mr. BEAUPREZ. I appreciate your very, I guess, ecumenical
attitude toward that. I also came to Congress with a pretty
clear pledge. I didn't come here to raise taxes, and I have
consistently told my credit union friends--and they are friends
from Colorado; they have been very supportive of me and I
appreciate that. I have told them that I did not come here to
raise taxes on them or anybody else for that matter. I am
pretty proud of the record we have had on this side of the
aisle on actually reducing the tax burden on the vast majority
of people, in fact, I think all people that actually pay taxes
out there. I think the record is pretty clear on what effect
that has had for our economy. I say all that just so people
don't get scared as soon as a community banker, who happens to
also be a Republican, opens his mouth, saying, he must be
planning to tax me. The place I would like to go though, and
this is the same message I have given my credit union friends,
is you have to help us. So, I want to pursue in the time I
have, a clear distinction that allows Congress to straight-face
say this tax-exempt status makes sense.
Chairman Johnson, you have said that they exist to help
people of modest means. I understand that. I think we all
understand that, that that was part of the original charter.
But you are not really suggesting that those are the only
customers of credit unions now, are people of modest means, nor
once people get out of whatever modest means status means and
move on, that they no longer can be a member of a credit union,
are you?
Ms. JOHNSON. Absolutely not.
Mr. BEAUPREZ. So, then credit unions don't exist only for
people of modest means, nor, I am assuming--I don't want to
lead the witness--but I am assuming you are not suggesting that
people of less than modest means can't belong to a credit
union?
Ms. JOHNSON. Congressman, the term ``modest means'' is
certainly open for interpretation, but I would probably assume
that most of us in this room and our families consider
themselves people of modest means. There are others that think
credit unions should serve only, quote, ``the poor.'' I would
contend that you can't have a common bond of the poor and have
a successful credit union. So, you need folks that can put in
deposits in order to serve those that need the loans.
Mr. BEAUPREZ. I accept that. Some banks serve people of
modest means as well, right?
Ms. JOHNSON. Right.
Mr. BEAUPREZ. Same basic financial services?
Ms. JOHNSON. That is right.
Mr. BEAUPREZ. Make loans, deposits, checking accounts, that
sort of thing.
Ms. JOHNSON. Right.
Mr. BEAUPREZ. Where we struggle--and Mr. Hillman, I would
like to go to you next because of a statement you made--where I
think we do struggle and part of the reason I think we are
having this hearing, is making that clear distinction again
beyond the obvious one, different ownership structure between
banks and credit unions. Where we struggle is where is the
service, the clear service differentiation that allows us to
say, well, there is an obvious reason for tax-exempt status
here. I think the statement you made--and again, I want to make
sure all you credit union folks out there hear me, I am not
here to raise taxes on anybody. What I am here, trying to make
sure we always understand, is that there is a clear distinction
as to why one is taxed and one is not. I think your closing
comments went something to this effect: services are provided
by State chartered--and I accept that--State chartered credit
unions expand, we have the responsibility to be determining
which of them generate income that is subject to unrelated
business income tax and thus, which ones are not. I think you
kind of set the stage. So, how do we continue doing that? I
would suggest to you, Chairman Johnson, that is a test. It is a
test as much for your membership as it is for us, is that that
distinction that those lines don't get blurred to the point
where somebody can't tell the difference. I think that is part
of what we struggle with up here is the difference. Mr.
Hillman, you want to respond as to what I wrote down as kind of
a blurring of those lines?
Mr. HILLMAN. I think you hit the nail right on the head,
and in fact, that is one of the two main reasons why credit
unions enjoy their tax-exempt status, and it is also something
that is very undefined in legislation. It is very vague. There
is no clear standard out there as to what the requirements are,
or defining an individual of smaller, modest means in order to
ensure that credit unions are providing the public good that
Congress is expecting, clarity in that standard would be
important.
Mr. BEAUPREZ. I will just close, Mr. Chairman, if I might,
that I think it is a very natural evolution from 1934 or 1916
to where we are today, that those lines have gotten blurred,
but it is also a responsibility of those in Congress to make
sure that--and I think that is why we are having this hearing,
just asking the questions--is can we still justify what the
original intent was? Thank you, Mr. Chairman.
Chairman THOMAS. Thank the gentleman. The gentleman from
Georgia wish to inquire?
[No response.]
Chairman THOMAS. Gentlewoman from Pennsylvania wish to
inquire?
Ms. HART. I do briefly, Mr. Chairman. I have a question
mostly centering around some of the law as it is today that
doesn't necessarily lead us to the point where we would want to
remove a tax-exemption. I represent an area where there are
many active credit unions, most of which are small and
represent a very small segment--I am sorry--their members are a
very small segment of the community. In communities that are
what I think most people would think of as traditional credit
union communities, that had lots of employees of one company.
They belonged to the credit union for generations. They don't
have a lot of money. They are what I think most people would
consider people of modest means who belong to a credit union. I
met with some of the credit union folks at home, and asked them
directly, do they believe that they are still fulfilling the
original mission of credit unions, and they, without
hesitation, said, yes, the original mission being to provide
access to people who might not really have it, and I believe
that for the most part these organizations do that.
The one thing that is in the law that they enjoy, and I
think one of the things that actually may cause a little bit of
discomfort among my colleagues, is the issue of transparency,
because the credit unions do enjoy this opportunity to not
disclose a number of things. What I am curious about mostly,
why are they excused from filing the forms such as 990? What
purpose does that really serve? Would, perhaps, changing that
part of the law, alleviate some of the concerns that people
seem to have about credit unions? I think Mr. Miller may be
able to help me with that.
Mr. MILLER. Congresswoman, the Form 990, again, we need to
divide our world, as I have said almost every time I have
spoken, into the State versus the federally chartered. The
federally chartered, by regulation of many decades at this
point, exempts, excuses from filing a Form 990 any
instrumentality of the U.S. Government, and one of the types of
instrumentalities is the Federal credit union. If we were to
require that--and I do believe we could require it; we would
have to modify a regulation, but we could require it--the
question is why? If Congress said because we want transparency
into that sector, notwithstanding the fact that that
transparency doesn't lead to any tax impact, then we could do
that. But again, with respect to Federal chartered credit
unions, that 990 is not going to provide us with virtually any
information of a tax nature. It may provide the public with
transparency into the workings of an organization, but not tax
information.
Ms. HART. That is okay. My goal is not tax information as
much as it is to have them be responsible for providing
information as other financial institutions would be. Mr.
Hillman, you look like you want to say something.
Mr. HILLMAN. Yes. The GAO has noted in prior testimony to
this Committee earlier this year, the need to improve
governance, transparency and oversight of the tax-exempt
sector. The public availability of key information about the
entities, i.e., transparency, can enhance incentives for
ethical and effective operation and support public oversight of
tax-exempt entities, while helping to achieve and maintain
public trust. The good thing about the Form 990 that you
referred to are that they are public documents, and
individuals, therefore, have an ability to review those
documents, and that helps to maintain the public trust.
Ms. HART. Thanks, I appreciate that. The discussion with my
constituent credit unions, one of the things they said that is
so very important and one of the reasons why I really don't
want us to be jumping to any conclusions here, is that if
someone does need a $250 loan, they are certainly not going to
go to a commercial bank and be able to get one. But there are
credit unions in the communities I represent that do that, and
I think that is a very important service. Since I have probably
a minute left, Ms. Johnson, can you tell me of any reason why
the organization would object to this form?
Ms. JOHNSON. What I would respect to is that currently it
is not required and so we don't require it. The volunteers that
serve as directors are the ones that set the salaries. The only
time that we have seen a need to take a closer look is for
safety and soundness reasons, if there is a credit union that
we are examining for safety and soundness reasons, that there
are problems, then we would look into that, but otherwise it is
the purview of management. We don't set salaries, and so----
Ms. HART. So, the disclosure would present no extra burden?
Ms. JOHNSON. I don't know that it is not a burden, other
than the time for reporting, but it isn't anything that we
require, and therefore don't.
Ms. HART. Okay. Thank you for your indulgence, Mr.
Chairman.
Chairman THOMAS. The gentlewoman from Ohio wish to inquire?
Mrs. TUBBS JONES. Mr. Chairman, Thank you very much, and
thank you for hosting this hearing. For the record, I am
pleased to be a part of a discussion with regard to credit
unions. My prior Committee service was on financial services,
and was glad to be a supporter and a founder, in fact, of a
credit union in my congressional district. My first question
goes to Mr. Hillman. Mr. Hillman, there are roughly 9,000
credit unions of all sizes. Of the 9,000 credit unions, have
there been any issues--and maybe this should be Mr. Miller as
well--with regard to credit unions compliance with any IRS or
GAO regulations, or any issues with regard to that, in
complying with what is the rules that are laid upon them?
Mr. HILLMAN. As part of this study we haven't looked into
the enforcement actions that NCUA has taken against credit
unions for certain activities and transgressions, but I suspect
that the enforcement unit has had some activity in that area,
but I am not aware of----
Mrs. TUBBS JONES. Surely any enforcement unit is going to
have some activity in some area, or else they wouldn't be an
enforcement unit. They probably would say, well, we don't need
any money there. But what I am asking, trying to get an
understanding, is that most credit unions meet the compliance
requirements that are laid upon them. Any of you can answer the
question.
Mr. MILLER. Let me say, Congresswoman, that that I think is
generally the case. We have one area I think we have under
investigation right now, and that is with respect to State-
chartered credit unions. The array of activities that we see,
particularly in the insurance area and the sale of insurance
products, whether income derived from those sources is taxable
under unrelated trade or business.
Mrs. TUBBS JONES. Excepting that part of that, if they are
State chartered, some of the regulation actually will come
under the State, not under your jurisdiction; is that fair?
Mr. MILLER. I believe that with respect to State chartered,
they are regulated by the State regulator, but for Federal tax
purposes on UBITs, on the unrelated business income tax, that
would fall within our purview.
Mrs. TUBBS JONES. Well, lest we leave this hearing with a
cloud over the heads of the credit unions of America, you are
saying you believe something is being looked at, but apparently
it must not be too big of a deal because credit unions continue
to operate with great success and support for their members
across the country.
Mr. MILLER. Let me clarify my comment, that we were talking
at the edges with respect to some income. It does not go to the
exemption, the tax-exemption of these entities. It goes to
whether they owe some income tax.
Mrs. TUBBS JONES. Let me move on, and just say, roughly, in
Ohio, that the number of credit unions in Ohio translates into
about 2.7 million Ohioans that are members of credit unions.
Collectively Ohioans have $6.5 billion worth of assets invested
in credit unions. So, needless to say, I am getting lots of
calls from my constituents about what is happening with credit
unions. One is great, it is the Wright-Patt, it is our largest
credit union. Then there is one in my congressional district
called Safe Community United Credit Union, that stepped in to
fill a void created by the desertion of traditional commercial
banks from inner city areas. Again, I think there is enough
room at this financial table for community banks, large banks
and credit unions, and in my 7 years of being here at this
table--well, not this table, but a table of the Congress, that
we continue to kind of push and shove, and I just want to be on
record saying there is room enough for all of you all. Let us
go on to something more about. Thank you very much. I yield
back my time, Mr. Chairman.
[Applause.]
Chairman THOMAS. Thank you. Obviously, that influences us.
Gentleman from Texas?
Mr. DOGGETT. Thank you, Mr. Chairman. I certainly would not
question the appropriateness of looking at the tax-exempt
status and the tax-paying status of any business entity, but it
does strike me that the priorities here and the rationale here
are somewhat peculiar. We have ample evidence of commercial
corporate tax dodging as the amount of corporate taxes continue
to decline as a percent of our overall revenue package. We have
ample evidence of abusive tax shelters, some of which involve
what are called tax in different parties, or non-tax-paying
parties. None of that has been considered in this Committee. We
have an increasing number of commercial entities that bear a
great similarity with credit unions in that they are no-tax
corporations, who year after year, though they have ample
multinational operations, don't pay a penny of taxes. We have
some corporations that have chosen to reincorporate abroad in
order to avoid any of their responsibilities. We have
substantial involvement of the investment banking community in
abusive corporate tax shelters along with firms that of course
are facing criminal charges like KPMG.
None of those matters have been made the subject of today's
hearing or other hearings. Indeed, I think it has been since
1999 that this Committee ever had a hearing that really focused
on extensive abusive corporate tax shelters. Fortunately, the
Senate, under the leadership of Senator Grassley, has explored
some of these issues and come up with some good ways of
addressing it in a bipartisan fashion, and has even dared to
look at the abuses that were so costly to investors and
taxpayers that Enron and similar companies have engaged in.
This all, of course, does involve a substantial amount of
money. I think that it would be appropriate if the goal is to
really reevaluate all of these areas and their contribution to
the community, to the Federal Treasury, that we look first at
those who have been the subject of the greatest abuses, even
though we might eventually want to get to charity hospitals and
credit unions. The second thing I would note about today's
hearing is that rarely does this Committee deviate from the
Bush Administration party line, and I am thinking that perhaps
today may be an exception. You made reference, Ms. Johnson, to
a Treasury Department study that was done in 2001 concerning
credit unions. Have there been any Treasury studies about
credit unions since that time?
Ms. JOHNSON. That is the latest study that I am aware of. I
would say, however, that your assumption is incorrect about the
support of the exemption. Both President Bush and Secretary of
the Treasury Snow, have both reiterated strong support for the
tax-exemption for credit unions, as have pervious
Administrations.
Mr. DOGGETT. Usually at a hearing of this nature, we would
have an Administration witness that would testify, but as far
as the Treasury Department is concerned, the 2001 study has
never been questioned. The Treasury Department has never come
forward and asked for legislation in this area, and the
Secretary of the Treasury has spoken out in favor of
maintaining the existing exemption?
Ms. JOHNSON. That is correct.
Mr. DOGGETT. As has the President of the United States?
Ms. JOHNSON. Yes.
Mr. DOGGETT. Let me ask you, Mr. Miller, has there been any
requests from the Internal Revenue Service for legislative
action concerning credit unions?
Mr. MILLER. Well, Congressman, legislative action and one
of the reasons why my testimony takes no position is because we
are not the tax policy arm of the Administration. That is a
different piece, and that is where legislative suggestions
would come from. But I am unaware at this point of legislative
requests in this area.
Mr. DOGGETT. So, it would be Secretary Snow's Department to
make the recommendations for policy changes?
Mr. MILLER. We are all in Secretary Snow's Department,
Congressman, but it would be the Office of Tax Policy within
his office that would push forward on tax policy matters.
Mr. DOGGETT. He is, of course, the individual who has
voiced a position favoring no change in the taxation of credit
unions; isn't that correct?
Mr. MILLER. I have read the speeches. That is all that I
know on that topic.
Mr. DOGGETT. Thank you very much. Thank you, Mr. Chairman.
Chairman THOMAS. Thank the gentleman. It is indeed an
interesting hearing that the gentleman from Texas finds comfort
and protection in the Bush Administration and the Secretary of
the Treasury in the Bush Administration, knowing that we know
so much about the activity here, and that therefore, they could
reach that conclusion. I would also remind the gentleman that
the President and Secretary of Treasury are not charged with
writing the Tax Code. We are. They aren't charged with
overseeing it. We are. They are not charged with changing it.
We are. That is why this Committee, the Committee responsible
in the House of Representatives for the Tax Code, is holding
the hearing.
Mr. DOGGETT. Mr. Chairman, may I ask unanimous consent at
this time to insert the letter and the speech of the Secretary
of the Treasury, Mr. Snow, and the President on this issue into
our record?
Chairman THOMAS. Certainly, without objection.
Mr. DOGGETT. Thank you.
[The information follows:]
PRESIDENT GEORGE W. BUSH
April 30, 2004
Hon. Daniel A. Mies
President and Chief Executive Officer
Credit Union National Association
601 Pennsylvania Ave, N.W.
Suite 600
Washington, D.C. 20004
Dear Dan:
My Administration's pro-growth policies have spurred strength and
vitality in our economy, and America's credit unions have played an
important role in that success. By increasing lending opportunities to
small businesses, families, and workers, credit unions are contributing
to our economic recovery and increasing opportunities in our
communities.
I support strongly the tax--exempt status of credit unions, and
will continue to highlight the important contributions that credit
unions make to our financial system. As service-oriented, member-owned
financial cooperatives, credit unions should continue to invest in a
safe and sound manner in America's future.
I look forward to continuing to work together to ensure a bright
future for all Americans.
Sincerely,
George W. Bush
------
FROM THE OFFICE OF PUBLIC AFFAIRS
September 10, 2004
Hon. John W. Snow
Prepared Remarks:
National Credit Union Administration
Health Savings Accounts Event
Lima, OH
Thank you so much for having me here today. It's always great to
come home to Ohio, and I always appreciate the chance to meet with
credit union managers . . . you are such an important partner, such a
valued member of the financial community.
It's wonderful to be here with my good friend Mike Oxley. Chairman
Oxley is someone I regularly turn to for insight and counsel on a broad
range of matters impacting the Treasury Department. I consider him to
be a leader of great substance; the Financial Services Committee
clearly benefits from his leadership, and the people of Ohio are lucky
to have his representation in Congress.
I appreciate that credit unions are in business to do good, as well
as to do business. That's clear from your motto: Not for charity, not
for profit--but for service. So before I go any further today, let me
say to you: I value the fact you are for service. Which is the
fundamental reason why talk of taxation of your industry, and what you
do, is something the Bush Administration opposes. We know that you
always get less of anything you tax. And we don't want to get less of
what you do.
We have a lot of things to talk about today, but I wanted to make
that point clear up front.
Americans know and trust their credit unions, and this makes your
role in our country's economic growth especially important. You're
there for your customers whether they are opening a checking account or
a small business. Whether they're saving for extra holiday spending or
their child's education, you've been there.
And while our Nation's economy is doing quite well--and enormously
better than it was just a few years ago--there is still much to be
done, and much that credit unions will be doing to help.
Your dedication to small-business lending is one of the major
reasons why I say that.
Small business is at the foundation of this great economy, and
credit unions have been there for entrepreneurs when they needed you
the most.
As of 2003, under the leadership of SBA Administrator Hector
Barreto, credit unions were welcomed into the SBA lending programs for
the first time. I hope that has helped out both you and America's
entrepreneurs as much as this Administration hoped it would.
You know as well as I do: small business is where the jobs come
from. We estimate that between two-thirds and three-quarters of recent
net new jobs are coming from that sector.
That's why we want to make small business tax cuts permanent, and
that's why I want to commend the credit union community for financing
America's hard-working small-businessowners!
In addition to providing your small-business customers with the
capital they need to start and grow, there is a new product that I
would encourage you to market to them, and that's what we're focusing
on here today: Health Savings Accounts (HSAs).
The recently enacted Medicare prescription drug bill created HSAs,
an innovative new program to empower consumers to make better health
care choices. HSAs are really super-charged IRAs that put patients back
in charge of their health care. You own it, you control it, you can
leave it to your heirs.
It's a new option for health coverage that is good news for
individuals and employers who are struggling with their health-care
costs.
I have good news for Credit Unions when it comes to offering this
new product. First, insured credit unions are automatically qualified
to handle HSAs.
Second, the reporting on these accounts is minimal. You only need
to report on them once a year--to the customer and the IRS--one form to
report contributions to the account and another form to report the
amount that has been taken out of the account.
Best of all: you won't need any new forms. Treasury has model forms
that you can use, or you can adapt the forms you use for IRAs for HSAs.
In terms of the market for this product, I believe the future is
bright. As small-business customers research the services you offer,
adding HSAs to your portfolio are bound to make you more attractive as
the small-business financial service provider of choice.
Federal employees will also be a rich market for HSAs. Soon, they
will have the option of opening HSAs and they are likely to come to
their credit unions for that service.
I believe the business opportunity for you is great. Just ask the
Mid-American Credit Union in Wichita, Kansas or HealthAmerica Credit
Union in Jacksonville, Florida--both of whom have gotten into the HSAs
business early!
And I know that you also appreciate that HSAs are good policy, a
mechanism that will bring more Americans into the ranks of the insured.
This speaks to your motto . . . not for charity, not for profit, for
service. And affordable health insurance is a service the American
people need.
HSAs are a critical step toward increasing the availability and
affordability of health insurance for all Americans. They are also
helping to put individuals in charge of their own health care . . . and
that's something that is good news both for the American family and for
the American economy as a whole.
Rising health-care costs are one of many factors that can act as a
drag on our economic health. And while our economy is the strongest and
most resilient in the world, it is important that we keep the burdens
on free enterprise as light as possible.
We want fairness and freedom for America's small-businessowners.
It's not fair to add additional burdens to their already-heavy load.
Lightening those burdens gives them the freedom they need to open a
business, expand it . . . or, if an entrepreneur wants to . . . to
close the doors and go fishing.
Lower costs for health insurance reduces one of the top burdens on
America's smallest employers--the employers who are also creating most
of the new jobs.
Lowering their tax burden is critical for their health as well, and
that's why the President's tax cuts paid particular attention to small
business.
The President's tax cuts allowed well over three-quarters of a
million small-businessowners to keep more of their business income, and
encouraged them to invest in the growth of their companies. For
example, nearly 860,000 business taxpayers here in Ohio will save money
on their 2004 taxes.
Similarly, the tax cuts have allowed individuals to keep more of
their income. More than 4.4 million Ohio taxpayers will have lower
income tax bills in 2004 thanks to the tax relief. Those tax cuts
helped to offset the serious blows to the U.S. including in rapid
succession the bursting of the stock market bubble back in March of
2000, the economy in steep decline which President Bush inherited, the
terrible behavior by high ranking corporate executives who forgot their
duties to shareholders, workers and pensioners, and of course September
11th which took such a toll. President Bush saw the urgent need to act,
to put oxygen into the economy and because of his leadership the
American economy is now getting back onto a good course.
I am often asked: what is the most important thing I can do, as
Treasury Secretary, to strengthen the American economy? And I think
that people appreciate the economic significance of tax cuts . . . that
is the obvious answer. But it strikes me that this question is even
better answered by Education Secretary Rodney Paige. For nothing will
have a bigger, more lasting impact on the American economy than
educating and preparing America's work force for the jobs of today and
tomorrow. Primary, secondary and continuing education--for generations
to come--are by far the most important efforts toward achieving
continued economic prosperity.
While recent economic recovery and growth has been impressive--with
1.7 million new jobs created in the last year, strong GDP growth, and
home ownership at an all-time high--we are not satisfied, and we must
always seek ways to increase growth and job creation.
You have lost jobs here in Ohio. No one knows the value of new jobs
better than the people of this state.
Ohio's is an economy grounded in manufacturing, and recent years
have been hard. I know what you are going through, what you have been
through, and I know that it hasn't been easy. I grew up less than 100
miles from here--in Toledo, another heavily industrial town.
The people of this state have lost jobs; getting them back to work
is a top priority for President Bush, and for me. We understand that
the manufacturing recession that began in 2000 hit Ohio hard. And the
effort to get the economy of the state on solid footing, to a place
where Ohio businesses can expand, grow and create more jobs, is awfully
important.
Some things we know for certain--like the fact that new jobs cannot
come soon enough for the people of Ohio. The question is: where will
those jobs come from?
While no one can really predict what the next high-growth industry
will be, in a country where innovation is so wonderfully strong we know
there will be plenty of jobs for our families. The state of Ohio
overall has had some good news recently on jobs, with 3,400 new jobs
created in July.
But much remains to be done. We need to return Ohio to its rightful
prosperity. I remember when Ohio was a Mecca for jobs and it drew
people from all across the country. I want those days to return.
I am optimistic that times will get better in Ohio. You will not be
left behind; the U.S. economy is too strong for that and Ohio's workers
and businesses have a long tradition of excellence and success. We're
going to keep growing as a country, and Ohioans will be part of that
growth.
And I know that Ohio's credit unions will be helping, every step of
the way.
You understand the value of working together to achieve important
goals. This quality makes you valuable to your customers, and makes you
valuable to your country. More valuable because we are working together
to fight the war on terror. Because while hatred fuels the terrorist
agenda, money makes it possible.
As we mark the third anniversary of September 11th, I am once again
reminded of the tremendous resolve in the financial community that came
out of that day . . . resolve to cut off the terrorists' lifeblood:
their money.
Institutions large and small have committed themselves to the task.
America's credit unions have done everything that the Treasury
Department has asked of you during this fight, and I want to personally
thank you for your efforts.
Your compliance with section 314 of the Patriot Act--which requires
everyone to share information--has been exemplary.
We've asked that you cross-check a list of terrorists and their
partners, sent to you by Treasury's Financial Crimes Enforcement
Network (FinCEN), every 2 weeks, against your customer databases.
It's a big job to keep up with these lists, and it's one that is
never finished. You're doing it, and our country is safer because of
it.
The list that comes to you from FinCEN is an important tool--but it
would be useless without your partnership. We're in this together.
We've also asked you to comply with section 326 of the Patriot Act,
which has to do with recordkeeping. And I want you to know that you do
have flexibility under those regulations . . . we've worked hard to
make sure that your customers are able to use as many forms of
identification as possible under those rules. We hope the flexibility
makes it easier for you to be vigilant.
And we're always looking for ways to provide you with more and
better information about our regulations. So let's keep up the dialog .
. . let us know when we're confusing you, or when we can do better--
because the better our regulations are understood by you, the more
successful our critical enforcement efforts will be.
I know that complying with the regulations is burdensome, but it's
for an important cause. We want to work with you to ease the regulatory
burden while tightening our grasp around terrorist financiers.
Working together, we have accomplished a lot on this front of the
war on terror in the last 3 years. The United States has designated 383
entities as terrorists or supporters of designated terrorists and
frozen nearly $142 million in terrorist-related assets. More than $37
million has been frozen in the United States.
The U.S. has also identified and frozen over $4.5 million in al
Qaida-related funds. In addition, almost $72 million has been frozen by
other governments worldwide.
Almost 1500 terrorist-related accounts and transactions have been
blocked around the world, including 151 in the United States.
Our efforts are making a difference. So please know that we
appreciate our working relationship on the war on terror, and that we
view you as a partner in other critical ways, as well.
You're also a partner in the effort to increase financial literacy
and protect our citizens from identity theft. Both programs are
critically important to the citizens of America.
For many Americans, credit unions are successful gateways for
people to enter the financial mainstream through their relationships
with employers, schools, community groups and other affiliations.
I want to commend you for your terrific support for financial
literacy.
The Department of the Treasury has awarded the John Sherman Award
for Excellence in Financial Education to several credit unions for
their innovative financial education efforts. For example, in June
2003, we presented a certificate to the Ohio Credit Union League's
Latino Financial Literacy Program, which provides financial education
for Latino immigrants in the Columbus area. We understand the
importance of your efforts.
The National Credit Union Administration also plays an important
role on the Financial Literacy and Education Commission along with the
Department of Treasury and 18 other agencies. This Commission is
working to coordinate the Federal effort on financial education and
will soon be launching a Web site and toll free hotline to provide
Americans with a central source for Federal financial education
information.
You do so much for your customers, and for your country . . . I'm
thrilled to be here with you today, and thrilled to have you as a
partner in so many efforts.
I look forward to continued work with the credit union community on
all fronts, and am pleased to share with you an optimism and enthusiasm
for the future of the American economy. We have a shared belief that
our best days are ahead of us. I am pleased to be working toward that
future together.
Thank you for having me here today.
Chairman THOMAS. Of everything that I have heard here
today, Mrs. Johnson, the one statement you made I just find
dumbfounding, that you cannot find a credit union back home in
Iowa that you can join. If you were in California, there are
ads that are run that say, ``Can you join?'' The response,
``Are you breathing?`` I think you meet that qualification. On
the panel number 3 we will have a spokesperson from Louisiana,
who will talk about how terrific it was that their particular
credit union had exchange relationships with other credit
unions, and so I could indicate that you could perhaps join a
credit union here in Washington, and I can't believe there
isn't a credit union in Iowa that would offer reciprocal
opportunities based upon your membership in the credit union
here. If that is not the case, you and I need to explore how we
can create for you the opportunity to join a credit union back
home. I think it is outrageous that you don't have the ability
to avail yourself of the services of the very structures you
are charged with overseeing.
The difficulty that I have, either in the President's
statement or the Secretary of the Treasury's statement, or most
of the other statements about whether or not we have a comfort
level with what is going on in credit unions, is the fact that
most often you have to accept statements, for example, Madam
Chairman, as you gave us: ``I have no doubt,'' ``we believe,''
``acts of faith,'' are probably not comfortable enough,
especially as the gentleman from Texas indicated, that there
was a lot of activity out there in the corporate community. You
indicated that you have CPAs who report. They had CPAs that
reported. They were concerned there were reporting requirements
that were burdensome and didn't want additional reporting
requirements. We now have an individual serving 25 years in
jail based upon what he actually did. What I have difficulty in
is not understanding, as you continue to evolve and change the
form of the credit union, that there isn't any more sensitivity
on what could happen in terms of the downside of that
evolution. Let me give you an example, and I would like to hear
your response.
In 1998, the definition for community was modified using a
local concept, geography. You have approved a local geographic-
based credit union which has as its boundaries, Los Angeles
County. That is more than 10 million people. If in fact there
is an opportunity to try to serve people of modest means, there
are ample opportunities in Los Angeles County. There are also
ample opportunities to locate your credit union offices in ways
in which you could absolutely skim those folk who make more
than half a million dollars a year, if they are so inclined to
use a credit union. Repeatedly, when Members asked you what do
you do in terms of a measuring unit to see if people are
actually providing services to people of modest means, you
don't have the structure or the data capability of determining
that. Does that concern you at all?
Ms. JOHNSON. Congressman, there have been some large
community charters granted, and I think that has been very
beneficial to those communities. They are still restricted in
their geographical boundaries. They have to establish a--there
has to be interaction, common interests documented. Typically,
when you have a single political jurisdiction, you find those
types of interaction services, a commonality among that
segment.
Chairman THOMAS. Would you give me an example of the
commonality other than the fact that they live in Los Angeles
County? In fact, I understand that they don't even have to live
in Los Angeles County to belong. They can worship or work.
Ms. JOHNSON. There is certainly commonality of public
services. There is commonality----
Chairman THOMAS. Not necessarily. Somebody could be in
Orange County, which is often the case, and work in LA. It is a
completely different county structure.
Ms. JOHNSON. Then the interaction of the working within the
county, using the facilities of the county, using the----
Chairman THOMAS. Just let me say that at this point,
comparing that structure to what we started with, ``I am a
member of a company,'' ``I am a member of a school district,''
in terms of what was the historical rationale for creating
these, and you are down to now telling me that those are still
substantially sufficient commonalities to allow the concept to
continue, I am just saying at some point you need to maybe take
a step back. In arguing in terms of the Community Reinvestment
Act--and we are going to have a panelist on the third panel and
I know he has a 3:00 o'clock flight, and I am going to do
everything I can to get him up here--here is the question. You
have tax-exemption. What is the primary reason you have tax-
exemption? Is it because of the cooperative community volunteer
structure of the organization, or is it because during the
'thirties, when it was clear that people of modest means were
not being served adequately, given the existing financial
structures of the day, that this made sense in creating
opportunities for people of modest means? Which one is the
primary reason you think that Congress gave credit unions tax-
exemption?
Ms. JOHNSON. I think by reading the statute. that Congress
was establishing an alternative provider for affordable
financial services, and the structure is certainly what it is
based on by having a not-for-profit with the members putting in
their capital and then loaning it back out, everyone, every
single member of the credit union was benefiting. That is
entirely different than a structure of a stock-held
institution.
Chairman THOMAS. No, no, I understand that.
Ms. JOHNSON. Having both is great.
Chairman THOMAS. I understand that, but is that the primary
reason you think you get the tax-exemption, because of the
structure?
Ms. JOHNSON. Reading the statute, I believe that that has
been reaffirmed, yes. The structure, and there is also then to
serve the savings needs and those of modest means, but I would
say yes. I would say the structure, in reading the statute, the
structure is the main basis for the tax-exemption.
Chairman THOMAS. Okay. But I think it is very important,
and I think you should underscore this, that was included in
the 'thirties is included in 1998, serving people of modest
means. Earlier, I used not-for-profit hospitals as an example.
The IRS has allowed not-for-profits based upon a changing
definition of what their mission is, to no longer have to serve
the poor. All they have to do is have a structure, and it is
the structure alone that allows them that competitive
advantage. But I think it is important that your structure, the
people that you are supposed to administer and oversee and
police, have this commitment in terms of serving people of
modest means, difficult to define, as we indicated. But I have
a hard time understanding why you would resist a question or
not put up a structure which would allow you to show clear
evidence that you do serve people of modest means, and that you
serve them better than other institutions that don't have that
as part of their charter. That is why I have some difficulty
understanding your testimony on page 12. I assume you were
presenting evidence which would convince us that you serve
people of modest means, and you made a comparison with banks,
and I would assume that the comparison with banks would show
you favorably in serving people of modest means if you were
going to include it in your information.
What you have in the last full paragraph on page 12 is that
in the year 2003 ``credit unions made a higher percentage of
single family mortgage loans to low and moderate income
borrowers . . . than banks.'' You were at 24.2, banks were at
23.2. You got them there by a percentage point. ``In addition,
credit unions significantly increased home purchase loans to
low and moderate income borrowers to 28.3% of their loan
portfolios at 2003.'' That is up from 23.6 in 2001. But you
make the point, ``while bank lending in this area stayed
relatively constant.'' Well, ironically, the relatively
constant rate of the banks was 28.6 percent in 2001, which was
5 percentage points better than credit unions. The point of
constancy showed that in 2003 banks loaning to low and moderate
income borrowers was 28.9, which is half a percentage point
greater than what the credit unions did in 2003. So, in both
instances the banks did a better job, according to your own
testimony, of loaning money to folks of low and moderate means
to purchase houses. How does that buttress your argument?
Ms. JOHNSON. Congressman, that is in part why the chart is
presented above. The interpretation of the HMDA data is being
done in a very different manner, and I would propose when the
HMDA data is analyzed in an objective form, you will see that
credit unions fare very well. If you look at the denial rates
for the minority groups on the mortgage, you will see that
credit unions are doing a very good job. In fact, the denial
rates are lower than for other financial institutions. I would
also say that those rates have improved on an annual basis. I
believe as GAO had reported earlier, that the rates are getting
better.
Chairman THOMAS. Of course they are getting better, but
your statement, your mission, one of the reasons you get tax-
exemption is because you are committed to serving people of low
and modest means, and banks aren't. They pay taxes and they are
beating you in a very significant, growing and important area
for people of low and modest means, and that is providing
personal loans on homes.
Ms. JOHNSON. The reason that this information is included
is because this is information from a particular group that you
will probably see elsewhere, and to be truthful in putting it
in, I think that that is what we need to do, because that is
information provided by one particular group that is calculated
and manipulated in one fashion.
Chairman THOMAS. All I am saying is that you included that
data, and I assumed you meant it to have some positive impact
on us, and I am trying to figure out how it does. That is all.
In addition, one of the things that shocked a lot of people was
the corporate behavior, how much the chief executives were
being paid, other remunerations that were available to them,
the discrepancy between a typical corporation and certain
corporations. What I heard in terms of your response to Ms.
Hart and others was about the idea of maybe if we could get
some understanding of executive compensation. We could show
that there is a consistent relationship between the size of the
credit union and what the CEOs get paid and there aren't any
anomalies, and if there are some anomalies, you might want to
focus on those anomalies. That is transparency.
But to get the transparency you have to be able to collect
the data, and the argument that the law doesn't require you to
collect that data, I would think, would be something you would
want to talk about with the credit unions so that you don't
wind up with a scandal. If your answer is, ``Don't worry, there
won't be one,'' I would be very concerned about that,
especially as the way you have changed your credit union
structure in which the similar relationship to join it is that
you are breathing, and that it can include a geographic unit
that is larger than 42 States in the United States. Those
structures create opportunities for people who aren't as
committed to the core concepts that created credit unions in
the first place, to give you some comfort that people who work
in the same place, people who are employed in the same place,
who deal with similar issues.
I will tell you that I belong to the current Schools
Federal Credit Union, and I understand the nexus, and I
understand people are there. It continues to change a little
bit, but I understand the basic nexus. I don't understand
county of LA. Your explanation as to why the county of LA makes
sense, I would tell you, probably isn't enough cement for the
people who might join this credit union to have a very high
comfort that they are going to be looking out after their own
interest, the common interest that we have, the common interest
that we are all in LA.
I have a little concern, because I would think you would
want to be looking for tools to provide accountability, tools
for transparency, tools for verifiability, because if as
recently as 1998 you restated your mission as helping people of
modest means, you should feel proud about proving that, and I
think you could if you had the instruments that could establish
that, but you don't. I would think, given the enormous
discrepancy that Mr. Hillman presented between credit unions,
and especially the comment about the shift from the structure
of credit unions, you would want to give people some comfort
that there isn't a certain structure, or you yourself would
like to know that maybe some of these newer structures are
simply not as responsive to the old core common ideas of a
credit union that protected you in the past. So, I am kind of
wondering why every time you gave an answer, it was an answer
that was very, in my opinion, defensive.
I came across a court opinion in 2004 which I think
illustrates the concern that a number of us have and one of the
reasons we would prefer having a hearing to listen to what you
are doing as the structure has evolved. The court said the
``NCUA must have some gatekeeping responsibility to ensure``--
in this instance--``that the local requirement be satisfied.''
It ``cannot act as a rubber stamp or cheerleader for any
application brought before it.'' This case is troubling because
there is no indication in the record that the NCUA questioned
any of the data Tooele First Credit Union (TFCU) provided, or
that the NCUA queried into areas that would diminish the
likelihood of finding a local community. If the NCUA had
conducted any critical analysis of the information provided, it
should have recognized areas of concern that required further
discussion.
That to me is a cautionary signal that you should be
concerned about the integrity that you could show easily and
simply by the data you collect, both through transparency and
through accountability, in terms of rules that are applied to
other institutions that have a slight different tax structure,
but which you should talk about emulating so that it doesn't
bite you. But to say ``I believe'' or ``I have no doubt'' in
today's world with the evolving structure of credit unions, I
personally believe puts you at great risk. I would just caution
you that Mr. Hillman and the GAO have provided you with some
structures. I know you are taking a look at it. Cheerleading
probably doesn't serve the clients of the NCUA as much as a
very careful analysis of where you might get tripped up, in
which public disclosure might be made, and that the credit
union movement is damaged far beyond the individuals who
conducted themselves in ways that certainly weren't typical of
the way credit unions were supposed to conduct themselves. The
old original structure virtually guaranteed that it wouldn't
happen. The new structure, I think, is going to cause a number
of people some real concern if there is no ability to prove,
not on faith, but on structure and information, that the
compensation, the accountability and the mission are all being
served.
So, I would think simply from a defensive point of view
that you would be anxious to find those tools, some of them
indicated by the GAO and others, so that you could readily
provide the data that would dismiss any argument, and perhaps
in collecting the data, you might find that there are some
outliers that you would be very concerned about, but you don't
know about them now because you don't collect the data. That
would be an early warning system that some of the new and novel
directions that you are going are perhaps fraught with a little
more peril than the old typical structure, which I think made a
lot of sense, still makes a lot of sense today, and serves
clearly defined groups. Frankly, peer group review is usually
one of the best ways to keep people in line, and that is based
upon the structure. I just have to tell you, I have a very
difficult time understanding peer group review when what you
have in common is that you either worship, work, go to school,
or live in a county that has a population greater than 42 of
the 50 States. That is really the point I wanted to make after
having listened to all of the members in terms of the questions
that they had, just as a prudent thing you might want to think
about doing sooner rather than later. Any reaction?
Mr. MCDERMOTT. Mr. Chairman?
Chairman THOMAS. I wanted to know if the chairman had any
reaction to the statement.
Ms. JOHNSON. Thank you for your comments, Congressman. We
realize that this is an issue, and we have met with GAO, and we
do intend to respond.
Chairman THOMAS. But I think you should look at, for
example, the 9nineties, which would provide you with some of
the compensation that is going on. I know you are not required
to do them, but perhaps some kind of a cooperative effort to
examine exactly what tripped up some of those other
corporations on accountability, on thinking that a CPA
structure worked, on relying on folk that you can't tell me by
a thorough examination actually did what they said they did. I
mean I know those things are unseemly, but in today's world I
think just to protect credit unions, the Agency created to
protect them would want to have an oversight function more than
a cheerleader.
Ms. JOHNSON. I would add that many of the credit unions
have voluntarily adopted many of the requirements in Sarbanes-
Oxley, not required by statute to do so, but many credit unions
have moved that direction. We encourage it. We have put out
guidance on Sarbanes-Oxley, and that transparency is also
beneficial.
Chairman THOMAS. Do you think we are probably worried about
those who voluntarily adopted Sarbanes-Oxley?
Ms. JOHNSON. I would say it is--I may have used that word a
little loosely. We have put out guidance and we have strongly
encouraged many of the Sarbanes-Oxley procedures.
Chairman THOMAS. I understand the cost and the difficulty
of complying. I think it makes all kinds of sense to figure out
at what level, given the risk of something going wrong,
especially since the small ones have that tighter old-fashioned
structure, would you draw a line, that you would say below this
level and this structure, there is not that great of a concern,
you don't necessarily have to comply; above that, moving in the
new direction with all of these different opportunities,
especially outreach with for-profit structures in alignment
with a not-for-profit structure, that this is probably a
prudent thing to really think through, given the size of
multibillion dollar operations and the opportunity in a whole
new environment to put you people at risk in a way that you
never thought you would be at risk. I am reacting to the way
you thought you were at risk with this hearing, when all I
wanted to do was to ask you to look inward and do the kinds of
things that you need to do to protect yourself so that what
happened to corporations doesn't happen to you. I agree
completely the old structure pretty well protected you. You are
off into areas now that are vastly different with amounts of
money that are vastly different, with people who become leaders
in the movement, who want to create new structures vastly
different than what you had 25 years ago even, and certainly
different than 50 years ago.
I would very much like to see, and in fact will make sure
on a follow up that we do it, that you have got some
structures, you are asking questions. There is never a problem
when you ask a question and the answer is a verifiable-
certified-backed-up-with-information, no. The fact that you
didn't do it would be of great concern, especially given the
Federal role you play in your oversight. Okay? Thank the panel
very much. Anticipate the second panel.
Mr. BECERRA. Mr. Chairman?
Chairman THOMAS. Anticipate the second panel.
Mr. BECERRA. Mr. Chairman.
Chairman THOMAS. I tell the gentleman we have been here,
and I accommodated everyone who was here when the Chairman
began the final statement, and the Chairman said at the
beginning of the hearing that the Chair would conclude with the
questioning. The gentleman will have ample opportunity to
question a number of other people on different panels.
Mr. BECERRA. Mr. Chairman, I was here before the Chairman
started his final remarks. He never said that this was his
final statement. I was here prior to that. I was here prepared
to ask my 5 minutes of questioning. I believe under the rules
of this Committee and this Congress, this House, I am entitled
to 5 minutes to address the panel. So, unless I don't
understand the rules, I am not sure why I would not be
entitled----
Chairman THOMAS. I tell the gentleman that the gentleman
that spoke just prior to the Chairman was the gentleman from
Texas who sat next to him, and I have to tell you that I saw
the gentleman from Texas in his entire profile.
Mr. BECERRA. Mr. Chairman----
Chairman THOMAS. However, the Chair wants to make sure that
no member, regardless of how brief their appearance in the
Committee, is shorted in terms of their opportunity to ask
questions. Does the gentleman from California, Mr. Becerra,
wish to inquire?
Mr. BECERRA. Under regular order, Mr. Chairman, yes, I
would.
Chairman THOMAS. The gentleman is recognized for 5 minutes.
Mr. BECERRA. I thank the Chairman. I thank the panel for
being here such a long time. Let me ask a couple of questions
of Ms. Johnson, because I think the Chairman brought up some
good points that I believe a number of the credit unions in the
industry are trying to address, and I think others could be
encouraged to do more. It seems to me that there has been a
good purpose served by giving credit unions an opportunity to
have options on how to service modest income, low-income
communities in this country so that they can avail themselves
of financial services. It seems, though, that most of the
studies do show that the credit union industry is still lagging
far behind, substantially behind even banks and thrifts, in
making loans to modest income communities, especially
communities of color, and, in some cases, when it's compared to
women. I know that a few years back in 2001 or 2000, there was
a proposal before the administration to try to provide for
something similar to what CRA does within the financial
services industry for banks and savings and loans. That
proposal, the community action plan, which was initially
approved by NCUA, was subsequently reconsidered. I know that
the reasons having been given were that NCUA was preferring to
use a carrot versus a stick approach. I guess my first question
would be: How long do we feed carrots before we think we need
to use a stick to make sure that the credit unions do move
forward and do a much better job of fulfilling the charter
passed in the thirties that we try to service modest-income
communities through credit unions?
Ms. JOHNSON. Well, it has been the belief of NCUA that the
credit unions are serving members of modest means and those in
the community because they can only serve their members. In
1998, Congress had debated at length CRA requirements and
whether they should be imposed on credit unions, and at that
time, there was no evidence to show that it was necessary for
credit unions.
Mr. BECERRA. Would you say that is still the case?
Ms. JOHNSON. We have----
Mr. BECERRA. With the evidence that is before you now, some
of the analyses that have been done, would you say it is still
the case that there is no need to try to have further
encouragement for credit unions to do a better job of serving
low-income or modest-income communities?
Ms. JOHNSON. Well, actually, Congressman, most credit
unions that have adopted underserved areas are actually growing
three times faster than other credit unions. We see the results
that they are reaching out into the community when they have
that opportunity for a community charter or through adoption of
an underserved area. Otherwise, if you are dealing with
employer groups, et cetera, many of those people are restricted
through that employee group. There are others in the community
that could probably benefit from a credit union that aren't
being--cannot walk through the door and join the credit union.
Mr. BECERRA. I think you sort of point out that, on the
whole, credit unions are still fairly small compared to banks
and savings and loans. I think Citibank by itself is bigger
than all the credit unions in the country combined----
Ms. JOHNSON. Actually, the----
Mr. BECERRA. In terms of total assets.
Ms. JOHNSON. Actually, the top three banks--the three
biggest banks, any one of them is larger than the entire credit
union industry combined.
Mr. BECERRA. To some degree, in response to the exchange
you had with the Chairman, you can only do what the law permits
you to do. How you go about enforcing these laws with regard to
outreach into low-income communities is dependent on what the
law permits you to do. The laws which are passed by this
Congress, to some degree, dictate, they prescribe to you how to
go about doing this. So, to some degree, I think we have to
recognize that we have to tailor the law so that credit unions
can go out there and encourage the membership in these modest-
income communities. But the 1998 law I think did you give you
an opportunity to expand membership to try to get into some of
these modest-income communities. We have this year legislation
that is working its way through the Committees that may come to
the floor in the House at least that would likely expand the
reach of membership for credit unions. While I have always
supported the charter of credit unions, it seems to me that
credit unions would probably serve themselves well if they did
a better job of demonstrating that they were going to go into
these modest income communities if the industry is going to try
to go out there and have a more expanded definition of
membership. So, I am wondering if you could just comment on
that last question.
Ms. JOHNSON. The aspects as far as membership that are
included in the proposed legislation is very limited. I believe
it allows credit unions to retain single segs. If they were to
become a community charter, they could retain those segs. There
are actually very minimal changes to the actual membership
proposals or to enlarge membership.
Chairman THOMAS. The gentleman's time has expired. I once
again want to thank the panel, and at this time ask the second
panel--Vice Admiral Cutler Dawson, Harriet May, Jeff L. Plagge,
David E. Hayes. I would recognize the gentlewoman from
Connecticut for purposes of introducing the last member of this
second panel.
Mrs. JOHNSON. Thank you, Mr. Chairman. It is my pleasure to
welcome Mark Macomber to the dais here to testify before the
Ways and Means Committee. I have known Mark for many, many
years. He is first Vice Chairman of America's Community
Bankers, but he is the President and CEO of Litchfield Bancorp
in Litchfield, Connecticut, a mutual organization, and has been
a leader not only in banking circles in Connecticut and now
nationally, but also in the communities of the Northwest
Corridor of Connecticut, not only dedicated to building a
strong economy, but to building strong communities, and I thank
him for all he's done throughout that region and welcome him
here today.
Chairman THOMAS. The Chair apologizes to the panel, and
would indicate that all of you have written statements and will
make them a part of the record, and you can then, as you have
noticed, address the Committee in whatever manner you see fit.
We might as well just go from the Chair's left to the right,
and start with Vice Admiral Mr. Dawson.
STATEMENT OF VICE ADMIRAL CUTLER DAWSON, PRESIDENT AND CHIEF
EXECUTIVE OFFICER OF NAVY FEDERAL CREDIT UNION, ON BEHALF OF
THE NATIONAL ASSOCIATION OF FEDERAL CREDIT UNIONS
Vice Admiral DAWSON. Thank you, Mr. Chairman. Chairman
Thomas, Members of the Committee, I am Vice Admiral Cutler
Dawson, United States Navy retired; President and CEO of Navy
Federal Credit Union. I am here today on behalf of the National
Association of Federal Credit Unions to address the tax-exempt
status of our Nation's credit unions. We have provided the
Committee a written statement, as you said, Mr. Chairman; and,
however, my oral comments will draw primarily on my experience
with Navy Federal Credit Union. In 2004, I completed a 34-year
career in the Navy and was chosen to take the helm at Navy
Federal. During that time, I have seen what the--during my time
in the Service, I have seen what the credit union has done for
sailors and marines. It is truly their credit union. Navy
Federal began operations over 70 years ago with a group of Navy
Department employees and their surplus dollars to make
emergency loans to employees. At the end of the first year of
operation, the credit union included 46 borrowers and total
assets of $450.
We now serve sailors and marines and Navy Department
employees and their families around the world through 106
members' service centers, including 21 that are overseas. Our
motto is we serve where you serve. We have not strayed from our
mission of serving those members who share a common bond of
military or civilian service with the Department of the Navy.
Last year, as I was leaving active duty, the last--one of the
last things I did while on active service was I went to Iraq to
review the finances of the folks that were there that were
conducting the operations.
I spent the day with the Marines in Fallujah, and they
spent the day briefing me on what they were about to do and
what operations they were about, and what they had contemplated
in the future. That night while we were having dinner, I
happened to mention to them that I was retiring from the Navy,
and that I had just been selected the day before to be the new
President of Navy Federal. All the conversation stopped at that
time about what they were doing. They wanted to know what I was
going to do at Navy Federal, 'cause virtually all of them were
members of Navy Federal. Some had been members for 25 years.
Some had been members for 10; some for less. But to a man and
to a Marine and to a woman, they wanted to know what I was
going to do.
This same commitment and dedication to their members is
duplicated by thousands of credit unions all over America. Navy
Federal and all credit unions are not-for-profit, as you know,
and that served defined memberships. We are owned by our
members and we are governed by unpaid directors who are elected
on the basis of one vote and one member regardless of deposits.
We build the necessary operating capital by retaining earnings,
earnings that if taxed would curtail our ability to do the very
best of things that we currently do. But how does the Nation
benefit from our tax-exempt status? I can only explain it to
you in terms of the members that we serve, many of whom are
sailors and marines. It allows Navy Federal to operate in
overseas locations where our members are serving our Nation. As
I mentioned to you earlier, we serve in 21 different locations
across the world.
We also conduct financial management training through Navy
and Marine Corps programs. In the first 6 months of this year,
we conducted over 750 such sessions. We assist our members
through budgetary counseling and debt management services at
no-cost to the member. We guarantee utility deposits and
security deposits for members in the Navy and Marine Corps. As
you know, they move quite a lot. We provide members remote
access to their accounts via the Internet worldwide, and even
to ships at sea. But most importantly, we offer financial
alternatives to provide lower loan rates and higher savings
dividends, and I think, in some way, we keep the payday lenders
at bay. In summary, Mr. Chairman, the credit union mission of
meeting the credit and savings needs of customers, including
the sailors and marines that serve our country is as important
today as it ever has. It is with this in mind that I believe
that continuing the Federal income tax-exemption for all credit
unions is merited. I thank you for this hearing today, and I
look forward to your questions.
[The prepared statement of Mr. Dawson follows:]
Statement of Vice Admiral Cutler Dawson, retired, President and Chief
Executive Officer of Navy Federal Credit Union, on behalf of the
National Association of Federal Credit Unions
Introduction
Chairman Thomas, Ranking Member Rangel and Members of the
Committee, the National Association of Federal Credit Unions (NAFCU)--
the only national trade association that exclusively represents the
interests of our nation's federal credit unions--thanks you for the
opportunity to testify here today on the tax exempt status of our
nation's credit unions. NAFCU represents over 800 federal credit
unions--financial cooperatives from across the nation--that
collectively hold 67 percent of total federal credit union assets and
serve the financial needs of approximately 28 million individual credit
union members.
The universe of tax-exempt entities is very large; as of 2004 there
were almost 1.4 million federal income tax-exempt organizations, not
including churches and religious organizations, under 501(c) of the
Internal Revenue Code. Credit unions constitute a very small portion of
that universe. In fact, our nation's approximately 9,200 credit unions
account for merely 0.66 % of all federal income tax-exempt
organizations. Yet while small in number, credit unions play an
important role in directly serving their members, and ultimately in
indirectly benefiting the American public; studies have shown that the
presence of credit unions benefits not only credit union members but
all Americans who use federally insured depository institutions.
America's credit unions have always remained true to their original
mission of ``promoting thrift'' and providing ``a source of credit for
provident or productive purposes.' Because of their cooperative not-
for-profit structure, credit union members find that product service
offerings remain widely available to them irrespective of economic or
stock market conditions. Such dependability means credit unions are not
in a particular market or product offering today but out of that area
tomorrow simply to bolster income. In providing quality services to
primarily the middle and lower-middle class, particularly with respect
to consumer credit needs, credit unions continue to fill a void left by
other financial institutions.
Credit union critics have erroneously claimed that some credit
unions today are no different than banks and thus should forfeit their
federal income tax exempt status. Such claims simply do not stand up to
close scrutiny. While credit unions--like all financial service
providers--have evolved and grown over the years to meet the changing
financial services needs of their members, the basic structure,
philosophy and guiding principles of credit unions remain the same
today as when the federal income tax exemption was granted to credit
unions in 1937. Congress reaffirmed this fact just seven years ago,
when as part of Section 4 of the ``Findings'' contained in the Credit
Union Membership Access Act (P.L. 105-219), Congress declared that:
``Credit unions, unlike many other participants in the financial
services market, are exempt from Federal and most State taxes because
they are member-owned, democratically operated, not-for-profit
organizations generally managed by volunteer boards of directors and
because they have the specific mission of meeting the credit and
savings needs of consumers, especially persons of modest means.''
That statement remains true today, the same as it did seven years
ago.
More recently, and as a part of that legislation, the 2001 Treasury
Department study comparing credit unions with other depository
institutions noted that credit unions
``are clearly distinguishable from--other depository institutions
in their structure and operational characteristics. . . . They are
member-owned cooperatives, with each member having one vote regardless
of the amount of a member's deposits. Moreover, they do not issue
capital stock, rather they are non-profit entities that build capital
by retained earnings. Finally, credit unions may serve only an
identifiable group of customers with a common bond (e.g., the employees
of a specific firm, the members of a certain organization, or the
members of a specific community). (Emphasis added).''
The federal income tax exemption for credit unions was supported by
then candidate and now President George W. Bush in 2000, when he stated
``. . . as part of my overall commitment to lower taxes and provide
more opportunities for working Americans, I support continuing the tax-
exempt status of credit unions.'' During the 2004 campaign, President
Bush reiterated that position, noting ``I support strongly the tax-
exempt status of credit unions and will continue to highlight the
important contributions that credit unions make to our financial
system.'' Treasury Secretary John Snow recently told a credit union
audience ``We oppose this talk of taxation of you and your industry . .
. it's a truism I think in economics, you always get less of anything
you tax. Well, we don't want to get less of what you do.'' Reflecting
the bipartisan nature of this issue, 2004 Democratic presidential
nominee John Kerry wrote to NAFCU that ``I want you to know that I will
continue to support America's credit unions and oppose any efforts to
change the existing tax-exempt status of credit unions.''
Historical Reasons for the Credit Union Tax Exemption
The 16th Amendment, which established the basis for a federal
income tax, was ratified in 1913; at that point state-chartered credit
unions had already been operating for four years. The federal income
tax status of credit unions, however, remained unclear until 1917, when
the Secretary of the Treasury asked the Attorney General for a legal
opinion on the tax liability of state-chartered credit unions operating
in Massachusetts. The Attorney General rendered an opinion that credit
unions were exempt from federal income taxes.
In 1934, Congress passed the Federal Credit Union Act (FCUA), which
created the federal credit union charter. The FCUA did not explicitly
exempt federal credit unions from paying income tax. In 1935, however,
the Commissioner of the Internal Revenue Service (IRS) ruled federal
credit unions were exempt from paying federal income taxes. A 1937
amendment to the FCUA explicitly granted a federal income tax exemption
for federal credit unions (12 U.S.C. 1768 (2000)). As set forth in
the 2001 Treasury Department study, ``two reasons were given . . . (1)
that taxing credit unions on their shares, much as banks are taxed on
their capital shares, `places a disproportionate or excessive burden on
credit unions' because their shares function as deposits and (2) that
`credit unions are mutual cooperative organizations operated entirely
by and for their members . . . ' ''
While the credit union community has continued to grow and evolve
in the changing financial marketplace, the core justifications for
which Congress granted federal credit unions a tax exemption have not
changed. Credit unions still operate as not-for-profit financial
cooperatives, according each member an equal vote in credit union
operations.
Bankers' Myths vs. the Credit Union Reality
Some critics of credit unions would have you believe that credit
unions pay no taxes at all. Credit unions, however, still pay many
taxes and fees, among them payroll and property taxes, but Congress has
determined that federal income taxation of member-owned shares in a
credit union would put a ``disproportionate and excessive'' burden on
credit unions. It is also important to note that share dividends paid
to credit union members are taxed at the membership level.
These same critics would have you believe that credit unions are
today no different than banks. The defining characteristics of a credit
union, no matter what the size, however, remains the same today as they
did in 1937: credit unions are not-for profit cooperatives that serve
defined fields of membership, generally have volunteer boards of
directors and cannot issue capital stock. Credit unions are restricted
in where they can invest their members' deposits and are subject to
stringent capital requirements. A credit union's shareholders are its
members (and each member has one vote, regardless of the amount on
deposit), while a bank has stockholders.
While credit unions have grown, like all financial institutions
over the years, the credit union community remains quite small when
compared to the size of the banking community. federally insured credit
unions had $647 billion in assets as of December 31, 2004, while FDIC-
insured institutions held over $10.1 trillion in assets. Last year
Federal Deposit Insurance Corporation (FDIC)-insured institutions grew
by an amount exceeding the total assets of all credit unions combined.
Navy Federal Credit Union, the world's largest with just over $22.9
billion in assets, is dwarfed by the nation's largest bank with over
$967 billion in assets. Furthermore, several of the nation's largest
banks have total assets greater than the entire credit union industry.
We would also note that in December of 1980 the credit union share of
total financial assets was 1.4 percent. According to Federal Reserve
Board statistics, 24 years later, as of December 31, 2004, credit
unions' share of financial assets was still only 1.4 percent. Banks, on
the other hand, accounted for 18.7 percent of household assets as of
December 31, 2004.
Finally, while banks continue to attack the credit union federal
income tax exemption, the number of banks that pay no corporate federal
income tax continues to rise through the increased number of banks
organized as Subchapter S corporations and through the utilization of
other tax avoidance measures. According to NAFCU's analysis of FDIC
call report data, as of December 31, 2004, nearly 24% of all FDIC-
insured institutions paid no federal corporate income tax as Subchapter
S corporations. These 2,139 FDIC insured institutions not only account
for nearly 24% of all FDIC-insured institutions; they collectively hold
over $322.5 billion in total assets, or just under 50% of the total
assets of all federally-insured credit unions combined. Of these 2,139
FDIC-insured institutions that paid no corporate federal income tax,
1,077 of them (ranging in size up to $9.5 billion) paid no income tax
of any kind.
Limitations on Credit Union Capital
Credit unions support sound economic policy and goals. At the same
time, credit unions must adapt to changing membership needs. Credit
unions must also create sufficient return on members' deposits to
establish sufficient reserves. Unlike other financial organizations,
credit unions have no stockholders and no access to the capital
markets. Credit union reserves, therefore, serve several needs.
They are a source of funds for assuring that credit
unions meet the statutory requirements for safety and soundness.
They allow credit unions to keep pace with modern-day
financial practices.
They are the only source of capital, which allows credit
unions to offer a wide array of financial services to their members.
Furthermore, some critics argue that credit unions serve some who
are not of modest means. While it is true that the average income of a
credit union member has grown since the Federal Credit Union Act was
enacted in 1934, a 2004 Filene Research Institute study entitled ``Who
Uses Credit Unions'' found that the average household income of those
who hold accounts solely at a credit union was less than $43,000, while
the average household income for those who solely hold accounts at a
bank was almost $77,000.
Additionally, because credit unions can only raise capital from the
deposits of their members, the cooperative nature of the credit union
means that the deposits of the entire membership allows the credit
union to have the money to make loans and provide services to those who
may not have significant deposits.
The Credit Union Income Tax Exemption Benefits Everyone
Although banks claim there is ``competition'' from credit unions,
banks continue to acquire record profits. An article in the January 31,
2005 issue of the American Banker newspaper entitled ``Feeling Heat
from Deposit Competition,'' reported that ``Zions Bancorp [of Salt Lake
City, Utah] was one of the many large regional banks that while making
record profits for the 4th quarter of 2004 and for the calendar year,
gave in to deposit pricing pressure in the fourth quarter [of 2004].''
The article continued: ``Zions said pressure from other banks and
specifically credit unions in Utah prompted it to raise rates on money
market accounts by 20 basis points late in the fourth quarter.''
A September 2004 report and analysis by Robert M. Feinberg, a
professor of Economics at American University, entitled ``An Analysis
of the Benefits of Credit Unions to Bank Loan Customers,'' found that
``a substantial credit union presence in local consumer lending markets
has a significant impact on U.S. bank loan customers, saving them at
least $1.73 billion per year in interest payments.'' A January 2005
study by Robert J. Tokle, a professor of Economics at Idaho State
University, entitled ``An Estimate of the Influence of Credit Unions on
Bank CD and Money Market Deposits in the U.S.,'' estimated that bank
customers benefit to the tune of $2.0 to $2.5 billion annually just in
interest on deposits due to the competitive presence of credit unions.
The credit union federal income tax exemption, therefore, does not
benefit solely credit unions and their members, but each and every
American who uses a federally insured depository institution.
Consumer advocates have also recognized and supported the federal
income tax exemption for credit unions. In the fall of 2003 the
Consumer Federation of America (CFA) examined the federal income tax
status of credit unions and reaffirmed these points in a study entitled
``Credit Unions in a 21st Century Financial Marketplace.'' In the
study, CFA concluded, among other things:
The benefits that credit unions deliver to the public far
exceed their costs, as measured by the tax exemption, through lower
priced services and higher interest rates; and,
The value of tax breaks enjoyed by banks is ``far
greater, in absolute and relative terms, than the value of the credit
union tax exemption.''
The Loss of the Federal Tax Exemption Would Raise Safety and Soundness
Concerns, Adversely Impact Member Rates and Fees, as well as
Increase Conversions to Banks
Federally insured credit unions must build their capital reserves
through retained earnings and all are prohibited from accessing the
open capital markets by law. As noted by former NCUA Chairman Dennis
Dollar in a letter to The Honorable Sheryl Allen (a member of the Utah
State House of Representatives) regarding potential safety and
soundness implications from the taxation of credit unions in that
state: ``it is certain that any resulting net worth considerations that
might arise (from taxation) could indeed become a significant issue . .
. [as a result of] credit unions having their retained earnings
negatively impacted [by taxation].''
Any taxes imposed on credit unions would, because of their
structure, most likely also adversely impact members' savings rates,
borrowing rates and fees--creating a tax increase on America's 87
million credit union members. In addition, credit unions' boards and
management would be driven to make decisions in a manner similar to
banks, with the end result being a decision-making process driven by
tax considerations or other issues rather than what is in the best
interest of members. As a result, a very unfortunate consequence could
be a shift in orientation imposing a broader economic cost, as noted in
the Congressional Budget Office's July 2005 Background Paper, ``Taxing
the Untaxed Business Sector.''
Finally, credit union boards would also have to carefully evaluate
alternative business models. Today federally insured credit unions are
more heavily regulated than any other financial depository institution,
with restrictions on capital, who they can serve, investments and--in
the case of the federal credit unions--a usury ceiling of 15%.
(Federally insured credit union member business lending is also more
restricted than that of either banks or thrifts.) Over the past 9
years, 29 credit unions have converted to mutual thrifts and 18 of
those have taken the following stop of becoming stock-held
institutions. Most recently, two credit unions in Texas, Omni Credit
Union with $1.1 billion in assets and Community Credit Union with $1.4
billion in assets converted to mutuals. A likely consequence on
taxation would be an increase in such conversions. Such conversions
could lead to job losses of credit union employees.
Credit Unions Pay Their Own Way
The deposit insurance of federally insured credit unions is self-
funded through a cooperative system that has never cost the American
taxpayer one dime. It was started with money from credit unions, and
pursuant to the Deficit Reduction Act of 1984, all credit unions with
federal insurance deposited in the National Credit Union Share
Insurance Fund (NCUSIF) an amount equal to 1 percent of their insured
shares (12 U.S.C. 1782) to recapitalize the fund (a move that also
helped to reduce the federal deficit). Credit unions also pay the full
administrative costs of their federal regulatory agency, the National
Credit Union Administration (NCUA). Fees levied on credit unions cover
the entire cost of NCUA's expenses for chartering, supervising and
examining credit unions, and for administrative overhead. With today's
federal budget expenditures approaching $2.48 trillion, credit union
members can be proud that the taxpayers are not charged for NCUA's
operations--the cost of which will be an estimated $148 million in FY
2005.
Credit Unions Service to their Field of Membership
Federal credit unions continue to actively reach out to low- and
moderate-income borrowers. As a result of the low-income designation or
adding of underserved areas, federal credit unions are striving to
provide greater access to low- and moderate-income individuals for much
needed financial services. In addition, federal credit unions engage in
partnerships with consumer organizations and participate in various
government programs in their efforts to enhance their services to those
in financial need.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Some federal credit unions are designated specifically as low-
income credit unions; \1\ they predominately serve low-income members,
and the number of federal credit unions with this designation is
increasing (see Chart 1).
---------------------------------------------------------------------------
\1\ A ``low-income credit union'' is a credit union in which the
majority of its members, or the majority of residents in the community
the credit union serves, makes less than 80 percent of the average for
all wage earners as established by the Bureau of Labor Statistics or
have an annual household income that falls at or below 80 percent of
the median household income for the nation as established by the Census
Bureau. 12 C.F.R. ff 701.1, 701.34.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Addition of Underserved Areas
Credit unions continue to add underserved communities to their
fields of membership.\2\ All types of federal credit unions have added
underserved areas, with the greatest participation coming from
multiple-common-bond credit unions, followed by single-sponsor credit
unions and then community credit unions. The number of areas added this
year is expected to reach 200 (see Chart 2 previous page), a slightly
slower pace than during 2004.
---------------------------------------------------------------------------
\2\ An underserved area is a local community, neighborhood or rural
district that is an ``investment area'' as defined in section 103(16)
of the Community Development Banking and Financial Institutions Act of
1994 (12 USC 4703(16)). 12 USC 1759(c)(2). Examples of areas that
qualify as investment areas include: an area where at least 20 percent
of the population is living in poverty; an area where the unemployment
rate is at least 1.5 times the national average; or an area meeting the
criteria for economic distress as established by the Community
Development Financial Institutions Fund (CDFI) of the U.S. Department
of Treasury.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Despite the slight decline in the pace of adding underserved areas,
the number of potential members in underserved areas continues to grow
(see Chart 3). As of September 2005, the potential number of members in
underserved areas added to the Fields of Membership (FOM) of FCUs was
21.6 million. By the end of 2005, FCUs are projected to add to their
FOMs underserved areas with approximately 29.0 million potential
members. This figure is slightly higher than the 2004 figure of 27.4
---------------------------------------------------------------------------
million.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Finally, FCUs with underserved areas as part of their FOMs have
achieved greater loan growth than the FCU community as a whole (see
Chart 4), reflecting the extent to which FCUs have taken advantage of
the opportunity to serve their members in these underserved areas.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mortgage Lending to Low and Moderate-Income Members
Based on the most recent Home Mortgage Disclosure Act (HMDA) data,
credit unions tend to make smaller mortgage loans than other financial
institutions and have a higher percentage of mortgage loans to low- and
moderate-income borrowers. Among all mortgage loans approved in 2004
for 1-4 family home purchases, the average loan size by banks was over
50 percent larger than the average loan size by credit unions, and the
average loan size by thrifts was almost 100 percent larger than credit
unions. In addition, the percentage of mortgage loans under the
conforming limit of $333,700 is higher among credit unions when
compared to other financial institutions (see Chart 5). Also, the
percentage of credit union mortgage borrowers with applicant income of
$40,000 or less is higher among credit unions (see Chart 6).
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Credit union approval rates also exceed that of banks and thrifts
(see Table 1 next page). In this regard, the loan approval rate, rather
than the proportion of total loans granted to low- and moderate-income
applicants, is the best indicator of credit unions providing service to
such applicants, because the loan approval rate does not depend on
field of membership type, or the geographical area served.
In 2004, the HMDA data collected, for the first time, included
information on the interest rate charged on mortgage loans. The
information was collected on the interest rate spread between the
mortgage loan annual percentage rate (APR) and an applicable Treasury
security yield. If the difference between the APR and the Treasury
yield were less than three percentage points for a first-lien loan and
less than five percentage points for a subordinated-lien loan, there
was no reporting requirement. Credit unions had a significantly smaller
percentage of loans mandating reporting (see Table 2) than either banks
or thrifts, not only with respect to all mortgage approvals, but also
with respect to those of household incomes less than $40,000 and those
granted to minority applicants.
Table 1--Mortgage Loan Approval Rate*
----------------------------------------------------------------------------------------------------------------
All Applicants White Applicants Minority Applicants
-----------------------------------------------------------------
Household Income Household Income Household Income
1998 -----------------------------------------------------------------
Less than $40,000 Less than $40,000 Less than $40,000
$40,000 or More $40,000 or More $40,000 or More
----------------------------------------------------------------------------------------------------------------
Credit Unions 85% 93% 88% 94% 72% 85%
----------------------------------------------------------------------------------------------------------------
Banks 71% 88% 75% 89% 57% 77%
----------------------------------------------------------------------------------------------------------------
Thrifts 69% 89% 72% 90% 60% 82%
----------------------------------------------------------------------------------------------------------------
2001
----------------------------------------------------------------------------------------------------------------
Credit Unions 84% 94% 87% 95% 70% 86%
----------------------------------------------------------------------------------------------------------------
Banks 70% 87% 74% 89% 60% 78%
----------------------------------------------------------------------------------------------------------------
Thrifts 77% 89% 80% 90% 67% 82%
----------------------------------------------------------------------------------------------------------------
2004
----------------------------------------------------------------------------------------------------------------
Credit Unions 81% 92% 84% 93% 66% 84%
----------------------------------------------------------------------------------------------------------------
Banks 70% 84% 73% 85% 59% 76%
----------------------------------------------------------------------------------------------------------------
Thrifts 71% 82% 74% 84% 59% 77%
----------------------------------------------------------------------------------------------------------------
Source: Federal Financial Institutions Examination Council HMDA Data
*Loans originated plus loans approved but not accepted as a percent of all loan applications. Minority
applicants include those who identified themselves as Native American, Asian/Pacific, Black or Hispanic
In conclusion, today, there are more low-income designated credit
unions, and more underserved areas are being added every year. When
compared to banks and thrifts, credit unions approve real estate loans
that are smaller in size, approve a greater percentage of conforming
real estate loans, have a greater percentage of real estate borrowers
with less than $40,000 income, and grant fewer real estate loans
charging three percentage points or more above the Treasury benchmark.
Table 2--2004 Approved 1-4 Family Purchase Loans
Percentage of Approvals with Rate Spreads**>=3%
----------------------------------------------------------------------------------------------------------------
All Applicants (with White Approvals Minority Approvals
race data) -------------------------------------------
---------------------- Household Income Household Income
Percentage Reporting Above 3 Percent Spread Household Income -------------------------------------------
----------------------
Less than $40,000 Less than $40,000 Less than $40,000
$40,000 or More $40,000 or More $40,000 or More
----------------------------------------------------------------------------------------------------------------
Credit Unions 4.0% 2.7% 3.9% 2.7% 5.0% 3.0%
----------------------------------------------------------------------------------------------------------------
Banks 10.5% 7.2% 9.5% 6.4% 16.8% 12.5%
----------------------------------------------------------------------------------------------------------------
Thrifts 7.8% 5.1% 7.3% 4.7% 11.1% 7.6%
----------------------------------------------------------------------------------------------------------------
Source: Federal Financial Institutions Examination Council HMDA Data
** Approvals equal loans originated plus loans approved but not accepted. Rate spread is the difference between
the annual percentage rate (APR) of the loan and the applicable Treasury yield of a comparable period of
maturity. The rate spread is reported only if it is equal to or greater than 3 percentage points for first-
lien loans and 5 percentage points for subordinated-lien loans. Minority approvals include those who
identified themselves as Native American, Asian/Pacific, Black or Hispanic.
Taxation of Credit Unions Would Harm America's Consumers
If credit unions were taxed, there are many possible results, over
time, for credit union members. Some of the results include:
Credit Unions Would Lose their Identity: By necessity,
credit unions would become more driven to increase profits in order to
pay taxes and customer service--one of the hallmarks of the credit
union philosophy--would likely suffer.
Rates and Fees: Monies paid in taxes would adversely
impact saving rates, borrowing rates, and fees.
Capital: Further restraint on the ability to raise
capital, potentially impacting safety and soundness.
Erosion of the Volunteer Base: As credit unions become
``more like banks,'' the self-help characteristic of credit unions and
the community as a whole would become less distinct.
Conversion to Other Business Models: Given the
significant regulatory burden that credit unions already carry, there
is a strong likelihood that the rate of conversions to mutual thrifts
would increase, this could result in a loss of jobs for credit union
employees.
Tax Status of Subchapter S Banks
Today, the banking trade associations have attacked the credit
union tax exemption as a remnant of the past, an unfair advantage that
is undeserved despite credit unions' not-for-profit, cooperative
structure. NAFCU disagrees with these sentiments. The bank attacks on
the credit union tax exemption ring hollow and hypocritical in light of
the growing number of Subchapter S banks. Like credit unions,
Subchapter S banks do not pay corporate income tax.
Under a provision in the tax code implemented in 1996, banks that
qualify as Subchapter S corporations are exempt from paying corporate
income tax. In 1996, Congress included a provision in the Small
Business Job Protection Act (P.L. 104-188) that allows banks that do
not use the reserve method of accounting for bad debt to qualify as
small business corporations and therefore, qualify as Subchapter S
corporations. In Subchapter S corporations, the tax at the corporate
level is removed, and only the shareholders pay an income tax.
Previously, banks were not allowed to qualify as Subchapter S
corporations because banks already enjoyed a substantial tax advantage
in the method in which they were allowed to account for bad debt.
Since passage of Small Business Protection Act, the number of
Subchapter S banks has steadily increased. In 1997, there were 604
Subchapter S banks. Today, there are 2,139 Subchapter S banks with
total assets of $322,461,619,000. The largest Subchapter S bank is
Emigrant Savings Bank, a thrift, with assets of $10,267,659,000.
Critics of the credit union community argue that large credit
unions have outgrown the historical justification for the tax
exemption, ignoring the fact that it is the structure of the credit
union is an important justification for the tax exemption. Few, if any,
critics would argue that all credit unions should be subject to
taxation. Instead, opponents try to distinguish between large credit
unions--which they argue should pay taxes--and small institutions with
limited assets and basic services.
Subchapter S corporations, however, enjoy the exemption from
corporate level income taxes without any restraints, real or proposed,
on their asset size. Currently, there are four main requirements to
qualify as a Subchapter S bank:
The total number of shareholders cannot exceed 100;
Second, shareholders must be individuals or other certain
trusts;
Third, the corporation can issue only one type of stock
and;
Fourth, the bank may not use the reserve method of
accounting for bad debts.
As the requirements make clear, banks may qualify as Subchapter S
corporations, and reap the tax benefits, regardless of their asset
size, or the services they provide. It would be inequitable to impose
an income tax on not-for-profit, cooperative credit unions based on
asset size, while for-profit Subchapter S banks--operating with fewer
regulatory restrictions--remain untaxed regardless of their size or the
sophistication of the services they provide.
Conclusion
In summary, the structure, philosophy and guiding principles for
credit unions, large and small, remains the same today as it was in
1937; i.e., they continue to be member-owned, democratically-
controlled, not-for-profit cooperative organizations managed by
volunteer boards of directors with the mission of meeting the credit
and savings needs of consumers, especially persons of modest means.
Thus, we believe there is more than ample justification for continuing
the federal income tax exemption for all credit unions, regardless of
size, charter type, field of membership or services offered.
Chairman THOMAS. Well, thank you, Admiral. Ms. May?
STATEMENT OF HARRIET MAY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, GREATER EL PASO'S CREDIT UNION, EL PASO, TEXAS, ON
BEHALF OF THE CREDIT UNION NATIONAL ASSOCIATION
Ms. MAY. Thank you. Good afternoon.
Chairman THOMAS. Push the button.
Ms. MAY. Got it. I know I always have to adjust this. Thank
you for this opportunity, Chairman Thomas, to speak before the
Committee. Thank you, Committee Members, for being here. I am
Harriet May, President and CEO of GECU of El Paso, Texas, and I
am testifying on behalf of the Credit Union National
Association. The GECU, formerly known as Government Employees
Credit Union, has served the families of El Paso County since
1932, when, at that time, 11 men pulled $5 a piece to serve
their fellow civil service employees. Today, we serve the needs
of over 247,000 members, with assets of over $1 billion. El
Paso's population is 82 percent Hispanic, with a median
household income of just under $30,000. Nearly 25 percent of
families live below the poverty level. Just over 43 percent of
our members have household incomes of less than $29,000. The
majority of our members are low-income, so our day-to-day
products and services, not just special products, must be
tailored to meet their unique needs.
So, Mr. Chairman, I confess GECU is one of those big, bad
billion dollar credit unions that the bankers claim have
morphed into something they were not intended to be; except,
quite honestly, they are wrong. They are wrong because GECU is
a relatively large credit union, by credit union standards, but
it is important to understand it operates under the same
philosophy, the same function, and is organized in the same
structural make up as occurred when it was set up in 1932 as do
other credit unions. It is this fact that justifies maintaining
the tax-exempt status of credit unions. My written testimony
addresses the issues laid out by the Committee for review,
making a strong case that credit unions earn their tax-
exemption each and every day. Let's be clear from the start.
The original reason for the credit union tax-exemption was
based on the positive nature of credit unions.
Since 1917, the tax-exemption has been reaffirmed a number
of times, most recently with strong statements in support from
both President Bush and Treasury Secretary Snow. Contrary to
rhetoric, the asset size of credit unions has never been the
basis for considering the imposition of Federal income
taxation. Additionally, whether or not credit unions make
business loans has no connection to tax-exemption. Since their
earliest days, credit unions have provided business loans to
their members. In fact, the first Federal statute limiting
member business loans was enacted in 1998. Recently, both the
U.S. Treasury and congressional studies have found that credit
unions are indeed fulfilling their purpose. Studies portray
credit unions as robust institutions with a specialized
structure serving identifiable groups of members. Meanwhile, in
1998, Congress recognized that there are five characteristics
that distinguish credit unions: member ownership, net worth
created by retained earnings, dependence on volunteers, and
not-for-profit basis of operations; and foremost, service only
to its members.
The findings concluded that credit unions are exempt from
taxation because of these characteristics and because they had
the specified mission of meeting the credit and saving needs of
consumers, especially, but not only, persons of modest means.
Even though taxing credit unions might result in $1.5 billion
in annual tax revenues, as described in my written statement,
consumers at credit unions and banks benefit approximately
$10.6 billion a year in the form of better rates on loans,
fees, and savings nearly because credit unions exist. As
member-owned institutions, credit unions endeavor to offer
products and services that their members need and want. As
technology results in more and better offerings, credit unions
must respond to their members' needs.
However, none of the core characteristics of credit unions
or rationales for the tax-exemption has anything to do with
credit union size, field of membership restrictions, the range
of services offered, or the extent to which credit unions might
not compete with financial institutions. Instead, they have
everything to do with the cooperative structure of credit
unions and their mission of providing affordable services to
American households. It is clear that credit unions play an
important role in our economy. Credit unions serve people of
all walks of life, at all economic levels. Credit unions
provide the public with a not-for-profit cooperative
alternative to the for-profit sector. Consumers benefit by
having access to lower cost services that might not otherwise
be available to them. The tax-exempt status of credit unions is
the glue that holds credit unions and their not-for-profit
approach cooperative financing together. If the tax-exemption
were removed, if 87 million Americans were forced to pay
additional taxes solely because of their ownership in the
credit union, it would lead to the end of a movement as we
know. Credit unions would become banks, and consumers would pay
a high price. Thank you, Mr. Chairman. I would be glad to
answer any questions.
[The prepared statement of Ms. May follows:]
Statement of Harriet May, President and Chief Executive Officer,
Greater El Paso's Credit Union, El Paso, Texas, on behalf of the Credit
Union National Association
EXECUTIVE SUMMARY
INTRODUCTION (Pages 1-4)
Although GECU is a relatively large credit union (by credit union
standards), and provides a wide range of services to meet the
particular and unique needs of its membership, it is important to
understand that it operates under the same philosophy, serves the same
function and is organized under the same structural make-up as all
other credit unions. It is this fact, repeated by credit unions of all
types and sizes across the nation who remain true to their historic
purpose and continue to provide the public need, that justifies
maintaining the tax-exempt status of credit unions.
This testimony addresses the issues laid out by the Committee for
review, including making a strong case that credit unions continue to
meet the needs of their members, as envisioned when credit unions were
created in the last century. The testimony also refutes many false and
misleading statements of the banking industry in its effort to
eliminate credit unions as a choice for America's consumers.
HISTORY OF THE TAX-EXEMPT STATUS (Pages 4-12)
The original reason for the credit union tax exemption was based on
the cooperative nature of credit unions. Today, credit unions continue
to exist as financial cooperatives, and their not-for-profit, tax-
exempt status helps to assure that credit unions fulfill their role in
the U.S. financial sector.
In fact, this credit union role, as a basis of the tax exemption,
dates at least from as early as 1917 in Massachusetts. Since then, the
tax exemption has been reaffirmed a number of times, including in 1935,
1936, 1937, 1951 and, most recently, in 1998. The 1951 reaffirmation is
significant because in that year Congress repealed the tax exemption
for mutual savings banks, specifically because these institutions had
strayed from their commitment to mutuality.
However, in 1969, Congress extended the unrelated business income
tax (UBIT) requirements of the Internal Revenue Code to cover a broad
array of otherwise tax-exempt organizations. State chartered credit
unions potentially became subject to UBIT under this action. (Federally
chartered credit unions (as federal instrumentalities) were
specifically exempt from UBIT.) From the start, this requirement has
raised some difficult issues that have yet to be addressed
satisfactorily by the IRS, particularly since IRS has never offered its
own articulation of the purpose of state-chartered credit unions'
federal tax exemption (which we believe is to enable these credit
unions to function as not-for-profit cooperatives offering financial
services that promote thrift). CUNA continues to work with the Service
to clarify this situation.
Contrary to banker rhetoric, credit unions were established to
serve the needs of working Americans, allowing them to pool their
resources in self-help financial organizations. This view is rooted in
the legislative history of the development of credit unions. In fact,
in 1934, a Senate report noted that there was a pressing need ``to
eliminate the loss of buying power which now results from the fact that
the masses of the people are obliged to look to high-rate money lenders
in time of credit necessity.'' Credit unions were formed to serve these
``masses,'' and are proud to have 87 million members today.
Never has the asset size of credit unions (which is often a
reflection of the number of members a credit union serves) been the
basis for considering the imposition of federal income taxation.
Additionally, while credit unions are specifically chartered to
serve the needs of individual members, since their earliest days credit
unions have provided business loans to those members. In fact, the
first federal statute limiting federal credit union business lending
was enacted in 1998 with the passage of the Credit Union Membership
Access Act (CUMAA).
Finally, credit union earnings are the only pot of money that would
be taxed at the end of the year. However, these earnings also stand as
a cushion to absorb any losses a credit union might incur through
changing economic conditions. Taxation would erode what credit unions
could build as this cushion and, depending on economic conditions,
could even undermine maintaining the net worth required by statute.
This cushion not only protects the credit union itself from future
challenges, but also protects the National Credit Union Share Insurance
Fund.
SERVING THEIR INTENDED GOALS (Pages 12-20)
Recent U.S. Treasury and congressional studies have found that
credit unions are, indeed, fulfilling their purpose. The U.S.
Department of the Treasury has conducted several detailed studies of
credit unions in the last eight years. These objective studies, which
were requested by Congress, are exhaustive and present detailed
analyses of the credit union system. The studies portray credit unions
generally as robust institutions with a specialized structure serving
identifiable groups of members.
Meanwhile, in 1998, the Congress wrote in the CUMAA ``findings''
that there are five characteristics that distinguish credit unions:
member ownership, net worth created by retaining earnings, dependence
on volunteers, not-for-profit basis of operations, and service only to
members.
The CUMAA congressional findings also concluded that credit unions
are exempt from taxation because of these characteristics and because
credit unions have ``the specified
mission of meeting the credit and savings needs of consumers,
especially (but not only) (parenthesis added) persons of modest
means.''
Credit unions put these characteristics to work every day by
serving all of their members, including those of modest means. In fact,
recent studies have shown that households using a bank and not a credit
union have higher incomes and wealth than do households using only a
credit union. Other studies, specifically of data collected under the
Home Mortgage Disclosure Act (HMDA), reveal that credit unions are
taking advantage of greater opportunities to serve low- to moderate-
income members (something they only attained the ability to do broadly
within the last 10 years) and disproportionately serve LMI borrowers.
Finally, credit unions of all types remain restricted in who can
join--either by community, occupation, association or some other
``common bond,'' despite rhetoric to the contrary by America's bankers.
USE OF THE TAX BENEFIT (Pages 21-23)
Credit unions employ the tax benefit by passing it through to their
members, primarily in lower rates on loans, lower fees (or none at all)
and higher returns on savings. The nation's 87 million credit union
members benefit by $6.3 billion a year as a result of paying fewer and
lower fees and lower loan rates and earning higher rates on deposits
compared to banking institutions. This $6.3 billion is not retained by
just a few large stockholders. Instead it is distributed across all 87
million members based on their usage of the credit union. In fact,
relatively more of the benefit accrues to lower income members than
would be explained by their volume of business at the credit union
because credit union pricing tends to be friendlier to lower balance
accounts than at banks and alternative financial institutions.
Additionally, there are also significant financial benefits to
consumers that are not members of credit unions. Recent studies have
shown that bank customers benefit in the aggregate by $4.3 billion a
year as a result of lower loan rates and higher deposit rates at banks
as a result of the existence of credit unions. In total then, bank
customers and credit union members benefit to the tune of at least
$10.6 billion a year merely because credit unions exist.
CHANGES IN THE INDUSTRY HAVE NOT COMPROMISED JUSTIFICATION OF RETAINING
THE TAX EXEMPT STATUS (Pages 23-28)
As member owned institutions, credit unions endeavor to offer
products and services that their members need and want. And as
technology results in more and better offerings, credit unions must
respond to meet their members' demands, so long as they are permissible
by law and regulation. In fact, over the years the National Credit
Union
Administration, like the bank and thrift regulators, has on
occasion amended its regulations to permit credit unions more
flexibility to serve their members better.
However, there is no question that while credit unions may offer
products and services provided by banks and thrifts in response to
their members' needs, credit unions operate under serious constraints.
As concluded by the Treasury in a recent report:
Federal credit unions generally operate within the same legal
framework as other federally insured depository institutions. Most
differences between credit unions and other depository institutions
derive from the structure of credit unions. Credit unions have fewer
powers available to them than do banks and thrifts.
Further, the relative size of a credit union, or the products and
services it offers, does not affect its mission. Because of their size
and efficiency, large credit unions are often more able to provide the
benefits of the cooperative to members, such as lower loan rates and
fees and higher dividend rates. Larger credit unions are also more able
to offer special programs benefiting low- and moderate-income
households.
However, none of the core characteristics of credit unions or
rationales for credit unions' tax exemption has anything to do with
credit union size, field of membership restrictions, the range of
services offered, or the extent to which credit unions might not
compete with other financial institutions. Instead, they have
everything to do with the cooperative structure of credit unions and
their mission of providing affordable services to American households,
especially those of modest means.
CONCLUSION (Page 29)
It is clear that credit unions play a powerful role in our economy.
Credit unions serve people of all walks of life at all economic levels.
Credit unions provide the public with a not-for-profit, cooperative
alternative to the for-profit sector. Consumers benefit by having
access to lower cost services that might not otherwise be available to
them, especially those of modest means. And the facts show that the
banking industry, which is engaged in an effort to put credit unions
out of business, continues to mislead Congress into thinking that their
very existence is threatened because of credit unions and their tax
status. But banks continue to earn record profits.
Recent oil industry ads in the Washington Post illustrate this
fact. The ads point out that in fact the banking industry recorded the
highest profits of all U.S. industries during the second quarter of
2005--even more than the pharmaceutical industry. While the banking
industry continues earning record profits, credit unions provide a
nearly 7-to-1 return to consumers on the dollar, benefiting them by
over $10 billion dollars in yearly savings.
Credit unions are an important part of the financial life of
American consumers. And the tax-exempt status of credit unions is the
glue that holds credit unions and their not-for-profit approach to
cooperative financing together. If the tax exemption were removed--if
87 million Americans were forced to pay taxes solely because of their
membership in a credit union--it would lead to the end of the movement
that we know. Credit unions would become banks, and the consumers would
pay dearly, not only in higher taxes, but in higher fees, less return
on their savings and borrowings and the loss of a cooperatively owned,
not-for-profit alternative in the financial services marketplace.
Good morning, Mr. Chairman, Ranking Member Rangel, and members of
the Committee. On behalf of America's Credit Unions and their 87
million members, thank you for inviting me to testify today on ``A
Review of the Credit Union Tax Exemption.'' I am Harriet May, President
and CEO of GECU in El Paso, Texas. I am testifying on behalf of the
Credit Union National Association (CUNA), of which I am a member of its
Board of Directors. CUNA is the largest of the credit union trade
associations, representing over 90 percent of the nation's
approximately 9,000 state and federally chartered credit unions.
GECU (formerly know as Government Employees Credit Union) has
served the families of El Paso (TX) County since 1932, when 11 men
pooled $5 each to serve fellow postal workers. Over the years, the
credit union's reputation for providing caring, proactive service to
its members has made it the largest locally owned financial institution
in El Paso. Today, we serve the needs of over 247,000 members with just
over $1 billion in assets. That equates to just over $4,000 per member,
a rather low number that can be explained by El Paso's demographic
composition.
El Paso's population is 82% Hispanic with a median household income
of just under $30,000. Nearly 25% of the families live below the
poverty level. GECU's membership demographics mirror that of the
community. The credit union serves 247,000 members--a third of every El
Pasoan. Just over 43% of our members have household incomes of $29,000
or below.
With these demographics, GECU has not developed ``special''
programs to reach the underserved or low income. Rather, we recognize
that because the majority of our community and the members we serve are
low-income, our day-to-day products and services must be tailored to
meet their unique financial needs.
We serve our members' lending needs with non-traditional products
and services:
Consumer Loans
Ready Credit line of credit--low-balance line of credit
for member emergencies and other small-dollar needs. Typical loans
range from $200 to $800 with the average being about $500.
Small dollar loans--GECU continues to make loans to
members to meet their needs even if the amount is only $200. This type
of loan would not be considered extraordinary, but rather ``normal''
for our membership. It is not atypical to provide a loan for a member
to purchase dentures or eyeglasses. For the year 2004, GECU funded
1,329 small-dollar loans for $518,948, an average balance of only
$390.48. As one member responded in a recent member satisfaction
survey, ``Doy gracias porque es el unico banco que nos presta dinero en
caso de emergencia con bajo interes. Gracias por todo.'' L. Ramirez.
(``I give thanks because you are the only ``bank'' that loans us money
in emergencies with low interest. Thank you for everything.'')
MasterCard First--designed particularly for those needing
to rebuild their credit and for individuals desiring to establish
credit
FamilyAccount MasterCard--GECU piloted this product for
MasterCard. The card enables the cardholder to allocate spending limits
for family members who in turn receive their own card and unique
account number which they can use to make purchases up to their
spending limit. Primarily designed for college-bound students in El
Paso, the product serves another segment of our population--parents and
other older relatives. With the Family Account MasterCard, the
cardholder is able to provide financial assistance for his or her
parents without stripping them of their independence.
Through July of this year, GECU has funded nearly $38
million in mortgage loans to El Paso families; 83% of all first lien
mortgage loans have been made to Hispanics; 40% of those loans were to
households with income less than $38,400.
Additionally, through July of this year, GECU has funded
nearly $11 million in mortgage loans through Fannie Mae special
programs, ``Expanded Approval'' and ``My Community'', both of which
provide additional financing opportunities for low-income families who
would not otherwise be eligible.
GECU has been very active in El Paso City Bond Money
programs, providing members with down payment assistance and lower
interest rates for homes purchased in targeted areas of town. The
credit union won another $3 million in September of this year and as of
October 21 there is already $1.3 million in the pipeline. The entire
allotment would have already been claimed if there weren't a current
shortage of dwellings from which to choose in our community.
GECU is the predominant provider of vehicle loans in El
Paso, having earned a reputation for lower interest rates and finding
ways to put members in new vehicles without putting unnecessary burdens
on their monthly obligations.
Small Business Loans
In response to member requests, GECU began offering small
business loans to our members two years ago. Based out of the One Stop
Business Resource Center in El Paso, staff works with small businesses
to provide loans for working capital, expansion and inventory. We work
closely with Accion, the Hispanic and Greater Chambers of Commerce, and
other not-for-profit organizations dedicated to the success of small
business in El Paso.
Deposit Products
GECU offers Free Checking (no monthly service fee; no fee
for excessive check writing).
We also offer ``The No Excuses Savers Club''. This
product enables beginning savers to open a 12-month CD with just $50.
The product earns the prevailing 12-month CD rate and allows multiple
deposits during the term of the CD (minimum $10). As of July, we have
over 5,362 accounts totaling over $6 million with an average balance of
$1,129--quite an accomplishment for our typical member, nearly all of
which are of modest means.
We offer a Christmas Club Account that enables members to
save for the holidays in a 9-month CD that they appreciate because the
money is ``off-limits'' until it matures. This helps members develop
savings discipline.
IRNet Vigo--GECU was the first credit union in Texas to
offer this low-cost alternative for wiring of money, designed
especially for credit unions, to foreign countries. Our members
especially appreciate being able to send money to their families in
Mexico for a fraction of the cost of other wire transfer services.
Financial Education
GECU offers monthly financial education classes in
English and Spanish through the El Paso Affordable Housing Credit Union
Services Organization (CUSO). Participants learn the basics about
credit and how to apply for a mortgage loan. The CUSO was formed in
2001 by 8 local credit unions to provide education to credit-challenged
individuals with the goal of eventually preparing them for home-
ownership.
The credit union also hosts quarterly seminars for first-
time homebuyers hosted by our own mortgage loan officers. These
seminars are offered in English and Spanish.
GECU's Financial Counseling experts, full-time employees
of GECU, educate members about developing realistic budgets and
strategies for debt-free living.
Through year-end 2004, Financial Counselors served 637
members with $2.8 million in the program.
GECU also partners with the YMCA with their Consumer
Credit Counseling program; YMCA staff works out of one of GECU's
branches to serve families with credit counseling needs.
GECU works to begin the financial education process early
and is active with local Partners in Education programs, Junior
Achievement and the CTAC (Career Technology Advisory Committee)
GECU staff takes the message of financial education to
the airwaves as well. Two of our senior managers are frequently asked
to appear on a local morning Spanish-language talk show where they
provide educational information about financial products and services
to listeners.
Being a locally-owned, locally-managed financial institution
benefits the community in many ways. The credit union philosophy of
``people helping people'' is more than a notion, it is our commitment
to GECU's membership and it is evidenced by the credit union's current
loan to deposit ratio of over 98%. Nearly every dollar deposited by a
GECU member has been loaned out to another GECU member; the money stays
in El Paso and is put back to work for El Pasoans--their families and
their businesses.
Mr. Chairman, as the Committee conducts its important oversight
function, I wanted to make sure I provided you with the backdrop for my
credit union, which, although large by credit union standards, operates
under the same philosophy, serves the same function, and is organized
under the same structural make-up as all other credit unions.
In that spirit, Mr. Chairman, I welcome the opportunity to assist
the Committee in its review of the history and purpose of the credit
union tax exemption. The fact is that the credit union tax exemption is
one of the best investments Congress has ever made on behalf of the
American consumer. Credit unions of all types and sizes remain true to
their historic purpose and continue to provide the public need that
justifies maintaining the tax-exempt status of credit unions.
My testimony today will address the specific issues you laid out in
the Committee Advisory notice. In addressing these issues, I will
clearly review the history of why credit unions are tax exempt, as well
as make the case that while the nation has undergone many changes in
the century or so that credit unions have existed, the need for them
continues today and credit unions continue to meet that need. I also
will refute the many false and misleading statements of the banking
industry in its effort to eliminate credit unions as a choice for
America's consumers.
HISTORY OF THE CREDIT UNION TAX-EXEMPT STATUS
The Cooperative Structure of Credit Unions
At the outset, it is important to establish that the original
reason for the credit union tax exemption was based on the cooperative
nature of credit unions. Credit unions today continue to exist as
financial cooperatives, and their not-for-profit, tax-exempt status
helps to assure that credit unions fulfill their role in the U.S.
financial sector.
The Federal Credit Union Act defines a federal credit union as a
cooperative association chartered ``for the purpose of promoting thrift
among its members and creating a source of credit for provident or
productive purposes,'' language that has not changed since 1934.
Cooperative banking was needed because consumers in the 1930's were not
typically served by the commercial banking industry but rather by loan
sharks. Senator Morris Sheppard, the key Senate proponent of credit
union legislation in the 1930's, said in his remarks when introducing
the bill that would eventually become the Federal Credit Union Act of
1934:
``A credit union is a cooperative bank--supplying its members with
(1) an excellent system for accumulating savings which enables them (2)
with their own money and under their own management to care for their
own short-term credit problems at normal interest rates with all the
resultant earnings reverting to the members as dividends on their
savings in the credit union and as surplus.''
These words could just as accurately be said today about the
nation's 9,000 federal and state credit unions.
The 1934 Senate report on the federal credit union bill stated:
``Credit unions also have vast educational values. The fact that credit
unions of working men and women, managed by fellow workers have come
through the depression without failures, when banks have failed so
notably, is a tribute to the worth of cooperative credit and indicates
clearly the great potential value of rapid national credit union
extension.''
Credit unions continue to operate as democratically controlled
mutual institutions, serving their members on a non-profit basis.
Credit unions do not have separate groups of customers and stockholders
with competing interests--obtaining reasonably priced financial
services versus assuring good stock prices and returns. Rather than
distributing net income among stockholders, most of a credit union's
income is returned to members in the form of lower loan rates and fees,
or higher yields on savings (and credit union dividends paid to members
are, of course, taxed). Some earnings are retained by the credit union
to comply with statutorily mandated net worth requirements and as a
cushion to anticipate future needs.
So, in spite of revisionist attempts to rewrite history, since its
inception, the credit union tax exemption has had nothing to do with
the size of a credit union, field of membership restrictions, or the
types of services a credit union offers.
Chronology of Credit Unions' Federal Tax-Exemption
The first credit union law was passed by Massachusetts in 1909.
Federal revenue laws in 1913 and 1916 contained exemptions for some
mutual and cooperative entities, but did not mention these new state
chartered ``credit unions'' by name. Therefore, in 1917 the U.S.
Attorney General ruled that Massachusetts credit unions were exempt
from federal income tax because:
[O]n examination of the purpose and object of such associations, it
appears that they are substantially identical with domestic building
and loan associations or cooperative banks `organized and operated for
mutual purpose and without profit' [the Attorney General quoting from
the 1916 statute]. It is to be presumed that the Congress intended that
the general terms used in Section 11 should be construed as not to lead
to injustice, oppression, or an absurd consequence.
The 1917 Attorney General ruling served as the basis for the
exemption of state chartered credit unions from federal income taxes
until 1951. By 1934 there were over 2,000 credit unions operating in
the United States, chartered by 35 states and the District of Columbia.
The Federal Credit Union Act of 1934 allowed the states to tax
federal credit unions only up to the maximum rates levied on similar
domestic banking institutions.
In June 1935, in response to an inquiry from the Farm Credit
Administration, which regulated federal credit unions at that time, the
Internal Revenue Commissioner ruled that federal credit unions would be
granted exemption from federal income tax.
In 1936 legislation was introduced to prohibit state and local
taxation of federal credit unions not based on real or tangible
property, and to provide credit unions an exemption from federal
taxation. The tax provision that passed in 1937 remains unchanged since
that time. Section 122 of the Federal Credit Union Act (12 USC Section
1768) reads as follows:
The Federal credit unions organized hereunder, their property,
their franchises, capital, reserves, surpluses, and other funds, and
their income shall be exempt from all taxation now or hereafter imposed
by the United States or by any State, Territorial, or local taxing
authority; except that any real property and any tangible personal
property of such Federal credit unions shall be subject to Federal,
State, Territorial, and local taxation to the same extent as other
similar property is taxed--
The arguments in support of the tax exemption were summed up in the
1937 House Committee Report:
Experience with Federal credit unions since the passage of the
original [1934] act indicates that the taxation of these organizations
in a manner similar to the taxation of domestic banks places a
disproportionate and excessive burden on the credit unions. . .As
Federal credit unions are mutual or cooperative organizations operated
entirely by and for their members, it appears appropriate that local
taxation should be levied on the members rather than on the
organization itself.
At the same time that Congress provided for the federal credit
union tax exemption, it designated federal credit unions as fiscal
agents of the United States, required to perform whatever services the
Secretary of the Treasury required in connection with the collection of
taxes and the lending and repayment of money to the U.S. government
(Section 121 of the Federal Credit Union Act, 12 USC Section 1767).
When designated, federal credit unions can be depositories of public
money, and some credit unions today hold federal tax and loan accounts,
typically used by employers to deposit periodic payroll taxes due to
the U.S. Treasury. This provision of the Federal Credit Union Act led
to the formal designation of federal credit unions as instrumentalities
of the United States government. This designation as a federal
instrumentality is significant in determining which section of the Code
governs federal credit unions' tax-exemption and in exempting federal
credit unions from the application of the unrelated business income
provisions of the Code.
Federal credit unions are exempt under Section 501(c)(1) of the
Internal Revenue Code because they meet the three requirements of that
subsection of the Code: They are chartered by Congress (through the
authority granted to the National Credit Union Administration); they
are federal instrumentalities; and the law they operate under (the
Federal Credit Union Act) specifically grants an exemption. National
banks are also federal instrumentalities, but they are for-profit
institutions and Congress has not included in the National Bank Act a
tax exemption for national banks.
Mutual Thrifts' Loss of Tax-Exemption
In 1951, the tax treatment of mutual thrifts and credit unions
diverged for a very good reason: mutual thrifts had strayed from their
commitment to mutuality, whereas credit unions have remained true to
that commitment. The Attorney General's 1917 ruling had continued to
provide the tax-exemption for state chartered credit unions until 1951.
In 1951 Congress repealed the income tax exemption of mutual savings
banks because they competed with taxed institutions and because they
engaged in widespread proxy voting schemes to control boards. Voting is
based on the amount a person has on deposit, not on the basis of one-
member-one-vote as is the case with credit unions. This voting system
allows a group to control the mutual thrift, and therefore to make
business decisions for their own personal pecuniary rewards, not as a
not-for-profit organization. The U.S. Treasury stated the following in
its 2001 comprehensive report on credit unions:
In 1951, however, Congress removed the thrift tax exemption because
these institutions had evolved into commercial bank competitors, and
had lost their mutuality, in the sense that the institutions' borrowers
and depositors were not necessarily the same individuals.
Although deciding to eliminate the tax-exemption for other mutual
financial institutions in 1951, Congress specifically retained the tax-
exemption for state chartered credit unions by adding to the list of
exempt organizations Section 501(c)(14)(A): ``Credit unions without
capital stock organized and operated for mutual purposes and without
profit.'' While this Code provision does not specifically reference
state chartered credit unions, federal credit unions were exempt from
federal income tax since 1937 under Section 501(c)(1), so this
subsection only applies to state chartered credit unions.
No credit union issues stock, and therefore no credit union has
stockholders. Credit unions have members, called shareholders because
of the requirement to purchase a share in the credit union as the
indicia of membership and ownership. No one can borrow directly from
the credit union without becoming a member. Credit unions can only
build up capital (``net worth'') through earnings retained after
covering expenses, including paying members for their savings through
dividends. (Credit union dividends are treated by the Internal Revenue
Service for reporting and taxing purposes as identical to interest paid
by bank customers on their savings.)
The Federal Credit Union Act assures that mutuality is maintained
because the Act mandates the membership requirement and that each
member of the federal credit union have one vote to elect the credit
union's unpaid board of directors, regardless of the amount of savings
at the credit union. The standard federal credit union bylaws, issued
by the National Credit Union Administration, dictate election
procedures in conformance to the Act. In short, credit unions'
commitment to mutuality is firmly embedded in the laws governing them.
When, in 1951, Congress determined that mutual savings banks had
become competitors with taxed institutions, the thrifts actually
accounted for a greater share of household savings deposits than banks
did. They were indeed significant competitors with banks. Today, in
comparison, credit unions represent only a tiny fraction of the
combined deposits of credit unions and banking institutions.
Unrelated Business Income Taxes
Not all credit unions are exempt from all federal income taxes. In
1969 Congress extended the unrelated business income tax (UBIT)
requirements of Sections 511-514 of the Internal Revenue Code to cover
a broad array of otherwise tax-exempt organizations. State chartered
credit unions potentially became subject to UBIT. Federal credit unions
are not subject to UBIT because federal instrumentalities are
specifically exempt from Sections 511-514. It is totally logical that
federally chartered credit unions are exempt from UBIT because Congress
establishes the powers of a federal credit union in the Federal Credit
Union Act and has not authorized any activity that it believes is
unrelated to the purpose of a credit union. Federal credit unions are
not required by the IRS to file the Form 990 that other tax-exempt
organizations are required to file. In response to the banking
industry's call for 990 filings by all credit unions, we wrote to the
Ways and Means Committee in July 2004, explaining why such a filing is
not required and not necessary for federal credit unions. State
chartered credit unions do file 990 forms, either individually or as
part of a group 990 form filed by their state regulator or trade
association, as permitted by the Service.
From the start, the application of UBIT to state-chartered credit
unions raised some difficult issues that have yet to be addressed
satisfactorily by the IRS.
UBIT applies to a trade or business regularly carried on by a
state-chartered credit union, where that trade or business is not
substantially related to the purpose of the credit union's tax
exemption. We believe that the purpose of state-chartered credit
unions' federal tax exemption is to enable them to function as not-for-
profit cooperatives offering financial services that promote thrift.
However, the IRS has never offered its own articulation of the purpose
of the exemption. Without that piece of the puzzle, it is very
difficult for credit unions to know what products and services are
unrelated to their tax--exempt purpose.
To make matters worse, what little guidance the IRS has issued on
this subject over the years has been sporadic, isolated, and
contradictory. In the 1970s, for instance, the Service issued a small
number of private letter rulings indicating that various insurance
products were not subject to UBIT. In 1995, however, the IRS issued
another private letter ruling that seems to contradict the earlier
ones. Of course, even private letter rulings are of limited utility, as
they are regarded as applying only to the organization to which the
letter is addressed. Credit unions have been left wondering what to do.
We have tried diligently to address the problem with the IRS. In
1997, CUNA and other credit union organizations formally wrote to the
IRS, challenging the conclusion of the 1995 private letter ruling and
requesting guidance applicable to all credit unions.
The IRS has yet to respond to our 1997 request for guidance.
Several years ago, the Service started to audit dozens of credit
unions, questioning if they should be filing a Form 990-T, which is
required for any tax-exempt organization with more than $1,000 of gross
income from unrelated business activities. Numerous activities were
cited by the field staff as being possibly subject to UBIT; the IRS
field staff turned to the central IRS office for guidance. We have been
discussing this issue with the Service for some time, and we understand
that the IRS hopes to provide some guidance to its own staff next year.
UBIT is a complicated area, and we think it is unreasonable to
expect any credit union to be filing 990-T forms until adequate, public
guidance is issued. The IRS Exempt Organization division recently
released a listing of its FY2006 plans, which implies that it has
possible problems with some state chartered credit unions complying
with the UBIT requirements. We are concerned that the IRS may now be
planning to hold credit unions responsible for taxes that they could
not have known they owed--and that the IRS has yet to articulate a
coherent theory of what is and is not subject to UBIT.
Recent Congressional Reaffirmation of Credit Unions' Tax-Exempt Status
In 1998, Congress overwhelmingly approved the Credit Union
Membership Access Act, which reaffirmed the tax treatment of credit
unions. CUMAA stated:
The Congress finds the following: (4) Credit unions, unlike many
other participants in the financial services market, are exempt from
Federal and most State taxes because they are member-owned,
democratically operated, not-for-profit organizations generally managed
by volunteer boards of directors and because they have the specified
mission of meeting the credit and savings needs of consumers,
especially persons of modest means.
Serving Working America
The Federal Credit Union Act was enacted by Congress during the
depths of the Great Depression. The law's preamble said the purpose of
the legislation was ``to establish a Federal Credit Union System, to
establish a further market for securities of the United States and to
make more available to people of small means credit for provident
purposes through a national system of cooperative credit, thereby
helping to stabilize the credit structure of the United States.''
That fleeting reference to ``people of small means'' was the only
mention of that term in the entire statute. (Many state credit union
laws do not mention this term at all.) Bankers cite these few cryptic
words to say that credit unions were chartered to serve only people at
the low end of the income scale. As the legislative history indicates,
however, Congress created a national system of credit unions to address
the credit and savings needs of working Americans, allowing them to
pool their resources in self-help financial organizations.
In 1934 basically there were rich people, served by the banks that
survived in the 1930's, and everyone else who were at the mercy of loan
sharks. As the 1934 Senate report on the federal credit union bill
stated, there was a pressing need ``to eliminate the loss of buying
power which now results from the fact that the masses of the people are
obliged to look to high-rate money lenders in time of credit
necessity.'' Credit unions were formed to serve these ``masses,'' and
are proud to have 87 million members today. The commercial banking
industry didn't seem to decide until the 1960's that it could make a
profit off of the everyday financial needs of the typical American
consumer.
When he introduced his credit union bill in 1934, Senator Sheppard
cited the success of the 2,200 state chartered credit unions: ``While
these credit unions--are managed by the working people and the farmers
who compose them, they have come through 3 years of extreme depression
with practically no failures, establishing the finest record ever
established by any form of banking in times of similar stress. . . .
This bill is offered as a substantial contribution to a better banking
system for average city workers and farmers. It would greatly stimulate
the spread of a form of cooperative banking, which has met every test
of the depression successfully.''
Senator Sheppard in his introductory remarks cited the success of
state chartered credit unions composed of: postal workers; railroad
workers; city employees; telephone workers; members of the National
Grange; and the American Legion. Looking at the largest credit unions
today, they are based on similar memberships composed of: America's
military services; federal, state and local government employees;
airline transportation employees; utility company employees; and so
forth. The common denominator of the credit union member of the 1930's
and the credit union member of the 21st century is he or she is part of
working America. Morris Sheppard, Wright Patman and the other members
of Congress who advocated in the 1930's the development of a national
credit union system would be very proud to see their handiwork today.
Credit union charters based on community, associations or
employment existed prior to 1934, and the new Federal Credit Union Act
also recognized these various types of charters. However, charters
based on employee groups were by far the most viable because they
consisted of people who were employed and were the easiest to organize
into a critical mass of participation. Therefore, most credit union
charters issued in the decades following 1934 were for employee groups.
Obviously, the U.S. economy has changed in 70 years. In the 1930's, one
in five U.S. workers was employed on farms; today, that ratio has
fallen to one in forty. In the 1930's, the service sector accounted for
only one-third of the work force; today it represents more than 80% of
all workers, many working for small businesses. It was not until the
early 1980's--faced with a serious recession, a changing workplace, and
the threat to safety and soundness both to individual credit unions and
the National Credit Union Share Insurance Fund (created in 1970)--that
many credit unions began to change to multiple employee group charters
or community charters.
The asset size of a credit union, which is typically a reflection
of the number of members a credit union serves, also has never been and
should never be the basis for considering the imposition of federal
income taxation. Interestingly, Roy Bergengren, a founding father of
the U.S. credit union movement, testified to the Senate Banking
Committee in 1933 that in some states some credit unions ``are now
bigger than the average bank in the State.''
Serving Member Businesses
Some people are of the mistaken belief that credit unions did not
get the authority to offer business loans until the passage of the
Credit Union Membership Access Act in 1998. On the contrary, credit
unions have offered what we now think of as business loans from their
earliest days. In fact, CUMAA limited for the first time by statute how
much business lending a federally insured credit union can do. Until
NCUA issued a member business loan regulation in 1987, the only
restriction on business lending by a federal credit union was found in
its bylaws.
It was no secret to those involved in passage of the Federal Credit
Union Act in 1934 that business loans were commonly made by certain
credit unions, depending on their field of membership. Roy Bergengren
said to the Senate Banking Committee in 1933 that credit unions
promote: ``--the public good by developing thrift through the credit
unions, solving the short-term credit problems of the worker, the small
business man, and the farmer, freeing them from the usurious money
lenders and teaching sound economic lessons at a time when such
teaching is very essential'' (emphasis added).
In fact, the 1934 law said that federal credit unions' purpose was
``creating a source of credit for provident or productive purposes.''
This language anticipated that business loans would be made by federal
credit unions, since state chartered credit unions had been making
business loans since first chartered in 1909. For instance, here is a
Boston advertisement from around 1912:
The Industrial Credit Union encourages borrowing by its members,
when it will enable them--(2) To become established in business.
Examples: The purchase of tools for a mechanic. The giving of
sufficient credit to a member to enable him to start a business where
he must put out money for wages, bonds, running expenses, etc. The
buying for cash of plant, good-will or stock in trade.
Roy Bergengren documented in 1923: A loan for a World War I veteran
to start a junk business; a loan to another veteran to buy a truck to
fix machines; a loan to a widow to buy stenography equipment; and a
loan to a man to buy a variety store in his neighborhood with follow-up
loans for improvements and goods. In 1924, in a meeting seeking to
organize financial cooperatives, the keynoter said a basic need in
obtaining federal legislation is to make loans for ``thrifty or
productive use; that is, primarily for purposes that will enable
borrowers to repay their loans out of the increase of that for which
money is spent.''
A 1927 study on ``Why Workers Borrow: A Study of Four Thousand
Credit Union Loans,'' published by the federal government in its
``Monthly Labor Review,'' found that about 8% of the loans were to
``small business men who needed help to tide them over a dull period or
to expand when their business seemed to warrant it. Many of the
shopkeepers also borrowed in order to make cash payments on stock when
they could buy it more cheaply that way.''
In responding to NCUA's 1986 proposal to impose restrictions on
business lending by all federally insured credit, those credit unions
making business loans provided many examples. (Of course, then as now,
only certain credit unions engage in business lending, depending on
their fields of membership.) Here are a couple of examples from the
mid-1980's of the types of business loans being made by credit unions
at that time:
Northeast Community Federal Credit Union in San
Francisco: Loans to immigrants to open small businesses in the changing
``Tenderloin'' area of the city.
Santa Cruz Community Credit Union in California: Between
its founding in 1977 and in 1985, approximately $12 million of its $20
million in loans were made for business purposes (many for less than
$25,000). Example: A business loan to a small local newspaper for
capital expansion.
So contrary to any belief that Congress intended that credit unions
be precluded from making business loans to its members as a condition
of being tax-exempt organizations, the record clearly shows that for 25
years prior to the enactment of the Federal Credit Union Act in 1934
and for the 70 years after its enactment, certain federal and state
chartered credit unions have been an important resource for member
business loans.
Credit Unions Are Unique Among Cooperatives
Credit unions' earnings are the pot of money that would be taxed at
the end of the year. Taxation would erode what credit unions could
build as a cushion and, depending on economic conditions, could even
undermine maintaining the net worth required by statute. This cushion
not only protects the credit union itself from future challenges, but
also protects the National Credit Union Share Insurance Fund. Because
the full faith and credit of the United States stands behind the
NCUSIF, ultimately the American taxpayers pay if serious problems arise
in the financial market place. This is what happened when the federal
government had to spend billions of dollars to clean up the savings and
loan industry debacle of the 1980's.
Although both the NCUSIF and the Federal Deposit Insurance
Corporation (which insures bank deposits) are backed by the U.S.
government, only the NCUSIF requires the institutions it insures to
deposit an amount equal to 1% of their federally insured funds with the
U.S. Treasury and to replenish the 1% from their retained earnings if
financial troubles throughout the system require large NCUSIF payouts.
As credit unions grow, they are required to contribute more to maintain
their 1% deposit in the NCUSIF, and the added dollars count toward the
federal government's deficit reduction. Therefore, the unique NCUSIF
capitalization system relies on well-capitalized credit unions that can
transfer funds to the NCUSIF in case of systemic problems. The FDIC
insurance program has no such safety net before it turns to the
Congress for appropriated funds.
Other cooperatives don't have the full faith and credit of the
United States ultimately standing behind their ventures. Fortunately,
credit unions by their very nature--volunteer-lead, non-stock
cooperatives--are conservatively run because there is no personal
pecuniary interest in taking risks with other people's money, a key
credit union distinction from both stock and mutual banks. It would be
counterproductive to tax credit unions, thereby encouraging them to run
up expenses and otherwise reducing their net income subject to tax.
Although estimates of taxing credit union indicate that that about
$1.5 billion a year would be collected by the federal government, these
estimates apparently don't take into account fundamental changes that
inevitably would be made in credit union operations if taxed. For
example, there are 150,000 people who volunteer their services by
serving on credit union boards and committees to further the not-for-
profit mission of their credit unions. The Federal Credit Union Act
prohibits all but one volunteer from being compensated, and for the few
federal credit unions that provide any ``compensation,'' it is nominal.
Some states allow board compensation, but again any compensation
received by board members in those states typically is quite nominal,
if provided at all.
Since any compensation paid by a taxable organization is a
deductible expense, the question would quickly arise if a credit union
were taxed, ``Why not pay people who serve on boards of directors,
supervisory committees, credit committees, and other committees of the
credit union?'' This would lower the taxes due, but also undermine a
credit union's fundamental philosophy, ``People Helping People.'' And
anyone serving in any position for other than nominal compensation is
certainly driven by different motives than those who are volunteering
their services.
ARE CREDIT UNIONS SERVING THEIR INTENDED GOALS?
Treasury and Congressional Findings: CUs Fulfill Their Purpose
The U.S. Department of the Treasury has conducted several detailed
studies of credit unions in the last eight years. These objective
studies, which were requested by Congress, are exhaustive and present
detailed analyses of the credit union system. The studies portray
credit unions generally as robust institutions with a specialized
structure serving identifiable groups of members.
One of the most comprehensive studies, ``Comparing Credit Unions
With Other Depository Institutions,'' was issued in 2001. (The link to
the study is:
http://www.treas.gov/press/releases/reports/report30702.doc.)
In that study, the Treasury Department was asked to analyze, among
other issues, the ``potential effects'' of imposing federal tax laws on
credit unions in the same manner as they are applied to banks and other
financial institutions.
As part of its review, the study examined the history of the tax
treatment of credit unions, including Congress' rationale for the
credit union exemption. The Treasury Department concluded (on page 28
of the report):
Thus, the tax exemption was based primarily on the organizational
form of credit unions--.
The study observed that credit unions have grown larger in recent
years and have expanded the list of products and services they offer
their members. Nonetheless, drawing on the Credit Union Membership
Access Act (CUMAA, P.L. 105-219) and a 1997 Treasury report, ``Credit
Unions,'' the study concluded, remain ``clearly distinguishable from''
banks and thrifts in their organizational and operational
characteristics. Such characteristics are:
Credit unions are member-owned and each is entitled to
one vote in selecting the credit union's board and in other decisions.
Credit unions do not issue capital stock but create net
worth by retaining earnings.
While some credit unions have the legal authority to have
paid employees or other paid directors serve on their boards, credit
unions depend on volunteers elected by their members to serve as
directors.
Credit unions are not-for-profit and all earnings are
either retained as net worth or returned to the members in the form of
lower loan rates, dividends or interest on savings, bonus dividends or
similar uses.
Credit unions may ``only accept as members those
individuals identified in a credit union's articulated field of
membership.''
The study noted that while other types of institutions may exhibit
one or more of these characteristics, only credit unions exhibit all
five together.
Section Two of the congressional findings of CUMAA--legislation
enacted in 1998 to overturn the Supreme Court's ruling on field of
membership--lists these same attributes as the distinguishing factors a
credit union embodies.
The CUMAA congressional findings also concluded that credit unions
are exempt from taxation because of these characteristics and because
credit unions have ``the specified mission of meeting the credit and
savings needs of consumers, especially (but not only,) (parenthesis
added) persons of modest means''.
Congress further found, after probing hearings in the House
Financial Services Committee and Senate Banking Committee, that the
credit union movement in the United States began as a ``cooperative
effort to serve the productive and provident credit needs of
individuals of modest means.''
Congress further stated in its findings that ``Credit unions
continue to fulfill this public purpose. . . .''
Service To All Members, Including Those of Modest Means, Is the
Hallmark of Credit Unions
I began this statement by listing some of my own credit union's
services. Credit unions all across the country undertake considerable
efforts to serve the financial needs of individuals of modest means.
These programs include pro-consumer check cashing and other services
that provide alternatives to payday lending; beneficial savings plans;
financial counseling; financial management workshops; special home
mortgage and other tailored lending programs; and partnerships with
community organizations that serve low and moderate income families.
These initiatives are in addition to the favorable loan and savings
programs credit unions routinely offer their members. Many credit
unions will open a share certificate or savings account for $100 or
less and will grant a member a loan for a similar low amount--a
practice that is virtually unheard of at other financial institutions.
In addition, a number of credit unions provide technical support,
training, equipment, financial or other assistance to credit unions
that serve predominantly low and moderate income areas.
Throughout most of their history, credit unions have actually been
hamstrung in their efforts to serve members of modest means because
field of membership rules generally restricted eligibility to
occupational groups. It is only in the past couple of decades that
smaller employee groups because eligible for credit union service, and
even more recently that community charters became relatively accessible
for credit unions. Then just five years ago, the National Credit Union
Administration adopted an expedited program known as Access Across
America to permit federal credit unions to add underserved areas to
their fields of membership. Since the beginning of 2001, over 92
million potential members from underserved areas have been added to
credit union fields of membership. Credit unions acknowledge it will
take some time to reach out to and serve members in these communities.
However, in the three years ending December 2003, credit unions that
added such underserved areas experienced membership growth over three
times that of other credit unions (17.4% vs. 5.2% over the three year
period.)
The study, ``Who Uses Credit Unions,'' (Lee, Jinkook, University of
Georgia and Kelly, Jr., William A., University of Wisconsin-Madison)
which was updated in 2004, clearly shows that households of modest
means, as well as households in other income categories, rely on credit
unions to meet their financial needs. The study was based on the Survey
of Consumer Finance that is sponsored every three years by the Federal
Reserve Board.
Among other things, the study reviewed the median net financial
wealth of households, which it defined as total financial wealth less
credit card and other unsecured debt. This included deposit accounts,
mutual funds, securities accounts, savings, insurance, cash and other
financial assets.
The study found that households that use banks exclusively have a
median net financial wealth 2.7 times as much as households that use a
credit union exclusively. The median net financial wealth for a credit
union household was $7,900. The average annual income for households
that use credit unions only for their financial needs was $42,662
compared to $76,923 for households using banks only. Income could
include wages, salaries, interest income, unemployment compensation,
child support, alimony, welfare assistance and pension income.
The study's findings squarely refute the charge that bank customers
are less affluent than credit union members. ``Households using a bank
and not a credit union have higher incomes and wealth than households
that use only a credit union,'' the study points out.
The methodology of the study is significant because unlike other
studies, it reviewed consumer financial institution affiliations based
on five categories: households that use banks only and are not members
of a credit union (56% of the households); households that use both
banks and credit unions, but primarily use a bank (16%); households
that use both banks and credit unions but primarily use a credit union
(12%); households that use a credit union only (8%); and those that use
neither banks nor credit unions (6%).
The use of this model allowed the study to overcome the
deficiencies in other studies on credit union membership that compare
credit union members with non-members or compare credit union members
with bank customers.
The study also found:
At the top income brackets, we see a very high use of banks only,
which suggests that banks are particularly successful in gaining the
entire business of these households. However, households in the top
income brackets seldom use a credit union only. For example, in the
$100,000-$200,000 income category, households are 23 times more likely
to use only a bank than only a credit union and households with income
over $200,000 are 68 times more likely to use only a bank than only a
credit union. . . . Further among those that use a bank only, median
net financial wealth is higher than among households that use a credit
union.
The latest report from the Federal Reserve Board on Home Mortgage
Disclosure Act (HMDA) data (December 2004) also demonstrates credit
unions' service to those of modest means.
The HMDA data set provides a wealth of information on mortgages by
type of loan (such as refinancing and conventional loans) and the
socioeconomic characteristics of the applicant. The data provides
information on loan approvals and denials. It also shows the proportion
of approved loans that were actually granted.
The HMDA data over the past three years, ending in 2004, shows:
A rising proportion of mortgage loans originated by
credit unions are to low-to-moderate income (LMI) borrowers (those
whose household income is at 80% of median or less).
As a result, in 2003 and 2004, a greater proportion of
credit union mortgage loans were made to LMI borrowers than at other
lenders.
PROPORTIONS OF MORTGAGES ORIGINATED TO LMI BORROWERS
------------------------------------------------------------------------
2002 2003 2004
------------------------------------------------------------------------
Credit Unions 24.3% 25.4% 27.6%
------------------------------------------------------------------------
All Other Lenders 26.2% 25.4% 26.6%
------------------------------------------------------------------------
CU--Others -1.9% 0.1% 1.0%
------------------------------------------------------------------------
This is firm evidence that credit unions are taking advantage of
greater opportunities to serve LMI members and disproportionately serve
LMI borrowers.
In addition to the core fact that credit unions make a greater
portion of their loans to LMI borrowers than other lenders do, there
are a number of other indicators in the HMDA data that demonstrate
greater credit union service to LMI borrowers. While credit unions
serve a greater proportion of LMI borrowers than do other lenders, they
also provide more favorable treatment to LMI borrowers compared to
their treatment from other lenders.
Credit unions understand and appreciate that they have a special
purpose in helping to meet the financial needs of individuals of modest
means. Not only is the regulatory environment more conductive to
outreach, but also CUMAA facilitates credit union expansions to serve
the underserved. Key data already indicate credit unions provide
important service to individuals ignored or shunned by other
institutions and there is every indication that future data will
reflect the ever growing efforts of credit unions to serve those of
modest means.
In fact, just three days ago, here in Washington a group of credit
unions announced a near billion-dollar new mortgage program targeted
specifically at our lower income members. This program has been under
development for the past year. Under the program, which we are calling
Home Loan Payment Relief (HLPR, pronounced ``helper'') credit unions
will make loans to borrowers with incomes at or below the local area
median at rates that are a full percentage point below market for the
first three years of the loan. After that, therates will adjust to
market on anadjustable basis, with yearly limits on the increase of 1%
and a lifetime cap of 5%.
With the initial rate discount, credit unions are essentially
giving up their normal net income from these loans. The program will
enable thousand of modest means credit members to buy their first
house, without exposing them to the severe risks of such exotic loans
as short-term adjustable interest only loans. We expect this program to
grow to over $10 billion over the next several years.
Field of Membership as a Defining Characteristic of Credit Unions
Since their inception, credit unions have had limitations on whom
they could serve. Historically, these limitations had nothing to do wit
the tax exemption. But this is an appropriate occasion to address some
issues raised by the banking industry about field of membership.
A credit union's field of membership represents the persons,
organizations and other entities to whom and which a credit union may
legally provide its services. At the federal level, a credit union's
field of membership may be occupational--based on employment by the
same or related businesses; associational--based on membership in the
same association; multiple group--comprised of more than one group; or
based on one or more communities. Each group within a credit union must
have a common bond, which is the characteristic that distinguishes the
group from the general public. There are a number of other statutory
and regulatory restrictions that apply, regardless of the type of field
of membership a credit union chooses.
Some would have this Committee believe that field of memberships
have become so broad that virtually anyone can join any credit union.
That is far from the case. As a resident of El Paso, I cannot join a
credit union with a community charter in New York, regardless of how
large that community might be. As a credit union CEO, I cannot join
Navy Federal Credit Union, and my colleague from Navy Federal cannot
join GECU.
At the same time, comments from then NCUA Board Chairman Dennis
Dollar help illustrate why reasonable field of membership expansions
and the capability to add new groups is so essential to credit unions.
We have lost more credit unions, and particularly small credit
unions, because of lack of diversification of field of membership than
any other reason. If we are going to be effective with risk-management
in our credit unions, if we are going to be effective enabling credit
unions to diversify their risk to where the closing or downsizing of a
sponsor does not take away what would otherwise be a strong and
functioning credit union, we must have diversification in our field of
membership within the bounds of what the law allows.
Consistent with the bankers' record of attack, several issues
remain the subject of their criticism. One relates to the misconception
that CUMAA only permits groups of 3,000 or less to be added to an
existing credit union. This is inaccurate.
Groups with 3,000 or more members are eligible to join an existing
credit union if the NCUA determines in writing in accordance with
guidelines and regulations that the group would not be financially
viable and is unlikely to succeed as a new single common bond credit
union. (S. Rept. 105-193)
Another issue is how NCUA views ``local'' as the term applies to
the area a community credit union may serve. The fact remains that
Congress specifically authorized NCUA to prescribe a regulation
defining ``well-defined local community'' for credit unions that seek
to serve a community. NCUA was given this task because it has the
relevant expertise developed over decades of implementing field of
membership issues.
Community credit unions must meet all legal requirements, including
being well-defined by specific geographic boundaries. Under NCUA's
policies, ``If NCUA does not find sufficient evidence of community
interaction and common interests--additional documentation will be
required'' in order for NCUA to assess whether the community exists and
may be rejected if all requirements are not met.
Additionally, community credit unions must develop a detailed and
practical business plan. The plan must ``focus on the accomplishment of
the unique financial and operational factors of a community charter.
Community credit unions will be expected to regularly review and to
follow--the business plan'' which is also subject to review by NCUA
examiners.
As NCUA Board Chairman JoAnn Johnson stated, NCUA follows three
standards when implementing policy: it must be thoroughly consistent
with CUMAA; it must comply with recognized and historical safety and
soundness standards; and it must be implemented with a minim amount of
paperwork and unnecessary regulatory burden.
In responding to Congress's directive to prescribe requirements for
``well-defined local communities'' that is exactly what NCUA has done.
As stated by then NCUA board member Debbie Matz when the changes to
the agency's field of membership policy were adopted:
I am cognizant of the fact that the statute requires that a
proposed community credit union must comprise ``a local community,
neighborhood, or rural district.'' I have given a great deal of thought
to the concept of ``local community'' and what that really means in the
year 2003. I have concluded that times have changed and so has the
concept of local community. Years ago this might have been the
neighborhood in which one lived and worked--perhaps a few city blocks
or a town. In this age of advanced communications, accessible public
transportation and highway systems and regional shopping malls and
business centers, the larger community charters permitted in this
regulation are not, in my opinion, inconsistent with the statutory
requirements.
Further, I have concluded that size, in and of itself, should not
be a factor in determining the validity of a field of membership. It is
a commitment to the credit union philosophy of people helping people.
This is what credit unions are all about. I believe that one of the
distinguishing characteristics of credit unions is the wide array of
affordable financial services they offer: $200 loans to a family to
prevent their electricity from being turned off; risk-based lending as
an alternative to payday loans; branches in very-low-income
neighborhoods; and world-class financial literacy programs. Under this
rule, the size of a community is no longer the primary focus. Our
attention would shift to the real issue--how the credit union would
serve everyone in its field of membership.
Perhaps most importantly, larger fields of membership will permit
more people to join a credit union and I think that is a really good
thing. This (change) will permit credit unions to make their services
available to some of the 56 million people who do not have accounts in
insured financial institutions.
Despite rhetoric to the contrary, credit union membership has
demonstrable limitations. Nonetheless, as recognized by GAO, the
Treasury and others, CUMAA contains a number of provisions that
authorize credit union membership growth and expansion. NCUA's
obligation as the regulatory agency charged with implementing these
provisions is to permit credit unions to utilize the full extent of the
field of membership authority granted to them by Congress, which the
agency seeks to do. Any less from NCUA would be abrogating the
responsibilities bestowed on it by Congress.
None of this has the slightest bearing on the tax exemption issue.
Credit Union Member Business Lending Meets A Need that is Not Being
Fulfilled Elsewhere
Based on data from the Small Business Administration (SBA) and
elsewhere, credit unions that engage in member business lending often
fulfill borrowing needs that are not being met by other institutions.
Nonetheless, credit union opponents often focus their criticisms on
member business lending activities.
Under CUMAA, the Department of the Treasury was requested to review
a number of issues relating to credit unions' member business lending.
This included examining the extent to which member business lending
helps to meet the financial needs of low and moderate income
individuals. The study also considered whether credit unions that
engage in member business lending have a competitive advantage over
other financial institutions.
In January 2001, the Treasury issued its report, which indicated
then, as is the case now, that member business lending is consistent
with the purpose of credit unions; it does not represent the
competitive concern that banks claim it does; and it is an activity for
credit unions that is consistent with safety and soundness.
Under NCUA rules and statutory requirements, a member business loan
(MBL) is a loan, line of credit, or letter of credit under which the
borrower uses the proceeds for commercial, corporate, business
investment property or venture, or agricultural purposes. Loans fully
secured by 1-4 family residences and loans the total of which to an
individual are less than $50,000 are excluded. As part of CUMAA, credit
unions must limit their MBLs to the lesser of 1.75 times net worth or
12.25 percent of total assets. These limits were first imposed in 1998.
In its study, the Treasury found that 25 percent of the credit
union member business loans were made to members with household incomes
of less than $30,000. Another 20 percent of credit union member
business loans were to households with incomes between $30,000 and
$50,000. The study also indicated that member business lending does not
pose a material risk to the National Credit Union Share Insurance Fund.
The Treasury added:
``Business lending is a niche market for credit unions. Overall,
credit unions are not a threat to the viability and profitability of
other insured depository institutions.''
A major reason for the Treasury's conclusion is that credit unions
share of business loans is less than 1 percent of the market. Only
about 1,780 credit unions make member business loans, an increase of
about 170 credit unions from 1995. Also, the average size member
business loan at a credit union is around $155,000. A 2002 survey
conducted by the American Bankers Association showed that only 4% of
commercial banks viewed credit unions as their primary competitors in
business lending or other business financial services.
``Banks still dominate SBA lending,'' the American Banker newspaper
reported on October 27, 2005. ``More than a dozen banking companies
make more loans on their own than all credit unions combined in fiscal
2005. Bank of America Corp., for example, made nearly 12,000 worth $413
million.''
Citing the need for lenders to make more, small business loans, the
SBA has encouraged credit unions to participate in its 7(a) lending
program. Currently 103 credit unions make loans through that program;
the average loan size is around $109,000.
Treasury Secretary John Snow has also encouraged credit unions to
provide member business loans. In February 2004, the Secretary appeared
before the CUNA Governmental Affairs Conference and commended credit
unions:
Small business is at the foundation of this great economy, and
credit unions have been there for entrepreneurs when they needed you
the most. As of last year, credit unions were welcomed into the SBA
lending programs, and I hope that has helped out both you and America's
entrepreneurs as much as this Administration hoped it would. You know
as well as I do: small business is where the jobs come from. We
estimate that between two-thirds and three-quarters of recent net new
jobs are coming from that sector. That's why we want to make small
business tax cuts permanent, and that's why I want to commend the
credit union community for financing America's hard-working small-
business owners!
In February of this year, the Secretary reiterated his support:
You do good work. Loans to small business, home mortgages,
financial education and fighting the financial war on terror--each one
of these efforts is critical to our country's economic health and
strength, and I applaud you for doing good while you do business. We
don't want less small business lending.
Yet, that is exactly what banker groups envision for credit unions,
making fewer member business loans. If that happens, it won't just be
credit unions and their members that are harmed, but the small business
community and the economy.
USE OF THE TAX BENEFIT
There are significant financial benefits to members. The nation's
87 million credit union members benefit by $6.3 billion a year as a
result of paying fewer and lower fees and lower loan rates and earning
higher rates on deposits compared to banking institutions. This $6.3
billion is not retained by just a few large stockholders. Instead it is
distributed across all 87 million members based on their usage of the
credit union. In fact, relatively more of the benefit accrues to lower
income members than would be explained by their volume of business at
the credit union because credit union pricing tends to be friendlier to
lower balance accounts than at banks and alternative financial
institutions. For example, in 2004, considering a basic checking
account, 79% of credit unions had a no fee account compared to only 32%
of banks. Further, at those credit unions charging a fee, the monthly
average was less than half the average fee charged by banks, $4.21
compared to $8.56. Finally, the average minimum balance required to
avoid the fee at a credit union was $486, less than a third of the
average fee-avoiding minimum at banks of $1,645. Clearly, lower income
members receive significant benefits from their access to credit union
service.
There are also significant financial benefits to consumers that are
not members of credit unions. Based on the work of Professors Robert
Tokle of Idaho State University and Robert Feinberg of American
University, and also based on research from the Board of Governors of
the Federal Reserve, bank customers benefit to the tune of at about
$4.3 billion a year. This is the result of lower loan rates and higher
deposit rates at banks as a result of the existence of credit unions.
The effect of credit union presence on bank fees has not been
estimated, but undoubtedly would add to the $4.3 billion annual benefit
to bank customers.
Although bank customers benefit because of the existence of credit
unions, other financial institutions continue to thrive in the presence
of credit unions. The FDIC recently reported that banks recorded record
profits for the fourth year in a row.\1\ Aggregate bank return on
assets (ROA) has exceeded 1% for the past 12 years, averaging 1.23%.
And credit unions are only growing marginally faster than banks. In the
decade ending in 2004, total banking institution assets grew at a
compound annual rate of 7.25% compared to 8.4% for credit unions.
Credit unions now account for 6.2% of the combined assets of all
depository institutions. At the growth rates of the past decade, it
will take until the year 2053 for the credit union share to climb to
just 10%.
---------------------------------------------------------------------------
\1\ Federal Deposit Insurance Corporation, Quarterly Banking
Profile, Fourth Quarter 2004.
---------------------------------------------------------------------------
The health of the banking industry over the past decade has not
been confined to just large banks. In a 2003 conference, Federal
Reserve Gov. Mark Olson said: ``The year that just ended was one of
record profits for the industry as a whole, and for community banks in
particular--Community banking has a long history of strength and
success and a bright future. The past year was a good one for community
banks. Once again the vitality and adaptability of the community
banking franchise were amply demonstrated.'' \2\ Two Federal Reserve
economists have recently described the strong performance of the
nation's smaller banks. They found that ``small banks have grown
considerably more rapidly than large banks and have tended to meet or
exceed them in some measures of profitability.'' \3\
---------------------------------------------------------------------------
\2\ Comments before the 2003 Chicago Federal Reserve Bank
Conference: Whither the Community Bank?
\3\ William F. Bassett and Thomas F. Brady. The Economic
Performance of Small Banks, 1985-2000. Federal Reserve Bulletin,
November 2001.
---------------------------------------------------------------------------
In total then, bank customers and credit union members benefit to
the tune of at least $10.6 billion a year. That is seven times the
amount of revenue that would result from the taxation of credit unions.
The tax exemption is leveraged in this way because of the cooperative
structure of credit unions. When comparing banks to credit unions, the
amount that banks pay in dividends to stockholders is more significant
than is the tax exemption. Further, credit unions pay very little
compensation to directors, with the savings passed on to members.
Finally, credit unions' ratios for expenses and loan losses compare
very favorably to similarly sized banks.
Society benefits in a number of ways from the tax exemption of the
nation's not-for profit credit unions. Both members and nonmembers
benefit from the existence of credit unions. Part of that benefit stems
from having a sector of the financial services industry with the
provision of service to the less fortunate in our society as an
integral part of their strategic mission. This benefits the nation's
modest means households both directly through credit union services and
indirectly by serving as an example to other financial service
providers. In addition, the taxpayer is provided considerable
protection from risk of loss to the National Credit Union Share
Insurance Fund by virtue of the tax exemption. Credit unions also
provide an important source of loans to America's small businesses at a
time when credit from other sources is becoming less available.
Removing the tax exemption of credit unions would so change the
structure of the industry that within a few years, most credit unions
would either have become banks or would be operating very much like
banks. That would result in a significant loss of benefits to the
nation's 87 million credit union members.
Credit union members benefit both financially and non-financially
by virtue of their membership in a credit union. In terms of non-
financial benefits, they have the opportunity to belong to and
participate in a democratically controlled financial cooperative.
Further, they may volunteer to participate in the governance of their
financial institution. Crucial to credit unions is the control exerted
by the over 150,000 volunteers who serve on boards and committees.
Credit unions are also known for offering consumer education and
financial counseling services that would be threatened under taxation.
Evidence of the consistently strong level of member focus at credit
unions is found in the results of the annual American Banker newspaper
survey of financial institution customers. Credit union members have
for 21 years in a row given credit unions higher satisfaction ratings
than bank customers give banks. The cooperative structure really does
make a difference.
The tax exemption also serves to protect taxpayers from losses to
the share insurance fund. There are two important connections between
the stability of NCUSIF and credit unions' tax exemption. First, the
primary buffer for a deposit insurance system is the capital or net
worth maintained in insured institutions. Because credit unions have no
access to capital markets, their only source of capital is the
retention of earnings. A tax on net income would thus disincent credit
unions from retaining earnings, weakening protection for the NCUSIF. In
fact, the cost to the taxpayer of FSLIC's losses far exceeded the total
taxes paid by FSLIC insured institutions prior to FSLIC's failure.
Second, as cooperatives, credit unions have a systemic inclination
to avoid risky activities. Kane and Hendershott have shown that the
cooperative structure of credit unions presents credit union decision
makers with incentives that are strikingly different from those faced
by a for-profit financial institution, making it less feasible for
credit union managers to benefit from high-risk strategies.\4\ This is
an especially useful trait for federally insured depository
institutions.
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\4\ Edward Kane and Robert Hendershott, The Federal Deposit
Insurance Fund that Didn't Put a Bite on U.S. Taxpayers Journal of
Banking and Finance, 20(September, 1996), pp.1305-1327.
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Credit unions have a long history of providing business loans to
their members, although such loans represent a small portion of the
portfolio for most credit unions. However, at a time when research
published by the Small Business Administration finds that consolidation
in the banking industry is reducing credit access for small business,
the credit access provided by credit unions is even more important.
Society benefits in a number of ways from the existence of
cooperative, not-for-profit credit unions. These benefits would
gradually disappear were credit unions subject to federal income tax.
Credit union regulation, which is much more restrictive than that for
other financial institutions, includes: limits on who the credit union
can serve, limits on business lending, lack of access to capital
markets, etc. The tax exemption is the incentive that encourages credit
union CEOs and boards to continue to operate as credit unions rather
than throwing off the restrictions by converting to a bank charter.
Such conversions would only limit the range of choices available to
America's consumers, especially those of modest means.
CHANGES IN THE INDUSTRY HAVE NOT COMPROMISED JUSTIFICATION OF RETAINING
THE TAX EXEMPT STATUS
Credit unions have undergone changes similar to other industries
over time. With new technology, the advent of new products and
services, credit union members have demanded that their credit unions
provide them with access to all the benefits of a modern financial
service provider. Credit union membership trends have changed during
this time as well. Historically, credit unions were employer based, but
with changes in the economy and the closure of many plants, credit
unions found ways to continue serving their members, most recently by
converting to geographically based memberships that the Federal Credit
Union Act has made possible since 1934. But one thing has remained
constant--the structure of a credit union and its intense focus on
providing its members a not-for-profit alternative with personal
service.
Credit Union Products and Services Remain Comparatively Restricted
As member owned institutions, credit unions endeavor to offer
products and services that their members need and want. And as
technology results in more and better offerings, credit unions must
respond to meet their members' demands, so long as they permissible by
law and regulation.
Over the years, NCUA, like the bank and thrift regulators, has on
occasion amended its regulations to permit credit unions more
flexibility to serve their members better. For example, in 2001 NCUA
included in its rules a list of activities that federal credit unions
may engage in that are incidental to their authority to operate as a
credit union. Such activities encompass electronic financial services
and loan-related products. While some have sought to portray the rule
change as too liberal, in essence the incidental powers rule codified
activities that NCUA had already permitted credit unions to engage in
through prior legal opinion letters.
While NCUA has made incremental changes to the list of permissible
activities for credit unions, Congress has not considered any
comprehensive modernization of the Federal Credit Union Act in over 70
years. (CUMAA, passed in 1998, as previously indicated, was a response
to efforts to correct a field of membership problem and resulted in
imposing new, burdensome regulations on credit unions.) By contrast, it
is fair to note that the sweeping new authority Congress granted the
banking system when it adopted the Gramm-Leach Bliley Act in 1999 does
not apply to credit unions, with the exception of the privacy
provisions. Under that Act, among other things, affiliations between
banks, securities firms and insurance companies are facilitated. In
addition, financial holding companies are authorized to engage in a
range of activities, including any activity that the Federal Reserve
Board determines is financial in nature or incidental to financial
activities. Banks are permitted to own or control a financial
subsidiary that engages in activities that banks may not engage in
directly, and they may underwrite and deal in municipal revenue bonds.
Further, the Act authorized a number of securities activities for banks
including statutory exemptions from broker/dealer requirements and
investment advisory requirements.
Even without Gramm-Leach-Bliley, credit unions lag far behind banks
in the kinds of activities in which they can engage, notwithstanding
the fact that credit unions may offer additional services to their
membership through credit union service organizations (Credit unions
may loan up to 1% of their assets to a CUSO or invest up to 1% of
assets in such organizations.) The 2001 Treasury study comparing credit
unions with banks makes it clear credit unions face more operational
restrictions than other institutions.
In general, federal credit unions have more limited powers than
national banks and federal savings associations. Most notably, federal
credit unions face stricter limitations on their commercial lending and
securities activities. In addition, a usury ceiling prevents them from
charging more than 18 percent on any loan, and the term of many types
of loans may not extend beyond 12 years.
The Treasury notes a number of activities that are not permissible
for credit unions but are allowed for banks. These include the offering
of trust accounts, the purchase or sale of derivatives, investments in
corporate debt securities and other activities. (Unlike banks, credit
unions' investments are very limited and include government and agency
securities, along with certain insurances of government-sponsored
enterprises. Credit unions with net worth of 9% have authority to
invest in certain mortgage-related securities.)
One of the harshest limitations on credit unions is the ceiling on
their member business lending, which is set at the lesser of 1.75 times
net worth or 12.25 percent of total assets. National banks have no
specific restrictions on commercial lending and thrifts may make
commercial loans up to 20% of their total assets.
Credit unions also come under more stringent core net worth
(capital) requirements than are placed on banks. As required by
statute, credit unions must maintain net worth levels that are actually
spelled out in the law. Banks also have core capital requirements, but
they are set by regulation, which is easier to change than statutory
requirements. In addition, credit unions sustain core net worth that is
a full two percentage points higher than the core capital required of
banks.
Indeed, the net worth, lending, and other significant restrictions
under which credit unions operate are the impetus for the credit union
provisions in the Financial Services Regulatory Relief Act, HR 3505,
and the Credit Union Regulatory Improvements Act, HR 2317, which are
currently pending in the House.
There is no question that while credit unions may offer products
and services provided by banks and thrifts in response to their
members' needs, credit unions operate under serious constraints. As
concluded by the Treasury:
Federal credit unions generally operate within the same legal
framework as other federally insured depository institutions. Most
differences between credit unions and other depository institutions
derive from the structure of credit unions. Credit unions have fewer
powers available to them than do banks and thrifts.
A Credit Union's Size Does Not Affect Its Mission
Some have suggested that the nation's very largest credit unions
are in some sense no longer true credit unions, that they no longer
live up to what Congress originally intended credit unions to be. They
go on to argue that therefore large credit unions should no longer be
tax-exempt. Yet, these ``large'' credit unions continue to promote
thrift and to provide a source of credit for provident or productive
purposes. How many members a credit union has, or how many loans it
provides does not affect the core characteristics of a credit union, or
the real reasons for credit union's tax exemption. Further, large
credit unions today fully live up to what Congress had in mind when it
originally created the federal credit union charter and later granted
the credit union tax exemption. It should also be remembered that a
``large'' credit union would still be modest sized by bank standards,
and that the nation's three largest banking institutions each is larger
than the entire credit union movement.
None of the core characteristics of credit unions or rationales for
credit unions' tax exemption has anything to do with credit union size,
field of membership restrictions, the range of services offered, or the
extent to which credit unions might not compete with other financial
institutions. Instead, they have everything to do with the cooperative
structure of credit unions and their mission of providing affordable
services to American households, especially those of modest means.
Credit unions are all about their members. Today credit unions
serve 87 million members with affordable financial services. Twenty one
million of those members belong to the one hundred credit unions with
assets over $1 billion. There is no relation between the size of an
institution and the absence or presence of reasons to justify the tax
exemption. Large credit unions are democratically controlled, not-for-
profit cooperatives in every way that smaller credit unions are. The
boards of directors of large credit unions are composed of volunteers
just as they are at small credit unions. A large credit union may be
more likely to offer a broader array of services, and to be a greater
presence in a local community. However, neither factor makes it less a
cooperative than a smaller credit union. No one suggests that as soon
as the congregation of a church, synagogue or mosque exceeds a certain
size, it should no longer be tax exempt. Likewise, it would be
ludicrous to say the American Heart Association should lose its tax
exemption simply because of its size, while a small local charity
should not.
Because of their size and efficiency, large credit unions are often
more able to provide the benefits of the cooperative to members, such
as lower loan rates and fees and higher dividend rates. Larger credit
unions are also more able to offer special programs benefiting low- and
moderate-income households. In a survey conducted in 2002, when asked
how many of up to 18 services geared to low/mod income households they
offered, only 6% of credit unions with assets below $20 million offered
at least half of the services. Fully 42% of credit unions with assets
over $500 million offered that many of the services. Large credit
unions are also more likely than small credit unions to participate in
outreach activities to attract low/mod income members, and to have
added underserved areas to their fields of membership under NCUA's
Access Across America program.
I have already described how my own large credit union fulfills its
mission. Here are some examples of what other large credit unions do
today:
Navy Federal Credit Union, the nation's largest with two and a half
million members and $25 billion in assets, is the epitome of a not-for-
profit financial cooperative organized to provide its members with low-
cost financial services. It is guided by an unpaid, volunteer, member-
elected Board or Directors (one member, one vote.) Navy Federal serves
most military and civilian personnel of the Navy and Marine Corps and
their families, including almost 400,000 young active duty military
personnel of modest means. Members can open a share account with only
$5, and the account has no monthly fees, minimum balance requirement,
and earns dividends. The credit union operates 108 field offices around
the world, from Keflavik, Iceland to Guantanamo Bay, Cuba, to Diego
Garcia in the Indian Ocean to Bahrain. Half of the overseas offices
operate at a loss, but they are maintained in order to serve military
personnel on overseas deployments.
San Antonio Federal Credit Union (230,000 members and $1.8 billion
in assets) is a pioneer in financing manufactured housing for members
with limited incomes. For many Americans, high quality manufactured
housing is a cost effect alternative to the escalating costs of
traditional site built homes. Manufactured housing must meet
manufacturing standards that meet or often exceed requirements of some
local codes. Since entering the manufactured housing finance market in
2002, San Antonio Federal Credit Union has made over 3,000 high quality
portfolio loans for this affordable housing. The average loan size is
about $50,000. The credit union is also developing the infrastructure
to assist other credit unions around the country to serve this market.
Despite the protestations of community bankers, as described above,
credit unions are not unfair competitors to banks, and credit unions
are not eroding their market share. Further, the share of total
depository institution assets held by community and smaller regional
banks (all but the top 100 banking institutions in the U.S.) has indeed
plummeted from 53% in 1992 to 27% in 2004. However, over the same
period, the share of credit unions has remained stable at about 6%. It
is the largest 100 banks (larger regionals, super regionals, and money
center banks) that have taken the market share, from 41% in 1992 to 67%
in 2004. This is shown in the accompanying chart.
If credit unions had such an ``unfair'' advantage over banks, one
can wonder rhetorically why we have not seen a wholesale conversion
from bank to credit union charters. The reason no commercial bank has
converted to a credit union is that doing so would expose them to
democratic ownership and control, would likely cause banker salaries to
decline dramatically, and would force the institutions to adhere to a
much more restrictive regulatory regime.
Finally, it is disappointing but not surprising that in all their
protestations about the tax treatment of credit unions the banking
organizations fail to mention the growing role of Subchapter S banks.
Over 2,100 banks have adopted the Sub S form of tax treatment since
1997. While Subchapter S status is not the same as a tax exemption, it
results in significant loss of government revenue. The direct cost to
the federal government from banking institution Sub S elections is
estimated to be $790 million in lost revenue in 2004, and the total
will only grow as banks continue to try to expand Sub S eligibility. In
fact, it is estimated that the total cost to the Treasury for Sub S
election will exceed the estimated cost of the credit union tax
exemption within a few years. We believe that the Committee may wish to
investigate Subchapter S election, as there appears to be absolutely no
functional difference between a Sub S and a Sub C corporation to
justify different tax treatment.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Largest 100 Banking Institutions
(1992 sahre = 41%: 2004 share = 67%)
Smaller Banking Institutions
(1992 share = 53%; 2004 share = 27%)
CONCLUSION
Mr. Chairman, it is clear that credit unions play a powerful role
in our economy. Credit unions serve people of all walks of life at all
economic levels. Credit unions provide the public with a not-for-
profit, cooperative alternative to the for-profit sector. Consumers
benefit by having access to lower cost services that might not
otherwise be available to them, especially those of modest means. And
the facts show that the banking industry, which is engaged in an effort
to put credit unions out of business, continues to mislead Congress
into thinking that their very existence is threatened because of credit
unions and their tax status. But banks continue to earn record profits.
And if you saw the oil industry ads in the Washington Post last week,
you would have noticed that in fact the banking industry recorded the
highest profits of all U.S. industries during the second quarter of
2005--even more than the pharmaceutical industry. While the banking
industry continues earning record profits, credit unions provide a
nearly 7-to-1 return to consumers on the dollar, benefiting them by
over $10 billion dollars in yearly savings.
Credit unions are an important part of the financial life of
American consumers. And the tax-exempt status of credit unions is the
glue that holds credit unions and their not-for-profit approach to
cooperative financing together. If the tax exemption were removed--if
87 million Americans were forced to pay taxes solely because of their
membership in a credit union--it would lead to the end of the movement
that we know. Credit unions would become banks, and the consumers would
pay dearly, not only in higher taxes, but in higher fees and less
return on their savings and borrowings.
Thank you again, Mr. Chairman, for the opportunity to address the
Committee in its effort to review the tax-exempt status of credit
unions.
Chairman THOMAS. Thank you, Ms. May. Mr. Plagge, is that
correct?
STATEMENT OF JEFF L. PLAGGE, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, FIRST NATIONAL BANK OF WAVERLY, WAVERLY, IOWA, ON
BEHALF OF THE AMERICAN BANKERS ASSOCIATION
Mr. PLAGGE. That's correct. Plagge.
Chairman THOMAS. Okay.
Mr. PLAGGE. Mr. Chairman, my name is Jeff Plagge, and I am
President and CEO of First National Bank, a community- and
employee-owned bank in Waverly, Iowa. We just celebrated our
141st anniversary. I am grateful for the opportunity to testify
about the credit union tax-exemption, and, on behalf of the
American Bankers Association, and thank you for holding this
hearing. As we've heard many times, Federal Credit Unions pay
no income tax. In 1937, Congress exempted Federal Credit Unions
from all forms of taxation--Federal taxation, and chartered
them with the specific mission of helping people of small
means. Traditional credit unions still fulfill this mission by
providing basic financial services to a well-defined group.
Unfortunately, an increasing number of credit unions have
abandoned this core mission. Instead of helping people of small
means, sophisticated credit unions are expanding into
commercial lending, buying naming rights to sports stadiums,
financing luxury hotels, and building elaborate headquarters.
My written testimony is filled with examples of these and other
activities.
How does a $5.2 million contribution for naming rights to a
sports arena serve credit union members? If a credit union can
add the entire State of Washington to its field of membership,
what has happened to the common bond? If a credit union is
making business loans to non-members, what does that have to do
with tax-exempt purpose, and who is indirectly being
subsidized? In my hometown, the $1.1 billion John Deere
Community Credit Union is more than five times larger than our
$200 million community bank. Fueled by its Federal tax-
exemption, the John Deere Community Credit Union competes
virtually for every one of my customers regardless of their
income, employment, or need. On the local level--and this is
what this is about, where all competition plays out--the
effects can be dramatic to our community bank and others like
it around the country.
Credit unions' tax-exemption gives them a significant price
advantage over tax paying banks that offer essentially the same
products and services, and it enables credit unions to grow
much more rapidly. The fact is in more and more communities,
credit unions are many times larger than the local banks that
are competing in that market. For example, my bank's average
agricultural and business loan size is $52,000. John Deere
Community Credit Union's business loan size is more than twice
that, and that is still a reasonable amount, and there are
others in the testimony on page seven that talk about some of
the more aggressive business lending things going on. The
Federal Government is subsidizing super competitors against
nearly 8,000 taxpaying community banks in this country that
have $500 million or less in assets. There are now 263 credit
unions with assets of more than $500 million each, and more
than a hundred credit unions with assets more than a billion
dollars each. Studies by the Federal Reserve and the GAO show
banks served more low and moderate income people than credit
unions. The National Community Reinvestment Coalition has also
concluded that the average bank is more often the source to
credit of people of modest means than credit unions.
The NCRC says most people would be surprised to learn that
banks are doing a better job of serving low- and moderate-
income people than credit unions. Credit unions argue that
their tax status exists because they are not-for-profit and
cooperatively owned. But being a not-for-profit cooperative
does not justify a tax-exemption. In fact, most cooperative
member-owned and not-for-profit financial institutions are now
subject to Federal taxation of some kind. Credit unions enjoy
the sweetest tax deal of all of them. In contrast, mutual
insurance companies, mutual savings banks, and mutual savings
and loan associations lost their tax-exemption years ago.
Removing their tax-exemption did not diminish their vitality.
These institutions are healthy, well capitalized, and
profitable. During the last 5 years, mutual savings banks and
mutual savings and loans paid $2.9 billion in corporate income
tax. Just like my bank, they are paying their fair share. This
cannot be said today for some of the new breed of large and
aggressive credit unions. These financially sophisticated
complex credit unions should be required to stay within their
mission or be taxed and regulated like the rest of us. The
ability of community banks like First National to compete
depends on it. Thank you, Mr. Chairman.
[The prepared statement of Mr. Plagge follows:]
Statement of Jeff L. Plagge, President and Chief Executive Officer,
First National Bank of Waverly, Waverly, Iowa, on behalf of the
American Bankers Association
Mr. Chairman, my name is Jeff Plagge. I am president and CEO of
First National Bank, a $200 million community bank located in Waverly,
Iowa. The American Bankers Association (ABA) appreciates the
opportunity to comment to the Ways and Means Committee on the tax
exemption of credit unions. Our comments focus on the evolution of
traditional credit unions serving ``people of small means'' to full
service, financially sophisticated institutions that compete head-to-
head with tax-paying banks and fail to serve the mission for which they
have been exempted from all federal taxation.
ABA on behalf of the more than two million men and women who work
in the nation's banks, brings together all categories of banking
institutions to best represent the interests of this rapidly changing
industry. Its membership--which includes community, regional and money
center banks and holding companies, as well as savings associations,
trust companies and savings banks--makes ABA the largest banking trade
association in the country.
This statement addresses three central points:
I. A new breed of credit union has abandoned its mission to serve
those of small means. In fact, studies show banks are more often a
source of credit to low- and moderate-income people than are credit
unions.
II. Being a non-profit cooperative does not, alone, justify a tax
exemption. Fairness dictates equal tax and regulatory treatment for
similarly situated institutions. Yet complex credit unions take
advantage of their tax-exempt status to unfairly compete with tax-
paying banks, offering virtually indistinguishable products and
services in the same markets.
III. Congress has repeatedly recognized that there are limits to
tax exemptions and has acted to eliminate them for entities that stray
from their intended public policy goals. Credit unions that have
abandoned their core mission should be taxed or required to convert to
bank charters.
I. Complex Credit Unions Outgrow Justification for Tax Subsidy
Chairman Thomas, as you stated earlier this year, ``Tax-exemption
is an important benefit and the Congress has a responsibility to
oversee and assure the American taxpayer that the tax-exempt sector is
living up to its legal responsibilities.'' We agree. ABA recommends
that Congress examine credit unions' tax-advantaged status,
particularly those that have strayed from the original credit union
mission. While many credit unions remain true to their original
mission, today a growing number of credit unions have abandoned their
roots and inappropriately taken advantage of their tax-exempt status.
Continuing the special tax treatment for institutions that look and
act like tax-paying banks has public policy consequences. The size of
the ``tax expenditure'' as the Office of Management and Budget (OMB)
calls it, is already big--more than a billion dollars per year. And
basic economics tells us that it will get bigger as tax-favored firms
take business away from taxpaying firms. Simply put, as these credit
unions get larger, so does the tax expenditure.\1\
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\1\ Tax expenditures are defined in the law as ``revenue losses
attributable to provisions of the federal tax laws which allow a
special exclusion, exemption, or deduction from gross income or which
provide a special credit, a preferential rate of tax, or a deferral of
liability.''
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This is not how the credit union movement began. Closely-knit
groups of people would pool their resources to provide small loans for
one another. Credit unions were originally created and granted their
tax exemption to fill a market void that existed in consumer finance in
the early 20th Century. Few, if any, banks at that time offered
consumer loans, and consumers, especially people of modest means, had
few options to obtain credit.
By 1934, the United States had approximately 2,500 credit unions,
with 38 states and the District of Columbia offering credit union
charters. Later that year, a federal credit union charter became
available. Whether chartered by a state or the federal government,
membership was limited to people with close bonds because familiarity
was critical to the ``character'' loans made by credit unions. The
commonality of interest among members--their common bond--was the
essence of credit unions. It was the justification for their unique
place in our financial system.
Who Serves Low- & Moderate-Income Consumers? Increasingly, Not Credit
Unions
Today, an array of options for credit is available for everyone,
dramatically reducing the justification for granting credit unions
special treatment. In fact, studies reveal banks serve more low- and
moderate-income people than credit unions do, despite credit unions'
supposed focus on ``people of small means,'' as required by the Federal
Credit Union Act.
The Federal Reserve's 2001 Survey of Consumer Finances revealed
that only 36 percent of the households that primarily used credit
unions had low- and moderate-incomes in contrast to 42 percent of the
households that primarily used banks. In 2003, the Government
Accountability Office (GAO) released a report that showed that 64
percent of households that primarily use a credit union are middle and
upper income, as compared to 58 percent of households that primarily
use banks. It also found that banks provided 34 percent of their
mortgage loans to low- and moderate-income borrowers while credit
unions issued just 27 percent of their loans to these borrowers in
2001.
A recent study conducted by the National Community Reinvestment
Coalition (NCRC) concluded that banks are more often a source of credit
to people of modest means than credit unions are. ``In the year 2005,
after 70 years of federal supervision of credit unions, most people
would be surprised to learn that banks are doing a better job of
serving low- and moderate-income people than credit unions,'' the NCRC
study said.\2\
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\2\ ``Credit Unions: True to Their Mission?'' NCRC, 2005.
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Think Federal Credit Union exemplified in its 2003 Annual Report
how credit unions' focus has changed when it stated: ``Yesterday our
challenge was to provide financial services to members who could not
get services elsewhere. Today our challenge is to provide financial
services to members who can get services anywhere.''
Instead of focusing their resources on people of modest means,
today a new breed of institution that bears little resemblance to a
traditional credit union is capitalizing on its tax-exempt status to
offer products and services far beyond any meaningful common bond.
There are now more than 100 credit unions each with assets greater than
$1 billion. There are 263 credit unions with assets of more than $500
million each.
In nearly half the states in this country, a credit union would
rank among the top ten banks in terms of size. As Gene Portias,
president of the Credit Union Association of Oregon, stated: ``In a lot
of places, credit unions are the major financial institution.'' \3\
Complex, aggressive institutions increasingly dominate the industry,
yet still try to hide behind the veil of a ``traditional'' credit
union.
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\3\ ``CUs, Banks Put Up Dueling Bills in Oregon,'' American Banker,
March 25, 2003.
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The credit unions' own surveys suggest that their image of serving
moderate- and lower-income people is no longer valid. The profile of
the average credit union member today--higher than average income,
better educated, and more likely to be in a professional occupation
than his or her non-member counterpart--is not one typically associated
with people needing taxpayer-supported financial services. According to
a recent demographic survey conducted by the Credit Union National
Association (CUNA), the average household income of credit union
members is 20 percent higher than nonmembers--$55,120 versus
$45,790.\4\
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\4\ CUNA National Member Survey, 2002.
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The fact is that bank customers are more likely to be from low- and
moderate-income households than are credit union customers--yet credit
unions continue to enjoy the tax expenditure purportedly because they
serve people of modest means. As Bruce Shawkey of Credit Union
Management magazine stated, ``. . . [C]redit unions' `bread and butter'
members are middle-aged white males with mid- to-upper-incomes.''
Even credit union executives are disturbed that credit unions have
strayed so far from their original mandate to serve people of small
means. Citing CUNA's numbers on the average household income of members
served by credit unions, Armando Cavazos, president of Credit Union One
in Ferndale, Michigan, said, ``We should almost feel guilty about
serving people of affluence.'' \5\
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\5\ ``How to Head Off Coming Under CRA Dominates Debate at CUNA
Convention,'' American Banker, October 14, 1994, p. 9.
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Jim Blaine, CEO of State Employees CU in Raleigh, NC, conceded,
``Maybe we've gotten so sophisticated we don't want to get our hands
dirty with poor folks any more. That's what we were created to do, and
sometimes I think we're forgetting that.'' \6\
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\6\ ``Are Credit Unions Dodging Their Responsibilities? One CEO
Thinks So.'' Credit Union Journal, December 2, 2002, p. 11.
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And, Ed Gallagly, president/CEO of Central Florida Credit Union,
says, ``There's no question that subconsciously--and even consciously--
some credit unions are trying to run-off unprofitable members. I hate
to use that term run-off but that's what's happening.'' \7\
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\7\ ``Are Members Really Leaving Credit Unions? CEOs Offer Their
Take,'' Credit Union Times, April 14, 2004, p. 42.
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Credit Union Subsidy is Used Inappropriately
As morphed credit unions stretch their fields of membership across
ever-larger geographic areas and venture into new business activities,
is the tax benefit being passed on fully to credit union members? In
more and more cases, the answer is no.
In some cases, it is going to build elaborate corporate
headquarters like Golden 1 Credit Union's new 200,000 square foot
headquarters in Rosemont, California, costing more than $30 million and
GTE Federal Credit Union's new 125,000 square-foot headquarters located
on a 12.5 acre campus in Tampa, at a cost of about $22 million. And
Digital Credit Union in Massachusetts paid $5.2 million for the naming
rights for an arena in Worcester (MA) in 2004 and University FCU in
Texas is contributing $13.1 million to the renovation of the University
of Texas's baseball stadium in exchange for naming rights. Is this an
appropriate use of the credit union tax exemption?
Communities are not being served, either. Credit unions, unlike
banks, are not required to meet the obligations set forth in the
Community Reinvestment Act (CRA). In a study of Virginia credit unions,
professors Murphy and O'Toole found that ``banks and savings
institutions in Virginia are putting a greater percentage (88 percent)
of their deposits back into the community in the form of loans than are
credit unions (76.3 percent). In other words, tax treatment of credit
unions has not resulted in a higher proportion of loans going to meet
the needs of the communities they serve.'' \8\
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\8\ A Study of the Evolution and Growth of Credit Unions in
Virginia: 1997-2002, by Neil Murphy and Dennis O'Toole, November 2003.
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Business Lending--Extending Tax-Subsidized Services to Commercial
Entities
In addition to serving a wealthier customer base, the new breed of
credit unions is looking for profitable opportunities in commercial
lending, thus further extending the tax exemption beyond its original
purpose. Business lending by credit unions grew by almost 50 percent in
2004. More than 420 credit unions have at least 5 percent of their
total loans in business loans and almost 240 have at least 10 percent
of their loan portfolio in business loans. Nearly 250 credit unions are
designated guaranteed lenders by the Small Business Administration
(SBA), and more than 300 credit unions have either purchased or
participated in business loans made to non-members. Should members'
savings fund business loans to non-members?
``Successfully banking the small-business owner is one of the keys
to increased credit union profitability,'' the Credit Union Executive
Society noted. And many credit unions are following this course to
boost profits. Jean Faenza, EVP for Telesis Community CU, describing
her credit union's pursuit of business owners, stated: ``Remember,
every business owner is a consumer who has other accounts . . . small
business are employers. We're greedy--we want all of those accounts.''
\9\
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\9\ ``Show of Hands Indicates CU Interest in Biz Lending,'' Credit
Union Journal, September 15, 2003, p 11.
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Lending by credit unions is big business. For example:
Less than one year after commencing operations, CU
Business Group, LLC said it had processed more than $50 million in
business loans--with the average-sized loan worth more than $600,000.
Larry Middleman, CU Business Group's President/CEO, noted that the
``[l]oan packages are much larger than we anticipated.'' \10\
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\10\ Credit Union Journal, September 1, 2003.
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The average business loan outstanding at Florida's Vystar
Credit Union is $463,000; at California's Telesis Community Credit
Union, it is $693,100.
Coastal Federal Credit Union with $1.5 billion in assets
has ventured into complex commercial real estate transactions where the
average size loan exceeds $4 million.\11\
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\11\ Credit Union Times, March 30, 2005, p. 23.
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Texans CU has approximately $382 million in business
loans on its book and funded Prism Hotel's acquisition and construction
financing of the 280-room Radisson Memphis Hotel in Tennessee.\12\
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\12\ ``Texans CU's Business CUSO Taking Off; Loans Range from
Multi-Million to Just Thousands,'' Credit Union Times, February 2,
2005, pp. 1, 36.
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Spokane Teachers CU financed a $3 million renovation of
the Montvale Hotel, a luxury hotel in Spokane, Washington.
These are all loans for which a bank would likely compete. It is
inappropriate that credit unions leverage their tax subsidy to compete
unfairly head-to-head with tax-paying banks and become ``super
competitors.'' It also begs the question of who is indirectly
subsidized by the credit unions tax exemption: Luxury hotels and
commercial real estate developers? Is this what Congress intended?
Subsidizing a ``Super Competitor'' That Preys on Community Banks &
Small Credit Unions
Although the credit union industry argues that the issue of credit
union competition is about big banks against little credit unions, it
is really about the billion dollar credit unions ``fueled by their
federal tax subsidy'' against the community banks in this country.
Competition in financial services occurs on the local level. The fact
that the banking industry as a whole is much larger than the credit
union industry has no bearing on head-to-head competition in the local
market.
There are nearly 8,000 community banks in this country with assets
of less than $500 million each. The credit union tax exemption
adversely affects these tax-paying banks. It gives credit unions a
significant price advantage over tax-paying banks that offer the same
products and services and enables credit unions to grow much more
rapidly.
The fact is that in more and more communities, it is the credit
union that is many times larger than the local banks. This trend
facilitates a market share shift from tax-paying institutions to tax-
exempt credit unions. For example:
In North Carolina, State Employees Credit Union (SECU),
which has assets of over $12.7 billion and 185 branch locations and 860
ATMs, competes directly with almost one hundred community banks, but is
44 times larger than the average-sized community bank.
The Credit Union of Texas, with $1.6 billion in assets,
is almost seven times larger than the 17 community banks it competes
with in its market.
Visions FCU with $1.6 billion in assets boasts that it
was the largest mortgage lender in Broome County (NY) for 2003.
Some aggressive credit unions are now so large that they
dominate the deposit market in their areas, competing head-to-head with
large and small banks alike. For example:
With $2.9 billion in assets, Vystar Credit Union in
Northeast Florida dominates its market area with more deposits in the
region than First Alliance, Wachovia and Bank of America combined.
With $5.6 billion in assets, Boeing Employees' Credit
Union in Washington State dominates its market area with more deposits
there than Washington Mutual and Bank of America combined.
With $1.8 billion in assets, ENT Federal Credit Union in
Colorado dominates its market area with more deposits in the region
than Wells Fargo and World Savings Bank combined.
It is obvious that the tax subsidy provides credit unions a very
large pricing advantage. For example, professors Murphy and O'Toole
found that ``. . . credit unions are enabled to offer a 67 basis point
advantage in loan pricing and deposit pricing over banks as a direct
result of the fact that credit unions do not pay state or federal
taxes. In a highly competitive industry, the 67 basis point government
subsidy is substantial.'' \13\
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\13\ A Study of the Evolution and Growth of Credit Unions in
Virginia: 1997-2002, by Neil Murphy and Dennis O'Toole, November 2003.
---------------------------------------------------------------------------
And the competition is not just banks versus credit unions, but
also morphed credit unions against traditional credit unions. Lorraine
Ratoni, CEO of Sacramento County Grange Credit Union noted: ``We're
losing members to larger credit unions. We're having a harder and
harder time competing.'' \14\ Again, who does Congress intend to
subsidize?
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\14\ ``Friendly Foes: Once Allies, Credit Unions Now Compete for
Customers,'' by Barbara Marquand, Sacramento Business Journal, May 24,
1999.
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Laura Bruce, writing for Bankrate.com, states, ``To say credit
unions don't compete with one another or with banks just doesn't ring
true anymore. There's competition. Some of it's for sheer survival;
some of it's for market share. Not all credit unions have jumped into
the fray. Some employment or organization-based credit unions may have
a very successful niche and be able to stay small and survive, maybe
even thrive--but they're part of a shrinking minority.'' \15\
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\15\ ``The Changing Face of Credit Unions'' By Laura Bruce,
Bankrate.com, December 19, 2003.
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Policies Fuel Credit Union Consolidation and Unlimited Growth
While credit unions have grown to serve wealthy customers and offer
commercial loans, NCUA continues to expand their tax subsidy without
restraint. Through pro forma approvals of multiple common bonds, rapid
approvals of community charters beyond any reasonable definition of
``local,'' and liberal interpretations facilitating expansion of
business lending and other service offerings, NCUA has fueled the
evolution towards larger, more complex credit unions. Today, a single
credit union can serve thousands of unrelated groups, or huge
geographic areas with millions of people. This is not what Congress
intended.
Mergers and acquisitions have also played an important role in the
expansion of many large credit unions. The result is fewer, but larger,
credit unions. Since 2000, the credit union industry has consolidated
at twice the rate of the banking industry. Over the last 4 years,
nearly 1,100 small credit unions have disappeared.\16\
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\16\ http://www.ncua.gov/news/speeches/2005/matz/463,20,Slide 20.
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Community charters are the fastest expanding segment of the credit
union industry. Federal law permits a credit union to serve anyone in a
``well-defined, local community, neighborhood or rural district.'' \17\
In fact, the number of federal credit unions with community charters
has more than doubled from 464 in 1999 to 1,051 as of year-end 2004.
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\17\ Public Law No.: 105-219.
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The use of the term ``community'' has reached absurd proportions.
NCUA and various state regulators have approved community expansions
that include some of the largest cities in the country, entire
Metropolitan Statistical Areas (MSAs), multiple counties across state
lines and even entire states as part of a credit union's field of
membership. The result, according to GAO, is that the average size of a
community charter approved by NCUA jumped almost three-fold from a
population of 134,000 people in 1999 to 357,000 in 2003.\18\ And this
growth occurred in spite of NCUA's acknowledgment that when Congress,
in 1998 legislation, added the requirement that community credit unions
be ``local,'' it intended to limit the size of such credit unions.
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\18\ Credit Unions: Financial Condition Has Improved, but
Opportunities Exist to Enhance Oversightand Share Insurance Management.
General Accounting Office, October 2003 (GAO-04-91), p 35.
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As Scott Waite, Senior Vice President and Chief Financial Officer
of the $3 billion-plus Patelco Credit Union, said on the credit union's
expansive community charter in Northern California: ``[I]f you walk
past our front door, you can join.'' \19\
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\19\ Bankrate.com.
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A few of the many other examples that illustrate just how far the
definition of ``local community'' has gone include:
NCUA approved a community charter application for LA
Financial CU to serve the 10 million plus residents of Los Angeles
County--larger than the population in 42 states and a geographic area
equivalent in size to the states of Rhodes Island and Delaware
combined.
Wescom Credit Union's field of membership includes the 16
million people living in Los Angeles, Ventura, Orange, Riverside, and
San Bernardino Counties.
In 1999 and 2000, Meriwest Credit Union added the three
million residents of Alameda and Santa Clara Counties and expanded its
reach into Contra Costa and San Mateo Counties with a combined
population of 1.7 million, and into the City and County of San
Francisco--representing another 750,000 people.
Boeing Employees CU in Washington State amended its field
of membership to include the whole state of Washington.
To evade field of membership limitations, credit unions have been
forming charitable foundations. Anyone who makes a donation to the
foundation is eligible to join the credit union. For example, $2.1
billion GTE FCU advertises on its website: ``You can join GTE FCU even
if you are not eligible for membership through your employer or a
family member. GTE FCU sponsors a non-profit educational financial
club, CUSavers.''
And some credit unions do not even go through the pretense of
having a common bond. As Greenwood CU in Rhodes Island states,
``membership . . . is open to all responsible people who want to be a
member.''
II. Being a Not-for-Profit Cooperative Does Not Justify the Tax
Exemption
Since morphed credit unions no longer embody the traditional
characteristics that justify continuing their tax exemption, they have
been forced to offer a new justification. According to Dick Ensweiler,
Chairman of the Credit Union National Association, ``Credit unions have
the tax status that they do because they are not-for-profit,
cooperatively owned, democratically governed, and generally led by
volunteers from among the membership.'' \20\
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\20\ American Banker, April 2, 2004.
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But being a not-for-profit cooperative does not justify being tax
exempt.
In fact, most financial institutions that had traditionally been
described as ``cooperative, member-owned and not-for-profit'' are now
subject to federal taxation. Those institutions include mutual
insurance companies, mutual savings banks, and mutual savings and loan
associations. Each of these financial institutions lost their tax
exemption years ago--mutual insurance companies in 1942, and mutual
savings banks and mutual S&Ls in 1951. Why?
In the 1951 decision, Congress determined that:
These cooperative and mutual institutions were in
``active competition'' with taxable institutions and continuing their
tax exemption would be ``discriminatory;'' and,
They had evolved into institutions whose ``investing
members are becoming simply depositors, while borrowing members find
dealing with a savings and loan association only technically different
from dealing with other mortgage lending institutions in which the
lending group is distinct from the borrowing group.'' \21\
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\21\ 56 Stat. 798.
Thus, Congress determined that mutuality alone was not sufficient
to continue the tax exemption for these institutions. This conclusion
is particularly telling because of the similarities between mutual
savings institutions and credit unions, as noted by the U.S. Treasury
Department: ``Mutual thrifts are the federally insured depository
institutions most similar in structure to credit unions, because like
credit unions, mutual thrifts generally do not have corporate stock,
are not-for-profit entities, and are owned by their depositors, or
members, rather than by shareholders.''\22\
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\22\ Comparing Credit Unions with Other Depository Institutions,
United States Department of the Treasury, January 2001, p.25.
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In fact, in a letter to the editor appearing in the September 28,
2005 edition of the Credit Union Times, Ralph Leas, president and CEO
of Golden Bay FCU writes, ``I have long believed that the original
logic of a credit union tax exemption has expired and that credit
unions, like other business cooperatives in the United States, should
pay their fair share.''
The tax preference originally provided to credit unions was a way
to subsidize financial services for individuals with low and moderate
income. Many traditional credit unions still dedicate themselves to
this purpose. But the metamorphosis to healthy and sophisticated credit
unions shows how quickly this goal can be abandoned.
If the tax exemption is no longer conditioned upon the policy goal
of serving low- and moderate-income individuals and offering a limited
menu of products and services, the special tax treatment for morphed
credit unions cannot be justified
III. Congress Has Acted to Limit Tax Exemptions
Financial entities that have retained their tax-exempt status are
generally subject to limitations that restrict either their size or the
breadth of their membership. Moreover, their tax-exempt status remains
based on narrowly crafted congressional directives relating to the
service of niche markets or to achieving limited policy goals. With the
erosion of both the common bond and the easing of limits on credit
union products and services, credit unions' are free to stray from
their original mission.
The question of where the line should be drawn to control the
taxpayer expenditure needs to be answered. Every expansion of a morphed
credit union expands the tax expenditure. OMB estimates that the credit
union ``tax expenditure'' will exceed $7.5 billion \23\ over the next
five years, and this figure does not take into account additional lost
state tax revenue. And most of the tax subsidy goes to the most
aggressive credit unions--those that are least likely to embrace
traditional credit union principles. In fact, the largest 100 credit
unions absorb 40 percent of the tax expenditure--quite a contrast with
the 29 percent of just 6 years ago.
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\23\ OMB, February 2005, for the fiscal years 2006 through 2010.
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This is a substantial subsidy and, with inadequate restraints, it
will grow rapidly. Basic economics tells us what happens when a tax-
exempt firm and a taxpaying firm offer the same products: the tax-
exempt firm grows at the expense of the taxpaying firm. As business
flows to the tax-exempt firms and away from taxpaying institutions, the
size of the tax expenditure will grow. The public deserves a thorough
review to assure that the tax expenditures are being appropriately
spent and not disadvantaging competing businesses that carry out the
same activities on which they pay taxes or fueling abandonment of the
mission for which the exemption was created.
As mutual insurance companies and mutual savings banks became
similar to, in the words of the Congressional Budget Office, ``profit-
seeking corporations'', Congress eliminated their tax exemption.\24\ In
the Revenue Act of 1942, Congress made mutual insurance companies with
annual gross receipts in excess of $75,000 subject to federal income
tax. This change was made to restrict the exemption to smaller
institutions deserving of the class exemption. Since that time, the
threshold for eligibility for this exemption has been changed to annual
net written premiums not exceeding $350,000.
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\24\ Budget Options, CBO, March 2003, p. 218.
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Conclusion & Recommendation for Change
Congress needs to ask: ``At what point do large, diversified credit
unions cease to be the type of institutions the Congress envisioned to
be worthy of a tax exemption?'' Complex credit unions, which have
evolved into full-service financial institutions serving the general
public, are a far cry from the small, traditional credit unions that
served distinct groups of ``people of small means'' that Congress
sought to assist when it provided tax subsidies to credit unions in the
1930's.
These credit unions are very different from the many credit unions
that have remained true to the spirit of the original credit union
charter. Credit unions that are indistinguishable from tax-paying
banking institutions no longer deserve their tax exemption and should
be required to pay taxes or to convert to a bank charter.
One possible tax model currently applies to most cooperatives
organized for economic purposes (as opposed to charitable or limited
purposes), i.e., Subchapter T of the Internal Revenue Code. Members, or
``patrons'' would be responsible for paying taxes on earnings (i.e.,
interest on deposits) passed through to them (at their individual tax
rate). Retained earnings--which do not benefit individual members--
would be taxed at the general corporate rate. Under this approach,
credit unions could continue to pass on their financial profits to
their members, either through higher interest rates on deposits or
through lower interest rates on loans. Their tax-advantaged growth,
however, would be eliminated. At a minimum, Congress needs to curb the
ability of credit union regulators to expand the size of the subsidy at
the taxpayers' expense.
Removing the tax exemption for mutual savings institutions and
mutual insurance companies did not diminish their vitality. These
institutions are healthy, well-capitalized, and profitable. During the
last five years, mutual savings banks and mutual savings and loans paid
$2.9 billion in corporate income taxes. Just like my bank, they pay
their fair share. The same cannot be said for today's new breed of
credit unions.
Thank you.
Chairman THOMAS. Thank you. Mr. Hayes?
STATEMENT OF DAVID E. HAYES, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, SECURITY BANK, DYERSBURG, TENNESSEE, AND CHAIRMAN,
INDEPENDENT COMMUNITY BANKERS OF AMERICA
Mr. HAYES. Mr. Chairman and Members of the Committee, my
name is David Hayes. I am President of Security Bank in
Dyersburg, Tennessee, and the Chairman of the Independent
Community Bankers of America. I am pleased to appear today on
behalf of the ICBA and its nearly 5,000-member community banks
throughout this great country. My bank has $135 million in
assets. I have 70 employees, and I live in a community 19,000
people, located in rural west Tennessee. The ICBA believes this
hearing will help foster a better understanding of the genuine
concerns and frustrations community banks often have as they
work in their local communities, pay their fair share of taxes,
and compete head on with credit unions. The credit union sector
often states that they represent only a small portion of the
entire financial service industry. However, an important
distinction is that most often tax-exempt credit unions compete
head on with taxpaying community banks of similar size.
Research finds that the largest overlap in terms of competition
in size is in the $10 million to $100 million asset size class,
which includes about half of all banks and about 40 percent of
all credit unions. In this class, banks and credit unions
primarily compete with each other and not with the largest
banks or credit unions.
Unfortunately, the dramatic tax burden difference between
these taxpaying banks and tax-exempt credit unions places
community banks at a severe competitive disadvantage. Congress
originally allowed credit unions tax and regulatory advantages
in the thirties for the purpose of helping serve people of
modest means and with a common bond. But today, the notion of
modest means and common bond is lost. For example, the local
credit union in my community promotes that anyone who lives,
worships, attends schools, or business or other legal entities
and their families are eligible customers. Today, credit unions
have more than 87 million customers, reaching the wealthy and
the middle-income classes. In fact, there are more than one
hundred billion dollar credit unions providing sophisticated
banking services. Consequently, today, the $680 billion credit
union industry is quite similar to any other financial service
provider except for their special regulatory treatment and tax
subsidy. Because of their rapid expansion, the credit union tax
subsidy will cost an estimated $31 billion in lost Federal
revenue over the next decade, according to the Tax Foundation.
Credit unions often cite that they deserve tax-exempt
status because of their mutual ownership structure. However,
mutual structures can be taxed and are, in fact, taxed. In
1951, Congress eliminated the tax-exemption for savings and
loan and mutual savings banks on the grounds that they were no
longer unique from other taxpaying financial institutions.
Perhaps most troublesome is the failure of the credit union
industry to provide any unique service to individuals of modest
means despite their large tax subsidy. A growing body of
research shows how banks consistently exceed credit union
performance in lending to women, minorities, and low- and
moderate-income borrowers in communities. Ironically, little of
credit unions' tax subsidy is passed to their members. The Tax
Foundation research shows that a huge portion of the credit
union earnings are retained and used for expansion. Only six of
50 basis points may go to credit union borrowers through lower
interest costs. While more and more research shows credit
unions are not providing any special services to the people of
modest means, the credit union industry has embarked on
expanding its business lending. It is doubtful that Congress in
passing the Federal Credit Union Act 1934 envisioned credit
unions making commercial loans. Yet, credit unions continue to
advance measures to skirt their legal business lending cap.
As long as credit unions are tax-exempt, the ICBA will
oppose expanding credit union powers, such as H.R. 2317. In
conclusion, the credit union industry is similar to other
taxpaying banks serving the same customer base. Notably, the
Tax Foundation credit union research concluded that today the
principal justification for tax-exemption would seem to be that
it already exists. Over the past decade, Security Bank has paid
more than $4.2 million in Federal income taxes alone, and we
proudly support our local community. During that same period of
time, Security Bank has committed over a million dollars to
fund scholarships at local community colleges, while tax-exempt
credit unions have done very little. When asked to contribute
for civic needs, the response typically is we can't because
we're not-for-profit. Community banks pay their taxes and serve
their communities. We urge the Committee to consider policies
that would help create greater parity between tax-exempt credit
unions and taxpaying community banks. Thank you very much.
[The prepared statement of Mr. Hayes follows:]
Statement of David E. Hayes, President and Chief Executive Officer,
Security Bank, Dyersburg, Tennessee, and Chairman, Independent
Community Bankers of America
Mr. Chairman, Ranking Member Rangel, and members of the committee,
my name is David Hayes, Chairman of the Independent Community Bankers
of America (ICBA) \1\ and President and CEO of Security Bank, a $135
million community bank in Dyersburg, Tennessee. I am pleased to appear
today on behalf of ICBA and its nearly 5,000 members nationwide to
testify on the ``Review of the Credit Union Tax Exemption.''
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\1\ The Independent Community Bankers of America represents the
largest constituency of community banks of all sizes and charter types
in the nation, and is dedicated exclusively to representing the
interests of the community banking industry. Founded in 1930, ICBA is
celebrating its 75th anniversary year. For more information, visit
ICBA's website at www.icba.org.
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The ICBA commends Chairman Bill Thomas and the Committee members
for undertaking this important hearing and for examining the current
tax treatment of the credit union sector. We hope that this hearing
helps foster a better understanding of the concerns and frustrations
community banks often have as they try to best serve their local
communities and compete head-on with tax-exempt credit unions.
Credit Union Tax Exemption Warrants ReassessmentThe origins of the
credit union industry's current tax exemption reach back to the Great
Depression, a time when basic financial services were extremely limited
for low- and moderate-income Americans. Congress originally allowed
credit unions generous tax and regulatory advantages in the 1930s for
the purpose of helping serve individuals of modest means. Individual
credit unions were largely limited to serving individuals sharing a
common bond--in most cases, the same employer or occupation. While the
credit union tax subsidy has continued for seven decades, today's
modern financial services industry is robust, highly competitive, and
offers a plethora of products and services readily available to all
consumers.
Over the decades, the tax-exempt credit union industry has changed
dramatically too. Credit unions have expanded aggressively in size and
scope. The tax-exempt credit union industry has been growing even
faster than commercial banks. According to the Federal Reserve Bank of
Kansas City's research, credit union growth is on a steady upward climb
with accelerated growth beginning in 2000.\2\ Between 1994 and 2004,
credit union annual asset and deposit growth exceeded that of
commercial banks in the United States. Commercial banks witnessed 7.7%
annual asset growth and 6.9% annual deposit growth during 1994 to 2004
while credit unions experienced 8.4% annual asset growth and 8.1%
deposit growth during that same decade.\3\
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\2\ Federal Reserve Bank of Kansas City. Financial Industry
Perspectives, July 2005.
\3\ Ibid. p.6.
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Today, credit unions have a broad customer base of more than 87
million customers, reaching the wealthy and middle-income classes and
they offer the full range of financial products and services. In fact,
credit unions are even expanding a large and growing commercial lending
business.
Consequently, today's $680 billion credit union industry has become
quite similar to any other financial service provider, except for their
special regulatory treatment and tax subsidy. As our Nation struggles
with its fiscal policy demands and strives to make our tax system more
fair and equitable, it is important for lawmakers to assess ways to
create greater parity between tax-exempt credit unions and competing
taxpaying entities.
Congress Made Other Tax-Exempt Financial Service Providers
TaxableCredit unions often cite that they deserve tax-exempt status
because of their ``mutual'' ownership structure. However, mutual
structures can be taxed--and in fact they are. For example, Congress
did impose taxes on mutual savings banks and mutual insurance
companies. Today, all mutual thrifts pay federal taxes at the same rate
as other for-profit companies. The savings and loan associations and
mutual savings banks were not subject to the federal income tax until
1951. By 1951, Congress recognized the services of the thrifts and
their customer base evolved so they were not much different from other
financial service providers. The equitable policy solution was to
include thrifts in the tax base and Congress eliminated their tax
subsidy on the grounds they were similar to competing taxpaying
corporations.
Likewise, today's tax-exempt credit unions have grown to resemble
other competing financial service providers which calls into question
the ongoing policy justification for the credit union tax subsidy.
Credit unions can offer their more than 80 million customers mortgages,
car loans, small business loans, credit cards, individual retirement
accounts, brokerage services, and commercial loans. From the modest
origins of the 1930s, today's tax-exempt credit union industry has
dramatically changed to support the same broad customer base, and to
provide the same range of services as taxpaying financial institutions.
An equitable tax system would impose the same tax treatment on the same
economic actions and transactions. Yet community banks face a greater
tax and regulatory burden than tax exempt credit unions while they
serve the same customer base.
Not Your Grandfather's Credit Union
Today there are one hundred credit unions with $1 billion or more
in assets providing sophisticated banking products and services to
wealthy and middle-income members while benefiting from tax-exempt
status. Another noteworthy aspect of today's tax-exempt credit union
industry is that corporate credit unions have been set up to provide
the same sophisticated wholesale services as taxpaying correspondent
banks. For example, U.S. Central Credit Union in Lenexa, Kansas holds
more than $35 billion in assets and is owned by 72 member credit unions
and has over $700 million in annual revenue. Today there are more than
30 corporate credit unions with over $110 billion in combined assets
providing specialized and sophisticated banking services for credit
unions.
No Common Bond
Today's credit unions have virtually no limit to their customer
base as the ``common bond'' requirement has become meaningless. Take
for example the recent credit union charter approval for the Los
Angeles Financial Credit Union to serve: ``Anyone who lives, worships,
works in, or attends school in Los Angeles County.'' This encompasses a
county of more than 10 million people and a geographic area larger than
the states of Delaware and Rhode Island combined.
Similarly, the NCUA justified the expansion of the $1.6 billion
Bethpage Federal Credit Union by saying that the 2.5 million people in
its field of membership ``interact by traveling along common roadways,
receiving news from common media outlets, and shopping at common trade
centers.'' One community credit union in Utah encompasses six
counties--an area larger than the state of Maryland. The ICBA believes
that these field of membership expansions undermine any concept of the
common bond, rendering it meaningless and removing a key policy tenet
underlying the purpose for any credit union tax-exempt advantage. The
87 million credit union customers are indistinguishable from the
customers of community banks and thrifts.
Tax Exempt Credit Unions Not Serving Special Purpose
What is the ongoing policy justification for the credit unions' tax
subsidy? Is the $680 billion credit union industry serving a unique
purpose not met by other financial service providers? A large and
growing body of research from the Congressional Budget Office, the
General Accountability Office, the Woodstock Institute, the Tax
Foundation and other research groups indicates that there is little or
no evidence that today's tax-exempt credit unions are better serving
the moderate and low-income individuals their tax-exempt status was
intended to foster.
A recent Tax Foundation study concluded that the credit union tax
subsidy has largely failed to deliver financial services to low-income
people.\4\ A 2005 study by the National Community Reinvestment
Coalition determined that banks actually do a better job of fulfilling
the credit unions' mission than the credit unions. This study
highlighted how banks ``consistently exceed credit unions' performance
in lending to women, minorities, and low and moderate-income borrowers
and communities.'' \5\ A 2003 Government Accountability Office Study
found that credit unions serve a more affluent clientele than banks.
This GAO study concluded that ``credit unions overall served a lower
percentage of households of modest means than banks.'' \6\
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\4\ ``Competitive Advantage: A Study of the Federal Tax Exemption
for Credit Unions,'' by Professor John A. Tatom, Ph.D. Tax Foundation,
2005. www.taxfoundation.org
\5\ ``Credit Unions: True to Their Mission?'' National Community
Reinvestment Coalition, May 2005. www.ncrc.org
\6\ General Accounting Office. ``Credit Unions: Financial Condition
Has Improved, but Opportunities Exist to Enhance Oversight and Share
Insurance Management.'' October 2003.
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Another study by the Woodstock Institute concluded that credit
unions serve a higher percentage of middle- and upper-income customers
than lower-income households.\7\ Similarly, a study by the Virginia
Commonwealth University concluded that credit unions tend to serve a
higher proportion of wealthier households in their customer base.\8\
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\7\ Woodstock Institute. ``Rhetoric and Reality: An Analysis of
Mainstream Credit Unions' Record of Serving Low-Income People. February
2002.
\8\ School of Business, Virginia Commonwealth University. A Study
on the Comparative Growth of Banks and Credit Unions in Virginia: 1985-
1995.'' August 1997.
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Additionally, a recent Congressional Research Service report added
that through credit union service organizations, ``credit unions may
provide their members with panoply of sophisticated financial services
and products that rivals the offerings of banks and thrifts.'' The CRS
report notes that ``over the past 30 years, most of the distinctions
between credit unions and other depository institutions have been
eliminated or reduced because of deregulation; consequently, the
justification for the tax exemption for credit unions has been
increasingly questioned.'' \9\ Simply stated, more and more studies are
piling up showing that today's credit unions are not serving any unique
purpose.
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\9\ Congressional Research Service. ``Should Credit Unions be
Taxed?'' August 2005.
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Credit Unions Expand into Commercial Lending
While new research continues to show credit unions are not
providing any special services to low- and moderate-income individuals,
the credit union industry has greatly expanded its business and
commercial lending. The credit unions recently sought and won
regulatory approval to increase their small business commercial lending
through the Small Business Administration (SBA). Ironically, Congress
did not approve SBA business lending for credit unions, however the
credit union regulator NCUA did. Notably, these SBA loans are not
subject to the legal 12.25 percent-of-assets business-lending cap
Congress specifically placed on the credit unions. So credit unions can
expand their SBA business lending regardless of Congress' intent.
Credit unions continue aggressive measures to skirt the legal 12.25
percent business-lending cap, notably with the advancement of the
``Credit Union Regulatory Improvement Act'' (H.R. 2317) in the 109th
Congress. This bill would raise the current statutory limit on business
lending by tax-exempt credit unions to 20 percent of a credit union's
assets from 12.25 percent, double the size of loans that would be
excluded from the cap from $50,0000 to $100,000 and exclude certain
other business loans from any limit.
As long as credit unions remain exempt from the tax and regulatory
requirements imposed on community banks, the ICBA strongly opposes the
expanded credit union powers in H.R. 2317. The bill substantially
increases the credit unions' commercial lending powers and makes a
number of statutory changes that are inconsistent with credit unions'
historic mission and favored tax status. This Ways and Means Committee
hearing on tax-exempts provides a solid opportunity to assess such
credit union activities in light of the ongoing special tax treatment
the credit union industry enjoys.
Commercial Lending Should Be Incidental Service
The ICBA continues to express concerns about the rapid expansion of
credit unions into the commercial lending arena, so long as credit
unions remain tax-exempt. It is doubtful that Congress, in passing the
Federal Credit Union Act of 1934 for the purpose of helping credit
unions serve individuals of modest means, envisioned credit unions
making commercial loans. Indeed, H.R. 1151, the Credit Union Membership
Access Act (``CUMAA''), which first codified the practice of commercial
lending, actually imposed a strict limit on credit union business
loans. The Senate Banking Committee report on this bill stated clearly
that Congress intended that business lending by credit unions be
incidental to, and not the main focus of, the services provided to
their customers. Yet through SBA lending and expanded lending powers,
credit unions are aggressively expanding into business lending.
Tax-Exempt Credit Unions Compete Directly With Taxpaying Community
Banks
Today, tax-exempt credit unions compete directly against taxpaying
community banks and continue to expand their financial service power,
size, and scope. The top federal income tax rate applied to C
corporation community bank income and S corporation community bank
income allocated to shareholders is 35%. Additionally, income generated
by C corporation community banks is subject to double taxation when
distributed in the form of dividends or capital gains, creating a
combined tax burden exceeding 57%.
In sharp contrast, tax-exempt credit unions pay no federal income
tax yet compete directly with taxpaying community banks. The dramatic
tax burden differential between taxpaying commercial banks and tax-
exempt credit unions places community banks at a severe competitive
disadvantage and highlights a specific example of where the tax code is
extremely unfair.
The credit union sector often states that they represent only a
small portion of the entire financial service industry. However, most
often tax-exempt credit unions compete head on with community banks of
similar size. The Tax Foundation's credit union study finds that the
``largest overlap in terms of competition and size is in the $10 to
$100 million size class, which includes about half of all banks and 30
to 40 percent of all credit unions. In this class banks and credit
unions primarily compete with each other and not with the largest banks
or credit unions.'' \10\
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\10\ ``Competitive Advantage: A Study of the Federal Tax Exemption
for Credit Unions,'' by Professor John A. Tatom, Ph.D. Tax Foundation,
2005. www.taxfoundation.org
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Growing Tax-Exempt Credit Union Industry Responsible for Significant
Tax Loss
The ICBA would like to call to the Committee's attention the most
recent independent research conducted on the tax cost associated with
the credit union industry. Notably, the Tax Foundation's 2005 credit
union study concluded that credit unions have used their tax-subsidized
status to greatly expand in size and scope. Because of their rapid
expansion, the Tax Foundation estimated that the credit union tax
subsidy will cost $31 billion in lost Federal revenue to the U.S.
Treasury over the next decade.\11\ This study noted how large, multi-
group and geographic-based credit unions have far exceeded their
original tax-exempt statutory mission and unfairly use their tax-free
status to compete with taxpaying community banks.
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\11\ ``Competitive Advantage: A Study of the Federal Tax Exemption
for Credit Unions,'' by Professor John A. Tatom, Ph.D. Tax Foundation,
2005. www.taxfoundation.org
---------------------------------------------------------------------------
Little of the Credit Union Tax Subsidy Passed Through to Customers
Other important finding of the independent Tax Foundation's
research into the tax-exempt credit union industry includes:
Corroborated by other studies of credit unions and banks, the
direct and indirect evidence gathered for the Tax Foundation study
shows that the equity holders of credit unions receive the tax savings
as unusual returns. These unusual returns do not show up as relatively
high dividends, however. Instead, they occur as unusually large
retained earnings accumulated as net worth in their credit unions. The
stakeholders' extra income reinvested in the credit union provides new
capital that allows the credit union to grow faster than other
institutions. Simply stated, rather than return the benefit of the tax
subsidy to their members, a huge portion of credit union earnings are
retained and used for expansion.
Only 6 Basis Points of 50 Basis Point Advantage Benefits Credit Union
Members
According to the Tax Foundation's research, of the 50 basis points
in subsidy that the tax exemption provides, at least 33 basis points
accrue to owners in the form of larger equity and larger assets.
Approximately 6 basis points may accrue to credit union borrowers
through lower interest rates, and not more than 11 basis points are
absorbed by higher labor costs. There is little or no effect on deposit
rates or other costs. There appears to be substantial leakage of the
credit union tax advantage into new expenditures to grow. For example,
the $2.7 billion Digital Credit Union in Massachusetts recently spent
$5.2 million to purchase the naming rights for an auditorium now called
the DCU Center.
Little Justification for Credit Union Tax Exemption
Today credit unions continue to grow faster than banks, have little
practical limitations on membership, and make business loans that
increasingly have no limits on who can borrow, how much or for what
purpose. More troublesome is the failure of the credit union industry
to provide any special or unique service to individuals of modest
means.
The Tax Foundation research concludes that today the principal
justification for the tax exemption would seem to be that it already
exists and, therefore, removing it could adversely impact thousands of
institutions and their customers. Under current law, as it is being
enforced, there is no good policy argument based on equity or
efficiency for maintaining the tax exemption. And these institutions
and customers are perceived, incorrectly, to be relatively lower income
or associated with the economic security and progress of lower income
people.
Tax Reform and Credit Unions
Policymakers are in the process of examining ways to make our tax
code fairer and simpler while raising needed revenues. Fiscal
neutrality and fairness in the Code would require addressing the
special tax treatment of credit unions. Taxing some financial
institutions that offer the same consumer deposits and loans while not
taxing others, in particular credit unions, distorts the allocation of
resources. It promotes the employment of deposit and credit resources
in the tax-free credit union sector at the expense of their
competitors, banks, thrift institutions and finance companies. Notably,
the Tax Foundation study could not find any net benefit to members that
could not or would not be available in the absence of tax-subsidized
credit unions. Credit unions are not compelled by regulators to meet a
higher standard in the service of low- and moderate-income customers,
and there is no evidence that they do so voluntarily.
Conclusion
Credit unions are among the most rapidly growing financial firms in
the country. Congress eliminated the tax exemptions for savings and
loans and mutual savings banks decades ago on the grounds that they
were similar to profit-seeking corporations. Since then, large credit
unions have come to resemble thrifts and banks. The looser field of
membership requirements allows credit unions, especially large ones, to
expand their growth opportunities, reinforcing the competitive
advantage obtained from their tax advantages.
Today's $680 billion tax-exempt credit union industry is
conspicuously similar to other taxpaying financial service providers
serving the same customer base. There is little or no evidence that
credit unions are providing any unique or special benefit or service to
people of modest means--the original impetus for their special tax
treatment. Therefore, it is important for policymakers to reassess the
tax-exempt status of the rapidly expanding credit union industry as
part of any review and oversight of the tax-exempt sector. This Ways
and Means hearing on the tax-exempt credit union sector is a welcome
first step.
Community banks pay their taxes and serve their communities.
Community banks play a vital role in the U.S. economy as a critical
source of lending for individuals, small businesses and farms across
America. The ICBA applauds the Ways and Means Committee for considering
policies that would help make the tax code more equitable as it is
applied to tax-exempt credit unions and taxpaying community banks.
I sincerely appreciate the opportunity to offer our comments for
this important hearing and to highlight areas where the tax code is
extremely unfair. The ICBA looks forward to working with the Committee
and we are encouraged by your ongoing efforts to fairly assess the
standing of tax-exempt credit union industry.
Chairman THOMAS. I thank the gentleman. Mr. Macomber?
STATEMENT OF MARK E. MACOMBER, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, LITCHFIELD BANCORP, LITCHFIELD, CONNECTICUT, ON BEHALF
OF AMERICA'S COMMUNITY BANKERS
Mr. MACOMBER. Thank you, Chairman Thomas. First, I'd like
to express my gratitude to Congress Nancy Johnson for her kind
introduction today. Nancy represents our district, our State,
and our Nation extraordinarily well. Chairman Thomas, Ranking
Member Rangel, and Members of the Committee. I am Mark
Macomber. I am President and CEO of the Litchfield Bancorp in
Litchfield, Connecticut. I am here this afternoon representing
America's Community Bankers, where I serve as first Vice
chairman of the board of Directors. I want to thank Chairman
Thomas for his leadership in reviewing the appropriate
application of tax-exemptions for cooperative and not-for-
profit organizations and in particular for today's hearing,
which is addressing the credit union industry. My institution
is a $180 million state chartered community bank that is part
of a two-bank mutual holding company. We are one of 765 mutual
savings institutions that operate throughout the country
alongside community banks organized as stock companies.
Today, my remarks will focus on the unfair competitive
advantages that credit unions have compared to community banks
like mine. We are facing a looming crisis unless tax policy
favoring multi-billion dollar credit unions is changed. We urge
the Committee to create a fair tax system that encourages a
diversity of community credit providers, offering competitive
products and paying taxes to support the public needs of our
Nation. The Nation's mutual savings institutions hold over $250
billion in assets and paid $800 million in taxes in 2004.
Mutual institutions have a long and vibrant history and have
demonstrated an enduring commitment to our communities. Over 35
percent of mutual institutions have been in existence for 100
years or more. My own institution was chartered in 1850. Mutual
institutions are cooperative. They were founded to serve the
average American. We are a critical part of our local
community--its life, its culture, and its economic future. We
have survived depressions and recessions, world wars, and
natural disasters.
In 1951, we survived taxation. Despite the revocation of
our tax-exemption, mutual savings institutions continue to
experience growth and thrive as pillars in the communities we
serve. The parallel to the development of mutual savings
institutions and credit unions is a very close one. In 1951,
this Committee determined that mutual institutions were mature
and provided a broad range of banking products and services,
and, as a result, should become subject to taxation despite
their cooperative status. I never had the opportunity to meet
my predecessors from that time, but I am quite sure that they
didn't like losing their tax-exemption. However, the
Committee's decision was the right one based on principles,
principles of equity, fairness, allowing the market to allocate
resources and generating revenue to support essential functions
of government. In our written submission, Chairman Johnson
states that, and I quote this, ``in 1951, Congress found the
mutual thrifts had essentially lost the essence of their
mutuality; and, therefore, lost their tax-exemption.''
Her submission reflects a total lack of understanding of
mutuality then and now. My own bank lives up to the intent and
standards of the community service envisioned by its
incorporators in 1850. She is simply wrong on this count.
Today, the credit union industry is a $646 billion segment in
the financial services industry, and is growing rapidly. This
growth, driven primarily by multi-billion dollar credit unions,
is increasingly displacing community banking. This trend will
accelerate unless the Committee takes action. Inaction will
result in more concentration and less competition driven only
by tax incentives and not by economic efficiency. The parallels
between mutual savings banks 50 years ago, including my own
bank, and today's conglomerate bank-like credit unions cannot
be ignored. Conglomerate full-service credit unions are
competing for the same customers and offering the same products
as community banks. In fact, credit union service
organizations, CUSOs, as used by Federal Credit Unions, are in
abuse of their tax-exempt status. Allowing credit unions to
create new companies that are outright purchase companies is
not only unfair, but completely unjustifiable and further
expands their tax-exemption.
These credit unions offer every conceivable financial
service, and serving more than most community banks. The range
of services even includes airplane leasing, and, as the
Chairman noted, pet insurance. Individual credit unions have
been granted geographic markets as large as 11,000 square miles
and so-called fields of membership of over 10 million people.
This last number, again alluded to--referred to by the
Chairman, is particularly phenomenal because it means that
there is one credit union today serving a population greater
than that of 42 of the 50 States. I say it again because it
bears repeating. Mr. Chairman and Members of the Committee,
like mutual savings institutions in 1951, these credit unions
should be recognized as a mature industry that has a
responsibility to contribute to essential federally funded
initiatives. In 1951, Congress concluded that the continuance
of tax-free treatment for mutual institutions would be
discriminatory. Clearly, continuing a tax-free treatment for
bank-like credit unions would be equally discriminatory today.
Thank you for the opportunity to testify before your Committee
today. I would be happy to answer any questions you may have.
[The prepared statement of Mr. Macomber follows:]
Statement of Mark E. Macomber, President and Chief Executive Officer,
Litchfield Bancorp, Litchfield, Connecticut, on behalf of America's
Community Bankers
Chairman Thomas, Ranking Member Rangel and Members of the
Committee, I am Mark Macomber, President and CEO of Litchfield Bancorp
in Litchfield, Connecticut. Litchfield Bancorp is a $180 million state
chartered community bank, part of a two bank mutual holding company. I
also serve as CEO of the holding company.
I am here this morning representing America's Community Bankers
(ACB), where I serve as First Vice Chairman of ACB's Board of
Directors. I want to thank Chairman Thomas and his staff for their
leadership in exploring the outdated tax exemption that bank-like
credit unions continue to enjoy at the detriment of community banks
across the country, and the impact of foregone revenue on strained
government finances.
My testimony is in four parts as follows:
1) History of Mutual Institutions and their Taxation;
2) History and Background of Credit Unions;
3) Taxation & Legislative History of Today's Credit Unions;
4) Mission of Credit Unions and How They Have Strayed.
The History of Mutual Institutions and their Taxation
Americans have always been entrepreneurs. Almost 200 years ago,
when Americans of limited means could not gain access to the commercial
banking system, neighbors pooled resources to create mutual savings
institutions. As customers of these institutions, they insisted on
quality service for themselves and their communities. As stewards, they
delivered it.
The contributions of mutual institutions are documented in the
history of American banking and the histories of the communities that
have benefited from the mutual institutions tradition of service. For
nearly two centuries, the nation's mutual institutions have contributed
to the quality of life in cities and towns across the United States. An
industry of independent, strongly capitalized and highly efficient
institutions with a commitment to community service has flourished.
Individuals of diverse backgrounds have formed businesses that strive
to address the need for credit and services in communities.
As the first financial institutions in our country, mutual
institutions in the United States were founded by individuals, for
themselves and their neighbors. The doors of commerce that banking
opened for the well-to-do in the early days of the country were closed
to average citizens. Mutual institutions stepped into this breach to
provide high quality consumer and small business banking services to
the depositors and to the communities they serve. They continue this
tradition today, and have become a critical part of their local culture
and community.
Beginning just 40 years after the Declaration of Independence,
mutuals were founded to provide banking services and credit access for
ordinary citizens whom the established banking community ignored.
Whether state or federally chartered, mutual institutions serve the
average American regardless of family background, occupation or belief.
These early mutual institutions did not pay taxes.
State chartered mutual savings banks, the earliest forms of mutual
savings institutions, date back to 1816. The first legally sanctioned
mutual savings bank in the world, The Provident Institution for
Savings, in Boston, Massachusetts, was patterned after similar
institutions in England and Scotland. Its founders dedicated the
institution to providing a ``means of contributing to the welfare of
the working classes.''
This was the forerunner of what became the mutual savings bank--one
of the two mutual savings institution charters that eventually became a
permanent part of the U.S. banking system. The other--the building and
loan associations--later evolved into the present savings and loan
associations. Federal savings and loans associations were first
chartered in 1933 after the enactment of the Home Owners Loan Act.
These institutions were chartered with the express purpose of promoting
and providing homeownership.
Provident Institution for Savings had as its purpose the
encouragement of thrift among low- and middle-income persons. One of
the reasons for the popularity of the new mutual institutions was the
ease of use--workers could deposit as little as five cents and could
withdraw the monies as needed.
About 765 mutual institutions--including mutual holding companies--
hold over $250 billion in assets. Mutual institutions have written and
hold about $175 billion in loans, and in addition they service about
$35 billion in mortgage loans that have been sold to the secondary
mortgage market. Mutual banks have helped millions of families live the
American dream by writing countless loans for homes, cars, education
and small businesses, and to help see families through difficult times.
Mutual institutions demonstrate an adaptability that allows the
development of new products. Like their stock-owned competitors, they
grow through internal expansion and by combination with other federally
insured depository institutions and branch networks. This flexibility
and adaptability is evidenced by the fact that 263 mutual savings
institutions operating today have been in existence for 100 or more
years. These venerable institutions, the oldest of which has operated
for 185 years, constitute 35 percent of all mutual institutions
operating today.
Mutual banks have survived depressions and recessions, world wars,
natural disasters and taxation because of a distinctive management
strategy that is focused on the long-term future of the bank and
community. Directors or trustees have a fiduciary responsibility to
ensure that their institution meets the highest standards of safety and
soundness. Mutual managers are free from the short-term focus of
financial analysts who expect higher earnings every quarter and are
thus able to look to the long-term needs of their institutions and
communities.
Mutual institutions are the perfect role model of community banks
and the community banking philosophy of putting customers and community
first. Mutuals are critical participants in the rapidly evolving
financial services marketplace. We believe that the orientation toward
community service, local decision-making and stable employment in
mutual banks are important keys to the continued success of any
community in which they are located. Mutual institutions have
demonstrated an adaptability that allows the development of new
products as well as growth. While mutual institutions have a continuing
need to be competitive and profitable, they demonstrate a
responsiveness to community that goes well beyond profits and strives
to improve the quality of life of their neighborhoods. Managers of
mutual institutions believe that their charter is well suited to
support non-profit and other civic enterprises.
Until 1951, mutual institutions of all types, including mutual
savings and loans associations, mutual savings banks, and cooperatives,
were tax-exempt. In 1951, the tax exemption was repealed and these
entities became subject to the regular corporate income tax on a
phased-in basis. It was believed that mutual institutions were mature
enough and were providing a sufficiently broad range of banking
products and services that they should not retain preferential tax
treatment.
In 1959 the Ways and Means Committee described the criteria laid
down as guidelines for considering such changes in taxation:
1. Equity and fairness;
2. Progression in the distribution of tax burdens;
3. Allowing free play of the market in allocating resources;
4. Providing a climate for economic growth;
5. Ease of taxpayer compliance and administration of the law.\1\
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\1\ ``Outline of Study by Committee on Ways and Means of Federal
Tax Revision,'' Press Release, Committee on Ways and Means, U.S. House
of Representatives, June 5, 1959.
Although mutual institutions initially were permitted to defer
portions of the new tax liabilities by establishing special bad debt
reserves to encourage the accumulation of reserves, these deferrals
were progressively eliminated in a series of changes, principally in
1962 and 1969, and were eliminated entirely in 1986. Despite being
progressively subjected to full taxation over a period of years, mutual
institutions have thrived as pillars in the communities they serve.
Over the past 15 years, the number of mutual institutions has grown
as a share of all banks. This change has occurred because the
cooperative structure and community focus of mutual institutions has
insulated them in part from the ``merger frenzies'' that have sometimes
gripped markets for publicly traded banks. Today, mutual savings
institutions are stable, competitive, tax-paying institutions that
operate under flexible charters conducive to offering a wide range of
essential banking services to the communities in which they operate. It
is little wonder that in recent years the memberships of two dozen
credit unions have chosen to convert to a mutual institution charter.
History and Background of Credit Unions
Credit Unions can also be state or federally chartered. State
credit unions were first chartered in the United States in the early
twentieth century. Federal credit unions are chartered under the
authority of the federal credit union act, which was enacted in 1934.
A federal credit union is a tax-exempt, cooperative financial
institution owned and run by its members. Credit unions enable members
to save and borrow money. Members pool their funds to make loans to
one-another. The volunteer board that runs each credit union is elected
by the members. In 1900, the credit union concept crossed the Atlantic
to Levis, Quebec. There, Alphonse Desjardins organized a credit union
to relieve the working class from usurious interest charged by loan
sharks. In 1909, Desjardins helped a group of Franco-American Catholics
in Manchester, New Hampshire organize St. Mary's Cooperative Credit
Association--the first credit union in the United States. An ironic
footnote--while it remains a credit union today, it recently changed
its name to St. Mary's Bank. The Massachusetts Credit Union Act became
law in that same year. The Massachusetts law has served as a basis for
subsequent state credit union laws and the Federal Credit Union Act.
Credit unions became increasingly popular in the 1920's. People had
more money to save and could afford durable goods. However, they needed
a source of inexpensive credit. Credit unions began growing because
commercial banks and savings institutions typically did not provide
consumer credit. In 1920, the Massachusetts Credit Union Association
began promoting the development of credit unions in that state. Within
a year, Massachusetts chartered 19 new credit unions. By 1925, 26
states had passed credit union legislation. By 1930, that number grew
to 32 states with a total of 1,100 credit unions. In 1934, President
Roosevelt signed the Federal Credit Union Act into law, authorizing the
establishment of federally chartered credit unions in all states.The
purpose of the federal law was ``to make more available to people of
small means credit for provident purposes through a national system of
cooperative credit . . .'' A statutory exemption from taxation was not
provided until 1937. Two reasons were given for granting the exemption:
1. Taxing credit unions on their shares, much as banks are taxed on
their capital shares, ``places a disproportionate and excessive burden
on the credit unions'' because credit union shares function as
deposits; 2. ``Credit unions are mutual or cooperative organizations
operated entirely by and for their members. . . .'' Competition in the
1970s brought major changes in the products and services offered by
financial institutions. Credit unions did not want to be left out. In
1977, federal legislation enabled credit unions to offer expanded
services, including share certificates and mortgage lending. During the
decade the number of credit union members more than doubled and assets
in credit unions tripled to over $65 billion. Deregulation, increased
flexibility in merger and field of membership criteria, and expanded
member services characterized the 1980s. High interest rates and
unemployment in the early '80s brought supervisory changes and
insurance losses. With the Share Insurance Fund near bankruptcy, the
credit union community called on Congress to approve a plan to
recapitalize the Fund. In 1985, federally insured credit unions
recapitalized the NCUSIF on their own by depositing one percent of
their shares into the Share Insurance Fund. Backed by the ``full faith
and credit of the United States Government,'' the National Credit Union
Share Insurance Fund has three ``fail safe'' features: Federal credit
unions must maintain a one percent deposit in the Fund; Premiums are
levied by the Board if necessary; and when the equity ratio exceeds 1.3
percent ($1.30 on deposit for every $100 insured), the Board sends a
dividend to credit unions. Since the recapitalization, the NCUA Board
has charged credit unions a premium only once. In 1991, the Fund
dropped to a 1.23 percent equity level and credit unions were asked to
pay a premium. Credit union failures declined steadily throughout the
90's and the Share Insurance Fund grew. Taxation and Legislative
History of Today's Credit Unions
The credit union industry is a $646 billion segment of the
financial services industry that paid $0 in taxes last year. In fact,
the credit union industry has contributed no tax dollars to our country
over the past 69 years, creating a competitive inequity that must be
remedied. By comparison, mutual savings institutions hold less than 40
percent of the assets currently held by credit unions, but paid $800
million in taxes, while credit unions pay nothing.
To gain a better understanding of the need for tax equity among
financial service providers, it is useful to review the dialogue that
took place when the tax exemption for savings associations and mutual
savings banks was repealed in 1951 and when tax deductible reserve
provisions for these same entities were reviewed ten years later. By
doing so, it becomes clear that the parallels between savings
associations and mutual savings banks 50 years ago and the conglomerate
credit unions of today cannot be ignored.
1951 and 2003: Active Competition With Taxpaying Financial Service
Providers
Today's conglomerate, full-service credit unions are competing for
the same customers and are offering the same products as community
banks, large commercial banks, and even brokerage firms. Like the
savings associations and mutual savings banks of 1951, these
institutions should be recognized as a mature industry that has a
responsibility to contribute to the nation's armed forces, educational
programs, homeland security, transportation system, and other important
federally funded initiatives.
Prior to the Revenue Act of 1951, savings and loan associations and
mutual savings banks were exempt from federal income tax under the
premise that they were cooperative enterprises that played an important
role in the national priority of financing residential mortgages, and
therefore should be exempt from taxation.
In 1951, Congress indicated that these institutions had grown in
financial strength to the extent that they should be expected to bear
their fair share of the tax burdens of the Nation. The Senate Report
for the Revenue Act of 1951 states:
Mutual savings banks are in active competition with commercial
banks and life insurance companies for the public savings, and they
compete with many types of taxable institutions in the security and
real estate markets. The continuance of the tax-free treatment now
accorded mutual savings banks would be discriminatory. So long as they
are exempt from income tax, mutual savings banks enjoy the advantage of
being able to finance their growth out of earnings without incurring
the tax liabilities paid by ordinary corporations when they undertake
to expand through the use of their own reserves. [Eliminating the
special treatment] would place mutual savings banks on parity with
their competitors.\2\
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\2\ S. REP. 82-781 (1951) reprinted in United States Code
Congressional and Administrative Service at 1993-1994.
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Likewise, today some credit unions have evolved to become
significant competitors for public banking services. In fact, credit
unions are more like banks today than savings associations were in
1951. In 1951 federal mutual savings associations could not offer
checking accounts and they were only authorized to engage in lending
activities within their communities, which generally were limited to a
50-mile radius.
Today, credit unions offer mortgages, credit cards, business
checking accounts, debit cards, IRAs, student loans, consumer loans,
home equity lines of credit, agricultural and commercial loans, money
market accounts, brokerage services, mutual funds, and insurance
products. Furthermore, community chartered credit unions have been
granted fields of membership stretching over 11,000 square miles.\3\ In
addition, LA Financial has been granted a field of membership
encompassing all of Los Angeles County and all of its 10.1 million
people. LA County has a population larger than the population in 42
states. It encompasses 4,084 square miles.
---------------------------------------------------------------------------
\3\ Tooele Federal Credit Union's community field of membership
consists of Salt Lake County, Davis County, Weber County, Morgan
County, and Summit County, and Tooele County Utah. The geographic areas
of these counties are available at http://quickfacts.census.gov/.
---------------------------------------------------------------------------
Because credit unions offer such a broad range of products and
because they may offer those services to such a large geographic
distribution of consumers and businesses, conglomerate credit unions
are clearly competing with other taxpaying financial services
enterprises. Large credit unions have matured, and special treatment
should not continue for that fast growing portion of the credit union
industry that looks and acts like banks. The words of the 1951 Senate
Report ring just as true for credit unions today as they did for
savings associations and mutual savings banks in 1951.
1961 and 2003: Reserves Represent Corporate Income
Some credit union advocates argue that taxing credit unions
threatens the safety and soundness of the entire industry. They
maintain that credit unions would not be able to survive such a tax
because they are only able to raise capital through retained earnings.
Like credit unions, mutual savings banks return income earned from
borrowers to savers after deducting expenses and required allocations
to reserves. Despite the revocation of their tax exemption, mutual
savings banks continue to experience growth. Moreover, just as Congress
determined that the safety and soundness argument was not persuasive in
the context of expanding the tax on mutual savings banks in 1961, the
assertion that credit unions cannot withstand any taxation should
likewise be rejected.
If the funds going into the corporation's reserve do represent
corporate income, there would appear to be no reason, from the
viewpoint of tax policy, for not taxing them. Moreover, other financial
institutions that compete for the savers' dollars, such as commercial
banks, do in fact have to depend primarily on surplus built up after
taxes, rather than on access to the equity capital market, in order to
obtain the protective capital cushions which all businesses need.\4\
---------------------------------------------------------------------------
\4\ Treasury Department Report of July 1961 on the Taxation of
Mutual Savings Banks and Savings and Loan Associations at 8.
---------------------------------------------------------------------------
The rationale for taxing credit unions is solid; the need to tax
credit unions is pressing; and the motivation for taxing credit unions
is central to the success of private enterprise. Credit unions have
matured to a $646 billion industry, and rising federal and state
deficits confirm the need for fairness. Congress should review the
government-created competitive disparity between credit unions and
community banks, particularly those that are mutually organized, and
should enact legislation that represents sound public policy, is fair
to all competitors in our banking system, and is fair to the American
taxpayer.
Please refer to Appendix I.
Mission of Credit Unions and How They Have Strayed
Credit unions are not fulfilling their mandate to serve persons of
modest means.
Congress chartered credit unions in 1934 to serve persons of modest
means. In return, credit unions were exempted from taxation. However,
an October 2003 General Accounting Office (``GAO'') report indicates
``that credit unions served a slightly lower proportion of low- and
moderate-income households than banks.'' Similarly, a 1991 GAO report
found ``no evidence that today's credit union members are for the most
part of small means.''
Further, the credit union industry has vehemently opposed efforts
to require credit unions to engage in special efforts to serve low-
income customers or neighborhoods like banks and savings institutions.
In fact, in a March 30, 2005 editorial the Credit Union Times, by Mike
Welch, stated: ``ACB apparently thinks credits unions' first obligation
is to serve communities in which they operate. Wrong. CUs' number one
obligation is to serve the changing financial needs of the members who
own it. Of course, the community will also be served as a by-product.''
The comment is self-serving and ignores the substantial federal safety
net provided to credit unions through the National Credit Union Share
Insurance Fund, in addition to the substantial tax subsidy under
discussion today. This would be like a bank saying that serving
shareholders is sufficient and serving the bank's community is a mere
afterthought. Credit unions' not-for-profit status is no excuse for an
exemption from community reinvestment responsibilities. Banks and
savings institutions have Community Reinvestment Act responsibilities
regardless of whether they make a profit.
Field of Membership Expansion. In 1998, the passage of the Credit
Union Membership Access Act (``CUMAA'') formalized the establishment of
several types of credit union membership. It specifically identified
single common-bond credit unions, multiple common-bond credit unions,
and community credit unions.In so doing, CUMAA encouraged many mid-size
and large credit unions to dramatically grow their memberships and
expand into new markets. This is particularly true with credit unions
that converted to community charters. In some cases, the geographic
limits of communities were extended to boundaries that not only defied
the definition of ``community,'' but also defied logic.
Emboldened by CUMAA, the NCUA has not only allowed, but actually
encouraged credit unions to abandon their historically well-defined
groups, such as employees of a specific company, and move on to adopt
all-encompassing ``community'' charters. On December 10, 2004 a federal
judge for the U.S. District Court for the District of Utah struck down
an NCUA decision granting a charter spanning six counties in the state
of Utah, which would have covered an area larger than the state of
Maryland. In the decision the judge expressed concern that the NCUA was
acting ``as a rubber stamp or cheerleader for any application brought
before it.'' The judge went ever further to criticize the NCUA for
failing to do due diligence. Judge Dale A. Kimball said that ``If the
NCUA had conducted a critical analysis of the information provided, it
should have recognized areas of concern that required further
discussion.''
Through such charters, the credit union can serve multiple
unrelated membership groups under one umbrella, including much of the
general public over a wide geographic area. Recent changes to the
NCUA's field of membership rules also provide for the creation of an
occupational common bond based on a trade, industry or profession.
Members can also share a common bond by virtue of providing similar
products, providing similar services or sharing the same profession or
trade.
Credit Union Service Organizations (CUSOs). Many credit unions have
formed subsidiaries known as credit union service organizations
(``CUSO''s) that have contributed significantly to the dramatic growth
of complex, conglomerate credit unions. CUSOs offer sophisticated
products such as trust administration and investment services. CUSOs
also provide non-traditional financial services such as real estate
brokerage, pre-paid legal service plans, and travel agency services. In
many cases, CUSOs are established to offer services not permitted by a
credit union's charter. All Income generated through CUSOs should be
taxed.
List of Permissible CUSO Activities\5\
---------------------------------------------------------------------------
\5\ 12 CFR 712.5. The specific activities listed within each pre-
approved category are provided as illustrations of activities
permissible under the particular category. The NCUA rules state that
this is not an exclusive list.
---------------------------------------------------------------------------
Checking and currency services
Check cashing
Coin and currency services
Money orders, savings bonds, travelers checks, and
purchase and sale of U.S. Mint commemorative coins services
Clerical, professional, and management services
Accounting services
Courier services
Credit analysis
Facsimile transmissions and copying services
Internal audits for credit unions
Locator services
Management and personnel training and support
Marketing services
Research services
Supervisory committee audits
Business loan origination
Consumer mortgage loan origination
Electronic transaction services
Automated teller machine services
Credit card and debit card services
Data processing
Electronic fund transfer services
Electronic income tax filing
Payment item processing
Wire transfer services
Cyber financial services
Financial counseling services
Developing and administering IRA, Keogh, deferred
compensation, and other personnel benefit plans
Estate planning
Financial planning and counseling
Income tax preparation
Investment counseling
Retirement counseling
Fixed asset services
Management, development, sale, or lease of fixed assets
Sale, lease or servicing of computer hardware or software
Insurance brokerage or agency
Agency for sale of insurance
Provision of vehicle warranty programs
Provision of group purchasing programs
Leasing
Personal property
Real estate leasing of excess CUSO property
Loan support services
Debt collection services
Loan processing, servicing, and sales
Sale of repossessed collateral
Record retention, security, and disaster recovery services
Alarm-monitoring and other security services
Disaster recovery services
Microfilm, microfiche, optical and electronic imaging,
CD-ROM data storage and retrieval services
Provision of forms and supplies
Record retention and supplies
Securities brokerage services
Shared credit union branch (service center (operations)
Student loan origination
Travel agency services
Trust and trust-related services
Acting as administrator for prepaid legal service plans
Acting as trustee, guardian, conservator, estate
administrator, or in any other fiduciary capacity
Trust services
Real estate brokerage services.
Please refer to Appendix II.
Credit Union Member Business Loans
In September 2003 the NCUA revised its rule to allow federal credit
unions to circumvent Credit Union Membership Access Act's statutory
assets. CUMAA stated that member business loans could be 1.65 times the
credit union's net worth or 12.25% of its total assets. However, the
new rule allows credit unions to exclude purchases of participation
loans and non-member loans from this statutory cap upon NCUA approval.
The Department of Treasury opposed the proposal, but unfortunately the
final rule virtually ignored Treasury's concerns and opposition.
Large Sophisticated Credit Unions Hide Behind the Small Credit Union
Image
Over the years, two distinct credit union industries have emerged.
The first adheres to its statutory mission. The other hides behind the
small credit union image to preserve its federal tax exemption. Even
the National Credit Union Administration recognizes that the expansion
that it has allowed to occur within the credit union industry now makes
many credit unions indistinguishable from banks and savings
associations. At a November 18, 2004 NCUA Board meeting, board member
Deborah Matz observed that many legislators consider small credit
unions to be the symbol of all credit unions. As a result, she
reasoned, it is important to preserve small credit unions so that the
entire credit union industry will not be taxed.
We see no value in subsidizing credit union conglomerates that
offer diverse, high-end financial products and services to the general
public. It is a common misperception that credit unions offer only
basic banking services to local hospital employees, schoolteachers, and
government workers. In reality, many credit unions have evolved into
complex financial institutions that do not have meaningful membership
restrictions.
For example, credit unions offer commercial loans, stocks, mutual
funds, margin and option accounts, trust services, and other
sophisticated products. Furthermore, many credit unions do not have a
distinct field of membership and offer financial products and services
to the general public. For instance:
LA Financial Credit Union's field of membership includes
all of Los Angeles County and its 10.1 million residents. Los Angeles
County is home to more than 25% of California's population and more
people than reside in 42 of this nation's 50 states.
Suncoast Schools FCU in Tampa, FL caters to persons in 14
counties and has assets of over $4 billion.
Citizens Equity First CU in Peoria, IL serves over 14
counties and employees of over 550 select companies.
Rhode Island-based Greenwood Credit Union advertises that
membership ``is open to all responsible people who want to be
members.''
$800 million Greylock Federal Credit Union in Massachusetts
recently ran radio advertisements telling listeners if they ``have a
pulse,'' they are probably qualified to join Greylock Federal Credit
Union.
Specific Abuses by Credit Unions Pet Insurance?
Yes, pet insurance. Believe it or not, CUNA has an article on their
website boasting the fact that two of the largest credit unions in
Colorado offer pet insurance to their members.
Fido, Kitty offered insurance through CUs
COLORADO SPRINGS, Colo. (7/23/03)--El Paso County, Colorado's two
largest credit unions have taken the family pet under their field of
membership--at least indirectly.
Ent FCU and Air Academy FCU are offering pet insurance coverage for
dogs and cats through a Colorado CU League subsidiary that also helps
credit unions offer trust services, dental insurance and other products
(The Gazette July 20).
Depending on the level of coverage and Fido's size, age, and
health, monthly premiums for dogs are $9.95 to $55.90. For Kitty, the
rates range from $8.50 to $26.90. Compare that to the $2,000 a year one
owner of a rambunctious mutt paid in vet bills, including $1,800 for
surgery to remove a corn cob stuck in the dog's intestines. The
coverage includes up to $3,000 per incident for accidents, broken
bones, bites, and illness.
Ent began offering the coverage last month when it became available
from the league and because members said pet care expenses were
becoming a financial issue. Air Academy began offering pet insurance in
May.
The credit unions share in the revenue produced by the pet
insurance program, which offers checks and electronic greeting cards
imprinted with a pet's photo, an online pet photo album, and discounts
at a pet products retail chain.\6\
---------------------------------------------------------------------------
\6\ Article reprinted from: http://www.cuna.org/newsnow/03/
system072203-9.html
---------------------------------------------------------------------------
Credit Unions Are Not For Profit?
Digital Federal Credit Union is spending $5.2 million for
the naming rights to the Worcester Centrum Centre. In effect, the
credit union's tax-free status means that local taxpayers will
subsidize the cost of these naming rights by $2 million. Digital
Federal Credit Union also conducted a major television advertising
campaign during Boston Red Sox baseball games.
Over the past year, $4.6 billion BECU sent 2.1 million
direct mail pieces and drew in 20,000 new members.
According to a July survey by the National Association of
Federal Credit Unions, 39% of respondents indicated that they impose a
minimum balance on share draft accounts while another 35% indicated
that they charge monthly fees.
Commodore Perry Federal Credit Union imposes a $5 check-
cashing fee on members that maintain only a regular share account at
the credit union, but no checking account, no loans, no active account.
Members will also be charged for cashing checks if they withdraw the
full amount of their direct deposit on the day it is deposited, but
have no active accounts.
Portland Teachers Credit Union President Cliff Dias
earned $1.6 million in salary and bonus in 2003, according to a report
the credit union filed with the IRS.
Unrelated Business Income Tax
As a general rule, not for profit organizations are subject to the
unrelated business income tax (UBIT) on net income from activities that
are not substantially related to the organization's exempt purpose. The
Internal Revenue Service (IRS) has not issued guidance regarding the
application of UBIT to non-traditional credit union activities,
although credit unions in Alabama, Connecticut, and Colorado have
reportedly received UBIT-related inquiries from the IRS.
Credit unions should not be permitted to offer such a wide array of
products to the general public without being subject to some form of
taxation. We urge the House Ways and Means Committee to study CUSOs in
the context of evaluating how credit unions have evolved beyond
organizations with limited fields of membership that provide financial
services to persons of modest means. We support examining whether the
UBIT or an UBIT-like tax should be applied to certain credit unions.
Sophisticated credit unions should be recognized as complex financial
institutions and should no longer be permitted to claim that they are
part of a ``mom and pop'' industry that deserves to be exempt from
federal income tax.
Credit unions compete with insurance providers and car dealerships as
well as community banks
Redwood Credit Union recently formed RCU Insurance Services, a
credit union service organization that offers insurance products to
both credit union members and non-members living in the community.
Redwood Credit Union also owns an auto center where members can shop
for vehicles with on-site financing and auto insurance.
(http://www.cuna.org/newsnow/products.html)
City County Credit Union, Margate, Fla., also owns a used car
dealership for both credit union members and non-members. They also
provide on site financing.
http://www.cuna.org/newsnow/archive/list.php?date=021005
Please refer to Appendix III.
Conclusion
Chairman Thomas, Ranking Member Rangel, and Members of the
Committee, we thank you for inviting America's Community Bankers to
testify on the ``Review of Credit Union Tax Exemption.'' Over 50 years
ago, this same Committee undertook an examination of the tax-exemption
granted to mutual banks and savings and loans. After lengthy
deliberation, the Committee concluded that mutual institutions were
competing directly with banks and to continue the exemption should be
discriminatory. The same is true today. We reemphasize that our concern
remains with the sophisticated credit unions that have grown beyond
their common bond and are as bank-like as mutual institutions that are
taxed. From a competitive perspective, these credit unions have become
tax-exempt community banks, creating situations in which a billion
dollar, tax-free credit union can sit opposite a $180 million, non-
stock, taxpaying mutual savings bank like mine. ACB commends the
Committee and its staff for undertaking an examination of the tax-
exempt sector, and we look forward to working with the Committee on
this important issue.
Appendix I
----------------------------------------------------------------------------------------------------------------
$7.5 billion.\8\
Federal mutual
$0 Would have paid savings
$1.32 billion if associations paid
Income tax liability 2003 taxed at the same Lost exemption in over $285 million $30 billion.\10\
rate as banks and 1952. in 2003. All
savings federally insured
associations.\7\ mutuals paid $1
billion.\9\
----------------------------------------------------------------------------------------------------------------
CRA obligations No CRA obligations. Predated the CRA. The CRA requires Same as federal
Mutual savings insured savings
associations depository associations.
worked to institutions to
maintain and serve and help
foster the foster growth in
economic strength each of the
of communities communities they
they served. serve, including
low- to moderate-
income areas
within their
communities.
----------------------------------------------------------------------------------------------------------------
Interest on consumer checking Federal credit No. Checking Federal savings Same as federal
accounts unions may pay accounts were not associations may savings
interest on both permitted. not pay interest associations.
consumer and on business
business checking checking
accounts. accounts.
Offering interest
bearing NOW
accounts to
individuals and
nonprofit
organizations is
permissible.
----------------------------------------------------------------------------------------------------------------
Field of membership Federal credit Mutual savings Not applicable. Not applicable.
unions may serve associations were
only persons authorized to
within their field lend within their
of membership. communities,
Over the years, which generally
membership was defined to
restrictions have comprise a 50-
been liberalized mile radius.
legislatively and
by regulation. In
2003, the NCUA
greatly expanded
its field of
membership rules.
At a minimum, the
new rules will
allow 56 million
additional people
to qualify for
credit union
membership.
Separately, some
states have very
liberal field of
membership
interpretations..
----------------------------------------------------------------------------------------------------------------
Lending limits A federal credit Historically, Lending limits The single
union may lend to mutual savings track those for borrower limit
any one member up associations national banks. generally is 15%
to 10% of its could lend up to Federal savings of the bank's
deposits.. a percentage of associations also capital and
assets, generally have an surplus on an
between 15-20% of additional unsecured basis.
assets to a lending limit An additional 10%
single borrower, authority for limit is
depending upon residential available if
loan type. development collateralized
loans. with fully
marketable
securities.
----------------------------------------------------------------------------------------------------------------
Business lending authority Federal credit No. Federal savings National banks
unions may make associations may have general
business loans of make commercial commercial
up to 12.25% of loans in an lending
total assets. aggregate amount authority.
However, a recent totaling 20% of
rule adopted by total assets, 10%
the NCUA allows of which must be
credit unions to in small business
exclude purchases loans.
of participation
loans and non-
member loans from
the statutory cap
if approved by the
NCUA.
----------------------------------------------------------------------------------------------------------------
Unsecured consumer loans Yes (12-year term No. Yes. Yes.
limit).
----------------------------------------------------------------------------------------------------------------
Insurance/securities powers Yes. No. Yes. Yes.
----------------------------------------------------------------------------------------------------------------
\7\ Banks and savings associations pay approximately 40% of their income in federal and state taxes each year.
According to the NCUA's 2003 Annual Report, Federal credit unions had a net income of $3.3 billion, 40% of
which is $1.32 billion. President Bush's FY 2005 budget estimates that credit unions' federal tax exemptions
will cost a cumulative total of $7.88 billion between 2005 and 2009.
\8\ SNL Database.
\9\ Id.
\10\ Id.
Appendix II--Credit Union Products and Services*
---------------------------------------------------------------------------
* This chart is intended to illustrate that credit unions have
evolved into full service financial service providers that offer the
same products and services as community banks. It is not intended to be
a comprehensive list.
Loan Products: Mortgate Loans; Commercial Loans; Commercial
Property Loans; Aircraft Loans; Lines of Credit; Recreational Vehicle
Loans (including Boats, MOtorcycles, Snowmobiles, and Waverunners);
Automobile Loans; Home Equity Lines of Credit; Credit Cards; Student
---------------------------------------------------------------------------
Loans.
Deposit Products: Individual Retirement Accounts; Checking
Accounts; Money Market Deposit Accounts; christmas Colubs; Certificates
of Deposit; Debit Cards.
Investment Products: Stocks; Margin Accounts; Option Accounts;
Trust Services; Unit Investment Trusts; fixed Annuities; Variable
Annuities; Retirement and Investment Planning; Mutual Funds; Retirement
Plans (401 (k), 403(b), SEP, etc.); 529 Educational Savings Plans; Tas
Free Municipal Bonds; Corporate Bonds; U.S. Government Bonds.
Insurance Products: Automobile Insurance; Term Life Insurance;
Whole Life Insurance; Accidental Death and Dismemberment Insurance;
Homeowners Insurance; Disability Income Insurance; Long Term Care
Insurance; Renter's Insurance; Dental Insurance; Risk Management
Insurance Needs Analysis; Credit Life Insurance.
Services: Sweep Services; Online Banking; Wire Transfers; Safe
Deposit Boxes; Savings Bonds; Cashier's Checks; Money Orders; Gift
Checks; Extended Warranty Policies on New or Used Vehicles; Cash Back
Real Estate Programs Members earn cash rebates when buying or selling
real estate. Members are assigned a real estate agent. After
settlement, a cash rebate is directly deposited into the member's
account; Automobile Listing Services A computerized listing service
that gives members access to listings of new auto prices, including the
MSRP and the dealer's invoice costs. The guide also provides
information on options and their prices; Discount Vehicle Buying
Services Advisors search for new and used vehicles on a member's
behalf.
Appendix III
Credit Unions: Fact vs. Fiction
------------------------------------------------------------------------
Myth Fact
------------------------------------------------------------------------
Myth: Credit unions deserve to be exempted Fact: Credit unions are not
from taxation because they are the only cooperatively
cooperatives. owned financial
institutions. Like credit
unions, mutually organized
savings and loan
associations and mutual
savings banks return to
savers income earned from
borrowers after deducting
expenses and required
allocations to reserves.
Mutuals pay corporate
income tax on retained
earnings (undistributed net
income).
------------------------------------------------------------------------
Myth: Credit unions are not-for-profit. Fact: Credit unions are very
profitable. They retain
earnings and they are using
those earnings to grow at a
rapid pace. In 2002,
federally insured ``not-for-
profit'' credit unions had
a net income of over $5.6
billion.\11\ Further, these
credit unions held over $37
billion in undivided
earnings. Federally insured
mutually organized savings
institutions had a net
income of approximately
$1.6 billion and paid
approximately $868 million
in income taxes.\12\
------------------------------------------------------------------------
Myth: Credit unions serve persons of Fact: An October 2003 report
modest means. by the General Accounting
Office found that banks
serve a higher proportion
of low- and moderate-income
households than credit
unions. Credit unions are
exempt from the Community
Reinvestment Act and are
not required to engage in
special efforts to serve
low-income consumers or
neighborhoods.
------------------------------------------------------------------------
Myth: Credit unions have limited fields of Fact: Credit unions no
membership. longer have the membership
limitations that were
originally justified their
income tax exemption.
Today, credit unions cater
to the general public and
serve the same customers as
community banks. Credit
unions that historically
served well-defined groups,
such as employees of a
specific company, have
moved to adopt
``community'' charters that
allow them to serve the
general public over a wide
geographic area. Other
``common bond'' credit
unions have been permitted
to include over 1,000
unrelated membership groups
within their field of
membership.
------------------------------------------------------------------------
Myth: Credit unions are a ``Mom and Pop'' Fact: Credit unions are a
industry. $623 billion industry.
Approximately 100 credit
unions have assets of $1
billion or more.
------------------------------------------------------------------------
Myth: Community banks hypocritically seek Fact: The shareholders of
additional Subchapter S benefits Subchapter S banks pay
taxes on their earnings
regardless of whether those
earnings are distributed.
While a credit union with
$1 million in retained
earnings pays $0 in taxes,
a Subchapter S bank with
the same retained earnings
pays close to $400,000 in
taxes.
------------------------------------------------------------------------
\11\ NCUA 2002 Annual Report. Federally insured credit unions include
federal and state charters that have share insurance. Federally
chartered credit unions alone earned nearly $3.1 billion in 2002.
\12\ SNL Database. Federally insured mutuals institutions include all
federally chartered institutions as well as those state chartered
institutions that have federal deposit insurance.
Chairman THOMAS. Thank you, Mr. Macomber. The gentlewoman
from Connecticut. Does Mrs. Johnson wish to inquire?
Mrs. JOHNSON. Thank you, Mr. Chairman. There clearly is a
difference between the very big credit unions and the smaller
credit unions. Are there greater constraints on you membership
area, Mr. Macomber, than on a credit union's membership area?
Or membership isn't the right word--but your service area?
Mr. MACOMBER. Well, legally, we get to go across State
boundaries. We certainly have to do some work. But we are not
really restricted geographically as far as the State of
Connecticut. There was at one time a law in place that had a
50-mile radius restriction on banks like mine. However, as a
practical matter, again, we are $180 million bank, and exactly
like credit unions, we generate all of our capital, all of it
from retained earnings. As a bank our size, we really don't
have access to capital markets for any consequential growth in
capital, so we are also limited to where our capital comes from
from retention earnings.
Mrs. JOHNSON. What is the regulatory burden of a small bank
versus a small credit union?
Mr. MACOMBER. Well, we are not subject to CRA. And, as I
think was mentioned earlier, there are a couple of recent--
actually one as recent as 2003 that indicated that credit
unions were not serving the lower-income and moderate-income
individuals as well as smaller banks are doing, community banks
are doing. I would like to quote actually something that was in
the Credit Union Times. Their editor, Mike Wells stated that--
and this is in response to a letter over my signature that was
printed in his publication, ``ACB apparently thinks credit
unions' first obligation is to serve communities in which they
operate. Wrong. CUs' number one obligation is to serve the
changing financial needs of the members who own it. Of course,
the community will also be served as a by-product.'' That is
not exactly, you know, a ringing endorsement of what the
Community Reinvestment Act is all about, and I think the
performance of credit unions outside of what they are chartered
to have done in 1934 supports that this statement is exactly
how a lot of credit unions feel.
Mrs. JOHNSON. Is it more costly for a small bank to make a
loan than it is for credit union to make a loan?
Mr. MACOMBER. That is hard to gauge. You know, I will say
that the overhead in credit unions, looking at their
statistics, tends to run higher. I don't think that is a
function of what it costs to make a loan.
Mrs. JOHNSON. In this issue of size, is there any precedent
in any other section, area of banking, to regulate differently
according to size?
Mr. MACOMBER. Again, in the CRA area, banks now under the
FTIC, the OTS, actually started this, and the FTIC has adopted
similar rules. Banks of a billion dollars or less have a less
detailed examination from a CRA perspective than banks of over
a billion dollars.
Mrs. JOHNSON. Thank you. Thank you, Mr. Chairman.
Chairman THOMAS. Does the gentleman from New York wish to
inquire?
Mr. MCDERMOTT. No.
Chairman THOMAS. Does the gentleman from Kentucky wish to
inquire?
Mr. LEWIS OF KENTUCKY. No. Not at this time.
Chairman THOMAS. Does the gentleman from Michigan wish to
inquire?
Mr. LEVIN. Thank you. Let me ask those from the community
banks, are there any restrictions on credit unions that don't
exist for you? Any of you want to answer that?
Mr. PLAGGE. I think probably the one right now, and it
would be part of this CREAL legislation, there is some
restrictions that they have as it pertains to the percent of
business loans they can have as part of their assets. Right now
that I believe is 12 and a half percent. They're seeking to get
that to 20 percent. But one of the things that is discouraging
to community banks in that percentage is they don't count loans
currently below $50,000, and I think the legislation calls for
not counting business loans below $100,000. As my testimony
identified, almost all of our business loans as a percentage
last year, 2004, 62 percent of our business loans--business and
agricultural loans--were under $100,000. Now, what that
legislation says is apparently they aren't even important
enough to count. That's indeed a big part of our portfolio.
Mr. MACOMBER. Also Federal savings banks do have
restrictions on commercial lending. They're restricted to 10
percent--excuse me 20 percent total; 10 percent, which has to
be small business loans. So, there are restrictions on that
part of the banking industry.
Mr. LEVIN. How about other restrictions that apply? How
about interest rates? Any difference?
Mr. PLAGGE. We see it up and down the ladder. I can find
credit unions where we have lower fees, lower rates. I can
probably--they can probably find credit unions that have the
reverse of that.
Mr. LEVIN. How about restrictions, though. Any legal
restrictions?
Mr. PLAGGE. Restrictions on interest rates?
Mr. LEVIN. Yeah.
Mr. PLAGGE. You mean just state usury laws and so forth?
The same. I would assume that would apply to credit unions in
our State.
Mr. HAYES. That would be my guess is I mean--you know, the
state law controls the interest rates on the----
Mr. LEVIN. How about for Federal Credit Unions? Isn't there
a difference?
Mr. MACOMBER. Well, I think the Chairman mentioned that
there's an 18 percent usury rate for Federal Credit Unions,
which would probably match most States or perhaps be higher
than some.
Mr. LEVIN. What is the largest credit union within 10, 15
miles of--or say 10 miles of each of your banks?
Mr. PLAGGE. I am in Waverly, Iowa. We have a branch of John
Deere Community Credit Union, which is a billion one. They are
in 33 I think now of the 99 counties in Iowa. So, they are by
far--I think they are the seventh largest financial institution
in the state. So, they are, by far, the largest in the State at
this point.
Mr. HAYES. There is a small credit union in the community
in which I live, and then 40 miles away, we have branches of
one of the larger credit unions in the----
Mr. LEVIN. Forty miles away?
Mr. HAYES. Forty miles. Yes, we have facilities there.
Mr. MACOMBER. We are basically in the same situation. We
have a small local credit union. But certainly within 35 or 40
miles, we have a billion dollar credit union as well.
Mr. LEVIN. Thirty-five or 40 miles? Okay. Thank you.
Chairman THOMAS. The gentleman from Texas, Mr. Brady, wish
to inquire?
Mr. BRADY. Briefly, Mr. Chairman. I would ask the panel,
back on the issue of small business access to capital, how does
the tax-exemptions for credit unions impact for good or for
worse access to capital of small business start ups and
expansions? Who--what institution now, what type of institution
now best serves those needs in our communities? I would--why
don't reverse it from the earlier panel. Start with Mr.
Macomber and head in that direction.
Mr. MACOMBER. Well, certainly, banks have the SBACU--in
Connecticut, we have the CDAs. So, we have a number of
government programs that are very helpful as far as start-up
capital. We also provide start-up capital for folks that we've
known, very much like credit unions. The different between a
small bank like ours that has been in the same community for
155 years and that of a credit union that has been there for 50
years is pretty slim as far as knowing our customers and being
able to help where it is appropriate. Start-up capital for new
businesses is a very difficult thing to come by, as you know.
Again, knowing our customers makes it easier for us than it
might be for someone from outside the State.
Mr. BRADY. Thank you.
Mr. HAYES. The same for our institution and our community.
I mean, you know, we are with our customers working in civic
projects. We are working with them on school boards. We
understand their needs. You know they understand that we are
there to help them achieve their dreams. So, you know, I think
we are a good source of that capital, being a community bank,
because if our community doesn't grow, then our institution
doesn't grow and we can't continue to add new staff. So, that
is an important part we play. And, you know, I am looking at my
loans for my board report next week. I would tell you that the
majority of the loans that we've made in the last 30 days would
be under $10,000.
Mr. BRADY. Thank you.
Mr. PLAGGE. As my figures show, I mean we make a lot of
small business loans. We have the same basically structure that
credit unions in our market would have. We have access to SBA
loans and so forth. It is really not the issue of small
business lending I guess that we say should be restricted with
credit unions. It is the types of business lending that you are
starting to see nationwide through the credit union industry--
some of the examples I gave in my written testimony--and the
amount of that that is actually occurring to non-members. So,
geographically, even though they may not have a credit union
branch in their market, there is business lending going on,
leaping across markets and the credit union industry. So, it
doesn't have to be--that competition doesn't have to come from
the local branch in your market. So, I think what we look at is
what is happening with the business loan exemption, and
indirectly when you start seeing luxury hotels and those kinds
of things being financed, who's being subsidized in the
process? So, it is not so much the--being against credit unions
and business lending. It is what you are starting to see and
the lack of regulation or the lack of monitoring behind it from
the standpoint of NCUA, saying is this what we intended that
tax subsidy for.
Mr. BRADY. Thank you.
Ms. MAY. I guess. Short arms. I guess in my community, it
is a little different. We are a low-income community, largely
Hispanic. We were not doing member business loans. We had for
many years prior to let's say 195 or so. But then we set back
and said this wasn't something we wanted to concentrate on. In
the late 'nineties, I started receiving a great amount of
pressure from my State Senator and my State Representatives
that there is lack of capital available in my city. We have an
abundance of out of the local market banks that have moved into
El Paso, and we see capital leaving in the form of deposits
going elsewhere. We had--a brother of our Congressman had to go
to a different State to get his small business loan made. So,
we did reach out and start making small business loans. Now,
our small business loans are averaging right around $120,000,
$145,000. But they are largely to minorities, and, as I said,
in a low-income community.
Mr. BRADY. All right. Thank you.
Vice Admiral DAWSON. Sir, we have also only recently begun
business lending. Our average loan for a business loan is about
$25,000. We see members such as spouses that start daycare
centers; members who have transitioned to a second career and
need to buy a fleet of two or three trucks. That is where we
are concentrating right now.
Mr. BRADY. Great. Mr. Chairman, thank you very much.
Chairman THOMAS. I thank the gentleman. Does the gentleman
from Washington wish to inquire?
Mr. MCDERMOTT. Admiral and Ms. Ma, you represent the credit
unions; is that correct? Can you give me your opinion about
what evil brought about this oversight hearing? What is it that
we are searching out? Why do you think you are being summoned
before the U.S. Congress?
Ms. MAY. I believe we have heard some of that in our recent
testimony here. We, as an industry, have grown to 6 percent of
the financial assets of the Nation.
Mr. MCDERMOTT. Six percent?
Ms. MAY. Yes, sir. That it is if you exclude the Merrill
Lynch's and so forth. I mean the insurance companies have gone
into offering checking accounts. So, we have grown to 6
percent, and as contrasted with the mutual savings industry,
which grew to 50 percent in the early '50--of the deposits.
This is--our 6 percent seems to be perceived as a threat. I
believe that the issue here is that we do not have to serve
stockholders. We serve our members, and our members only. All
our net income is returned to the members in the form of lower
rates on loans, higher rates on deposits, and contributions to
retained earnings, which provides safety and soundness. It
seems to be a concern that our structure works in that manner.
But I think as a result, we have, as quoted by Ms. Johnson from
I believe it was Zion National Bank made the issue that if it
weren't for credit unions, just think what their record profits
could be.
Mr. MCDERMOTT. Admiral?
Vice Admiral DAWSON. Sir, at Navy Federal, we consider our
tax-exemption to be a privilege. I am very happy to come here
today and to explain how we use that privilege to the best use
of the Nation and to our members.
Mr. MCDERMOTT. Is there anything about your credit union
that would me it--now, I am talking about your own personal
credit union, not your National status--that would--that you
are worried about? Is there some kind of creeping problem
there?
Vice Admiral DAWSON. No, sir. The Chairman's remarks at the
beginning about transparency, accountability, and verifiability
that is something that we work on very hard every day at our
credit union, as I think all credit unions do, and I think we
should. We owe that to our members and we owe that to you.
Mr. MCDERMOTT. But my understanding of the value here is we
are talking about $600 billion in credit unions as opposed to
about $4 trillion in the--and all the credit unions put
together don't even come up to Citicorp. So, what is this
threat? I mean how could you be a threat? Is it the idea would
catch on, that people would form their own banks? Is that--it
is kind of like a socialist germ that is infecting the body
politic or what are we----
Ms. MAY. I do have an application to convert to a credit
union if any of my peers would like it here at the table.
[Laughter.]
Mr. MCDERMOTT. Well, let me ask a technical question. If
you have money--you have made some money, and you retain it;
you don't give it out in dividends to your members. You use it
as a capital to be used for your operation of your credit
unions; is that correct?
Vice Admiral DAWSON. Yes, sir. That is correct.
Mr. MCDERMOTT. So, if you had to pay that, you could no
longer keep it. You would have to pay taxes to the Federal
Government. Where would you get that capital that you would
use? You would have to go----
Vice Admiral DAWSON. There is no other source under
current----
Mr. MCDERMOTT. But can't you get it from the Federal
Reserve or some place? Maybe you should open it up so that you
can go to the Federal Reserve? How would you function if you
lose your capital?
Ms. MAY. We couldn't--we can only build capital from
retained earnings. If--we pay out dividends on our member
shares, which is the same as interest on deposit accounts. But
we have to retain earnings into capital, which is held at a
higher standard for credit unions than it is for our banking
brethren. We have mandated capital standards under the 1151,
which was passed in 1998. Without that capital, at the level we
maintain it, and net income we have to contribute to it every
year, we would not be considered as safe and sound as----
Mr. MCDERMOTT. You mean the law that was passed by the
Republicans in 1998; is that correct?
Ms. MAY. Yes. This must be a fight between the Banking
Committee and the Ways and Means Committee. I guess that is why
you are here today. Thank you, Mr. Chairman.
Chairman THOMAS. The gentleman is welcome. Does the
gentleman from Colorado, Mr. Beauprez, wish to inquire?
Mr. BEAUPREZ. Thank you, Mr. Chairman. I think I will start
with you, Mr. Macomber. Am I pronouncing it correctly?
Mr. MACOMBER. That is about as close as anyone ever gets.
That is great. Thank you.
Mr. BEAUPREZ. Nobody tries my name ever at all. You have
made a case that I think actually is going to invite a response
from the Admiral and from Ms. May. But you made a case that
credit unions aren't unlike the mutuals of the 'fifties. All
credit unions?
Mr. MACOMBER. Credit unions aren't like mutuals of 2005,
either. I think the answer to that might be to go back--Mr.
Brady had asked a question of Chairman Johnson about could she
really quantify or make a real distinction between credit
unions and small community banks. She seemed unable to come up
with an answer to that, and frankly I am unable to come up with
an answer to that as well.
Mr. BEAUPREZ. Well, I wanted to clarify that that is what
you said, because I want to come back to the Admiral and Ms.
May because my guess is that you have a different perception,
and invite you to maybe rebut that at least.
Mr. MACOMBER. If I could add just one quick question.
Mr. BEAUPREZ. Very quickly because my time is----
Mr. MACOMBER. But I am with a mutual savings bank, and our
only real source of capital is also retained earnings. We are
fully taxed.
Mr. BEAUPREZ. Oh, I heard that. I understand that.
Ms. MAY. Any real differences between credit unions and
mutual savings banks?
Mr. BEAUPREZ. Yes, and let me tell where I am going. In my
earlier questions, I said I am here to reduce tax burdens on
people. I am not looking to raise taxes, and I am very serious
about that. But I am also very serious that the credit union
industry needs to help us somehow--I think it is a line that
the Chairman was following--in defending what the Admiral just
used I think exactly the right word, the privilege, of tax-
exempt status. I think that is--I think with all due respect to
my colleague from Washington, I think that is what this is
about is making sure that we can do that.
Ms. MAY. Well, and I certainly acknowledge that it is a
privilege to have a tax-exempt status, and I value that highly.
You know, when I walk out of my office at any time of the day,
and I look at the members that we serve, or when I answer my
phone----
Mr. BEAUPREZ. Well, I want to be very specific because I
have got limited time.
Ms. MAY. Okay.
Mr. BEAUPREZ. I want to go right to the heart of his
question. If we just say because in El Paso, there are poor
folks, I understand and accept that.
Ms. MAY. Yeah. In El Paso, I am able to reach out and do
things with my members that if I was paying and concerned about
paying interest or dividends to stockholders I would not be
able to do.
Mr. BEAUPREZ. Okay. I accept that. Admiral?
Vice Admiral DAWSON. Sir, I have no rebuttal. I just--I
know what we are as a credit union. We are owned by our
members. Our borrowers are our--and lenders are the same
people. We are governed by a volunteer board.
Mr. BEAUPREZ. Okay. All right. I accept that. I am going to
leave you with but a singular, very personal experience, and
tell you that, like we politicians suffer with one bad apple
spoiling the barrel and we all get painted, I would submit to
you that there is--that is a little bit of the challenge your
industry faces. I would submit to you that it is probably
incumbent upon your industry again to help us make sure that
your privilege is protected. I would like to be able to do
that. Here is my very personal experience. I had a daughter who
was obsessed a particular little car. She found it in the used
car--the want ads. It was about an hour and half away. My wife
and she went down to the used car lot, looked at it,
negotiated, got a price, and the salesman when they were
closing the deal said you need a loan. Well, frankly, she
didn't, but her curiosity was up, and she said what do you got.
He says, well, the credit union right across the street will
take care of you.
Oh, but I am not a member. That is not a problem. There is
your problem, Ms. May and Admiral Dawson. That is your problem
in that, you know, we had nothing to do with that area, that
region, that field of membership, and when you see those kind
of circumstances I understand why people like this have
concern, and when I wrote down the words equity and fairness,
that is our job. On this side of the desk now, I have a
different job. It is very much one of trying to provide equity
and fairness to all of the taxpayers and those that don't. I
submit to you again the challenge for your industry, of which I
am a fan and I want to remain a fan, and I want to be as
supportive as I can possibly be, is to help us help you
demonstrate that we are still continuing to be fair and
equitable to everybody that is operating on the playingfield.
Thank you, Mr. Chairman. I yield back.
Chairman THOMAS. I thank the gentleman. The gentleman from
Louisiana? The gentlewoman from Pennsylvania?
Ms. HART. Thank you, Mr. Chairman. I asked a question
earlier of the Association President Chairman I guess,
Chairwoman, regarding the transparency issue for credit unions,
and just request an answer from you since I really didn't get
one from her, Admiral and Ms. May. Is there some objection to
providing more transparency in the credit union business? Is
there something that I am missing that would present a problem
for that industry if they filed the same form, the form 990,
with the IRS?
Vice Admiral DAWSON. I can speak for Navy Federal, and I
will say that none whatsoever. We want to be transparent. We
think that we are. We submit a 5300 report once a quarter to
NCUA. That report is available to anyone that wants to see it,
not only our members, but anyone in the Nation that wants to
see it. We have a--I have an internal audit Committee or audit
division that looks very closely at my credit union. We have
Price Waterhouse as an outside auditor. In fact, as I speak
today, they are on board doing their quarterly audit. I have a
supervisory Committee made up of volunteers that can look at
anything within my credit union. Transparency is a good thing.
Ms. HART. Okay. Ms. May?
Ms. MAY. As the gentleman from IRS mentioned several times,
state-chartered credit unions do file a 990. I am a state-
chartered credit union. So, we do file in the State of Texas,
and it is filed as a group 990, and then I subsequently file a
990-T.
Ms. HART. Is there information that is disclosed in there
that you believe is sensitive that in some way might harm the
credit union members?
Ms. MAY. You know, complying with the law and the rules set
forth is certainly something that is very important to us. I,
like the Admiral, go out of our way to make sure our members--
everything possible can be disclosed to our members. I also
have the same audit Committee structure, do the same certified
CPA audits. They are fully unqualified with--we sign off on the
various statements that we have to make to get a CPA audit.
There are, in fact--my institution, my staff, and my self go
out of our way to over comply with any rule or any reporting
requirements. So.
Ms. HART. I didn't get--what is the size of your credit
union?
Ms. MAY. One point one billion.
Ms. HART. Okay. Thank you. I would like to ask the bankers
a similar question. Do you think it is necessary that they
would comply with the same transparency?
Mr. HAYES. Yes, ma'am.
Ms. HART. Tell me why, Mr. Hayes?
Mr. HAYES. Well, you know, I have examiners coming in my
bank on Monday. I have had the 30-page questionnaire, and we
have completed all that, and I am sure that the credit unions
go through that as well. But it is imperative--it is sort of
like the report card that your children sometimes don't want to
bring home. You know, when you ask them how are they doing?
Fine. But until you get the piece of paper that says well, you
made a ``C.'' I think transparency is that report card, and I
think it is absolutely not a problem for me, and I don't think
it should be a problem for anybody, especially if there is a
tax advantage that is there.
Ms. HART. I think that is the major point is that people
have a suspicion because there isn't a level of transparency,
and it may be completely unfounded.
Mr. HAYES. Right. I think they are all very----
Ms. HART. But we can't be sure.
Mr. HAYES. We are all honorable people. But, you know, I
think it is just transparency needs to be there, and I think
that is important. I applaud these folks that are doing it. But
the regulator needs to say, the regulator tells us what we are
going to do nine times out of 10.
Ms. HART. Right. Mr. Macomber?
Mr. MACOMBER. I don't really have a different--anything to
add to what----
Ms. HART. Okay.
Mr. MACOMBER. --Dave said, except that the FDIC, which
examines our bank and is our primary Federal regulator, does
have some curiosity about salaries and things in the bank,
which doesn't appear to be true for the NCUA.
Ms. HART. Okay.
Mr. PLAGGE. The only comment I would make: It really struck
me in the first panel of just how an entity that is there for
the public good has literally no reporting to do, period--I
mean as it relates to CRA, as it relates to those kind of
things that would prove the marketplace that they serve there
seems to be no push from the regulator, who is supposed to be
doing that, as OCC does with our bank, to actually accomplish
that. That is probably the biggest frustration. If everybody
followed the best practices that we just hear to the right,
that is probably not--you know, it is probably a lot less
conversation.
Ms. HART. That may be the case. Ms. May, do you want to
respond?
Ms. MAY. I just want to say a CPA audit is a requirement.
Ms. HART. Yes.
Ms. MAY. There is no way around that. The audit by the
examiners, by the regulator occurs every year, and, yes, they
do ask my salary and the salary of my management staff. There
is no hiding of any facts in that sense. We do also report HMDA
information. The only report that we don't make is the CRA
report. We do everything else that has been alluded to. Quite
honestly, I assume the mutual savings were reporting 990 during
the S&L crisis.
Ms. HART. Thank you. I am out of time. Thank you, Mr.
Chairman.
Chairman THOMAS. I thank the gentlewoman. Does the
gentleman from Tennessee, Mr. Tanner, wish to inquire?
Mr. TANNER. Thank you very much, Mr. Chairman. And, Mr.
Hayes, thank you for being here. He is from the great eighth
district of Tennessee, and we appreciate your coming to
Washington today.
Mr. HAYES. Thank you, sir.
Mr. TANNER. Most of the questions that I had have been
asked. Are there any meaningful restrictions on credit union
membership? In other words, is there--if Mr. Beauprez's
daughter can join a credit union across the street with no
connection to that area or anything, what are the meaningful
restrictions on credit union membership and who sets them?
Vice Admiral DAWSON. Unfortunately, his--I don't think his
daughter could join my credit union. I would like her to, but
she would have to join the Navy or the Marine Corps first. We
are always looking for a few good folks. So, yes, I have
restrictions on my field of membership, which is the Department
of the Navy active duty military sailors and marines and
civilians that work for the Department of the Navy. I have
restrictions.
Mr. TANNER. Could I just add something here? But the
membership, and let me preface my remark by saying I spent 22
years in the Navy. I was once a member of the Navy Federal
Credit Union, and have a great deal of respect for everything
the credit union does. But the credit union membership rules
are not just members of the military, but their spouses, their
mothers, their fathers, their grandparents, and then it can go
out from there. By the six--if you remember the movie, ``Six
Degrees of Separation,'' you could take on just about anybody
in the country. There are 2.5 million members in the Navy
Federal Credit Union. That is not a criticism of the credit
union. But I think it shows you how the membership can be just
expanded. This is the first time I have ever taken issue with
an admiral in a public forum.
Vice Admiral DAWSON. No issue there. Did you keep your
membership?
Mr. MACOMBER. I did not get my membership.
Vice Admiral DAWSON. But unfortunately, if you had applied
again, you couldn't become a member; is that is the restriction
that I have so.
Mr. TANNER. Do you set that or does the--are you a Federal
credit union--who sets the membership guidelines? Is it left up
to individual credit unions or is it----
Vice Admiral DAWSON. No. No, sir. You apply for your field
of membership with our regulator, NCUA, and they determine what
your field of membership can be.
Mr. TANNER. Well, I was just wondering what the field of
membership is for your daughter.
Mr. BEAUPREZ. I don't know what the field of membership was
Mr. Tanner, but the question that we asked was, how do we
become a member. Oh, all you got to do is walk in and sign the
form. If you wanted to be a member, in other words, my wife was
told, you are a member. That is all you needed.
Mr. TANNER. Is that because we all have a body temperature
of approximately 98.6? I assume we do at least unless somebody
up here is dead.
Chairman THOMAS. Will the gentleman yield? Apparently, that
is variable as well.
[Laughter.]
Mr. TANNER. Thank you, Mr. Chairman.
Chairman THOMAS. Does the gentleman from California wish to
inquire?
Mr. BECERRA. Yes, Mr. Chairman. Thank you. Let me see if I
can ask a question that Ms. May posed or she made a comment
that I am hoping folks from the banking industry might respond
to. She indicated that she had an application for credit union
status with her. Can you give us your explanation of why more
banks or mutuals have not converted to credit unions if the
credit unions have it so good?
Mr. PLAGGE. First National Bank in Waverly is a 141-year-
old small business. It is a small banking institution. It's
part of the American fabric of small business. There are non-
profits. There are for-profits. There are publics. There are
privates. I guess the question in itself, if the world was made
up if not-for-profits, non-taxpaying, tax-exempt entities, it
doesn't work. Again, our argument isn't against the industry
itself, the credit union industry itself. It is those that--
that it made a comment here several times before--that seem to
have no limits on what they can do. It seems to frame around
NCUA that has no borders on what they will approve for a
community charter for a common bond for business and products
and services. You are seeing exceptions here with the large
credit unions that are staying to task, that are staying to a
membership field common bond, which is terrific. But that is
not what we are seeing on a nationwide basis as it relates to
business lending and so forth. So, I am not apologizing for our
status as a community bank in Waverly, Iowa, 141 years old,
owned by our community and employees. So, that is not an option
we would chose to take.
Mr. BECERRA. I think that is a great response, and before I
move to anyone else, let me do that--is it Plagge or Plague?
Mr. PLAGGE. Plagge.
Mr. BECERRA. Plagge. Mr. Plagge I think makes a good
argument here that you can have any number. His concern is not
with any credit union. It is those that seem to be going beyond
the scope of what the charter was meant to provide to any
credit union. To those of you who operate credit unions, two
questions: Is there ever a point where you get too big? Second,
should you be allowed to get bigger when you still--or at least
some or the credit unions in the industry still don't seem to
be providing service to a lot of the modest-income families
that you would think that credit unions would be best at
serving?
Ms. MAY. Congressman, when 1151 was passed in 1998, that
made available to credit unions the opportunity to expand
beyond their traditional fields to add low-income areas. In
adding low-income areas, we have seen I believe Ms. Johnson
reported three times the growth among those credit unions than
we have in the credit unions that did not add low-income areas.
As a credit union grows and reaches out and serves more people
of modest means, I think that is a success factor, and that is
an opportunity to bring more services to people who otherwise
are unbanked.
Mr. BECERRA. So, Ms. May, if I could ask you there: At what
point will you be able to come back to us and say you at least
match the banks when it comes to providing loans, mortgages, or
otherwise to folks in modest income communities to the level
that banks do?
Ms. MAY. Are you speaking of GECU or are you speaking of
credit unions as a movement?
Mr. BECERRA. As a whole.
Ms. MAY. As a whole.
Mr. BECERRA. Because obviously, as I think Mr. Plagge
pointed out, there are some exceptions or perhaps they are the
rule, but they are concerned more with the outliers.
Ms. MAY. Well, we are already seeing in the HMDA data an
improvement year by year.
Mr. BECERRA. But I am asking at what point do you think the
industry, the credit union industry, will at least as an
industry come to the point of matching the banking--the for-
profit industry--when it comes to making loans to modest-income
families in this country?
Ms. MAY. Well, I would suspect we are already there or
above it.
Mr. BECERRA. Okay. I am not sure if the data are out there,
but I am not sure if that is the case. I would hope that that
would be the case because that would certainly move forward in
lending you a lot more support. I think I stopped is it Mr.
Hayes?
Mr. HAYES. Yes, sir. You know, like Mr. Plagge, I mean we--
you know, we have been around for 75 years, and we have been
there because we have served our customers, all levels of
customers, from low to moderate to those who have resources. As
I have traveled throughout the country representing the ICBA
and the 5,000 member banks--we represent 6 percent of the total
banking assets, and we are--you know, we pay taxes. I think it
gets to be an issue to us is just, you know, it looks like it
is not fair. And, you know, you shouldn't even be asking the
question if the charter was to serve the low and moderate, and,
yet, you are having to ask the question when are they going to
be there, I mean if that was the charter, that was what was put
forth. I think it is ironic that we are even asking the
question.
Mr. BECERRA. Thank you very much.
Chairman THOMAS. The gentleman's time----
Mr. BECERRA. My time has expired.
Chairman THOMAS. The gentleman's time has expired. Does the
gentleman from North Dakota wish to inquire?
Mr. POMEROY. I did, Mr. Chairman. I thank you for this
hearing. I think it has been a very interesting discussion. I
am not quite sure where all of this is going, but if we are
just in a kind of expansive, fact-gathering position of the
Ways and Means Committee, I have found this to be a quite an
interesting discussion. I might suggest, Mr. Chairman, that a
hearing similar on pensions would be extremely timely. It is
just an enormous amount of concern in this area, and a lot of
misinformation in this area, too. Even having the discussion
about it, absent any particular legislation might be something
that would be a good pursuit for this Committee. But as to the
issue before us----
Chairman THOMAS. Would the gentleman yield?
Mr. POMEROY. Yes, I will.
Chairman THOMAS. I think I have a thick enough skin for
that.
[Laughter.]
Mr. POMEROY. I reckon you do.
[Laughter.]
Mr. POMEROY. I would just have a couple of questions. It is
a bit off the topic, but I have been concerned about, and as
long as we have the Navy here, Admiral, I have been concerned
about the location of these payday lending outfits and these
subprime outfits and even the--I used to be an insurance
commissioner--the marketing of scurrilous insurance products to
the men and women in our military. I think that for the favored
tax status of credit unions, we do have a right to expect a
measure extra, and investment back in the members. So, I am
interested in what you can tell us about Navy Credit Union's
effort to really help your membership steer its way through and
around that subprime industry.
Vice Admiral DAWSON. We do a variety of things. We make
our--we make services available to the bases where we serve, to
provide education on finances for young sailors and marines. I
have a very large budgetary counseling division at Navy Federal
that people can call in to get counseling, and they work with a
lot of people that--or a number of people that have gotten in
trouble with payday lenders. I think of payday lending for--as
a spiral of doom for sailors and marines. It is something they
just can't recover from. We all must bring forth alternatives
to that. We have worked with the Navy-Marine Corps Relief
Society. We have talked to them about how we can bridge the gap
between when people arrive at their doors who are destitute,
many of them because they have just gone on the shoals from
payday lending.
Mr. POMEROY. I appreciate that response, and I--in the
event there are Federal legislative issues that you think we
actually ought to pursue, relative to market abuse in this
area, the Committee would I am sure appreciate having it called
to your attention. Generally, it is a regulatory issue dealt
with at a state level, but it does concern me a lot. I mean
those who would prey upon men and women in our Services, and it
is despicable conduct. More generally, on this--look I have got
friends on both sides of this issue, and I have spent a lot of
years with my friends in the North Dakota banker community
talking about the words you used, Mr. Macomber, an impending
crisis. There is no doubt they feel like they can't compete
against these non-taxed entities, and they are deeply anguished
about it, sincerely so. For me trying to evaluate how all this
sorts out, I tend to think market share is the ultimate
demonstration of whether or not we have got something here that
indeed has given somebody a clear and non-competitive advantage
in the marketplace. Now, I would like the bankers on the panel
to tell me how you--to me it looks like the market share is
staying relatively stable and that profits are healthy in the
banking sector, and that diminishes my concern that we are
heading toward an impending crisis in banking. I don't say that
to be argumentative. I would just like your response, sir.
Mr. PLAGGE. Well, I think it is a great question, because I
just refer back to something David just said. You know, the
community banking sector represents 6 percent of the financial
sector. Interestingly enough, that is the same percent as the
credit union. The credit union industry tries to do I think a
great job, and it has been very successful at it--doing--making
this the discussion about Citi Group or Citicorp against small
credit unions, when, in fact, the real battle lines are on the
local level against large credit unions and community banks.
One tax study in Virginia said that there is a 67 basis point
difference--benefit to the credit union either on the loan side
or the borrowing--or the deposit side. If that indeed is the
case, and whether it is that amount or a little less, whatever.
Just take the tax rates and look at it as a whole. If we are
all community-based, and we all know our customers, we are all
offering essentially the same products and services, 67 basis
points is a huge difference. Because it is an exemption that
goes into that marketplace, I mean competition isn't
competition. It is not level playingfield competition. The tax-
exemption gives enough benefit in rates and terms that it can
move the market in that direction, which is what we are seeing
happen in community bank marketplaces.
Mr. POMEROY. Well, I mean that is just a question. I mean I
know the argument. It has been well advanced and often today.
Mr. PLAGGE. Right.
Mr. POMEROY. But what is happening in market share relative
to community banks?
Chairman THOMAS. The gentleman's time has expired. Any of
these questions that are asked in which time runs out, if any
panel member of any panel wishes to supply in writing
additional information to explore this area, because I do think
share of overall pie versus concentration within a share of the
pie is something that I think needs to be talked about
completely. Does the gentleman from Indiana, Mr. Chocola, wish
to inquire?
Mr. CHOCOLA. Thank you, Mr. Chairman. Thank you all for
being here today. At the risk of stating the obvious, I think
we all, obviously, understand that credit unions' tax-exempt
status is based on their unique organizational structure and
their goal of operating for mutual purposes, serving under-
served areas and populations. So, I guess the purpose of being
here today is to answer: Do you do that? Maybe to help us
answer that, we can look at the state I come from, which is
Indiana. The Federal Reserve has estimated that a minimum
profitable loan is about $2,400. There was a survey done this
year in Indiana that indicated that 41 credit unions were
randomly surveyed, and it found out that the average minimum
loan for these credit unions was $281.
It also found out that no-cost checking in these credit
unions was offered on an average of a $17 balance in the
checking account. Also, 26 percent of their members had
checking balances under $100; and 55 percent of the savings
account balances in these credit unions were under $250. So, I
guess for the credit union representatives, I would ask, is
this unique to Indiana? Or is this a similar experience that
you see in your state and industry-wide? In the interest of
full disclosure to the community bankers, I was part of a group
that started a series of community banks in Indiana. Is this
the kind of business that you solicit and want? Do you see this
as potentially profitable? So, I would ask the community bank
representatives, first, is this unique to Indiana, or is this
what you see industry-wide?
Vice Admiral DAWSON. I think we see it across the credit
union industry. At Navy Federal, in 2005, we have a quarter of
our loans average $1,600. Also, as you mentioned, checking, we
not only have free checking, we pay interest in checking. And
20 percent of our checking accounts have $100 balance or less
at the end of the month. So, they not only get free checking
for that, they get interest on that, as well. I don't think we
are unique in the credit union industry.
Mr. CHOCOLA. Ms. May?
Ms. MAY. While I don't have the exact numbers with me, he
is absolutely right. Indiana is not unique. Our 247,000
members, the average balance overall is $4,000 in their deposit
accounts in total. In a financial cooperative, you have those
who have, and those who don't have. So, it takes a few very
large depositing members to make available the moneys that we
can lend out to those who don't have. We make $200 loans on a
regular daily basis. We make loans for eyeglasses, for
dentures--whatever it takes to improve our members' lives.
Mr. CHOCOLA. Are those profitable loans?
Ms. MAY. No. Our tax-exemption allows us to make those
loans. There are a number of loans that we make that are not
profitable. We participate actively in a bond program in our
city, and there is no profit in those loans, either; but we are
able to put a good number of people, first-time homebuyers,
into homes. Twenty-six percent of the mortgage loans we made
last year were for first-time home buyers. We put out over $3
million just in bond money, which is low-interest downpayment
assistance money. The tax-exemption does allow us to do
business the way we are able to do business, to help our
members--our members, your constituents.
Mr. PLAGGE. Our bank offers the same things: free checking,
free ATM, free money markets, free Internet banking, all those
kinds of things. We do small loans. We do a variety of direct
loans, credit cards, home equity lines, all those kinds of
things the same way. We are not unusual in the community
banking industry. As an industry, though, there are lots of
statistics out there that the credit union industry actually
has a higher-wealth membership than our customer base is in the
community banking world. There are plenty of studies to show
that as well again, and I think it is actually part of my
testimony.
Mr. MACOMBER. There is no one here that is running a
private bank. We are taking customers regardless of their
background. Again, the statistics that came out, there was a
survey I mentioned earlier that goes back to 2003 that
indicates that small community banks do a better job of serving
low- and moderate-income individuals than credit unions do. So,
I think you can focus in on certain statistics, but I think
that is pretty much where we are. I think everything we have
heard today from the industry, from the credit union industry
itself, supports that position.
Mr. HAYES. We are community bankers. That is our community.
I mean, that is who our customers are. When you have $8-, $10-
an-hour jobs that you worked hard to bring into your community,
I mean, you are going to take care of those people. Having been
in a community bank, I believe you understand that those
customers that we all probably have are similar. There is just
one difference.
Mr. CHOCOLA. Well, thank you. I yield back, Mr. Chairman.
Chairman THOMAS. Thank the gentleman. Does the gentlewoman
from Ohio wish to inquire?
Ms. TUBBS JONES. Thank you, Mr. Chairman. I always am in
amazement, having sat as a judge for about 10 years, when I
bring people into my chambers for pre-trial discussion. I say,
``Plaintiff, tell me what is going on,'' and I say,
``Defendant, tell me what is going on.'' I realize I have to
wade through all of it to understand, myself. I am always
amazed at why one or the other of the financial institutions in
this community seem to think they are better than the other, or
they are at a disadvantage, or whatever. But I understand the
next thing on the loom is when Wal-Mart gets to become an
industrial bank.
Mr. HAYES. Yes, ma'am.
Ms. TUBBS JONES. All of you are going to be at my desk,
telling me, ``Don't let it happen,'' right?
Mr. HAYES. You don't want to get me started on that.
Ms. TUBBS JONES. Don't get you started, huh?
Mr. HAYES. How long do you have?
Ms. TUBBS JONES. All right, I'll just ring a bell in the
room here.
[Laughter.]
Ms. TUBBS JONES. I really think, Mr. Chairman--and I would
suggest this--that there might be a forum in which we might be
better able to have a discussion like this--because members are
restricted to 5 minutes--if there are truly issues that anybody
needs to address to make themselves stronger in the job that
they do. Clearly, our goal is that our constituents are served,
no matter what institution it is that is in our community. We
all really want to try and be supportive. Maybe there is a
forum in which we could literally sit down, maybe with all the
credit unions talking about what it is we see, or they need to
do, or with all the community banks, with all the other ones.
Then maybe try and bring them all in the same room--without
boxing gloves--and have a discussion about finances in America.
I thought I would ask another question, Mr. Chairman, but I
know, like all of my colleagues, we are probably at the end of
questions. I just put that on the table as a possibility that
we might engage in down in the future. Also, it makes it not
seem as if there is an environment operating here to support or
not support any institution. I yield back the balance of my
time, Mr. Chairman.
Chairman THOMAS. Thank the gentlewoman. The problem in part
is that it depends on how you ask the question, as to what you
get in answer. If are a common bond union and you belong to a
corporation and everybody is employed, then you don't have
extremely low-income, as people would define low-income. But
you also oftentimes don't have very high income. So, on
average, you may be higher than someone else, or in fact you
may not be. When you talk about including under-served areas,
that doesn't mean that you are necessarily serving people who
are low-income in the under-served area; unless, of course, you
can produce the data that shows that. Part of the discussion
has been that, unfortunately, in the Chair's opinion, the
agency that is created to oversee the structure seems to not
understand that the ability to produce data is a very positive
thing which can make a point and which provides an early
warning system if in fact certain things are going in
particular directions. It seems to be that the people are more
comfortable simply saying ``I believe, and therefore it is.''
Now, in some instances, you can get an answer that shows you
how comfortable people are when they say ``I believe.'' Vice
Admiral Dawson, you folks, what is your structure? Common bond,
multiple bond?
Vice Admiral DAWSON. Common bond.
Chairman THOMAS. You are a common bond. Now, we have gone a
little out of the color marks of Navy. It is navy family, even
if they are civilians; but it is on bases, so you are looking
at Navy. You are enormous in size.
Vice Admiral DAWSON. Navy and Marine Corps, yes, sir.
Chairman THOMAS. Navy and Marine Corps together. You have
got to include those. But you are enormous in size. But you
have a common thread which I think is fairly clear, but you
extend it to families.
Vice Admiral DAWSON. Yes, sir.
Chairman THOMAS. How far out does the family tree go?
Obviously, husband or wife.
Vice Admiral DAWSON. Husband or wife.
Chairman THOMAS. Obviously, children.
Vice Admiral DAWSON. Children, mothers.
Chairman THOMAS. Mothers.
Vice Admiral DAWSON. Yes. My mother is a member.
Chairman THOMAS. Well, therefore, fathers, I assume.
Vice Admiral DAWSON. Fathers, yes.
Chairman THOMAS. Okay. Is that it?
Vice Admiral DAWSON. Yes, sir.
Chairman THOMAS. Ms. May, you folks have decided to take it
one more jump; is that correct?
Ms. MAY. That is correct. We were originally Federal Civil
Service workers and their family members.
Chairman THOMAS. But that was a common bond.
Ms. MAY. That was a common bond.
Chairman THOMAS. But you are not a common bond any more?
Ms. MAY. We are now a community, the El Paso County.
Chairman THOMAS. Right. But you are also under the state
structure, right?
Ms. MAY. I am also under state structure.
Chairman THOMAS. Yes. You are state, and he is Federal.
Ms. MAY. That is correct.
Chairman THOMAS. Yes. But you don't just stop at mother,
father, sons, and daughters. You include----
Ms. MAY. Pretty much everybody in El Paso County is
related, so that pretty well handles my community.
[Laughter.]
Chairman THOMAS. Is that why you decided to go to first
cousins?
[Laughter.]
Ms. MAY. Well, you know, first cousin really was--that is
pretty far out there.
Chairman THOMAS. But you cover first cousins.
Ms. MAY. We cover first cousins.
Chairman THOMAS. If someone comes in and says, ``I am a
first cousin----''
Ms. MAY. But typically, they qualify because they live in
El Paso County. We only have offices in El Paso County.
Chairman THOMAS. You clearly serve under-served areas.
Ms. MAY. Absolutely.
Chairman THOMAS. Do you believe that if you are now going
to respond to an under-served area, and you put an ATM in
there, that that really meets the financial services of an
under-served area?
Ms. MAY. I can only respond for GECU.
Chairman THOMAS. That is why I am asking you.
Ms. MAY. We have placed offices--12,000-square-foot
building--in, I'd say, the southeast side of El Paso, which is
primarily Hispanic. In fact, every sign we have in that office,
every brochure we have in that office, is in the Spanish
language. This is what I would consider an under-served area,
and it is a very successful branch. We are very proud of what
we do in that branch.
Chairman THOMAS. Don't you find, though, that if you are
really going to try to service an under-served area, one, you
probably have to have a facility, because they are not as
knowledgeable about the way things work; you have to have
people who speak their language; and the counseling has to be
far more supportive than it would be in an non-under-served
area?
Ms. MAY. In my city, that is true.
Chairman THOMAS. Yes.
Ms. MAY. As I say, we are Hispanic. It is face-to-face,
mano-a-mano. We speak the language, we share the common
culture, quite honestly.
Chairman THOMAS. But you are saying that probably an ATM
would not----
Ms. MAY. Not in my city.
Chairman THOMAS. --satisfy?
Ms. MAY. No, sir.
Chairman THOMAS. That is why I find it interesting that
there has been an attempt to move ATMs as satisfactory in
under-served areas. That seems to me to be looking at outreach
far more similar to these fellows over here, who are driven by
the profit motive, by which we temper that with taxes, because
all they want to do is just make money. The credit unions don't
want to just make money; they want to serve an area. But it
seems to me, as I said, ATMs, period. Admiral, have you ever
discussed going beyond the common bond in terms of structure;
multiple bond or community?
Vice Admiral DAWSON. No, sir, not at our credit union.
Chairman THOMAS. I mean, if you push this community thing
anywhere a ship sails, you guys have got a pretty interesting
territory.
[Laughter.]
Vice Admiral DAWSON. Girlfriends are not permitted to join.
Chairman THOMAS. Okay. Ports of call, I mean, you know.
Vice Admiral DAWSON. Girlfriends are not permitted to join.
[Laughter.]
Chairman THOMAS. Now, I am going to ask you, and I am going
to ask Ms. May, and I know it is difficult because you are here
representing organizations, and not yourselves, and you may not
want to answer this question. If you choose not to, I
understand. Ms. May, you saw a need in the community, and so
the community concept and outreach with the state structure
made sense to you.
Ms. MAY. Yes, sir.
Chairman THOMAS. Do you have any minor discomfort about the
concept that a geographic or community structure would include
Los Angeles County, with all of the rich and the poor and the
millions of people?
Ms. MAY. I guess my simple response to that would be, a
credit union is a financial cooperative. In order to have a
cooperative, you have to have those who have, and those who
have not. Those who have make deposits, so that those who don't
have can borrow moneys.
Chairman THOMAS. That wasn't my question, but I understand
the difficulty you would have in answering a question like
that. Based upon the way you answered it, I really thank you
very much.
[Laughter.]
Chairman THOMAS. Vice Admiral, do you get any qualm at all
about an area which is supposed to be local that has a
population greater than 42 states?
Vice Admiral DAWSON. Sir, I have just been aboard 11
months. I would have to look at what that is all about. I am
not familiar with that.
Chairman THOMAS. You see, I think you are comfortable and
people are comfortable with you because, in essence, it is Navy
family, or people who are close to Navy family.
Vice Admiral DAWSON. Right.
Chairman THOMAS. So, you feel comfortable with that;
notwithstanding the fact that you are millions, and have got
billions. But there is a comfort level based upon that nexus. I
am just trying to get my arms around the nexus of LA County.
That is part of my problem. But I appreciate your narrow
answer--which could have been different, and wasn't. So, I
appreciate it very much. Does the gentleman from New York wish
to inquire?
Mr. RANGEL. I just wanted to thank Ms. May. I have heard
that just her presence here and her presentation has made you a
very pleasant Chair here and changed the whole atmosphere----
[Laughter.]
Chairman THOMAS. Oh, not at all.
Mr. RANGEL. Well, I just heard that, so let me say----
Chairman THOMAS. It was actually the fact that you were
gone.
[Laughter.]
Mr. RANGEL. Okay. Ms. May, I just want you to know that I
may be calling you from time to time----
[Laughter.]
Mr. RANGEL. You know, just to just be here and sit here and
be your pleasant self.
[Laughter.]
Mr. RANGEL. Let me thank all of you for making it possible
that we understand the problem better. Thank you.
Chairman THOMAS. Thank you. Let me say, if you understood
the discussion on the first panel, that the fear that we are
simply out as a cash cow to find money where people aren't
paying taxes should not be thought of as the particular thrust.
Our concern is with how a changing structure, not justified or
documented is fulfilling its responsibilities. Obviously, Ms.
May, in the basis of how you grew up and what you did and where
it is, that is the kind of thing that is documented. Then the
question is, ``Okay, so why?`` That is a second decision. But
given the structure movement with definition and obviously
displayed by small bankers who I think partly have some envy of
the loans made to these massive buildings and major companies,
which is something they would be desirous of--does that really
focus on a mission statement? But to the extent that the
mission statement is seen totally as the organization or the
structure of the organization doesn't focus on the social
assistance aspect to it, I do believe we have a problem because
the lines are getting blurred. That is where we have to spend
more time focusing on that line to get it clear; rather than
what I think is a blurring which generates a degree of
criticism, which in part has led to this hearing, but which
also is simply something systematically this Committee needs to
do under the oversight structure.
We let people do what they do without paying taxes.
Periodically, we have to stop by and say, ``How are things
going? Because I have got people who are paying taxes, and they
want to know why you don't pay taxes.'' That is what this
hearing is all about. Thank you very much. If we will have the
third panel, I want to thank the third panel for their
patience. But apparently, I don't have to, because the first
name on the third panel is someone who is very familiar with
the way this place works. It is a pleasure to have before this
Committee a former member, a former colleague, a former
Representative from New Hampshire, Norm D'Amours. We have
Gordon V.--is it Karels?
Dr. KARELS. Karels.
Chairman THOMAS. Karels, thank you, Karels, who is the
Associate Dean, College of Business Administration, at the
University of Nebraska; John Taylor, who is the President and
Chief Executive Officer of the National Community Reinvestment
Coalition; and Constance Kennelly--``Kennelly''? It is
pronounced ``Kennelly''? I thought it was ``Kennelly,'' but
they put it ``Kennelly,'' because we had a former member of the
Committee who we had as ``Kennelly.'' Of Tulane-Loyola Credit
Union in New Orleans, Louisiana. All of you have submitted
written testimony. It will be made a part of the record. During
the time that you have, you can address the Committee as you
see fit. If you will allow me, I will start with our former
colleague, Mr. D'Amours.
STATEMENT OF HON. NORMAN E. D'AMOURS, A FORMER REPRESENTATIVE
IN CONGRESS FROM THE STATE OF NEW HAMPSHIRE; FORMER CHAIRMAN,
NATIONAL CREDIT UNION ADMINISTRATION
Mr. D'AMOURS. Thank you, Mr. Chairman and Ranking Member
Rangel, Members of this Committee. I am here today, at the
request of this Committee, to offer my perspective on the
performance of credit unions in serving low-income Americans,
as they were dedicated to do by their founders, their history,
their traditions and, very importantly, by the U.S. Congress in
the 1934 Credit Union Act and the 1998 Credit Union Membership
Access Act. In my opinion, the majority of credit unions are
holding true to their mission of focusing on low-income members
and potential members. However, this majority controls a
relatively small minority of the total assets of the credit
union system, and this majority has little or no voice in
setting the direction and priorities of the overall direction
of the credit union system. The founders of the credit union
movement insisted that unpaid volunteers would control a not-
for-profit system, run on sound business principles by people
who were not out for personal enrichment, and who would focus
on low-income Americans.
The reality today is that a small minority of large credit
unions have created a tightly-controlled and intimidating
structure, controlled not by volunteers, but by professionals
who pursue growth for its own sake, and who profit quite
handsomely from that growth. Those in control are uncomfortable
with, and even at times in denial of, the traditional credit
union obligation to focus on low-income people. They fear there
is just not enough profit in that. When I was Chairman of the
NCUA, I attempted to refocus the system on low-income credit
unions and low-income people who belong to those credit unions
and to other credit unions. That effort was resisted by the
major credit union trade groups and by some larger credit
unions. Also, as Chairman of NCUA, I tried to effectively
measure the performance of credit unions in serving low-income
people. Those efforts were defeated by the NCUA board because
of strong opposition by trade groups and some credit unions.
There have been several objective studies over the past six
years providing substantial evidence that credit unions as a
whole are not serving low-income people adequately. These
studies, by Dr. John Caskey of Swarthmore College in
Pennsylvania, by the Woodstock Institute of Chicago, by the
GAO, by the National Community Reinvestment Coalition, conclude
that in many cases banks serve more low-income Americans than
do credit unions, and credit unions aren't sufficiently focused
on low-income people. You can ignore these studies if you
choose to, but they are there. There is also strong evidence
that, while touting their performance in serving low-income
people, some credit unions and their trade groups fiercely
resist any meaningful effort to effectively measure that
performance, just as they did when I was Chairman of NCUA.
Mr. Chairman and Members of the Committee, I am not here to
suggest that credit unions should lose their tax-exemption.
However, as both a taxpayer and a strong supporter of credit
union ideals, I do think credit unions should be held
accountable for their tax advantages that they are provided.
This tax advantage is based on the traditional focus of credit
unions on people of small means. Congress needs to mandate and
oversee measurable standards requiring credit unions to focus
on serving low-income Americans. This effort is going to have
to come from this Committee and from this Congress. It will
surely not come from the current credit union structure, and it
will not come from the NCUA. A good first step might be an
effective survey of credit union performance in serving people
of small means. That action might begin the process of
injecting needed transparency into a closed system. The
Woodstock Institute study, by the way, in 2003, did suggest
other steps that perhaps this Committee could look at.
Lacking strong congressional direction, I believe it is a
virtual certainty that the credit union system will continue to
veer further and further off course, and this to the great
detriment of low-income Americans and to America itself. Mr.
Chairman, there are hundreds and hundreds of small credit
unions out there greatly in need of assistance. They aren't
getting that assistance; meaning their low-income members
aren't getting the help and assistance that they need. I hope
this Committee will, after this hearing, follow up and see to
it that the steps we have discussed, and that I have mentioned
in my written testimony, and that the Woodstock Institute
outlined, will be considered. I thank you for your attention. I
will be glad to answer questions, when the moment arises.
[The prepared statement of Mr. D'Amours follows:]
Statement of Hon. Norman E. D'Amours, a former Representative in
Congress from the State of New Hampshire, and former Chairman, National
Credit Union Administration
Mr. Chairman and members of the Committee, I am here today at the
request of the Committee to comment on the performance of credit unions
in serving low income people who belong to a credit union or are within
its field of membership.
I have had the opportunity to observe credit unions from various
perspectives for about thirty years. I served on the U.S. Congressional
Financial Services Committee (then called the Banking Committee) from
1975 to 1985. After leaving Congress in 1985 I was hired by the Credit
Union National Association (CUNA) as a legislative lobbyist and acted
in that capacity until 1993. In that year, I was confirmed by the U.S.
Senate to the Board of the National Credit Union Administration (NCUA)
which regulates and/or insures almost all of America's credit unions. I
was immediately appointed chairman of that Board and served in that
position until I left the NCUA in December of 2000.
I have been informed that the purpose of today's meeting is to
address the concerns of some Committee members that credit unions may
have strayed from their traditional mission of serving people of small
means, meaning low-income people, as that mission is imposed upon them
in the preamble of the 1934 Credit Union Act and re-imposed in the 1998
Credit Union Membership Access Act.
Credit unions were introduced into the United States in the early
part of the last century through the efforts of wealthy department
store owner Edward Filene, Massachusetts banking commissioner Pierre
Jay, Massachusetts attorney Roy Bergengren, Monseigneur Pierre Hevey
from my hometown of Manchester, New Hampshire and other leaders who
were united by their desire to bring fairly priced financial services
to lower income people.
These early credit union movement leaders strictly insisted that
credit unions should not be based upon a profit motive. They were
adamant in their belief that unpaid volunteer directors of credit
unions would govern the operations of financially sound institutions
with no thought of personal financial benefit and based on sound
business principles. They intended credit unions to work together as
cooperatives to help instill habits and values of thrift and prudent
borrowing to people who were not financially sophisticated and who did
not have access to the mainstream financial institutions of that day.
These were the Americans targeted by financial predators. Their efforts
helped countless Americans find their way to financial solvency and
independence.
The underlying realities that led to the formation of credit unions
are very much in existence in today's America. Credit unions are still
very much needed to carry out their traditional functions. It is not
only the low-income members of credit unions who are helped by
traditional credit unions. The American free enterprise financial
system benefits when more and more Americans are empowered to join the
financial mainstream by breaking the shackles placed on them by
predatory lenders. By admitting them to membership in credit unions,
low-income people immediately acquire an ownership stake in their
institution. They benefit from higher returns on their savings and
lower interest rates on their loans because of the credit unions unpaid
directors, its not for profit structure and, of course, its exemption
from taxes. I am told that there are a few credit unions that still
give periodic or end of year dividend bonuses and interest rate rebates
to their members when the credit union has had a good year. This
practice is not remotely as common today as it once was for reasons I
will touch on later.
Mr. Chairman and members of this committee, I am convinced that the
credit union philosophy espoused by the movements founders is a
beautiful thing. It is consistent with America's promise of self-
empowerment. It is consistent with the American dream of the
accumulation of assets and wealth that gives our citizens the sense of
pride, accomplishment and independence that in turn makes our country
stronger.
I come to you speaking as someone who is deeply committed to the
traditional focus of credit unions on low income Americans. It is from
that perspective that I can assure this committee that its concerns
about credit unions having strayed from their mission are not
misplaced. They are very well grounded in reality. In fact, there are
many people both within and outside of the credit union community who
share that concern.
During the seven years that I was at NCUA, I made several efforts
to position that agency to pay more attention to small credit unions
and low-income credit unions. Such credit unions are more apt to be
made up of low-income members. Those efforts were surprisingly
difficult to advance because of strong resistance from credit union
trade groups and some credit unions.
In 1997, I attempted to persuade the NCUA Board to approve a
requirement that community based credit unions should include in their
business plans a short statement of the general efforts they would make
to serve and reach out to low income members of the community they were
chartered to serve. This modest and reasonable effort was also strongly
resisted by the major credit union trade groups. In October of 2000,
after several permutations, it finally passed as the Community Action
Plan (CAP). I left the NCUA at the end of 2000. The NCUA Board repealed
CAP in December of 2001 just weeks before it was to take effect.
In 1999, Dr. John Caskey, of Swarthmore College in Pennsylvania,
conducted a study of full service credit unions. Dr. Caskey concluded
that many and perhaps most of those credit unions were not making
efforts to reach out to low income Americans. Dr. Caskey also concluded
that while some credit unions were making stellar efforts to serve
people of modest means, many others were ``free riding'' on their
backs.\1\ That is, they were benefiting politically from the efforts of
those staying true to the traditional credit union philosophy while
avoiding the responsibility to do so.
---------------------------------------------------------------------------
\1\ Credit Unions and Asset Accumulation by Lower Income
Households. Filene Research Institute. July, 1999, P41
---------------------------------------------------------------------------
In 1999, I sought to measure the performance of credit unions in
serving low income persons by having the NCUA approve a survey to
evaluate how credit unions were reaching out to underserved members or
potential members. The NCUA Board did approve that survey but over my
strong objections they voted to make it a voluntary one. The survey was
never sent out to credit unions because the Office of Management and
Budget (OMB) weighed in to agree with my stated contention that a
voluntary survey amounted to a self-selecting sample and would produce
no useful data.
In 2002, the Chicago-based Woodstock Institute conducted a study of
credit unions that concluded credit unions were not living up to their
traditional values and responsibilities toward low income people.
In November of 2003, the U.S. Government Accountability Office
(GAO) issued a report on credit unions that made three rather startling
points. First, they found that banks were outperforming credit unions
in serving low-income people. Second, they found the differences
between banks and credit unions were attenuating. Third, they suggested
that criteria should be developed by NCUA to measure credit union
performance in serving low income Americans.
Earlier this year the National Community Reinvestment Coalition
(NCRC) released a very detailed study demonstrating that bankers,
because of their Community Reinvestment Act obligations, were
outperforming credit unions in serving low-income households and
individuals.
Thus, it seems clear that there is considerable evidence that
today's credit union system is not dedicating its substantial assets
and skills to serving low-income people, which is its traditional,
philosophical mission and statutory purpose. It also seems clear that
the leaders of the credit union system today do not want credit union
performance in this regard to be measured in any meaningful way. Their
reaction to the 2003 GAO report was that it was ``outrageous'' and they
implied that GAO was biased.
My personal answer to the question of whether credit unions have
strayed from their traditional mission would be that the majority of
credit unions have not. However, the reality is that the majority of
credit unions control only a relatively small percentage of credit
union assets and do not play a significant role in determining the
direction of the credit union system as a whole.
According to the 2003 GAO study, credit unions with over one
billion dollars in assets account for 28 percent of all credit union
assets but for less than 1 percent of credit unions. Credit unions
holding over $100 million in assets account for 75 percent of total
credit union assets but only 11 percent of all credit unions.
In my opinion, it is this fundamental imbalance between the
majority of credit unions and the majority of credit union assets that
is root cause of the growing disconnect between traditional credit
union philosophy and the systemic credit union resistance to serving
low income people. It also helps explain the very harmful and systemic
drift towards growth for its own sake and the increasing competition
between credit unions within what was once a once more cooperative
structure.
The structure within which credit unions are operating is very
tightly controlled, from the top down, by profit motivated
professionals who seem to be pushing credit unions to grow just for the
sake of growing. That is not a natural way for credit unions to grow
and can result in a deterioration of services provided to members,
especially those of low income. A credit union's surplus will not be
returned to the benefit of its members if, only for the sake of
growing, those surpluses are dedicated, for instance, to pushing new
loan products (that may, perversely, discourage the thrift credit
unions were by tradition and statute directed to promote); if they are
dedicated to contracting with outside vendors for products that
increase income from fee charges; if they are dedicated to acquiring
smaller credit unions; if they are dedicated to paying top salaries and
bonuses to management, and so on.
While there are many legitimate and natural reasons for credit
unions to grow, growth for its own sake is driven in large part by the
understandable inclination of professionals who control credit unions
to overly focus on higher and higher salaries and bonuses as opposed to
serving low income members and potential members. This focus on growth,
income and profit seems to apply both to the professionals who manage
such credit unions and those who run the trade groups they belong to.
That linkage results in a powerful control bloc that is pushing a
systemic growth for growth's sake in a nearly irresistible manner.
In my opinion, the antidote to this forced growth is the
introduction of systems and policies that will cooperatively direct
more of the credit union systems' assets toward serving all credit
union members and potential members including, with special emphasis,
low income people.
Another complication in dealing with this problem is the fact that
there is no one size fits all solution. Some of the largest credit
unions do keep to the traditional philosophy and values of the original
credit union movement. They make special efforts to reach out to low
income people and to support small credit unions. Some of the managers
of these large credit unions have expressed deep concern about the
direction of the credit union movement. Unfortunately, the existing
structure of the credit union system is so intimidating that most
knowledgeable credit union people are afraid to speak out publicly.
I remain hopeful that it is still practically possible today to
redirect the concentration of credit union assets from the current
growth frenzy into areas or programs that could be of great benefit to
low-income Americans. Surely, that is an effort work making.
Whatever actions might be taken to refocus the current credit union
system on its traditional core values, I am absolutely certain of one
reality that I hope I can adequately convey to this committee and to
the Congress. That reality is that any effective effort to get credit
unions as a whole to do a better job serving lower income households
will not come from within the credit union power structure as it exists
today. If this Congress doesn't demand it, it won't happen.
One place to begin might be to find ways to make credit union
structures and operations more transparent. A survey such as I tried to
send out in 1999 and as the GAO suggested in 2003 might be helpful.
Thus far, the current structure's leadership has successfully resisted
transparency. Beyond resisting objective measurements, they even
succeeded in exempting their activities from the very reasonable
disclosures made by other not for profit 501(c) groups as required by
IRS form 990.
I am not here to advocate taxing credit unions. This committee and
this Congress in its wisdom can certainly devise methods and criteria
that will provide the American taxpayer with some assurance that the
great benefit and advantage the tax exemption gives credit unions is
not being abused. Hopefully, as a first step, a much greater degree of
transparency will help root out, through exposure, some of the
excessive profit motives that have been creeping into and seriously
harming the system. At the least, it might give us a clearer picture of
who the ``free riders'' are.
Mr. Chairman and members of the committee, I thank you for your
attention and I will be pleased to address any questions you may have.
Chairman THOMAS. Thank you very much. Dr. Karels?
STATEMENT OF GORDON V. KARELS, PH.D., ASSOCIATE DEAN, COLLEGE
OF BUSINESS ADMINISTRATION, UNIVERSITY OF NEBRASKA-LINCOLN
Dr. KARELS. Thank you, Chairman Thomas, Ranking Minority
Member Rangel, and distinguished Committee Members. I want to
express my appreciation for the invitation to testify before
your Committee today. I just want to reiterate the main points
of my submitted testimony: First, the rationale for credit
unions' Federal income tax-exemption is not entirely
transparent to me, and may no longer hold; Second, the credit
union common bond requirement has evolved markedly since the
granting of the tax-exemption, and no longer constrains credit
union opportunities and incentives as it had in the past;
Finally, the ultimate beneficiaries of the credit union tax-
exemption are very difficult to determine. To me, the rationale
for exempting credit unions from federal income tax is probably
best understood by examining the reasons Congress eliminated
the same exemption for mutual savings and loans and mutual
savings banks in the Revenue Act 1951. According to the U.S.
Treasury 2001 study, the reason for the loss of the tax-
exemption was the evolution of these associations as commercial
bank competitors. Mutual thrifts operated in a manner similar
to banks, and the exemption gave them a competitive advantage
over taxable commercial banks and life insurance companies.
That same study also indicated that the original exemption
in 1937 was based upon their mutual nature; being operated by
and for their members. That was also consistent with the
original 1917 administrative exemption for state credit unions
that were said to closely resemble the cooperative banks and
similar institutions Congress had earlier exempted. Credit
unions evidently had preserved their mutuality in a fashion
such that members were not just customers in other depository
institutions. Clearly, credit unions competed with commercial
banks, thrifts, and savings banks in the personal lending
market. They also offered share accounts that served as
deposits. But their uniqueness among depository institutions is
quite apparent; and to me, that is the affinity among their
members with a common bond. The common bond requirements
subject credit unions managers to restrictions not found in
other depository institutions. Loan opportunities are limited
in the field of memberships, so that managers are constrained
in their ability to grow the institution, and they may not
rapidly change the riskiness of their loan portfolio.
In the case of credit unions with occupational common
bonds, long the most dominant type, it also produces company
sponsors who have an interest in monitoring the operations of
the credit union and help promote safety and soundness. It is
widely accepted that the mutual organizational form produces
organizations that are not as risky as stock-based companies.
This has been demonstrated at both banks and insurance
companies. Some research that we did in looking at the adoption
of federal deposit insurance by credit unions in the seventies
found no evidence that the adoption of deposit insurance led to
increased risk-taking in the credit industry. I think this was
somewhat of a surprise in the academic community. We find that
the common bond requirement helped to limit the risk-taking
behavior of managers. In addition, loan size limitations help
to constrain loan losses. While these limitations were relaxed
and new types of loan and share accounts were allowed after
1977, they influenced the overall composition of the balance
sheets for some time.
It is widely accepted that the NCUA's support for multiple
employee groups grew out of concern about concentration risk.
The recession of the 'eighties caused many industrial firms to
close or relocate, and associated credit unions to fail. We did
some research there, and found that the addition of select
employee credit union groups allowed credit unions to dissipate
some of this concentration risk; but at the same time, it
reduced the informational advantage they had with the close
common bond. In many ways, it seems that credit unions have
evolved in a fashion similar to that of savings and loans 50
years earlier. Credit unions now have many powers that allow
them to compete directly with other depository institutions in
many lines of business. Furthermore, the common bond has become
diluted. The tax-exemption gives credit unions a competitive
advantage over depository institutions, and this advantage can
manifest itself in various ways.
One might expect that credit unions would, because of their
not-for-profit status, have a lower overall profitability than
banks. As mutual organizations, the managerial priorities would
seemingly favor competitive loans and deposit rates over profit
levels. The emphasis on member services would also tend to
drive up operating expenses and reduce profitability.
Ultimately, the tax-exemption provides an avenue for credit
unions to have a competitive advantage in loan and deposit
rates that are still providing expanded levels of service and
reasonable capital accumulation financed out of profits.
Historically, we don't find that they necessarily have lower
overall profitability. There is also mixed evidence as to
whether they actually have lower net interest margins than
other mutual organizations. In addition, there is mixed
evidence as to whether credit unions are less efficient than
other mutual types of organizations. In summary, all of these
changes, I believe, parallel the developments that led to the
taxing of mutual thrifts and savings banks. Deposit insurance
has removed the issue of excessive burden of share accounts. It
is not clear that credit union members have been the direct
beneficiaries of the tax-exemption. At the same time, there is
only limited evidence of expense preference behavior. Overall,
it does not appear that a repeal of the exemption would be
particularly detrimental to members, but would more likely
affect the ability of credit unions to grow at the rates they
have had in the past. Thank you.
[The prepared statement of Dr. Karels follows:]
Statement of Gordon V. Karels, Ph.D., Associate Dean, College of
Business Administration, University of Nebraska-Lincoln, Lincoln,
Nebraska
The views presented in this statement represent those of the author
alone. The author is Associate Dean and Professor of Finance in the
College of Business Administration at the University of Nebraska-
Lincoln and holds the Nebraska Bankers Association College Professor of
Banking Professorship. The Professorship was created in 1992 with a
gift from the Nebraska Bankers Association to the University of
Nebraska Foundation. College Professorship appointments are recommended
to the University Chancellor by the Dean of the College upon review by
a College Faculty Chaired Professorship Committee. The Nebraska Bankers
Association sponsors endowed professorships at two of the University of
Nebraska campuses. It does not participate in the selection of
professorship recipients.
This statement addresses only the issue of the federal income tax
exemption for credit unions and has three central points:
I. The rationale for credit unions' federal income tax exemption is
not entirely transparent and may no longer hold.
II. The credit union common bond requirement has evolved markedly
since the granting of the tax exemption and no longer constrains credit
union opportunities and incentives as it had in the past.
III. The ultimate beneficiaries of the credit union federal income
tax exemption are difficult to determine.
I. Historical Development of the Tax Exemption
There appears to be no disagreement as to the origins of mutual
savings and credit associations or their purpose. Financial
cooperatives such as mutual insurance companies and building
associations emerged in the latter part of the 17th and early 18th
century. The first credit associations were founded in Germany by
business persons in need of financial services that were not provided
by the existing commercial banking sector. These early organizations
led to the development of three types of mutual depository institutions
in the U.S.--credit unions, savings and loan associations and mutual
savings banks--that have both complemented and competed with commercial
banks.
U.S. Treasury (1997) outlines five characteristics that distinguish
credit unions from other depository institutions.
1. Credit Unions are member-owned and member-directed cooperatives
with each member having one vote. Technically credit union member
deposits are the capital base of the organization. However these
accounts also serve the traditional banking roles of checking and
savings deposits so that over time, retained earnings serve the
regulatory capital function.
2. Credit Unions rely on unpaid volunteers directors elected by and
from their members.
3. Credit Unions are not for profit and return surplus earnings to
members in various forms including higher returns on deposits (shares),
lower costs of borrowing, greater financial services and retained
earning for growth and regulatory capital needs.
4. Credit Unions have a public purpose. The Federal Credit Union
Act of 1934 declares that credit unions are established for ``promoting
thrift among [their] members and creating a source of credit for
provident or productive purposes.''
5. Credit Unions have limitations on membership based on some
affinity among members (``common bond'').
All U.S. credit unions were originally state-chartered with federal
chartering originating in 1934. State-chartered credit unions were not
initially exempt from state or federal income taxes. An administrative
ruling exempted state-chartered credit unions from federal income taxes
in 1917. Federally-chartered credit unions were exempted from both
state and federal income taxes in 1937.
The rationale for exempting credit unions from federal income taxes
is probably best understood by examining the reasons Congress
eliminated the same exemption for mutual saving and loan associations
and mutual savings banks in the Revenue Act of 1951. U.S. Treasury
(2001) cites the Senate Report of that Act as indicating the reason for
the loss in the tax exemption was the evolution of these associations
as commercial bank competitors. Mutual thrifts operated in a manner
similar to banks and the exemption gave them a competitive advantage
over taxable commercial banks and life insurance companies.
The 2001 Treasury study also suggest the original legislative
exemption provided to federal credit unions in 1937 was based upon
their mutual nature i.e., being operated by and for their members. In
addition, taxing credit unions on their shares would be excessive
because share accounts also function as deposits. This was consistent
with the 1917 administrative exemption for state credit unions where
they were said to closely resemble the cooperative banks and similar
institutions that Congress had earlier exempted.
Credit unions evidently had preserved their mutuality in a fashion
such that members were not just customers as in other depository
institutions (including mutual thrifts). Clearly, credit unions
competed with commercial banks, thrifts and savings banks in the
personal lending markets. They also offered share accounts that served
the deposit function. Their uniqueness among depository institutions
was quite apparent: an affinity among members (``common bond''). This
affinity appears to be the significant characteristic that explains the
maintenance of the tax exemption.
II. The Role of the Common Bond
Credit union membership was historically limited to individuals
sharing a common bond of occupation, association or geographical area.
The common bond requirement subjects credit union managers to
restrictions not found in other depository institutions. Loan
opportunities are limited to the field of membership so managers are
constrained in their ability to grow the institution or rapidly change
the riskiness of the loan portfolio. In the case of credit unions with
occupational common bonds--long the most dominant type--it also
produces company sponsors who have an interest in monitoring the
operations of the credit union and help promote safety and soundness.
It is widely held that cooperative and mutually organized firms are
less risky than their stock-owned counterparts. For example, empirical
evidence offered by Esty (1997) finds that stock-owned thrifts had both
riskier portfolios and higher failure rates than mutuals. Lee, Mayers,
and Smith (1997) find that risk in the asset portfolios of stock-owned
property-liability insurers increased markedly relative to their
mutually owned counterparts following enactment of state guaranty fund
laws. This is not to say, however, that the mutual form of ownership
guarantees limited risk-taking behavior. The large number of failures
of mutual savings and loan associations in the 1980's speaks to this
point. Indeed, a study by Esty (1993) of 1,737 mutual thrifts operating
in 1982, found that over 28% failed (or had tangible net worth ratios
less than 2%) by 1988.
Federal deposit insurance for credit unions was not instituted
until 1971 and was not required of many state-chartered credit unions
until the mid 1970's. A study by Karels and McClatchy (1999) found no
evidence that the adoption of deposit insurance led to increased risk-
taking in the credit union industry. They suggest that the common bond
requirement helped to limit the risk-taking behavior of managers as
deposit insurance was implemented by credit unions. In addition, loan
size limitations and maturity limitations (5 years on unsecured loans
and 10 years on secured ones) also helped to constraint loan losses.
While these limitations were relaxed and new types of loans and share
accounts were allowed after 1977, they influenced overall composition
of balance sheet for some time after.
Beginning in 1982, the National Credit Union Administration (NCUA)
reinterpreted the common bond requirement in a way to allow certain
types of credit unions to add multiple groups referred to as ``Select
Employee Groups'' or SEGSs. A successful court challenge to this
interpretation eventually led to the passage of the Credit Union
Membership Access Act of 1998, which explicitly allows for the addition
of multiple groups to credit unions' fields-of-membership. By the time
of the passage of that Act, over 4,000 state and federal credit unions
had added SEGs to their memberships. By 1999, multiple common bond
credit unions accounted for over 70 percent of total federal credit
union assets.
It is widely accepted that the NCUA's support of multiple employee
groups grew out concern about concentration risk. The recession of the
1980's caused thousand of industrial firms to close or relocate. Credit
unions associated with such firms had limited memberships and
subsequently experienced solvency problems. NCUA reported some 500
federal credit union liquidations or failures in 1981 alone. Frame,
Karels and McClatchey (2002) examined the degree to which SEGs affected
credit union risk. We found that a greater number of SEGs is associated
with higher loan-to-share ratios, higher loan delinquency ratios and
lower capital ratios. These results indicate that expanded membership
does increase investment opportunities and hence reduces concentration
risk but the informational advantage arising form the common bonds
becomes diluted.
Since the passage of the Credit Union Membership Access Act,
membership at credit unions with multiple bonds has actually declined.
This is due in part to the rapid increase in community-charted credit
unions. The terminology for the community field of membership allows
for the greatest growth potential in the credit union industry and a
significant number of federally-chartered credit unions are converting
to community charters. Community and multiple common bond credit unions
now account for over 80 percent of all assets in federally-chartered
credit unions.
Of the 50 largest federal credit unions in 2003, only seven had a
single associational or occupational bond. Six of the largest 50 were
community chartered and the remaining 37 were multiple bond credit
unions. While credit unions are still predominantly in the consumer
lending area, business and real estate and business loans now account
for nearly 30 percent of their loan portfolios (and the larger credit
unions have relatively higher percentages of real estate and business
loans compared to smaller credit unions). Twenty years ago, real estate
and business lending accounted for only about 5 percent of credit union
loans.
In many ways is seems that credit unions have evolved in a fashion
similar to that of the saving and loan associations some 50 years
earlier. Credit unions now have powers that allow them to compete
directly with other depository institutions in many lines of business.
Furthermore, the common bond has become diluted. The tax exemption
gives credit union a competitive advantage over other depository
institutions and this advantage can manifest itself in various ways.
III. Who Benefits from the Tax Exemption?
Credit union's tax exemption would be expected to manifest itself
in one or more of the following ways:
1. Higher deposit rates for members.
2. Lower loan rates for members.
3. Expanded services and products for members.
4. Higher capital ratios fund future growth or enhance safety and
soundness.
5. Consumption perks for employees.
One might expect that credit unions would, because of their not-
for-profit status, have lower overall profitability than banks. As
mutual organizations, the managerial priority would seemingly favor
competitive deposit and loan rates over profit levels. The emphasis on
member services would also tend to drive up operating expenses and
hence reduce profitability. Ultimately, the tax exemption provides an
avenue for credit unions to have a competitive advantage in loan and
deposit rates while still providing expanded service levels and
reasonable capital accumulation levels that are financed out of
profits.
Historically we do not observe credit unions having lower overall
profitability than banks and thrifts. This may reflect the underlying
risk of the loan portfolio position rather than managerial motives.
Hinson and Juras (2002) examined this issue by comparing the spread
between loan and deposit returns for credit unions and mutual savings
and loans. Mutual thrifts were chosen as the comparison organization to
control for the impact of ownership form on the profit motive of
managers. They found that credit unions do not, on average, have lower
net interest margins than mutual thrifts after adjusting for
differences in the composition the loan portfolio and assets. They
interpret this finding as evidence that credit unions are not passing
along a significant portion of their tax exemption to members and may
instead be using it to cover higher operating expenses.
Using the exemption to provide for managerial perks or to
subsidize operating inefficiencies would misallocate the exemption
benefits away from credit union members. Frame, Karels and McClatchey
(2003) examine this question by estimating and comparing the cost
functions of credit unions and mutual thrifts. We found mixed evidence
in this regard. Credit unions with a residential common bond do have
higher cost than mutual thrifts of similar size but single common bond
occupational and associational credit unions are more cost efficient.
There were no significant cost differences between multiple common bond
credit unions and mutual thrifts
The profitability of credit unions has played an important role in
accumulating regulatory capital. Both banks and credit unions have
increased their capital by roughly the same proportion in the last 20
years. Credit unions did this in the first half of the period where
profitability was relatively higher than banks and banks have done it
in the second half of the period where they have been relatively more
profitable than credit unions. In addition, growth in credit unions
through common bond expansion or conversion to community charters has
been more extensive in the last half of this period and this was
accompanied by very limited increases in capital adequacy. Banks and
credit unions appear to have converged to similar capital positions
that are much stronger than in the past with asset portfolios and
product lines that are much more similar.
Conclusion
Credit unions have matured and evolved greatly since the passage of
the 1951 Revenue Act. Credit Unions are now modern depository
institutions that offer a broad array of products to, in many
instances, a very diverse customer base. Customer shares accounts have
the added feature of deposit insurance which limits potential customer
losses to near zero. Expanded lending powers allow credit unions to
compete for residential mortgages longer-term, unsecured personal loans
and business loans. Traditional, single-common bond associational and
occupational credit unions now account for less than 50 percent of
federally-chartered credit unions and for less than 20 percent of
credit union assets. Credit union capital adequacy is very similar to
that of commercial banks.
All of these changes parallel the developments that led to the
taxing of mutual thrifts and savings banks. Deposit insurance has
largely removed the issue of the excessive burden of share accounts
cited in the 1937 exemption. It is not clear that credit union members
have been the direct beneficiaries of the tax exemption. At the same
time there is only limited evidence of expense preference behavior on
the part of credit unions. Overall it does not appear that a repeal of
the exemption would not be particularly detrimental to members but
would more likely affect the ability of credit unions to grow at the
rates they have in the past.
The ``public purpose'' characteristic is often cited as
justification for the favorable tax and regulatory environment of
credit unions. Extending financial services to individuals of small or
modest means was embedded in the original common bond concept for
credit unions. Credit unions have been very effective in providing
services to its members but it is also apparent that banks, thrifts and
other financial institutions also serve people of very modest means. If
fact, one could argue that CRA reporting requirements provide better
documentation of this public purpose for banks than credit unions.
There is obvious concern that the removal of the tax exemption will
ultimately hurt individuals of modest means the most. While the
evidence does not seem to point to that, perhaps other tax policies
that provide direct benefits to these individuals instead of potential
indirect benefits through a financial intermediary should be
considered. Alternatively, providing for a class of loans to
individuals of modest means that has an interest income exemption for
all financial institutions (such as municipal bonds) might result in
competition that more directly benefits individuals.
References
Esty, B.C., 1993. Organizational form, leverage, and incentives: a
study of risk taking in the S&L industry. Working Paper, Harvard
Business School.
Esty, B.C., 1997. Organizational form and risk taking in the
savings and loan industry. Journal of Financial Economics, 44, 25-55.
Frame, W.S., Karels, G.V., McClatchey, C., 2003. Do credit unions
use their tax advantage to benefit members? Evidence from a cost
function. Review of Financial Economics, 12, 23-48.
Frame, W.S., Karels, G.V., McClatchey, C., 2002. The effect of the
common bond and membership expansion on credit union risk. The
Financial Review, 37, 613-636.
Hinson, Y.L., Juras, P.E., 2002. Performance evaluation of credit
unions: reaping the benefits of tax status. Journal of Managerial
Issues, 14, 145-161.
Karels G.V., McClatchey, C.,1999. Deposit insurance and risk-taking
behavior in the Credit Union Industry. The Journal of Banking and
Finance, 23, 105-134.
Lee, S.J., Mayers, D., Smith Jr., C.W., 1997. Guaranty funds and
risk-taking: evidence from the insurance industry. Journal of Financial
Economics, 44, 2-24.
U.S. Treasury, 1997. Credit Unions. Government Printing Office,
Washington, D.C.
U.S. Treasury, 2001. Comparing Credit Union With Other Depository
Institutions. Government Printing Office, Washington, D.C.
Chairman THOMAS. Thank you very much, Dr. Karels. Mr.
Taylor.
STATEMENT OF JOHN TAYLOR, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, NATIONAL COMMUNITY REINVESTMENT COALITION
Mr. TAYLOR. Good afternoon, Chairman Thomas and Ranking
Member Rangel. The National Community Reinvestment Coalition is
honored to be here today and to speak for our 600 community
organizations across the country that comprise our membership.
We are essentially a trade association of economic justice
organizations working to increase access to credit and capital
for minority and working-class families. The fundamental
purpose and basis of establishing credit unions is the same as
for the Community Reinvestment Act. The establishment of credit
unions and the passage of CRA were motivated by concerns that
lending institutions were not serving low- and moderate-income
borrowers. When banks do not meet their CRA obligations, they
face ramifications, including failing their CRA exams and
possible denials of mergers and branching applications. When
credit unions do not serve low- and moderate-income borrowers
and communities, the penalties are non-existent. Unfortunately,
NCRC's research indicates that large credit unions are not
adhering to the mandate of the Federal Credit Union Act 1934 to
``make credit available to people of small means.''
Recently, NCRC conducted a comprehensive study, entitled
``Credit Unions: True to Their Mission,'' which I believe we
have supplied to the Committee. This study compared the
performance of banks and credit unions serving minority
communities and women and low-income borrowers in home loans.
Despite credit unions' origins as institutions devoted to
people of modest means, NCRC's study finds that banks make a
higher portion of their home loans, with fewer loan denials,
than credit unions, to traditionally under-served populations.
The NCRC's study adds powerful evidence to the numerous studies
over the years that have detailed credit unions' lackluster
service to people of modest means. I am not including all
credit unions because, obviously, some of them do an extremely
good job. But I am talking about the majority of these credit
unions, the large credit unions that constitute--I think we
have a chart somewhere; it is not up--but that constitute the--
could someone run over and put that chart up on the percentage
of ownership?
[The information follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
------
If you look in terms of the percentage of assets that are
controlled by a small number of credit unions, that is the
group we are really focusing on and their lack of commitment
toward under-served populations. A Federal Reserve survey
revealed recently--and there was an earlier question from the
panel about what income was being served--that 36 percent of
the households that use credit unions had low and moderate
incomes; in contrast to 42 percent of the households that
primarily use banks. The GAO released a report finding that
banks provided 34 percent of their mortgage loans to low- and
moderate-income borrowers; while credit unions issued just 27
percent of the loans to borrowers in 2001. The NCRC's study
finds over a three-year period, from 2001 to 2003, when all
types of home lending are considered, banks out-perform credit
unions in 36 states; or 72 percent of the states. When just
home purchase lending is analyzed by itself, credit union
performance drops off even more. Banks out-perform credit
unions in 40 of the 50 states; or 80 percent of the time.
In home purchase lending, the difference in bank and credit
union performance was usually substantial. For example, in
2003, banks made 14.1 percent of their loans to minority
neighborhoods; whereas credit unions issued just 7.9 percent.
In 2003, banks made 21 percent of their home purchase loans to
women; credit unions issued 18.7 percent of their loans to
women across the country. In 2003, banks made 9 percent of
their home purchase loans to Hispanics; credit unions, 4.8
percent to Hispanics across the country. In your home State of
California, Mr. Chairman, banks made 18.3 percent of their home
purchase loans to Hispanics; while credit unions issued 12.4
percent to borrowers in 2003. In your home State of New York,
Ranking Member Rangel, banks made 16.6 percent of their home
purchase loans in minority neighborhoods; while credit unions
issued just 5.1 percent in these tracts during 2003.
Finally, banks made 5.6 percent of their home purchase
loans to African-Americans; whereas credit unions issued just
2.8 percent of their purchase loans to African-Americans in
2003. In preparing for this testimony, NCRC conducted analysis
of the most recent data, the 2004 HMDA data, Home Mortgage
Disclosure Act data. This analysis shows once again that credit
unions trail banks in making loans to minorities, to women, and
to low- and moderate-income borrowers and communities. The
chart in our testimony shows that banks exceeded credit union
performance on all nine CRA and fair lending indicators. In
addition, the largest credit unions--Navy Federal Credit Union,
who you just heard from, and Golden 1 in California--also
performed poorly. Navy Federal lags all credit unions on five
of the nine indicators of performance, and Navy Federal lags
all banks and thrifts on eight of the nine indicators of
performance.
I think the question posed by the gentleman from North
Dakota is a very accurate one, about the presence of so much
predatory lending business butting up to and surrounding
military bases. It begs the question: if the Navy Federal
Credit Union is doing such a great job and serving people in
the Service, why are they surrounded by predatory lending,
payday lenders, and other kinds of sharks that are literally
across the street from the bases where the men and women of
Service, as the President of the Navy Credit Union pointed out,
are being taken advantage of? Let me close by saying large
credit unions and their trade associations should not be
comfortable in arguing to Members of Congress that, while
credit unions lag banks, credit unions are getting better.
Their tax benefits and other privileges dictate that they
should be better. More importantly, you are right, Mr.
Chairman. Why would Congress be satisfied with credit unions
lagging banks, considering the valuable benefits bestowed on
these institutions by the American taxpayer?
In my home State of Massachusetts, we actually have CRA for
credit unions. If you look at our study and you look at the
performance of state-run, state-mandated credit unions compared
to banks, guess what? With the presence of CRA, they perform
just the same as banks in terms of serving low-income,
minorities, and women. The NCRC recognizes that a significant
segment of the credit union industry remains devoted to serving
people of modest means. But don't be misled that Ms. May
constitutes anything near what the majority of the credit
unions are made up of--the majority of number of credit unions,
certainly; but in terms of who controls the assets, it is a
very, very different picture. By the way, I have got to say,
just as an aside, I really love all this conversation from the
majority, talking about the need to increase access to credit
and capital for under-served people, for poor people and people
of modest means. I hope that carries over in a lot of other
ways. Because I think you are absolutely right on in that
perspective, because it continues to be a problem. Predatory
lending is growing in this country.
Taking the time to really look at institutions that get
public benefit, whether it is from depositors' insurance;
applied guarantees like the GSC's, the ``too big to fail''; or
whether it is credit unions having tax-exemption--which by the
way, for the record, we continue to support the tax-exemption
for these credit unions; but we think the most wise avenue for
the credit unions, for CUMAA and the large credit unions to
take, and the wisdom that they could show the rest of the
industry, would be to endorse the CRA-like applications so
there is a level playingfield between those community banks and
other banks, and that they have to serve under-served
populations, which is what they have not been doing. Thank you,
Mr. Chairman, for your indulgence.
[The prepared statement of Mr. Taylor follows:]
Statement of John Taylor, President and Chief Executive Officer,
National Community Reinvestment Coalition
Introduction
Good Afternoon, Chairman Thomas and Ranking Minority Member Rangel.
NCRC is honored to be here today as the voice for over 600 community
organizations from across the country that comprises the National
Community Reinvestment Coalition. NCRC is the nation's economic justice
trade association dedicated to increasing access to credit and capital
for minority and working class families. Our member organizations
represent communities from your congressional districts. These
organizations include the California Reinvestment Coalition, the
Greenlining Institute, Inner City Press/Community on the Move, and
Rural Opportunities, Inc. We appreciate you convening today's hearing
on an issue that our members have been addressing for the last several
years.
When NCRC first started analyzing credit union performance, we were
hoping that we would find that the credit union industry, by and large,
was adhering to mandate of the Federal Credit Union Act of 1934 to
``make credit more available to people of small means.'' Our research
indicates that a very important segment of the industry, community
development credit unions, is devoted to serving the working poor and
modest income customers. As a disclaimer, some of the leading community
development credit unions in the country are NCRC members, including
the Bethex Federal Credit Union in New York City, the Enterprise
Corporation of the Delta based in the Gulf region afflicted by
Hurricane Katrina, and the North Side Community Federal Credit Union in
Chicago. In addition to the community development credit unions, we do
not doubt that a number of traditional credit unions have also stayed
true to the 1934 law. However, we have found repeatedly that large
credit unions have strayed from their mission and the letter and spirit
of the Federal Credit Union Act.
The fundamental purpose and basis of establishing credit unions is
the same as for the Community Reinvestment Act (CRA). The establishment
of credit unions and the passage of CRA were motivated by concerns that
lending institutions were not serving low- and moderate-income
borrowers. Congress therefore passed legislation creating credit unions
as lending institutions focused on low- and moderate-income communities
and borrowers, and then Congress imposed upon banks a continuing and
affirmative obligation to serve low- and moderate-income borrowers.
When banks do not meet their CRA obligations, they face ramifications
including failing their CRA exams and/or denials of merger and
branching applications. When credit unions do not serve low- and
moderate-income borrowers and communities, the penalties appear to be
non-existent.
NCRC's Study Agrees with a Substantial Body of Research--Large Credit
Unions Need to Do a Better Job In reaching Minorities, Women,
and Low-Income Borrowers
Recently, the National Community Reinvestment Coalition (NCRC)
conducted a comprehensive study, entitled ``Credit Unions: True to
their Mission.'' This study compared the performance of banks and
credit unions in serving minorities, women, and low- and moderate-
income borrowers with home loans. Despite credit unions' origins as
institutions devoted to people of modest means, NCRC's study finds that
banks make a higher portion of their home loans with fewer loan denials
than credit unions to traditionally underserved populations. NCRC's
study is the first that we know of that has compared credit union and
bank performance in home lending over three years across the country as
a whole and in each state. A copy of the report can be found on our
website at http://www.ncrc.org/policy/states/credit--union--report.php.
In 1934, the Federal Credit Union Act (FCUA) established the
federal supervision of credit unions as alternatives to banks. The
necessity for such an alternative arose because the financial needs of
low- and moderate-income people were not being met by traditional
lenders Spurred by the 1934 legislation, credit unions increased their
presence around the country as lending institutions controlled and
owned by people of modest means. Based on the assumption that credit
unions are serving the needs of low- and moderate-income members,
credit unions are afforded certain benefits, such as federal tax
exemptions, to help them fulfill their mission.
In the year 2005, after 70 years of federal supervision of credit
unions, most people would be surprised to learn that banks are doing a
better job of serving low- and moderate-income people than credit
unions. This comes in the wake of the 1998 Credit Union Membership
Access Act, which provided for significant expansions of credit union
membership. While this law empowered credit unions by reversing Supreme
Court restrictions on credit union membership, it has not resulted in
credit unions markedly improving their performance in lending to
traditionally underserved communities.
NCRC's study adds powerful evidence to the numerous studies over
the years that have detailed credit unions' lackluster service to
people of modest means. The Federal Reserve's 2001 Survey of Consumer
Finances revealed that only 36 percent of the households that primarily
used credit unions had low- and moderate-incomes in contrast to 42
percent of the households that primarily used banks. In 2003, the
Government Accountability Office (GAO) released a report finding that
banks provided 34 percent of their mortgage loans to low- and moderate-
income borrowers while credit unions issued just 27 percent of their
loans to these borrowers in 2001. NCRC's previous analyses of Home
Mortgage Disclosure Act (HMDA) data also showed that credit unions
trailed banks in the percent of their loans to low- and moderate-income
borrowers in 1999 and 2000.
In the first study of its kind, NCRC's three year analysis
concludes that banks consistently exceed credit unions' performance in
lending to women, minorities, and low- and moderate-income borrowers
and communities. NCRC scrutinized lenders' performance on 14 fair
lending measures including the percent of loans to different groups of
borrowers and the differences in denial rates to minorities versus
whites and low- and moderate-income borrowers versus middle- and upper-
income borrowers. Banks are compared to credit unions because federal
Community Reinvestment Act (CRA) requirements to serve low- and
moderate-income communities apply to banks but not credit unions.
When considering performance in home purchase lending by itself, or
when considering home purchase, refinance and home improvement lending
combined, credit unions consistently lagged banks in service to
minorities, low- and moderate-income (LMI) borrowers, women, and LMI
and minority neighborhoods. Over a three year period from 2001 through
2003, when all three loan types are taken together, banks outperformed
credit unions in 36 states or 72 percent of the states. When home
purchase lending is analyzed by itself, credit unions' performance
drops off even more--banks outperform credit unions in 40 states or 80
percent of the time.
In home purchase lending, the difference in bank and credit union
performance was usually substantial, even in 2003 when credit unions
were performing better than they were in previous years. For example,
in 2003, banks made 14.1% of their loans to minority census tracts
whereas credit unions issued just 7.9%. Likewise, banks made 20.8
percent of their loans in minority and/or low- and moderate-income
(LMI) tracts whereas credit unions issued just 15.3 percent of their
home purchase loans in these tracts across the United States in 2003.
Other examples of large differences in performance include:
In 2003, banks made 21.8% of their home purchase loans to women;
credit unions issued 18.7% of their loans to women across the country.
In 2003, banks made 9% of their home purchase loans to Hispanics;
credit unions, 4.8% to Hispanics across the country.
In Florida, banks made 17.1 percent of their home purchase loans to
Hispanics; credit unions issued 9.9 percent of their loans to Hispanics
during 2003. Banks made 25.4 percent of their home purchase loans to
women; credit unions offered 19.4 percent of their loans to women in
Florida during 2003.
In Texas, banks made 25.1% of their home purchase loans to LMI
borrowers; credit unions issued 20.2% of their loans to LMI borrowers
in 2003. Banks made 11.8% of their purchase loans to LMI minorities
while credit unions issued 6.2% of their loans to these borrowers in
Texas during 2003.
In California, banks made 18.3% of their home purchase loans to
Hispanics while credit unions issued 12.4% to these borrowers during
2003. Likewise, banks made 35.1% of their purchase loans to residents
of minority census tracts; credit unions made just 25.6% of their loans
to these census tracts.
In New York, banks made 16.6% of their home purchase loans in
minority census tracts while credit unions issued just 5.1% in these
tracts during 2003. Banks made 23.5% of their purchase loans to women
while credit unions made just 18.7% of their loans to women in 2003 in
New York. Finally, banks made 5.6% of their home purchase loans to
African-Americans whereas credit unions issued just 2.8 percent of
their purchase loans to African-Americans during 2003. This disparity
is even larger than the national difference (banks made 5.4% and credit
unions made 4.4% of their loans to African-Americans during 2003).
Home purchase lending represents the means by which most Americans
build wealth; home purchase lending is perhaps the most difficult type
of home lending since more families buying homes for the first time
will be less wealthy or have fewer assets than families refinancing
their mortgage loans. It is distressing that mainstream credit unions
lag banks by an even greater extent in home purchase lending than other
types of home lending since home purchase lending represents the
gateway towards the American Dream of homeownership, wealth building,
and providing for one's family.
The results in NCRC's analysis are driven by large credit unions as
they make the most loans in the credit union industry. For the year
2003, the top 25 credit unions (in terms of highest number of loans)
had a median asset size of $2.3 billion and a median membership base of
250,094. The top 25 credit unions made 220,867 loans overall and issued
28 percent of the single family loans (home purchase, refinance, and
home improvement) made by credit unions across the country in 2003. The
median loan amount was 5,637 loans for top 25 credit unions.
Here are some loan totals and membership sizes of large credit
unions:
Navy Federal--68,567 loans and 2.5 million members
Golden 1 Credit Union--18,774 loans and 625,559 members
Boeing Employees Credit Union--9,673 loans and 401,783 members
In preparing for this testimony, NCRC conducted analysis with the
new 2004 HMDA data for single family lending (home purchase, refinance,
and home improvement lending combined). This analysis shows once again
that credit unions trail banks in making home loans to minorities,
women, and low- and moderate-income borrowers and communities. The
chart below shows that banks exceeded credit union performance on all
nine CRA and fair lending indicators. In addition, the chart reveals
that the largest credit unions, Navy Federal and Golden 1, also perform
poorly. Navy Federal lags all credit unions on 5 of the nine indicators
of performance and Navy Federal lags all banks and thrifts on eight of
the nine indicators of performance. Golden One performs better than
Navy Federal but still lags banks on 6 of the 9 indicators.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
NCRC's study acknowledges that credit union performance improved
over each year of the analysis. However, banks were still exceeding
credit union fair lending performance in the great majority of states
by 2003. This is indeed not good performance for institutions that were
originally devoted to serving the credit needs of poor people. Large
credit unions and their trade association should not be comfortable in
arguing to members of Congress that while credit unions lag banks,
credit unions are getting better. Their tax benefits and other
privileges dictate that they should be better. More importantly, why
would Congress be satisfied with credit unions lagging banks
considering the very valuable benefits bestowed on these institutions
by the American taxpayer. The mission established in the Federal Credit
Union Act of 1934 requires credit unions to lead banks in lending to
minorities, women, and low- and moderate-income borrowers, not lag
behind banks. Moreover, the diverse and large membership bases of these
large credit unions should provide plenty of opportunities to serve
women, working class Americans, and people of color.
When considering lending on a national level, we find that bank
fair lending performance exceeds credit union performance by even
greater margins than when considering performance state by state. This
finding is the result of banks consistently out-performing credit
unions in the largest states while credit unions held the advantage in
states that were predominantly rural and less heavily populated.
Just one state in our country, Massachusetts, has applied CRA to
credit unions over a long period of time. Our study featured a perfect
control experiment in that it compared the performance of state-charted
credit unions in Massachusetts against federally-charted credit unions
not subject to CRA. When considering home purchase, home improvement
and refinance lending together, state-chartered credit unions
outperform their federally-chartered counterparts in Massachusetts 69
percent of the time. While banks outperform all credit unions in
Massachusetts 71 percent of the time in single family lending, banks
and state-chartered credit unions perform almost the same--the bank
advantage is reduced to only 55 percent.
NCRC recognizes that a significant segment of the credit union
industry remains devoted to serving people of modest means. Community
development credit unions (CDCUs), for example, are specifically
dedicated towards communities left out of the financial mainstream.
About 300 CDCU's have more than 860,000 members and assets of $3.1
billion. But the credit union industry is now large, totaling over
9,000 credit unions with assets of $629 billion. While a number of
credit unions toil daily to reach poor people, it is clear that the
industry as a whole has some catching up to do and also has the
resources to do a much better job.
NCRC's findings strengthen the argument that credit unions overall
are not meeting their intent of serving low- and moderate-income
people. Based on our analysis of the impact of Massachusetts' Community
Reinvestment Act (CRA) law and our findings that CRA regulated banks
consistently outperform credit unions on fair lending measures, NCRC
concludes that federal CRA must be expanded to large, mainstream credit
unions. Research has long documented CRA's effectiveness in its
application to banks. Likewise, CRA can be effectively applied to
credit unions as is evidenced by the Massachusetts experience. Since
the Federal Credit Union Act of 1934 and CRA have the same fundamental
purpose--ensuring that low- and moderate-income borrowers and
communities are served--doesn't make sense that CRA be applied to
large, mainstream credit unions that need a legal and regulatory push
to better serve people of ``small means.''
Credit Union Industry's Regulatory Relief Proposal Goes in the Wrong
Direction
Finally, we are also concerned by the credit union's attempt to
seek regulatory relief that demonstrates the industry's interest to
abandon its public obligation to underserved areas and those with
modest means. The credit union's regulatory relief proposals include
efforts to expand their fields of membership, expand commercial
lending, and to serve underserved communities with ATMs instead of full
service branches. In June of 2004, CUNA testified before the Senate
Banking Committee on Regulatory Relief, requesting that Credit Unions
be allowed to serve underserved communities with ATMs. We have seen
this request reappear this year as a regulatory relief proposal for
consideration by the Senate. This request would repeal existing law and
undermine the intent of both House Report 105-472 and Senate Report
105-193 language that explicitly stated that the term ``facility'' does
not include an ATM.
House Report, 105-472, August 1998
``Any person or organization within an underserved local community,
neighborhood, or rural district may be added to multiple common bond
credit unions which establishes and maintains an office or facility in
the underserved areas. The term `facility' in the Act is meant to be
defined in the same way that the National Credit Union Administration
(`NCUA' or `Board') has defined `service facility,' that is, an
automatic teller machine or similar device would not qualify.''
Senate Report, 105-193, August 1998
``An additional exception exists for persons or organizations
within a local community, neighborhood or rural district that is
underserved by other depository institutions. These persons or
organizations may join an existing credit union provided that the
credit union establishes a service facility in that area. The term
`facility' is meant as it is defined by the NCUA. An automatic teller
machine or similar device does not qualify as a service facility.''
Throughout HR 1151, the Federal Credit Union Act of 1998, Congress
made clear and reaffirmed in its findings the public purpose of credit
unions, ``SEC. 2. (1) The American credit union movement began as a
cooperative effort to serve the productive and provident credit needs
of individuals of modest means.'' The request by credit unions to serve
underserved communities only with ATMs is inconsistent and in conflict
with the public purpose of credit unions to serve the credit needs of
those individuals of modest means.
While our goal is not to limit the growth of credit unions, it is
to ensure that credit unions maintain their focus on underserved areas.
Instead, we see their proposal on Community Credit Union Membership as
an attempt by the credit union industry to distort and inappropriately
expand their fields of membership to areas which credit unions view as
desirable and profitable, rather than to underserved areas, despite the
original and reaffirmed mission to serve people of modest means.
This proposal would undermine Congress's enactment of the Credit
Union Membership Access Act (CUMAA) HR 1151, and therefore, its
affirmation that credit unions have a mandate to serve the underserved.
Through CUMAA, Congress permitted a limited exception for multiple-bond
credit unions to expand their fields of membership by adding
underserved areas. Currently, adding underserved areas is one of the
only means by which multiple bond credit unions can actively expand
their fields of membership. In providing an exception for underserved
areas, Congress reaffirmed the original mission of credit unions to
serve those with modest means.
The credit union industry is also requesting to shift the focus of
business lending from those persons of modest means to commercial
lending that does not serve persons of modest means. Throughout Senate
Report 105-193, the intent was clear, ``Title II reaffirms that insured
credit unions have a continuing obligation to meet the financial
services needs of persons of modest means, including low- and moderate-
income individuals''. We believe that credit unions should improve upon
its home purchase lending to persons of modest means and not on
expanding its business lending to serve large commercial firms.
In general we are troubled by the attempts of the credit union
industry to seek relief from public law and guidance that is
fundamental to its public purpose and obligation. We are also concerned
by this request because it demonstrates the credit union industry's
interest to abandon its public obligation to undeserved areas and those
with modest means. NCRC and our 600 member organizations have worked
diligently to insure that the banking industry serve and provide
branches to underserved communities through the CRA where they are held
accountable. Should the credit unions be successful in obtaining their
regulatory relief proposals they would enjoy expanded fields of
membership and expanded commercial lending without any check and
balances to insure that they are serving persons of modest means.
The next step in the evolution of credit unions in this country is
applying CRA to mainstream credit unions, thereby requiring these
credit unions to abide to an affirmative and continual obligation of
meeting the credit needs of low- and moderate-income communities.
Chairman THOMAS. Thank you. Ms. Kennelly, before we ask for
your testimony, I just want to indicate that every Member
indeed, those who aren't here and the Members of Congress,
offer our sincere condolences. You folks were right in the
heart of what was an extremely difficult, tragic, natural
disaster--perhaps exacerbated by some man-made assistance, but
the devastation was there nevertheless. Our colleague, the
gentleman from Louisiana, Mr. Jefferson, and my colleague, the
gentleman from Louisiana, Mr. McCrery, have been focused on
trying to make sure that, at a minimum, life is restored back
to some semblance of normal as soon as possible. I am anxious
to hear where you were, where you are, and what has been going
on, from someone who obviously is at the forefront in listening
to, hearing, and probably trying to meet people's needs who had
no understanding of what their needs were going to be just a
couple of months ago.
STATEMENT OF CONSTANCE KENNELLY, CHIEF EXECUTIVE OFFICER,
TULANE-LOYOLA FEDERAL CREDIT UNION, NEW ORLEANS, LOUISIANA
Ms. KENNELLY. Exactly. Thank you very much. I must admit, I
did evacuate. I did not stay. Chairman Thomas, Ranking Member
Rangel, distinguished Members of the Committee on Ways and
Means, I do want to express my profound gratitude for the
opportunity to testify before you today, and to share with you
my personal story and those of others regarding the ways in
which credit unions assisted them and their families and untold
thousands of other people in the aftermath of Hurricanes
Katrina and Rita, in ways that I believe are unique. I also
want to express my appreciation to my fellow Louisianians,
Congressman Jefferson, who represents a significant number of
my members, and Congressman McCrery, for their continuing
efforts in the Committee to help our devastated state recover.
I am, and have been since 1998, the Chief Executive Officer of
the Tulane-Loyola Federal Credit Union, and I am also a member.
Our membership includes the faculty, staff, and students from
Tulane University, Tulane Hospital, and Loyola University,
which I think spreads the gamut of income across the board.
We are small, with slightly less than $15 million in assets
and 5,000 members. In addition, our credit union is unique, in
that it has been designated as a low-income credit union, which
will allow the credit union to receive grants to serve low-
income members of the community, including those devastated by
the hurricane. As you might imagine, Hurricane Katrina's impact
on our membership and on the membership of credit unions
throughout the greater New Orleans area has been catastrophic.
More than 4,800 of our members were evacuated, and many were--
and some still remain--temporarily located throughout the
United States; some in remote areas, but with fairly heavy
concentrations in Baton Rouge, Houston, Dallas, and Atlanta. To
date, only about 30 percent have actually returned to the New
Orleans area. It has been reported that the universities plan
to reopen for the spring semester in January of 2006; however,
it still remains unclear how many of our members will be able
to return home by that time.
Of our 14 staff members, five lived in the areas of total
devastation now well known to most of the Nation: the Lower
Ninth Ward of New Orleans, New Orleans East, and Saint Bernard
Parish. They may not be able to return. During the storm's
aftermath, I had my personal cell phone number listed on the
National Credit Union Administration's website, as well as on
our own website, for member contact. The calls were answered
from 7:00 a.m. until 11:30 p.m., and most of the information
requested was related to being able to access their funds. I
was able to direct them to the service center link on our
website, or to provide them with the information directly if
they did not have access to a PC. During the first few days, I
responded personally to over 700 e-mails from members. For
weeks, there were overlapping, non-stop phone calls. With rare
exception, Members were able to access their funds conveniently
from credit union service centers or outlets within the
cooperative credit union network of people helping people. In
only two instances were members located outside of a convenient
radius--that is, greater than 25 miles from the nearest
branch--and for those, funds were wired to them at no cost.
In so many instances, Louisianians were not just separated
from their homes; they were also separated from family and from
the means by which to live. Many were left not only homeless,
but penniless as well. With phone lines and other means of
communication compromised, ATM service was sporadic throughout
the affected area. Even credit and debit card use was limited
in many areas. Moreover, most people who evacuated--including
myself--never envisioned the level of destruction wrought by
Katrina, and were thinking that they would only be away from
home for a couple of days; not weeks or even, as we have seen,
months. Thankfully, credit union members have access to
something unique in the financial services industry, and it is
a cooperative, shared branching network. Because of this
network, our members were able to walk into credit unions all
over the country--in Texas, in California, in Georgia, and
elsewhere in Louisiana--and access their funds, obtain
emergency loans, initiate lines of credit, increase their
credit card limits, and receive other critical financial
services, with no questions asked, as though they were at their
own home credit union. To my knowledge, there is no similar
shared access system in the banking sector. Moreover, while we
had certainly planned for emergencies, an event of this
magnitude is unprecedented; and yet the shared branching
network far exceeded the expectations, and ensured our members
the financial access they needed.
We heard from members who had been separated from their
family. There was one, a sister, who had been separated. Funds
were transferred from their joint account. We were able to
intervene and allow the apartment owners to actually waive the
$175 fees. We had another instance with an incoming Tulane
student who had joined the credit union literally 1 hour before
they were told to evacuate with their family. They called. We
had not processed the check, but we immediately made that
$1,000 available to them. To sum it up again, I do want to
thank you for your indulgence. I see that I have gone over by
27 seconds right now. I want to add that not only do we as
credit unions not pay taxes; we don't pay our volunteers. We
are run by credit unions. Although we are considered not-for-
profit, we have to make a profit, because we have to maintain a
level of capital above that of other financial institutions.
So, we are not-for-profit; we meet capital expectations; and we
do not pay our directors. Thank you very much, Chairman.
[The prepared statement of Ms. Kennelly follows:]
Statement of Constance Kennelly, Chief Executive Officer, Tulane-Loyola
Federal Credit Union, New Orleans, Louisiana
Chairman Thomas, Ranking Member Rangel, distinguished members of
the Committee on Ways and Means, I want to express my profound
gratitude for the opportunity to testify before you today and to share
my personal story and those of others regarding the ways in which
credit unions assisted them and their families and untold thousands of
other people in the aftermath of Hurricanes Katrina and Rita in ways
that I believe are unique. I also want to express my appreciation to my
fellow Louisianans, Congressman Jefferson, who represents a significant
number of my members, and Congressman McCrery for their continuing
efforts in the Committee to help our devastated state recover.
I am, and have been since 1998, the chief executive officer of the
Tulane-Loyola Federal Credit Union; I am also a member. Our membership
includes faculty, staff and students from Tulane University, Tulane
Hospital and Loyola University. The Tulane-Loyola Federal Credit Union
is small with slightly less than 5,000 members and $15 million on
deposit. In addition, our credit union is unique in that it has been
designated as a low-income credit union which allows the credit union
to receive grants to serve low-income members of the community,
including those devastated by the hurricane.
As you might imagine, Hurricane Katrina's impact on our membership
and on the membership of credit unions throughout the greater New
Orleans area has been catastrophic. More than 4,800 of our members were
evacuated, and many were (and some remain) temporarily located
throughout the United States--some in remote areas but with fairly
heavy concentrations in Baton Rouge, Houston, Dallas and Atlanta. To
date, only about 30 percent have returned to the New Orleans area. It
has been reported that the universities plan to re-open for the spring
semester in January 2006; however, it remains unclear how many of our
members will be able to return by that time.
Of our fourteen staff members, five lived in the areas of total
devastation now well known to most of the nation--the Lower Ninth Ward
of New Orleans, New Orleans East, and St. Bernard Parish. They may not
be able to return.
During the storm's aftermath, I had my personal cell phone number
listed on the National Credit Union Administration's website, as well
as on our own website, for member contact. The calls were answered from
7 a.m. until 11:30 p.m. Most of the information requested was related
to being able to access funds, and I was able to direct them to the
Credit Union Service Center link on our website or provide them with
the information directly.
During the first few days, I responded personally to over 700
emails from members. And for weeks there were overlapping, non-stop
phone calls. With rare exception, members were able to access their
funds conveniently from Service Centers or Outlets within the
cooperative Credit Union network of people helping people. In only two
instances were members located outside of a convenient radius, that is,
greater than 25 miles from the nearest service center or branch, and
for those, funds were wired to them at no charge.
In so many instances, Louisianans were not just separated from
their homes; they were also separated from family and from the means to
live. Many were left not only homeless, but penniless as well. With
phone lines and other means of communication compromised, ATM service
was sporadic throughout the affected area; even credit and debit card
use was limited in many areas. Moreover, most people who evacuated
never envisioned the level of destruction wrought by Hurricane Katrina
and the subsequent deluge. Quite reasonably, given common experience,
most of those who evacuated were prepared to be away from home, away
from their livelihoods, for a few days. When they left, they had no
idea--no reason to expect--they would need to be prepared to be gone
for weeks or, as we have seen, months.
Thankfully, credit union members have access to something unique in
the financial services industry--a cooperative shared branching
network. Because of this network, our members were able to walk in to
credit unions all over the country--in Texas, in California, in Georgia
and elsewhere in Louisiana--and access their funds, obtain emergency
loans, initiate lines-of-credit, increase credit card limits, and
receive other critical financial services with no questions asked as
though they were at their home credit union. To my knowledge, there is
no similar shared access system in the banking sector. Moreover, while
we had certainly planned for emergency situations, an event of this
magnitude is unprecedented, and yet the shared branching network far
exceeded expectations and ensured our members the financial access they
needed in the days and weeks after their lives were turned upside down
by Hurricane Katrina.
We heard from a member who had been separated from her sister and
grandmother during the evacuations from the Superdome. The sister had
transferred funds from the joint account by telephone teller
unbeknownst to the member who wrote a check for rent in Houston.
Ultimately, we assisted the member by having the apartment complex
reverse the NSF charges imposed on her.
Another of our members called to re-order checks in order to be
able to rent an apartment for his family. In the interim period, we
wired funds for him at no charge. For other members, we expedited loans
for displaced members, waived fees for stop payments and wires, and
deferred loan payments until the end of November.
An incoming Tulane student, who had joined the credit union just an
hour before being evacuated on the Saturday before Katrina, contacted
us for a withdrawal. Knowing the circumstances, we credited his $1,000
deposit immediately even though the check had not been processed.
A credit union in the Lake Charles area promptly accommodated
several of our members by providing withdrawals, even though they were
not, at that time, a part of our shared branch network, and we, in
turn, wired covering funds to them. During the first weeks after
Katrina, one Service Center even agreed to accept and post payments
from auto insurance companies totaling our members' automobiles, sight
unseen.
These are just a few examples of the manner in which credit unions
care for the needs of their members. I represent just one of many
credit unions whose members were adversely affected by the recent
hurricanes, and yet I sit before you today certain that my colleagues
at those credit unions and their members could recount hundreds of
similar acts of kindness and compassion too seldom found in the
financial services sector. For us, and for our members, caring, and not
profit, is the rule.
From a member's perspective, a credit union represents caring and
thoughtful service, even during the most difficult of times. Members
may be unaware of the size of their credit union, but they care deeply
about the personal service, convenience and responsiveness. While
Hurricane Katrina and its aftermath were extraordinary circumstances,
thanks to the member-oriented approach of credit unions throughout the
country, we were able to provide a lifeline to our members and fulfill
our stated mission of taking care of our membership one member at a
time.
Thank you again for the opportunity to testify.
Chairman THOMAS. Thank you, Ms. Kennelly. Does the
gentleman from Louisiana, Mr. McCrery, wish to inquire?
Mr. MCCRERY. Mr. Chairman, I don't have any questions. I
appreciate the testimony of the panel. We have had some
thought-provoking testimony, I think, today from all three of
our panels. I commend the Chairman for undertaking this
responsibility of the Committee to review the tax-exempt status
of institutions that have that grant from the Federal
Government. Certainly, we ought to continue this with other
institutions, as well. But I do think today's testimony has
been enlightening in many respects, and gives us a good bit to
look at and examine as we move forward with these hearings. So,
I thank the Chairman for holding the hearing, and thank the
panel for their testimony.
Chairman THOMAS. Thank the gentleman. Does the gentleman
from Michigan wish to inquire?
Mr. LEVIN. I just want to join with you and Mr. McCrery and
others. It has been an interesting hearing, and this last panel
added some provocative thoughts. Thank you.
Chairman THOMAS. The gentleman from Texas, Mr. Brady?
Mr. BRADY. Mr. Chairman, one, I think this has been an
excellent hearing. My only point would be I think regulation
has a cost, and sometimes an unintended consequence. If we were
a banking Committee, I would be taking a good, hard look at the
whole regulatory structure on all our lenders in the community,
to see and make sure, as I think that we have, I think,
overburdened them in areas that they ought not be. I think we
ought to provide a lot more flexibility than we do today. But
with that, again, thank you for holding this hearing.
Chairman THOMAS. Thank the gentleman. The gentleman from
Louisiana.
Mr. JEFFERSON. I thank you, Mr. Chairman. I don't have any
questions, either. I do want to thank Ms. Kennelly for having
come and for the testimony she offered, as well as the other
witnesses, but particularly her; and for the work that she did
to help relieve the suffering and to provide some point of
contact for people who were displaced all over the country as a
result of the horrific events of Hurricane Katrina, and Rita
after that. I think what is really important here is that there
may be some differences of opinion about the tax-exempt status,
or about the lending practices, or whatever; but I think the
importance of a hearing like this is that these things get
aired, and that from each side there can be, we hope, some
basis on which the private sector can find a way to come
together itself and resolve some of these issues without the
need for there to be any intervention by this Committee or by
any Committee of Congress. Sometimes, just by having these
matters explored as they are and having others hear the
concerns, one here in front of the other, helps to bring
resolution to the problem and helps to prod some of us to make
changes where we hadn't really thought about the need to do
that. So, I am hopeful that out of this will come some
voluntary action on the part of those who may feel themselves
on the edge of some concerns of others, and find a way to work
things out before the Congress has to make any decision about
stepping in on that. So, I want to thank the Chairman for
bringing the parties together and for holding this hearing. I
think it has been very beneficial.
Chairman THOMAS. Thank the gentleman. The gentlewoman from
Pennsylvania.
Ms. HART. No questions.
Chairman THOMAS. The gentleman from California.
Mr. BECERRA. Thank you, Mr. Chairman. I, too, would like to
thank the panel for its testimony. I have one question for Ms.
Kennelly; but I would like, before I do ask the question, to
say that I hope that what we get from this is an opportunity to
have a further discussion, as I think Mr. Taylor was trying to
say, about what the responsibilities of the credit unions
should be. To me, most of the evidence I see points to the fact
that credit unions have done something very good for many
Americans. If it reduces the cost of obtaining credit and
opportunities to expand a business or to purchase your first
home, I think that is great. I think we have to continue there.
But I think, Mr. Taylor, you point out in your testimony very
well that, as the credit unions grow, it seems they are growing
in areas that don't fulfill the mission that was first set
forth for them back in the 19thirties; and that was to serve
modest-income families principally. While I think many of them
do a very good job, sometimes as you grow, sometimes you
forget, or you lose sight of your mission. I hope that they can
focus as much as possible, because I think most of us in
Congress would like to continue to support not just the credit
unions and the industry, but their tax-exempt status. Ms.
Kennelly, a quick question for you. Mr. Taylor did propose that
we consider adding CRA-type requirements or regulation over the
credit industry's larger players, its larger credit unions. I
am wondering if you can comment on that suggestion by Mr.
Taylor?
Ms. KENNELLY. Well, I don't know what the threshold would
be. I really don't have much of a comment. I think most credit
unions generally fulfill those requirements without being
required to do so. I don't recall what the threshold was. Do
you?
Mr. TAYLOR. Yes. Well, it is different for different
institutions but--May I?
Mr. BECERRA. Please.
Mr. TAYLOR. In fact--and this gets to Mr. Brady's point--
the regulators really did streamline the process. This Congress
dealt a lot with the regulatory burden associated with
financial institutions; very recently reduced the reporting
requirements as it relates to CRA. For small institutions less
than--what is it, Josh, 100 million, 250 million? For 250
million, it is really----
UNIDENTIFIED SPEAKER. It started off, I think, at 50.
Mr. TAYLOR. Yes, it has grown very easily. It is a very
streamlined exam, so I don't think the idea of having CRA-like
requirements is going to add a terrible burden. For all these
institutions that say, ``We're doing it, we're doing it,'' they
shouldn't have to worry about complying with it. But I didn't
want to answer for you.
Ms. KENNELLY. Well, I answered. Originally, when all of
that came up, I thought it was $50 million. We are very small.
Mr. TAYLOR. Yes.
Ms. KENNELLY. So, it is not a burning issue for me. But I
do feel--believe--that most of the credit unions are complying,
without the regulation being there. If it is $100 million, you
will probably see some that will want to stay at 99.9.
Mr. BECERRA. I think Congressman D'Amours pointed out that
in the past there was an attempt by the industry to try to have
something similar to CRA applied, but that proposal--which had
at first been adopted, I believe, under your chairmanship--was
subsequently reconsidered. It seems like perhaps now we are
finding that the fruits of that reconsideration may be coming
back to haunt some of the credit union industry a bit. But I
don't know if you have any comment on that.
Mr. D'AMOURS. Yes, Congressman, if you would permit me.
That was my proposal. I advanced that--well, way back in '97, I
believe, for the first time. You heard Chairman Johnson and
other people refer to, when Congresswoman Hart and other people
were asking about transparency and reporting, the 5300 report
that they filed quarterly. All I was asking for in that attempt
was that they add into their business plans something that
would state what efforts they might make to reach out to low-
income people. They called that ``CRA.'' They fiercely resisted
it. After 3 years or so of persisting, I finally got it passed.
It was not an industry effort; it was an agency effort, because
I was the chairman of the agency. It was repealed a month or
two before it went into effect, after I left the agency. The
truth is, they don't want to be looked at, and I wonder why.
Mr. BECERRA. I thank everyone for their comments. As we
move forward, those of us who are very supportive of credit
unions hope that this is something that can be examined
further, now that we are collecting more and more data. Perhaps
one of the things we should do is try to collect even more
data, to give us a better sense of really where the industry is
heading; and therefore we have something to compare apples and
apples with. So, I thank you for your testimony. Mr. Chairman,
I thank you for the time.
Chairman THOMAS. Thank you. As we conclude, I want to make
some statements and ask some questions, because I think we have
been dodging around some of the core structures that we have to
face sometime. If other Committees, or if agencies that are
seen more as enablers than regulators, aren't willing to face
up to it, then I am willing to make some statements and I am
willing to allow people to respond to the statements that I
make. I believe--in large part, based on historical analysis--
that the term ``modest means'' was used for a couple of
reasons. ``Low-income'' is easily measured. It is a term that
is often used inside government. ``Modest means'' is in the eye
of the beholder. But clearly, in the thirties, when you talked
about ``modest means,'' it was a typical, middle-class
structure in those days. I honestly believe Congress did not
intend to include ``modest means'' in the credit union
structure to require that not-for-profit structure reach out to
low-income and racial minorities as a primary focal point in
establishing a mutual credit structure.When you talk about
common bond, they were all kind of the same. When you use a
company with its employees, they aren't exactly low-income. It
was because the banking structure at that time did not make
loans, normally, to those kinds of people.
When you look at the history that we have now gone
through--and we are looking at it today--for someone to
respond, who is supposed to be a regulatory agency over credit
unions, ``We don't know what 'modest means' really means,''
then it is time to get serious about a definition. I believe
today ``modest means'' would be substituted with ``low-income
and racial and ethnic minority.'' I know there is resistance if
that is the definition that is used, but I cannot believe we
sat through an entire hearing in which people just shrugged
their shoulders and couldn't figure out what ``modest means''
means. It means a whole lot different today than it did in the
thirties. Now, I asked the question several times: What is the
primary reason for granting tax preference? The structure,
which is certainly admirable, in terms of a cooperative, self-
help, bootstrap kind of a concept, is not the sole reason for
the exemption. It made sense at the time, because of the
environment the country was in, for individuals trying to get a
loan.
Today, as we have seen, there are banks who pay taxes, who
have no common bond, who offer lower rates to low-income and
minority individuals. Why? Because, ironically, the structure
that was to provide assistance back in the 'thirties is a
limitation today. Because of the structure, you are limited;
and so the people who belong may not necessarily be low-income
or minorities. So, the credit unions believe they have shifted
to a degree by creating the opportunity for a number of common
bond folk to come together, in a multiple bond; or in fact, to
go out and deal with a community. I just found it almost
amazing that when you talk about under-served areas, it was
always geographic; it wasn't people. There was no evidence that
was required to show that if you achieved moving out into this
other area which was defined as under-served, that you had to
show you were in fact serving the under-served.
So, one of the real concerns I have is not understanding
why the credit union industry does not want transparency and
accountability. In terms of seeing whether or not we are
getting our money's worth, I, personally, as the Chairman of
this Committee, as long as I am the Chairman of the Committee,
when we are dealing with somebody who gets a tax-preferred
status--as admirable as a volunteer, cooperative structure is--
I am going to interpret the tax-preferred structure as meaning
servicing those who are unable, either through the structure
that is present or geography, to get their basic financial
needs met. Today, that means low-income, minorities, racial,
women, and so on; and not some ``modest means'' that can't be
defined.
I also am quite concerned that an agency that is supposed
to be a regulator appears to be, to a very great extent, an
enabler which is making excuses for not being able to measure
up to deliver a product which gets a tax preference. People
keep talking about how tax preference isn't worth much. In
fact, banks are better off than the rest. Well, then I can't
figure out why you are fighting so much, worried so much, and
causing so much concern about examining the question of tax
preference. If it is no big deal, why are you here? So, what I
really think this industry and Congress and everybody else
needs to do is look at how the full panoply of financial
services are providing the kinds of needs that Americans of all
economic levels, ethnicities, or gender, need, and determine
whether or not the taxpayers' dollars--which I think are
supposed to be available to help service--are really being met.
The only way you can know that those needs are being met is
to gather data to determine if the decisions you make are
effective or not. I do not fully understand the defensiveness
on the part of a number of people, who have been provided with
new structures presumably to reach out and provide those
services to certain groups of people, who seem to say that,
``That isn't our job. That isn't why we are here.'' That
probably concerns me as much as anything, in terms of the
comments that have been made during this hearing. No, I don't
think you should remove the tax-exempt status; but I won't put
a period there. I would say where it makes sense, in terms of
the historical and current use of a cooperative structure--
which, interestingly enough, enabled at one time in the
thirties, inhibits today to carry out your various activities.
That is why I think measurements such as the community----
[Discussion in hearing room.]
Chairman THOMAS. Don't worry about them. They are perfectly
willing to be rude because they have other needs they want
serviced. You can do it outside the room, if you so desire.
[Pause.]
Chairman THOMAS. It seems to me that a measurement that is
applied to taxable entities of financial services should be a
reasonable yardstick to be applied to the tax-free area. It has
to be explained to me why you shouldn't adopt it. Providing
information on remuneration totally of officers and other
people who are paid, to allow for transparency, shouldn't be
fought. You should do it to show how reasonable and equitable
the payment structure is, which reflects the membership
structure, and how it appears favorably to other institutions
who deal with money--unless, of course, that is not the case.
Arguing that you have CPAs who collect data, which is exactly
the same argument the corporations made, does not pass the
oversight test. Prior to our peeling off the ugly cover we
found that the relationship between the then-existing CPA
structures, who not only audited but advised the financial
structure where to put their money, and who then went back and
looked at the structure and said it was okay.
To resist voluntarily submitting yourself to something that
is an FDIC Sarbanes-Oxley similar accounting system, instead of
explaining what you do have, is again something I think you
need to be concerned about. Because as we have seen the
concentration of money is in a select group of credit unions--I
think you are beginning to see a potential of a mitosis, in
terms of a broad-based, historical structure which renders a
valuable service at a particular level and style of service,
that may not be compatible with today's modern structure, with
what they want to do and how they want to do it. To
artificially gloss over those differences because you want to
retain some kind of structure for its historical integrity,
rather than trying to deal with the issue that is currently
growing inside your structure, is something I think everybody
should be concerned about. One of the purposes of this hearing,
as far as I was concerned, was to get all of the different
kinds of credit unions not only to talk to us, but to talk to
each other; so that you can begin to understand that a single,
common bond, small community credit union isn't the same as a
credit union that has as its endeavor the entire County of Los
Angeles, with no other bond than that you live, work, go to
school, or worship there--and that that collection can pull
together amounts of money that rival relatively major financial
institutions, to finance office buildings, hotels, and other
activities.
Then, finally, of all of the not-for-profit structures,
this is the one, ironically, that has hung onto that commitment
to people, tied to people of modest means. Maybe some of you
fail to realize that that definition, which was never firmed
up, has changed, and ``modest means'' means low-income, racial
minorities, and women. The easiest way to show that is to use
the CRA as a standard. I would just tell you, if you look at
Massachusetts, which is an absolute case study of a requirement
that some use and some don't, all the fog disappears. There is
a bright line of who is servicing those, and who is not.
Mandated; imposed--I don't care. It is taxpayers' money going
to you for the purpose of carrying out a particular function.
Frankly, I think a good and worthy one is to define the people
of modest means along the lines of the CRA. Now, that is a very
strong opinion on my part, as I said, based upon the changes
that I have seen occurring and the reading that I have made. I
will give anybody a little bit of time here to have a response
back, if what I have said outrages you, or misses the point, or
does not assist us in moving forward at the end of this hearing
to try to get a handle on where we are and where we need to go.
Mr. D'AMOURS. Mr. Chairman, may I say something?
Chairman THOMAS. Certainly.
Mr. D'AMOURS. I think you are quite right in noting that it
is amazing that we can't get a definition of what ``modest
means'' amounts to. But the truth is that that is not
happenstance; they want it that way. To hear somebody in this
room say that everybody in this room is a person of modest
means is to fundamentally misunderstand what credit unions are
all about. When the credit union system was created--it goes
back to Canada--people of modest means were people who didn't
have access to banks. I will bet everybody in this room has
access to a bank or some kind of financial institution. In that
day, they didn't. All they had was loan sharks and other
predatory lenders. People, if they had jobs, it was small
factory jobs that weren't paying very much. The truth is, when
I was Chairman, and I stressed that they should focus on low-
income people, in several cases--as that Woodstock Institute,
by the way, study found--in several cases, they shot back that
credit unions were never really intended to serve anything but
the middle class. So, it is to their advantage to deny that
``modest means'' means ``low-income.'' It did mean ``low-
income'' at the beginning, Mr. Chairman. I take slight issue
with you on that, if I may. It did mean low-income people from
the very beginning. The people of modest means, it was built
into the credit union statute, were in fact low-income people.
But I just want to say, Mr. Chairman, thank you----
Chairman THOMAS. If the gentleman would yield briefly, the
reason I said it didn't was because those people were invisible
back in those days.
Mr. D'AMOURS. Precisely. Precisely.
Chairman THOMAS. They really weren't low-income. They were
modest means, and they thought they were low-income, but nobody
looked at all the other folk out there who really were.
Mr. D'AMOURS. But I do want to say, Mr. Chairman, having
hit my head up against a brick wall for 7 years as Chairman of
NCUA, thank you very much for what you are doing. I hope that
this isn't just going to be another rallying point for credit
union trades to go out and raise a lot of money to fight the
tax bogeyman, and it will result in something positive coming
from the U.S. Congress. As I said earlier, if it doesn't come
from Congress, it is not going to happen.
Chairman THOMAS. Thank you very much.
Mr. TAYLOR. Mr. Chairman, if I may?
Chairman THOMAS. Mr. Taylor?
Mr. TAYLOR. I, too, want to thank you, Mr. Chairman and the
other Members of the Committee. I think this is a very
important discussion, at least from where I sit, in trying to
influence financial institutions to not overlook the needs of
traditionally under-served people, or low- and moderate-income
people. I do think it is a problem when the NCUA Chairperson
sits in front of you and says, ``I consider myself someone of
modest means,'' because I think there is a disconnect as to--I
mean, I don't know what they pay these days to the Chairman of
NCUA, and maybe it is modest means; but the medium income for a
household in this country is about $42,000, and I would put
``modest'' somewhere below that.
Chairman THOMAS. Right.
Mr. TAYLOR. Now, I know you have been cutting government
budgets and cutting salaries and cutting things, so maybe you
have done a lot more than I perceived. But I have got to tell
you, I think the problem is bigger than simply: why doesn't the
industry sort of get it, and subject itself to some
transparency, some sunshine? Because while we are having this
conversation, the credit union association, CUMAA, through its
Renaissance Commission, in June of 2001, issued a report that
was sent to its members with a recommendation that it remove
the words ``people of modest means'' from the credit union
mission statement. In that, they went on to say, ``That is a
clear victory. We won it. We have done it. You know, we don't
need that statement any more.'' Even in the testimony today,
Mr. Chairman, if you look at the CUMAA testimony on page 9,
there are two paragraphs that refer to those important words,
``people of modest means,'' as cryptic words; a fleeting
reference. In other words, trying to downplay what we all
think--and I think we do--is an important part of the mission
of what credit unions are about: to serve people of modest
means. They are working to try to eliminate that from the
mission statement. So, it is actually a bigger problem than
simply--you know, they are trying to move away from that; make
no mistake about it. I think this Tulane Credit Union, the El
Paso, I think they do great work. I think they are, obviously,
very nice people. But it is not representative of the majority
of assets, of where this industry is going. I think this is an
incredibly important hearing, and I really thank you again for
having it.
Chairman THOMAS. Well, let me conclude with this statement.
Because if in fact I advocated that we would remove the tax-
exemption status, you would get something similar to what
occurred here when this was just an oversight hearing, and you
would see a whole lot more. I have no intention of doing that.
I will tell you, though, Mr. Taylor, that transparency,
accountability, verifiability, are extremely valuable tools.
Because it then means somebody else determines whether or not
somebody should continue to receive a tax-free status. I think
what you will find is some people meet the test easily; others
with difficulty, and need to change; and others, as you
indicated, who wanted to drop that phrase altogether, have no
interest in meeting it, and do not want transparency,
accountability, or verifiability, because then they would be
exposed. Right now, they are all behind the structure of the
small, common bond, wonderful--I belong to one--credit union.
All I tried to do with this particular hearing was to get
people to realize that who comes up to the mike to talk about
what is going on isn't necessarily representative of an
industry that is rapidly changing and needs transparency,
accountability, and verifiability. Thank you all very much. The
hearing is adjourned.
[Whereupon, at 4:10 p.m., the hearing was adjourned.]
[Questions submitted from Chairman Thomas to Ms. JoAnn
Johnson, and her responses follow:]
Question: Please describe what data the NCUA collects regarding
Credit Union Service Organizations (CUSOs), including their ownership
and activities. How many CUSOs are there? How many are wholly owned by
a single credit union? How much revenue do CUSOs generate annually?
Answer: It should be noted, as an initial matter, that NCUA does
not directly regulate CUSOs. Instead, in conformance with the Federal
Credit Union Act and our regulatory framework, the focus of the agency
is on the credit union and its relationship with CUSOs. While we
require that a CUSO's books and records be fully accessible to us,
issues such as unauthorized CUSO activity or other threat to a credit
union's safety and soundness are addressed at the credit union level.
In such cases, we would require either divestiture or other remedial
action to be taken by the credit union, as opposed to a direct
regulatory intervention at the CUSO level.
On a quarterly basis, NCUA requires federally insured credit unions
to submit the following data via Schedule D--Credit Union Service
Organization (CUSO) Information--of the 5300 Call Report:
Full/legal name of CUSO
Value of investment in CUSO
Amount loaned to CUSO
Wholly owned (yes or no)
Predominant service
Accounting method used by the credit union to reflect the
value of the CUSO on the credit union's financial statements
Aggregate Cash Outlay in CUSO
For the third quarter of 2005, there was an aggregate of
$735,219,785 reported in investments in CUSOs and $396,499,868 in loans
in CUSOs. These figures reflect a mere .17% of all credit union assets,
comprised of .11% from investments and .06% from loans. As reported on
the third quarter 2005 call reports, there were 551 wholly owned CUSOs.
Overall, 2,017 credit unions reported a loan or an investment in a
CUSO. This figure includes the 551 wholly owned CUSOs.
The total number of CUSOs is approximately 750. This figure is an
approximation because NCUA collects CUSO data by legal name which in
order to be aggregated by number requires data analysis to remove any
inconsistencies in the reporting of multi-owner CUSOs. The primary CUSO
trade group, NACUSO, and credit union consulting firm Callahan and
Associates jointly publish a CUSO directory that reflects the
aggregated list of names. Their figure from the June 2005 Directory of
Credit Union Service Organizations is 758 CUSOs.
NCUA believes the risk to credit unions is not in the dollar amount
of investments or loans but in potential service disruptions or other
reputation issues. For example, a CUSO providing Electronic Data
Processing (EDP) services may represent an insignificant investment on
an individual credit union's balance sheet, but the risk of disruption
of service needs to be mitigated and contingencies developed. For EDP
CUSOs, NCUA includes them in the annual review of data processing
vendors and a sample is selected for on-site review by an NCUA
Information Systems Officer.
NCUA's data collection does not capture CUSO revenue data.
Question: What information is needed in order for a credit union to
obtain approval by the NCUA to engage in a business relationship with a
CUSO? By law, credit unions are restricted in some of the services they
can provide, however, CUSOs allow credit unions to offer such services.
Is the NCUA concerned about the increased use of CUSOs, and how does
the NCUA oversee these relationships?
Answer: NCUA's CUSO rule, 12 C.F.R. Part 712, sets out the
requirements governing FCU investment or lending to CUSOs. NCUA expects
every Federal credit union (FCU) to comply with these requirements, but
does not require advance notice of, and does not issue specific
approval for, a particular FCU's determination to engage in a business
relationship with a CUSO. NCUA oversees the relationship and enforces
compliance with its rule through the examination process. Additionally,
CUSO activity is monitored from information gathered in the quarterly
call report program.
Section 712.5 identifies broad categories of permissible types of
activities for CUSOs. All such categories reflect the statutory
requirement for CUSOs that they may engage only in providing services
that are associated with the routine operation of credit unions. The
Board has authority to prescribe rules for the administration of the
FCU Act. 12 U.S.C. 1766(a). The loan authority for CUSOs in the FCU Act
specifically reads: ``[a] credit union organization means any
organization as determined by the Board, which is established primarily
to serve the needs of its member credit unions, and whose business
relates to the daily operations of the credit unions they serve.'' 12
U.S.C. 1757(5)(D) (emphasis added). Similarly, the investment authority
for CUSOs in the FCU Act defines CUSOs as: ``any other organization,
providing services which are associated with the routine operations of
credit unions . . . with the approval of the Board.'' 12 U.S.C.
1757(7)(I).
By contrast, an FCU has several specifically enumerated express
powers, as well as the authority to exercise ``such incidental powers
as shall be necessary or requisite to enable it to carry on effectively
the business for which it is incorporated.'' 12 U.S.C. 1757(17). There
is some direct overlap between a FCUs authorized services and that
which may be provided by a CUSO. For example, while an FCU can always
do its own data processing, one or more credit unions may be able to
achieve economies of scale or other efficiencies from securing
necessary services through a CUSO. Similarly, one or more FCUs may
secure advantages in terms of available expertise by conducting their
mortgage or member business loan origination through a CUSO. Other
services, for example, consumer loan origination, are not an authorized
activity for CUSOs. Similarly, section 712.5 includes some activities
that are not authorized for FCUs. The attached Appendix outlines each
of the areas listed in section 712.5 and outlines whether the activity
is one that is permissible for an FCU.
In general, NCUA is pleased with the range and extent of CUSO
activity. The flexibility reflected in the CUSO rule allows credit
unions to take advantage of pooled resources to obtain expertise for
complex programs, such as a sophisticated consumer mortgage loan
origination or business lending program. For more traditional services,
use of a CUSO allows an FCU to take advantage of economies of scale in
obtaining services, resulting in improved services at a lower cost for
members.
Question: According to NCUA regulations, the NCUA may limit any
CUSO activities at any time, based on safety and soundness reasons. How
many times has the NCUA done so?
Answer: NCUA has found CUSOs engaging in inappropriate activities.
These cases are dealt with by requiring corrective action to be
implemented via the credit union that has investments or loans to the
CUSO. Unless the corrective action is implemented, NCUA typically
requires that the credit union divest itself of its investment or loan
to the CUSO. Prior to September 2005, when NCUA implemented a new
problem resolution tracking system, the agency did not capture data in
a format that can be queried for this type of information. The
resolution of CUSO related problems is documented in individual
examination reports and it would be labor intensive to generate the
number of instances corrective action or divestiture was required.
Two additional factors have a bearing on risk mitigation, from a
safety and soundness standpoint, as between an FCU and its relationship
with a CUSO. First, the extent of permissible investment by an FCU in a
CUSO is limited to one percent, in the aggregate, of the FCU's shares
plus undivided earnings. An FCU may lend an additional one percent to
CUSOs. In the unlikely event that an FCU's financial stake in a CUSO
were to become a total loss, the impact on the FCU's overall capital
position would not be significant. Second, as more clearly spelled out
in the CUSO rule, an FCU is required to assure that the corporate veil
between itself and its CUSO is intact. In accordance with general
principles of corporate law, the corporate veil insulates a shareholder
from liability for the debts of the corporation.
Question: NCUA regulations also state that a CUSO may offer
services beyond the list of preapproved activities and services only
with the approval of the NCUA. How many such applications have been
received by the NCUA, and how many of these applications have been
approved, and how many have been denied?
Answer: The provisions in the CUSO rule relating to the ability to
petition NCUA to request approval for a service not specifically listed
in the rule have been included in subsection 7 since March, 1998. 12
C.F.R. 712.7 As the NCUA Board clarified in 2001, the examples under
the broad categories listed in the rule are for illustrative purposes
only and are not intended to be exhaustive. Since the adoption of the
rule, we have reviewed numerous requests for interpretation as to
whether a specific service, such as the referral to other lenders of
loan applicants that have been turned down by the credit union and the
subsequent servicing of those loans, is considered permissible under
the rule. In accordance with the FCU Act, NCUA is guided in its
evaluation of any such request by the consideration of whether the
proposed service relates to or is associated with the routine, daily
operation of credit unions.
As prescribed in the rule itself, a request for an addition to the
broad categories listed in section five should be accompanied by a
complete analysis and explanation of how the proposal conforms to the
overall purpose and requirements of the rule, i.e., that the service
relates to or is associated with the routine, daily operation of credit
unions. If NCUA determines to act on the request, we would first
publish notice in the Federal Register, treating the request as a
petition to amend the rule, and invite public comment, which would be
reviewed and evaluated before any amendment is made. Since 1998, we
have received a small number of requests to amend the rule by expanding
the approved listing of categories, none of which have been approved.
The Board did amend the rule in 2003 to add the category of business
loan origination as an approved category, but this determination, which
became effective after notice and the solicitation of public comment in
the Federal Register, was made by the Board on its own initiative.
Question: The NCUA chartering manual recognizes four types of
affinity on which a community charter can be based: residence,
education, worship, or employment in the relevant community. For how
long has the NCUA recognized these forms of affinity as satisfying the
requirements of the Federal Credit Union Act that an individual be
``within a well-defined local community, neighborhood or rural
district''?
Answer: The NCUA Chartering Manual currently recognizes four types
of affinity on which a community charter can be based: residence,
education, worship, or employment. 63 Fed. Reg. 72011, 72037 (Dec. 30,
1998). NCUA has recognized these forms of affinity as satisfying the
requirements of the Federal Credit Union Act since various dates as
reflected in Federal Register issuances. The history is as follows:
In 1989, NCUA issued a proposed rule and a final rule, Interpretive
Ruling and Policy Statement (IRPS) 89-1, on its Chartering and Field of
Membership Policy. In both rules, NCUA wrote: ``Congress has required
that a credit union charter that will be based on a tie to a specific
geographic location be limited to a `well-defined neighborhood,
community, or rural district.' NCUA recognizes two types of affinity on
which a community common bond can be based: residence and employment.''
IRPS 89-1, 54 Fed. Reg. 31165, 31170 (Jul. 27, 1989); 56 Fed. Reg.
12221, 12225 (Mar. 24, 1989).
In 1993, NCUA proposed changes to IRPS 89-1, but proposed
continuing that there be: ``two types of affinity on which a community
common bond can be based: residence and employment.'' IRPS 93-1, Jul.
28, 1993. After receiving and reviewing public comments on this
proposal, NCUA issued a final rule in 1994 adding the affinity based on
worship. In IRPS 94-1, NCUA ``recognize[d] three types of affinity on
which a community common bond can be based--persons who live in,
persons who worship in, and persons who work in the community.'' IRPS
94-1, 59 Fed. Reg. 29066, 29077 (June 3, 1994).
In 1995, NCUA proposed changes to IRPS 94-1. 60 Fed. Reg. 51396
(Oct. 4. 1995). In 1996, NCUA, after receiving and reviewing public
comments, issued a final rule adding an affinity based on education,
stating:
One commenter requests that students should be part of the
community common bond so that persons who attend any educational
institution located in a community would be eligible to join a credit
union whose field of membership includes that community. The Board
agrees. The Board believes that a student is working for the purpose of
the community common bond and therefore a person going to school within
the community boundaries is deemed to be working in the community for
field of membership purposes. IRPS 96-1, 61 Fed. Reg. 11721, 11725
(Mar. 22, 1996).
In 1998, after the passage of the Credit Union Membership Access
Act (CUMAA), NCUA issued proposed and final rules to implement CUMAA,
retaining the four previously approved affinities. The preamble to the
proposed rule stated that: ``NCUA continues to recognize four types of
affinity on which a community common bond can be based--persons who
live, work, worship, or attend school in the community.'' 62 Fed. Reg.
49164, 49167, 49187 (Sept. 14, 1998). After receiving and reviewing
public comments, NCUA issued a final rule in 1998. IRPS 99-1 stated
that ``NCUA recognizes four types of affinity on which a community
charter can be based--persons who live in, worship in, attend school
in, or work in the community.'' IRPS 99-1, 63 Fed. Reg. 72011, 72037
(Dec. 30, 1998).
Question: Is there any requirement that a credit union verify that
a potential member prove that he works, attends school, worships, or
resides in the relevant community?
Answer: Section 5 of a federal credit union's charter defines those
persons eligible for membership in a community credit union. Article
II, Sections I and II of a federal credit union's bylaws provide that
membership applications will be signed and accepted, and approved or
denied from those eligible persons. Credit unions must comply with
their bylaws, and NCUA has an expectation that credit unions will only
serve individuals who qualify for membership.
It is standard practice for credit unions to maintain completed
signature or membership cards for their members. A sample signature
card form is provided to credit unions in Section 707, appendix B of
NCUA's Rules and Regulations. The sample form includes a statement by
the member certifying he or she is within the credit union's field of
membership. In the Supervisory Committee Guide for federal credit
unions, Supervisory Committees are tasked with ensuring adequate
internal controls exist over share accounts. The testing of new member
signature cards for proper member qualification and approval is one
element of signature card control itemized in the Internal Control
Checklist for share accounts. NCUA examiners consider such testing
during their normal review of Supervisory Committee activity, and also
during their own review of share accounts. Chapter 14 of NCUA's
examiner guide sets forth the examination objective to determine share
account programs meet all legal requirements.
[Question submitted from Mr. Johnson to Ms. JoAnn Johnson,
and her response follows:]
Question: A majority of the House delegation from Texas, including
myself, sent letters to the NCUA detailing our concern with what
appeared to be unnecessary regulatory obstacles thrown in front of two
Texas-based credit unions in their attempts to convert to for-profit,
taxable banks. After having to go back and forth through the courts,
the credit unions were finally allowed to convert to banks. What I'd
like to know is what steps, if any, the NCUA is taking to ensure credit
unions which choose to convert to tax-paying, for-profit banks are able
to do so?
Answer: NCUA fully supports the legal ability of credit union
members to change the charter of their financial institution under the
Federal Credit Union Act and NCUA regulations and acknowledges that
NCUA's regulatory role is limited to oversight of the methods and
procedures of the vote. In carrying out its responsibility, NCUA
believes complete and accurate disclosures for members are crucial to a
fair and legal vote and members are entitled to know the effects a
conversion to a mutual savings bank will have on their ownership and
control of their financial institution.
[Submissions for the record follow:]
Statement of Walter C. Ayers, Virginia Bankers Association, Glen Allen,
Virginia
Should the Wright Patman Congressional Federal Credit Union and the
United States Senate Credit be using their tax-exempt status to compete
in the private sector, providing services to non-government entities?
Well, they are, as are many other government based credit unions that
have chosen to morph away from their roots. Therefore, we believe that
it is most appropriate that the Ways and Means Committee is conducting
hearings to examine the role of the tax-exempt sector in our economy,
including the wisdom of continuing the tax exemption of credit unions
that have morphed into bank-like institutions
Credit unions have already captured 25% of the deposit base in the
Commonwealth of Virginia, and are growing deposits at almost twice the
rate of banks. While it is a process that seems to be happening below
the public policy radar screen, deposits are being transferred from
taxpaying institutions over to tax-exempt institutions at a rapid pace.
With respect to morphed credit unions, there are two significant
developments in Virginia. First, are all of the aggressive growth
credit unions that were government and military based when created,
that have left their original mission, in some cases changed their
names to conceal their former purpose, and now use multiple and
community common bonds to serve the general public. The second
development is the evolution of the same thing for specific industry
based credit unions. Many of these credit unions now bear no
resemblance to the purpose for which they were originally created.
Ironically, the abandonment of original mission, and the use of the
tax-exemption to compete in the private sector, starts right inside the
United States House of Representatives with the Wright Patman
Congressional Federal Credit Union, a $435 million asset credit union
that most would assume exist to serve members of the U.S. House of
Representatives and staff. In fact, Congressional Federal has adopted a
multiple common bond approach and morphed away from its original
purpose. It is now using its tax-exempt status to market its services
to Virginia based private sector employee groups that have absolutely
nothing to do with the House of Representatives or with government.
Indeed, Congressional Federal, as is typical of those listed below,
states on its web site ``we have a wide variety of groups in our
membership including law firms, health organizations, software
companies, and many others.'' Was it the intent of the U.S. House of
Representatives, when it authorized the creation of its credit union
that its tax-exempt status be used to serve law firms, software
companies, etc.? One would surely hope not.
Based on information published on their web sites, I list below
additional examples of credit unions headquartered in Virginia that
have capitalized on their tax-exempt status to make the same strategic
shift away from original purpose as has Congressional Federal.
The United States Senate Credit Union is now a $338
million asset institution that now uses a multiple common bond to
serves numerous private sector employee groups that obliviously have
nothing to do with the U.S. Senate.
The State Department Credit Union, an $814 million asset
credit union, has stepped well beyond its roots, and now serves
disparate private sector groups outside the Department.
Northwest FCU, a $1.402 billon credit, apparently began
as a credit union to serve employees of the CIA. Today, it serves some
300 non-government groups in high income northern Virginia. All that is
required by this credit union for an employee group to become a part of
its common bond is for a company to send in a letter on company
letterhead.
Langley Federal is a $1,099 billion credit union that has
morphed from a credit union serving Langley Air Base to a general
purpose depository institution that now uses a multiple common bond to
serve whomever it chooses to enroll, largely by adding private sector
employee groups.
ABNB is a $324 million credit union. It was formerly the
Amphibious Navel Base Credit Union, but has now morphed into an
institution that uses a community common bond to serve the general
population across eight Virginia counties and cities.
Chartway FCU is a $1,033 billion asset credit union that
was originally the Navy Air Credit Union. Over the years, it left its
military anchor and morphed into a multiple common bond credit union
serving over 600 different employer groups. Now, they simply advertise
that they serve anyone that lives where they have branches across five
states.
Commonwealth One, formerly the Army Air Force Annex #1
Credit Union, is now a $225 million credit union serving over 100 wide
ranging groups, mostly private sector, that have nothing to do with the
origins of this credit union. Plus, this credit union now claims a
community common bond involving four counties and cities.
1st Advantage FCU started as the Fort Eustis Credit
Union. Today it has morphed into a $425 million asset general purpose
institution that advertises that it serves anyone who lives on the
Virginia Peninsula.
Pentagon Federal is a $7,974 billon credit union
established to serve the military. It now uses a multiple common bond
to serve private sector employee groups.
The University of Virginia Credit Union, a $314 million
credit union, no longer makes any pretense of existing to serve
University of Virginia employees. It now has a community common bond
and serves the general public across eight counties and cities.
The Virginia Credit Union, with $1.240 billon in assets,
no longer limits itself to serving government employees. It now has a
multiple common bond and has already enrolled over 225 employer groups,
most of which have nothing to do with government, and like so many
other credit unions, this credit union is tapping into higher income
groups--insurance companies, doctor groups, law firms, etc.
1. Apple FCU had its origins as a government based credit union
for teachers. Today, it is a $773 million asset credit union that
serves a large number of disparate, non-teacher groups in Northern
Virginia that range from the Bar Association to software companies.
Member One FCU, a $318 million asset credit union, is the
former N&W Railroad credit union. This credit union left its original
mission and now serves several hundred major employer groups, PLUS
geographic areas involving 14 Virginia counties and cities.
DuPont Community is a $507 million asset credit union
that has abandoned its mission of serving DuPont employees and now has
a community common bond to serve the public across a 11 county and city
region.
Newport News Shipbuilding Employees' Credit Union, an
$883 million institution, is no longer for shipbuilders. While its
sponsoring company is primarily a defense contractor, this credit union
now has a community common bond, and serves the general public across a
16 county and city geographic area.
To give you an idea of the magnitude of what is happening, 15
credit unions now control 83% of total credit union deposits in
Virginia. Five of the ten largest depository institutions headquartered
in Virginia are now tax-exempt credit unions. Stated simply, there is a
new breed of aggressive growth credit unions that offer virtually
everything a bank can offer, and they have been given an open field to
serve the public. The one thing that has not changed is they get to
keep their tax exemption. The tax exemption has become a reward to this
new breed of credit unions for abandoning original mission. It is a
reward for adding doctors, lawyers, accounts, IT firms, etc., to the
list of groups served. In effect, it is a reward for legal redlining,
that is, carving high income groups into a multiple common bond while
ignoring the underserved. It is a reward for obtaining a community
common bond and serving the general population. In short, the tax
exemption has become a reward for aggressive growth credit unions for
no longer serving ``people of small means'', which was the original
intent of credit unions. Little wonder that the GAO concluded that
banks do a better job than credit unions of serving the underserved.
Does anyone believe the above illustrated developments were
intended when the tax exemption was granted credit unions in 1937? I
don't believe so. Is it not time to tax this new breed of aggressive
growth credit unions that have morphed into bank-like institutions?
Surely it is.
Navy Federal Credit Union
Vienna, Virginia 22180
November 10, 2005
The Honorable William M. Thomas
Chairman
Committee on Ways and Means
U.S. House of Representatives
2208 Rayburn House Office Building
Washington, DC 20515
Dear Mr. Chairman:
On Thursday, November 3, 2005, in his testimony before the House of
Representatives Committee on Ways and Means regarding the ``Review of
Credit Union Tax Exemption,'' John Taylor, President and CEO of the
National Community Reinvestment Coalition (NCRC), attacked Navy
Federal's record of lending to minorities, low-income borrowers, and
women. NCRC often appears to slant its research findings to support its
predetermined conclusions. In the past, we have brought errors in
NCRC's data analysis to its attention and offered to meet with Mr.
Taylor to discuss inaccuracies in its analyses and issues related to
how best to serve low income, minority and disadvantaged borrowers.
NCRC has not responded to our inquiries and invitations.
Navy Federal has an outstanding record of serving women, minority,
and low- to moderate-income members of the credit union. A principal
example of our commitment to serving all of our members, regardless of
race or gender, is our history of mortgage loan approvals. Our
percentage of loan denials of women and minority applicants is
consistently well below the average of other mortgage lenders
nationwide as evidenced by the following table:
----------------------------------------------------------------------------------------------------------------
Navy Navy Navy
National Federal's National Federal's National Federal's
Year Black Black Hispanic Hispanic Women Women
Denial Denial Denial Denial Denial Denial
----------------------------------------------------------------------------------------------------------------
2004 30.50% 17.05% 23.61% 11.32% 23.47% 12.15%
2003 27.85% 15.65% 21.56% 10.06% 19.15% 9.22%
2002 24.70% 7.58% 19.16% 6.00% 16.45% 3.47%
----------------------------------------------------------------------------------------------------------------
Additionally, Navy Federal has taken several specific steps to
assist low- to moderate-income and minority members in obtaining
financing for their mortgage loans:
Counseling--Employees provide detailed counseling and
education to members to make certain they understand the homebuying and
mortgage loan process. In addition to face-to-face and telephone
counseling, we also conduct Homebuyers Seminars in areas where we have
concentrations of members. These seminars are directed to first-time
homebuyers.
Low Cost Loans--Navy Federal does not charge any ``junk
fees'' on our mortgage loans, and we always strive to provide the
lowest rate possible to our members. We also have loan programs that do
not require private mortgage insurance for loans with low down
payments. These considerations allow more members to qualify for our
loans by reducing their monthly payments and out-of-pocket costs.
Minority Loan Review Committee--A group of minority
employees review all loans to minorities that are denied. This insures
that there are no hidden biases in Navy Federal's underwriting
decisions.
100% financing--To assist first-time homebuyers, Navy
Federal offers a program with no down payment required.
HELPER loan--Navy Federal is getting ready to introduce
this CUNA mortgage program that offers a 3/1 ARM loan, at 1% below
market, to borrowers with low incomes.
I respectfully request that this letter be included in the record
of the testimony presented to the House Committee on Ways and Means,
Thursday, November 3, 2005.
Navy Federal has a proven record of fair lending, and I am
confident that the needs of our entire membership are being well-
served.
Sincerely,
Cutler Dawson
President/CEO
National Association of Federal Credit Unions
Arlington, Virginia 22201
November 17, 2005
The Honorable William M. Thomas
Chairman
Committee on Ways and Means
United States House of Representatives
Washington, DC 20515
Dear Chairman Thomas:
I am writing on behalf of the National Association of Federal
Credit Unions (NAFCU), the only national trade association that
exclusively represents the interests of our nation's federal credit
unions, to submit information for the record of the hearing on the
``Review of the Credit Union Tax Exemption'' that was held November 3,
2005.
Two issues were raised at the hearing on which we would like to
comment on further--credit union transparency and credit union service
to those of modest means.
There appeared to be some confusion during the hearing regarding
the transparency of credit union financial reporting. NAFCU wants to
stress to that there is full and complete transparency with respect to
credit union finances. All federally insured credit unions must file
with the National Credit Union Administration (NCUA) a form 5300 Call
Report on a quarterly basis. The call report--a public document--
includes comprehensive credit union financial data. (A copy of the call
report of Navy Federal Credit Union, downloaded from NCUA's Web site,
is attached.) A number of independent rating firms use this public data
to rate individual credit unions (e.g., IDC Financial). We would also
note that over 87 percent of federally insured credit unions' annual
audits are performed by external auditors or by state-licensed persons.
As you will note from the attached 5300 Call Report, it includes
detailed information about real estate loans (Schedule A), member
business loans (Schedule B), investments (Schedule C), credit union
service organizations (Schedule D), borrowings (Schedule E), savings
(Schedule F), off-balance sheet commitments (Schedule G), information
systems and technology, and other miscellaneous information (e.g., new
programs or service offerings). We would also note that in some areas
the credit union call report contains more information than that
provided by other financial depository institutions. For example,
details on loan maturity and interest rates charged are not collected
on the public reports submitted by other depository institutions.
In addition to the 5300 Call Report, federal credit unions must,
under the Federal Credit Union Act, adopt bylaws. Credit unions may
adopt the 1999 bylaws as set forth by the NCUA, a previous edition of
the NCUA bylaws, or a combination thereof, and the credit union may
also request from NCUA approval for bylaws amendments.
Subsection 6(c) of Article VII of the 1999 bylaws promulgated by
NCUA states:
``. . . the financial officer will: ``Within 20 days after the
close of each month, ensure that a financial statement showing the
condition of this credit union as of the end of the month, including a
summary of delinquent loans, is prepared and submitted to the board and
post a copy of such statement in a conspicuous place in the office of
the credit union where it will remain until replaced by the financial
statement for the next succeeding month.''
As an example, a copy of Navy Federal Credit Union's statement of
financial condition as of October 31, 2005, downloaded from Navy
Federal Credit Union's website, is also attached.
We would also like to address the issue of service to people of
modest means and minority populations. While not the subject of the
hearing, we find it ironic that the banking trade associations (ABA,
ACB, ICBA) would appear before the committee to criticize credit union
service to those of modest means when the financial institutions
represented by their witnesses granted a total of 13 mortgage loans to
minority households in 2004, according to the most recent HMDA data.
I have attached a copy of a chapter from NAFCU's 2005 Report to the
Board of Governors of the Federal Reserve that addresses in further
detail how credit unions are serving the underserved. As detailed in
the attached, there are more low-income-designated credit unions and
underserved areas being added by credit unions each year. In addition,
when compared to banks and thrifts, credit unions approve real estate
loans that are smaller in size, approve a greater percentage of
conforming real estate loans and have a greater percentage of real
estate borrowers with less than $40,000 in income.
Finally, our analysis shows that when credit unions grant mortgage
loans to households with under $40,000 in income, or to minority
households, a significantly fewer number of credit unions are charging
3 percentage points or more above the Treasury benchmark, a new area of
HMDA data reporting in 2004. This again demonstrates the benefits that
credit unions provide their members over and above that provided by
other financial depository institutions.
We thank you for this opportunity to add these comments to the
record of this hearing. NAFCU looks forward to working with you on this
and other matters as they arise. Should you wish to discuss these
matters, please feel free to contact Brad Thaler, NAFCU's Director of
Legislative Affairs, at (703) 522-4770, ext. 204, or me at (703) 522-
4770, ext. 215.
Sincerely,
Fred R. Becker, Jr.
President and CEO
California Credit Union Leagues
Rancho Cucamonga, California 91730
November 15, 2005
The Honorable William M. Thomas
Chairman, Committee on Ways & Means
U.S. House of Representatives
Washington, D.C. 20515
Dear Chairman Thomas:
On behalf of the California and Nevada Credit Union Leagues, I
appreciate the opportunity to submit a letter for the record regarding
the Committee's Hearing on Review of the Credit Union Tax Exemption
held on November 3, 2005. Together, the California and Nevada Credit
Union Leagues represent the largest state trade association for credit
unions in the United States, serving 500 member credit unions in
California and Nevada with 9 million members.
This letter will address several false and misleading claims made
by credit union critics during the hearing, as well as describe how
credit unions remain true to the mission for which they were created.
Credit Unions Are Serving Those of Modest Means
Despite misleading claims to the contrary made during the hearing,
credit unions are proactively serving their current members of modest
means, and making impressive strides in attracting potential members in
this group to join credit unions.
A Filene Research Institute publication titled ``Who Uses Credit
Unions'' (updated 2004; originally published in 1999), which uses
Federal Reserve data, showed that the average net income, financial
assets and net worth of people using only (or predominately) credit
unions are all below those of people using only (or predominately)
banks. The average household income for those using only banks was
$76,923, while the average household income for those using only credit
unions was $42,664. The median net financial worth of those households
using banks only was $21,500, while the median net financial worth of
those households using credit unions only was $7,900. The Filene
Research Institute also reports that the average credit union member
typically has modest loan and deposit balances:
Auto loan balance, $11,900; Business loan, $142,500.
Signature loan balance, $2,200; Savings account, $2,000.
First Mortgage loan, $99,700; Checking account, $2,200.
Home Mortgage Disclosure Act (HMDA) data consistently shows that
low-income borrowers are substantially more likely to be approved for a
mortgage at a credit union than at any other type of lender. In 2003,
credit unions nationwide approved 72.2 percent of home mortgage loans
to low-income borrowers (up from 69 percent in 2000). By contrast, non-
credit union lenders nationwide approved only 47.8 percent of such
loans (up from 46 percent in 2000). In 2003, credit unions denied 15.6
percent of mortgage loans to low-income borrowers. Non-credit union
lenders denied 27.7 percent of loans to low-income borrowers. Viewed
another way, the approval rate for mortgages is 151% higher at credit
unions than at other lenders. These approval rates hold true for credit
unions in every state.
A significant way credit unions provide value to those of modest
means is through the pricing of their services. Numerous studies and
reports show that credit unions charge fewer and lower fees than do
banks for the same kinds of services.\1\ In particular, minimum
balances to avoid fees are typically much lower at credit unions than
at banks. Lower rates on loans, especially on used cars and small
loans, are another way credit unions serve those of modest means.
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\1\ 2004-2005 Credit Union Fees Survey, CUNA. Big Banks, Bigger
Fees2001, U.S. Public Interest Research Group. New Jersey Department of
Banking and Insurance, various surveys. The Money Talks Personal
Finance Advice website at www. Moneytalks.org.
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A Woodstock Institute report comparing the terms and conditions of
the nation's 10 largest banks and 10 largest credit unions found that
the credit unions performed better in terms of interest rates, late
fees, over-the-limit penalties, grace periods, and disclosure in
terms.\2\ In explaining why the huge difference in fee structures
between the two types of financial institutions, the report cited two
factors: 1) credit unions' nonprofit cooperative structure, which leads
to a different cost structure than banks; and 2) the credit union
mission. ``Their mission,'' the report noted, ``is one reason why
credit union-issued credit cards might have different terms than cards
issued by other financial institutions.'' As the Woodstock report
illustrates, credit unions continue to adhere to their original mission
to provide working people with access to affordable financial services.
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\2\ Blindfolded Into Debt: A Comparison of Credit Card Costs and
Conditions at Banks and Credit Union, Woodstock Institute. July 2005.
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For decades, most credit unions could generally only offer
membership to people who were part of an occupational group. This had
the effect of limiting credit union access to members of modest means.
However, the passage of the Credit Union Membership Access Act in 1998
gave occupational-based credit unions a streamlined way to add
geographic areas to their memberships that are ``underserved'' (not
based on occupational bonds). This provision gave credit unions a
greater opportunity to serve persons from all walks of life--including
the lowest income levels. In other words, more people--especially those
in low or moderate income areas--have only recently become eligible for
credit union membership. Since 1999, more than 650 federal credit
unions have added 1,406 underserved areas to their fields of
membership. In the three years ending December 2003, credit unions that
added these underserved areas experienced membership growth over three
times that of other credit unions (17.4 percent vs. 5.2 percent over
the three year period).
While credit unions remain committed to serving those of modest
means, we must point out that credit unions could not remain viable if
they served only those of low or moderate income. As financial
cooperatives, credit unions provide services and benefits for its
members in proportion to what its members contribute to it. In other
words, to have a viable cooperative you must have those who ``have''
and those who ``have not.'' A credit union cannot provide loans to its
members unless other members have made deposits from which to loan. We
believe credit unions should provide all members the same opportunity
to improve their financial well-being.
Big is Not Bad
We would like to address a misunderstanding introduced during the
hearing that larger or more complex credit unions have strayed from
their original mission and are therefore undeserving of their tax-
exempt status. There is no legal or historical basis for this view. The
tax exemption Congress granted in 1937, and upheld in 1951 and 1998,
was not related at all to the size of the institution benefiting from
it. It was based primarily on the cooperative structure of credit
unions (i.e., member-owned, democratically operated, not-for-profit
organizations generally managed by volunteer boards of directors).
Do other tax-exempt organizations risk losing their tax exemption
when they get ``too big?'' For example, should the Red Cross be subject
to taxation because they've grown larger than small, local
organizations that also provide relief or charitable services? Larger
credit unions are still democratically controlled, not-for-profit
institutions in every way that smaller credit unions are. A larger
credit union may be more likely to offer a broader array of services,
and have larger presence in a local market, but this does not make it
less a cooperative organization than a smaller credit union.
It's also important to note that the credit union tax exemption was
not granted and reaffirmed by Congress on the premise that credit
unions must offer only limited services to their members. Congress has
never suggested that credit unions forgo pursuing technological
improvements to their systems, or ignore consumer demand for more
convenient services, in exchange for tax exemption. The argument that
larger credit unions should be taxed simply because they offer similar
services to many banks ignores the fact that the tax exemption was
granted and upheld based on the organizational form of credit unions
and not on a credit union's size or sophistication, or the degree of
competition it may provide to other financial institutions. To view it
from another angle: it doesn't appear that banks are subject to
taxation because of the array of products and services they may offer,
they are taxed because of their structure--that is, they are non-
democratically-controlled, profit-maximizing organizations.
The economies of scale of larger credit unions make it possible for
them to offer more affordable and responsive services to members of
modest means. The presence and cooperation of larger credit unions
enables smaller credit unions to access infrastructure such as shared
ATM networks (e.g., CO-OP Network), the corporate credit union system,
group lending programs, and shared branching. (Shared branching allows
credit union members to conduct transactions on their accounts at any
credit union that belongs to the shared branching network. We would
like to clarify that shared branching does not, however, involve shared
membership. Members are permitted to obtain loans and other services
only at credit unions to which they belong.) The size and efficiency of
larger credit unions allows them to provide all of their members--
including those of modest means--with lower loan rate and fees and
higher dividend rates.
Larger credit unions are also more able to offer special programs
benefiting low- and moderate-income households. In CUNA's ``Serving
Members of Modest Means'' Survey Report, published in 2003, when asked
how many of up to 18 services geared to low-moderate income households
were offered, only six percent of credit unions with assets below $20
million offered at least half of the services. Fully 42 percent of
credit unions with assets over $500 million offered most of the
services. The survey also showed that larger credit unions are also
more likely than smaller credit unions to participate in outreach
activities to attract low/moderate income members, and to have added
underserved areas to their fields of membership.
Credit Unions are Not Mutual Savings Banks
During the hearing, some witnesses attempted to suggest that credit
unions are no different from mutual savings banks and, since mutual
savings banks pay federal taxes, credit unions should be taxed, too.
Although many savings banks and S&Ls are mutually owned, there are key
differences in structure and operation that continue to make credit
unions unique.
Mutual savings banks lost their tax exemption in 1951 not because
they had become ``too big'' or too similar to other financial services
providers, but because they had lost their ``mutuality,'' in the sense
that the institutions' depositors did not exercise democratic control
of the enterprise. Specifically, Congress found:
Mutual savings banks had evolved into commercial bank
competitors. Unlike 1951, however, there is no evidence that today's
credit unions are a competitive threat to banks or thrifts. In fact,
the FDIC reports that banks have enjoyed record profits each of the
last four years. The real competition in the banking industry has been
taking place between small and large banks. Since 1993, small community
banks have lost nearly half of their depository market share to the
largest 100 U.S. banking institutions, while credit unions have
maintained the same depository market share.\3\
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\3\ Source: FDIC, NCUA, U.S. Census Bureau
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Mutual savings banks had engaged in widespread proxy
voting schemes. Federal credit unions are prohibited from using proxy
votes under the Federal Credit Union Act (12 USC 1760), while mutual
savings banks continue to use proxy voting. Thus, in a mutual savings
bank, the board, which directs all policies and operations of the
institution, can be elected through control of the proxies. The OTS
clearly states the practical application of this practice in their
Regulatory Handbook (Section 110, Capital and Stock Ownership):
``In practice, members delegate voting rights and the
operation of federal mutual saving associations through the granting of
proxies typically given to the board of directors--or a committee
appointed by a majority of the board.''
Mutual savings banks were not democratically controlled
(voting was based on the size of each member's deposit). Even today,
under OTS rules, mutual savings banks can--and often do--apportion
voting privileges based on one vote for each $100 in an account, up to
1000 votes. In 1998, OTS changed its regulations to permit mutual
savings banks to amend their bylaws to allow from one to 1000 votes per
member. In direct contrast to this practice, each credit union member
has always had one vote, regardless of the amount they have in the
credit union.
So, while some mutual savings banks may tout that they are
``community and employee owned,'' it's unlikely that their depositors
enjoy the equal ownership and voting rights afforded to all credit
union members. In fact, what the OTS and the courts have said about
ownership ``rights'' of federally chartered mutual thrift depositors
clearly support this. An illustrative case is Ordower v. Office of
Thrift Supervision, where mutual bank depositors challenged the OTS's
approval of a conversion from a mutual savings bank to stock form.\4\
The court stated:
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\4\ Protecting the Rights and Interests of Credit Union Members,
American Association of Credit Union Leagues, August 2005.
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``Nominally the customers own the mutual, but it is ownership in
name only.''
The OTS' Regulatory Handbook also states:
``The ability to exercise control over a mutual savings association
by its members is not coextensive with the rights of stockholders of
ordinary corporations.'' (Section 110, Capital and Stock Ownership)
Other key differences between credit unions and mutual savings
banks include:
Not for Profit: Credit unions are not-for-profit
financial cooperatives, while mutual savings banks operate for the
mutual profit of their owners. Indeed, given the limited rights of
depositors of mutual savings banks as described above, the only thing
``mutual'' about mutual savings banks appears to be the way they
operate for the mutual profit of their owners.
Volunteer service: Most credit union boards of directors
serve voluntarily and are unpaid. Board members are elected by and from
the credit union's membership. Mutual savings banks have paid
directors.
Limited market: Credit unions are restricted by statute
to a limited field of membership composed of specific groups or those
in a geographical area. Mutual savings banks have no such restrictions.
Limited powers: Credit unions are the most heavily
regulated of all financial institutions. They must operate within
limitations on business lending, loan interest rates, loan maturities,
investments, and a host of other restrictions that don't apply to
mutual savings banks, and are not allowed access to capital markets.
CRA is Not Appropriate for Credit Unions
Banks are subject to the Community Reinvestment Act (CRA) for one
simple reason: prior to the passage of CRA, banks accepted the deposits
of low-income customers but many banks routinely ``redlined'' poor
areas as too high-risk for lending. In response, Congress passed CRA in
1977 to require financial institutions to make credit available to
those who deposited funds in a given financial institution. Congress
exempted credit unions because credit unions--by law and in practice--
can only lend to their members (i.e., those who belong to a given
credit union).
CRA is not appropriate for credit unions for some of the following
reasons:
Credit union data results are inherently skewed under CRA
because of legal restrictions that banks or thrifts do not face:
Banks and thrifts have no limits on who they can
serve.
Credit unions' outreach area is restricted by their
field of membership.
Even ``community'' credit unions can only serve
members.
CUs are legally barred from providing ``lifeline
services'' to households that are in need and are eligible for
membership, but have not formally become members.
The result: vulnerable households face yet another
barrier to accessing basic transaction services.
Credit unions are technically restricted from serving
the very households CRA was intended to reach even though those
households qualify for membership.
Credit unions and consumers are denied the
opportunity to build trust and a longer-term financial
relationship over a series of transactions.
CRA emphasizes lending, especially mortgage and business
loans.
Credit unions specialize in flexible savings products
and consumer loans, which are much more fundamental products
and services for households of modest means.
CRA doesn't measure consumer lending, the core
business of most credit unions.
Credit unions face a legislated cap on member
business loans of 1.75 times their net worth up to a maximum of
12.25% of assets for ``well-capitalized'' credit unions.
Regulatory restrictions on credit union investments
render credit unions ineligible to earn substantial CRA credits under
the ``investment test.''
Credit unions cannot legally make investments in
community development corporations (CDCs) or community
development loan funds (CDLFs) that banks can and do use for
CRA credit; credit unions are also prohibited from
participation in tax-credited affordable housing bonds, the New
Markets Tax Credit Program, and CDFI Fund grants of taxpayer
money for community development projects.
Thus, credit unions cannot invest in affordable
housing projects, community development centers, etcetera
whereas banks and thrifts can.
In closing, the California and Nevada Credit Union Leagues would
like to thank the Committee for the opportunity to provide additional
information for the record regarding the unique nature of credit
unions. Credit unions have by no means abandoned the statutory mandate
Congress gave them in 1934 to remain modest-means focused and
cooperative in nature. The federal tax exemption--its privilege and its
responsibilities--motivates the decision process for all credit unions,
whether they are decisions regarding members, products and services, or
field of membership. We believe the evidence clearly shows that credit
unions--both large and small--remain true to their original mission of
providing all members with the means to build a better way of life.
Sincerely,
David L. Chatfield
President/CEO
Statement of Financial Services Roundtable
The Financial Services Roundtable believes it is necessary to
examine the tax exemption of federal credit unions. There is a class of
credit unions that appear to have less focus on serving individuals of
modest means and a field of membership that stretches the definition of
a ``common bond.'' This, coupled with the ability of these taxpayer
subsidized credit unions to offer services similar to that of tax-
paying financial institutions, as a matter of competitive fairness,
brings into question whether it is appropriate for these credit unions
to be tax exempt. The Roundtable believes the Committee must examine
this tax exemption, which is in part based on: 1) these credit unions
serving individuals of modest means, and; 2) a ``common bond'' that
defines a credit union's membership.
The Financial Services Roundtable represents 100 of the largest
integrated financial services companies providing banking, insurance,
and investment products and services to the American consumer. Member
companies participate through the Chief Executive Officer and other
senior executives nominated by the CEO.
Roundtable member companies provide fuel for America's economic
engine, accounting directly for $40.7 trillion in managed assets, $960
billion in revenue, and 2.3 million jobs
Serving Individuals of Modest Means?
Part of the basis for the tax-exempt status of credit unions is
their service to individuals of modest means. The Credit Union
Membership Access Act of 1998 states, it is in part ``because they have
the specified mission of meeting the credit and savings needs of
consumers, especially persons of modest means.''
A key question that must be examined is if credit unions are
serving individuals of modest means. Based on data available credit
unions serve those of modest means, but also serve a significant
portion of individuals with substantial means. Based on a recent
demographic survey by the Credit Union National Association the average
household income of a credit union member is $55,120, which is
significantly higher than the median household income in the United
States of $44,389.
The Government Accountability Office in a 2003 report stated
``[o]ur assessment of available data--the Federal Reserve's 2001 SCF,
2001 HMDA data, and other studies--provided some indication that credit
unions served a slightly lower proportion of households with low and
moderate incomes than banks.'' More specifically the report indicates
that only 36% of households that primarily or only use credit unions
are of low and moderate income, compared to 42% that primarily or only
use banks.
The information available suggests that credit unions are not doing
as well as other financial institutions in serving individuals of
modest means.
A Broad Common Bond
Credit unions also receive a tax exemption due to the nature of
their membership or specifically the common bond that is shared between
members. The Credit Union Membership Access Act states, with respect to
this common bond that ``a meaningful affinity and bond among members,
manifested by a commonality of routine interaction, shared and related
work experiences, interests, or activities, or the maintenance of an
otherwise well-understood sense of cohesion or identity is essential to
the fulfillment of the public mission of credit unions.'' Today, in
practice, what constitutes a common bond stretches this definition
allowing for the formation of large credit unions that compete for the
same customers as tax-paying financial institution in local markets.
Today credit unions that share a common occupational bond are
permitted to add other occupational groups to their membership based on
what has been said to be pro-forma approval of the NCUA. Although even
more troubling is the approval by the NCUA of charters for credit
unions with a large community as a common bond, which has fueled the
conversion of existing credit unions to community credit unions. In
2004, there were 84 conversions to community credit unions with some
having the ability to serve millions of members.
These community credit unions are typically chartered to serve
people ``who live, work and worship or attend schools in, and
businesses and other legal entities located in'' a particular area.
Given the population of some of these areas there is a large potential
membership pool. Some examples of credit unions converting to community
charters in 2004 include:
The LA Financial Credit Union, which will be able to
serve all of Los Angeles County, California and has a potential
membership of 9.6 million people.
The Dessert Schools Credit Union, which will be able to
serve all of Maricopa County, Arizona and has a potential membership of
3.1 million people.
The Dallas Teleco Credit Union, which will be able to
serve all of Dallas County, Texas and has a potential membership of 2.2
million people.
The U.S. Credit Union, which be able to serve the
counties of Anoka, Carver, Dakota, Hennepin, Ramsey, Scott and
Washington Counties, Minnesota and has the potential membership of 2.6
million members.
These four conversions account for over 5% of the population of the
United States. From the end of 1999 through 2004, there have been 589
credit unions established or converted to community charters.
This ability to serve millions of people in a community, not only
stretches the definition of a common bond, but creates local markets
where a tax-subsidized credit union can compete community-wide with
tax-paying financial institutions for the same customer.
Issue of Fairness
Today credit unions offer a full range of services and products,
including commercial lending services. In essence, credit unions are
indistinguishable from banks. On a local level as credit unions are
able to serve whole communities it creates a competitive disadvantage
for tax-paying financial institutions.
The tax-payer subsidized credit unions have a price advantage over
the tax-paying institutions in competing for the same customer base. A
study on credit unions in Virginia, by Professors Neil Murphy and
Dennis O'Toole attributes a ``67 basis point advantage in loan pricing
and deposit pricing'' to credit unions' tax-exemption.
If a credit union does not have to focus on individuals of modest
means and is permitted to serve large communities, why should it be
entitled to a tax exemption? As credit unions are permitted to serve
large communities, it has the potential to create two banking systems
in a local market, one that is tax payer subsidized and another that
pays taxes. Fairness dictates that they similarly situated institutions
be treated equally.
Conclusion
As the Committee examines the tax exempt status of credit union,
the Roundtable believes it is important to pay particular attention to
large credit unions that are unlimited in their ability to compete in a
market for the same customers as financial institutions.
The Roundtable believes it is necessary to evaluate whether these
credit unions are actually serving their intend purpose of providing
services to individuals of modest means, or have greater interest in
serving all members of a community through a broad common bond. It is
an issue of competitive fairness as tax-payer subsidized credit unions
are indistinguishable from banks and compete for the same customers. It
is important to ask if the American tax-payer should continue to
subsidize theses credit unions.
Statement of the Honorable Phil English, a Representative in Congress
from the State of Pennsylvania
I commend Chairman Thomas and Oversight Subcommittee Chairman
Ramstad for holding today's hearing to review the tax-exemption for
credit unions. The oversight responsibility of the Ways and Means
Committee is one of its most important roles and examining the vast
corners of the tax-exempt sector falls squarely within that
responsibility. A thorough assessment of the standards for tax-
exemption for credit unions, as well as other tax-exempt entities,
helps our Committee fulfill its responsibility to American taxpayers.
Through this process, I look forward to examining the benefits the
nation receives in exchange for the credit union tax exemption. The
credit unions in my home state of Pennsylvania alone, serve 3.5 million
customers. In my district in the northwestern part of the state, many
working class families rely on credit unions for low-cost financial
services.
As we examine the structure of these not-profit credit unions, I
welcome examples of the benefits credit unions consumers receive,
including in the form of favorable interest rates and fees. I also look
forward to receiving information regarding the demographics of credit
unions' clientele.
After a comprehensive examination of their structure and benefits,
I believe the Committee will find credit unions' tax-exemption is
justified because they continue to fulfill the important public policy
goal of providing working Americans with an affordable alternative to
their for-profit counterparts.
A.M. Community Credit Union
Kenosha, Wisconsin 53144
November 1, 2005
Congressman Thomas, My name is Don Gillespie and I am fortunate to
serve as the President/CEO of A M Community Credit Union (see endnote
1). While I must admit to being somewhat concerned that your committee
is undertaking the review mentioned above, I also must admit that a
periodic review of tax exempt organizations is an application of sound
government practice. Further, I am confident that you, and your
committee, will better appreciate the value of the credit union system
and its tax exempt status through the hearing process. I hope to
contribute to the committee's review by providing some personal views
of the issue in a concise bulleted format.
The background information provided by the committee indicates that
the tax status of credit unions was reaffirmed by the Congress in 1998
when the correctly prioritized their reasons;
Credit unions remain member owned cooperatives, that
individual ownership stake illustrates more than a symbolic structure,
it ensures that credit unions remain more responsive to their member
needs.
Credit unions are indeed democratically controlled, one
member--one vote, is a principle we embrace that enfranchises even the
lowest economic sector of an individual credit union.
Credit unions remain not-for profit entities retaining
earnings sufficient to fulfill fiduciary safety and soundness standards
and returning all other earning to their members through extended
services or improved pricing on loan, deposit, or transaction accounts.
Credit unions boards are populated exclusively with
volunteer directors (with exception to the credit union CEO who may
serve as a director). Those volunteers establish the mission and vision
of their unique entities, they hire and guide executive management, and
they represent the members that elected them to office with sincerity
and diligence.
Credit union missions were sighted by the congress in
reaffirming the tax exempt status of such organizations, I offer as
support for the contention that the mission sighted by the congress is
substantially similar to the mission of our credit union (see end note
2).
Further, the specific mention of ``consumers'' denoted by the
descriptive ``modest means'', as highlighted in the 1998 record, might
give committee members cause to review in more depth the financial
performance of America's credit unions. To that end I offer the
following (see endnote3). CUNA through a review of FFIEC-HMDA data
illustrates that between 1998 and 2003 credit unions approved 68.5% of
mortgage applications submitted by low income borrowers, while all
other lenders approved a mere 45.3% of low income applications--low
income mortgage seekers are = again more likely to be approved at a
credit union than a non-credit union.
Our detractors will attempt to make much of the congressional
reference to consumer service and the development of some business
services in some credit unions. Listen closely to the information
provided; you will learn that relatively few credit unions offer
business services and that business lending represents a small
proportion of the credit union balance sheet. NCUA and FDIC data were
used by CUNA to show that credit union share of business lending
remains below 1% of the market (see endnote 4).
Admittedly credit union business lending activity has increased,
yet it represents less than 1.00% share of the business loan market, I
suggest that business lending activity is being driven more by a
demographic change in the American consumer than the business evolution
of credit unions. I believe that it is well accepted that through
economic and demographic changes in the nation and the world more and
more consumers are self employed.
The U.S. Bureau of Labor and Statistics
http://www.bls.gov/news.release/pdf/empsit.pdf reports that the
number of self employed Americans increased 72,000 during the month
of September 2005 alone, that growth translates into an annualized
rate of 8.40%. Of course as the downsized or outsourced middle
manager begins her/his entrepreneurial journey they seek the
financial institution closest to them, their credit union.
Chairman Thomas, the tax exempt status of credit unions has been
and remains in the best interest of American consumers (see endnote 5).
Any new tax on credit unions is simply a new tax on 87
million credit union members.
Those outside interests that are calling for credit union
taxation have the demise of credit unions not the best interest of
Americans at heart.
The congress in 1998 sighted first and primary the reasons for
credit union tax exempt status as the member owned nature,
democratically controlled structure and volunteer board led reality of
the credit union system. Those realities exist today in each credit
union in our nation. Regardless of the field of membership or number of
members, the asset size or business activity: a Credit Union is A
Credit Union--we are owned by, governed by and strive to serve our
members. With each member having the same voice, and earning the same
high degree of respect--no matter their individual circumstance.
Please diligently review the status, purpose and operation of
credit unions. Consider the source of the testimony before the
committee. Weight the antagonists and protagonists testimony and you
must conclude that the institution of credit unions in America is
indeed fulfilling the congressional mandate and is certainly deserving
of their tax exempt status.
Sincerely
Donald J. Gillespie
Endnotes
1. A M Community Credit Union, 6715 Green Bay Road, Kenosha, WI
53142, 262-697-3700.
2. Mission Statement:
To be a member driven cooperative providing a line of financial and
financially related products to satisfy the needs of the people who
live or work in Kenosha and Racine Counties:
Maintaining the Highest Quality of Member Services
Offering Competitive Consumer Financial Products
Encouraging Full Member Participation in our Cooperative
5. Tax Credit Unions? It Doesn't Add Up
Estimated annual increase in federal income tax revenue arising
from credit union taxation (a direct tax on 87 million credit union
member-owners): +$1.5 billion
Estimated annual decline in credit union member benefits arising
from change in tax status and subsequent operational changes*: -$6.3
billion
Estimated annual decline in bank customer benefits arising from
greatly reduced influence of credit union competition**: -$4.3 billion
Net annual economic impact of credit union taxation: -$9.1 billion
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
* Hampel, Bill and Schenk, Mike, CUNA Research & Policy Analysis.
``The Benefits of Credit Union Membership''.
http://www.cuna.org/member/download/whpaper_mmbrshp.pdf
** Feinberg, Robert, M. American University. ``An Analysis of the
Benefits of Credit Unions to Bank Loan Customers''. September 2004.
http://www.cuna.org/member/download/ba_benefits.pdf. Tokle, Robert J.,
Idaho State University. An Estimate of the Influence of Credit Unions
on Bank CD and Money Market Deposits in the U.S.''
http://www.cuna.org/member/download/ba_influence.pdf
West Haven, Utah 84401
October 28, 2005
Thank you for this great privilege to submit a written statement
concerning the credit union tax exemption. As a citizen of this great
country, it is truly an honor to submit this statement. What a great
country! Where else in this entire world would I be able to have this
opportunity?
I am the father of 11 children. My wife, Shelley, and I are
expecting our 12th child around Valentine's Day next year. Our oldest
child is 22 years old. She and her husband recently made us the proud
grandparents of our first grandchild, a girl.
I joined a credit union when I first graduated from college in
April 1981. My first job out of college paid an annual salary of
$16,200. I thought I was rich! My credit union provided me with savings
plans that helped me save enough money ($5,000) for a down payment on a
new starter home (total price $50,000), which we finished building the
week before we were married in February 1982.
Our credit union has continued to provide us with savings plans
that meet our modest needs. Our financial goals for our children have
been to help them save and prepare for college, church missions, and
marriage. Our credit union offers a unique savings plan which allows us
to automatically transfer a minimum of $10 per child per month from our
paycheck into each child's savings account. This ``dedicated savings''
account has no minimum balance requirements but pays certificate of
deposit rates! Our oldest daughter will be graduating from college this
year. Her ``dedicated savings'' account helped finance her education
and also provided money for her wedding. Our oldest son recently
returned from a church mission to California. His younger brother is
currently serving a church mission in Brazil. While both boys were
serving missions at the same time, we were paying $800 a month to cover
their mission costs. Their ``dedicated savings'' accounts allowed us to
financially support them while they were serving their missions. These
accounts also helped finance the missionary in Brazil while he attended
college before his mission. The missionary that served in California
will be starting college in January and he will benefit greatly from
his ``dedicated savings'' account. He has also accumulated enough money
in his account in case wedding bells ring in the near future.
We are people of modest means. We are a one-income family, living
on an average salary. People often ask me in amazement how we can
afford to have such a large family. I always tell them that (1) we are
blessed because we contribute to our church and (2) our credit union
provides us the savings tools that we can't find anywhere else.
I don't know where I would be financially without my credit union.
We have since used our credit union for a mortgage loan to build a
modest home with 5 bedrooms. We later turned to our credit union for a
refinance and a lower interest rate on that mortgage loan. With the
help of our credit union, we hope to be completely debt-free many years
before we retire. My credit union means everything to me. They have
helped me raise 11 (soon to be 12) children to be outstanding,
respectful, law-abiding, contributing citizens of this country. I feel
that the United States has received something in exchange for the
benefit of my credit union's tax exemption. That tax exemption has
directly benefited me, my wife, and our children as credit union
members.
Sincerely,
Lane Gittins
Utah Bankers Association
Salt Lake City, Utah 84111
November 2, 2005
The Honorable Bill Thomas
Chairman
Committee on Ways and Means
U.S. House of Representatives
Dear Chairman Thomas,
On behalf of the Utah Bankers Association we commend you for your
courage to address the evolving public policy benefits of the tax
exemption granted to some cooperatively owned financial institutions,
those designated as credit unions.
The Utah State Legislature has been on the forefront of this policy
debate due primarily to the actions of our state regulator to
effectively eliminate the common bond membership limitations on state
chartered credit unions over twenty years ago. This resulted in wide-
spread tax subsidized competition to the point that the Commissioner's
actions were challenged and overturned in state court. This led to
several legislative debates and even a special task force which
concluded its study late last year.
As a result, the Utah State Legislature adopted a resolution
endorsing a recently adopted statute that established certain large
credit unions as ``nonexempt'' and urging Congress to consider the same
approach. The resolution also identified several other inequities
resulting from the federal tax treatment of federally chartered credit
unions including an impingement of state's rights to collect the same
state and local taxes from federal credit unions that are assessed to
state chartered credit unions.
Attached is a research paper we submitted to our state level
legislative task force. The research clearly shows that there were two
primary reasons for the tax exemption: 1. to facilitate the extension
of credit to the poor; and 2. to give credit unions the same tax
treatment as other cooperatives at that time. I believe you will find,
as did the Utah State Legislature that at least as it relates to the
larger more complex and diversified credit unions, neither of these two
justifications applies in today's marketplace. First, even as recently
as two years ago, the GAO determined that banks were at least as
effective if not more so than credit unions at meeting the needs of the
poor. Secondly, other cooperative businesses are now taxed.
I am also attaching a copy of House Joint Resolution 1 adopted
earlier this year by the Utah State House of Representatives and the
Utah State Senate. Please feel free to contact me with questions.
Sincerely,
Howard M. Headlee
President
Statement of Thomas Heller, Orlando, Florida
I am writing to ask you to oppose any efforts to eliminate the
federal tax exemption for credit unions. A new tax on credit unions is
an additional tax on 87 million working Americans.
I have been involved with credit unions since 1989. I had been out
of work for three months and had accumulated credit card debt. Once I
was working again, I needed a consolidation loan to pay off my credit
card. Only my credit union was willing to give me the loan and not
charge a high interest rate.
Studies have shown that consumers save $6.3 billion a year by using
a credit union instead of a bank. I save hundreds of dollars a year
myself just in ATM fees that I do not have to pay. I also use the
internet for most of my online ``banking''.
When I first moved to Florida, I opened a bank account with
SunTrust. They charged me nearly seven dollars a month, just to bank
online!
My credit union charges me nothing for online access to my money
and they do not charge me three dollars every time I want to withdraw
my money.
Banks are in the business of making money for stock holders. Credit
unions are formed by people from similar backgrounds or employers so
that they have a better way of saving money and getting loans at low
rates when nobody else will loan them money.
Kent, Washington 98032
November 1, 2005
Dear Committee,
As a credit union professional in the business since 1979, I see
firsthand why the House Committee on Ways and Means Chairman Bill
Thomas wants to review the credit union industry tax-exemption. Several
times over the years I called on my peers to operate in a fiscally
responsible manner that respects our tax-exemption.
Allow me to give a few examples of how our industry dishonors the
tax-exemption:
``Volunteers'' receiving $5,000 annual conference/
education allowance to go to Hawaii, Caribbean cruises, Germany, etc.
CEOs enjoying membership to exclusive country clubs and
driving $70,000 luxury cars paid for by the credit union.
Industry average fee of $22 for non-sufficient funds
(NSF) when the cost associated to an NSF is estimated at $2. Strange
way for not-for-profits to operate on behalf of member-owners.
Industry charging loan interest rates in excess of the
congressionally mandated 15% APR when the Fed Funds rate at 1%. NCUA,
giving in to industry lobbyists, allowed a waiver so that credit unions
could charge up to 18% APR even though interest rates were at 45-year
lows.
Credit unions building extravagant offices/ branches that
the tax-paying banking sector cannot justify.
Credit unions serve a vital role in the country's financial
services industry and should be allowed to remain tax-exempt. At the
same time, congress should make credit unions more accountable for
operating in a manner warranting a federal tax exemption. Again, allow
me to provide a few quick examples.
Similar to the interest rate cap, congress should mandate
maximum fees charged for basic financial services such as NSF, Courtesy
Pay, Returned Check services. I propose a maximum NSF/Courtesy Pay fee
of three times the federal minimum wage.
Place a maximum on the capital levels for credit unions.
Credit unions with 14%, 16%, 23% are not returning the earnings back to
the member-owners. From the 1930's to the 1980's credit unions
successfully operated with less than 8% capital. Today, the industry
average is 40% higher and at the same time fees charged to members
increased more than 500%.
Require credit unions to make available a minimum package
of basic financial services without a service fee and tightly regulate
user fees.
Credit unions are currently asking the House Financial Services
Committee to approve H.R. 2317, the Credit Union Regulatory Improvement
Act. I encourage Congress to consider some pro-member amendments to
H.R. 2317 that will refocus our industry on our member-owners and keep
us deserving of the tax-exemption.
I welcome the opportunity to discuss in further detail any or all
aspects of this submittal.
Respectfully,
Dale Kerslake
President/CEO
Credit Union National Association
Washington, DC 20004
November 17, 2005
The Honorable William M. Thomas
Chairman, Committee on Ways and Means
U.S. House of Representatives
Washington, DC 20515
Dear Chairman Thomas:
On behalf of the Credit Union National Association, our affiliated
state associations and leagues, and America's 87 million credit union
members, I appreciate the opportunity to submit this letter as a means
of clarifying several issues raised in your Committee's November 3,
2005 hearing to review the federal tax-exempt status of credit unions.
Please incorporate this letter into the hearing record.
In this letter, I will also address several incorrect and
misleading statements about credit unions and our mission made by
witnesses from the commercial banking industry. We appreciate your
review of this letter and please do not hesitate to contact me or my
staff if you have further questions or need clarification on any of the
issues raised during the hearing.
I. TRANSPARENCY
Assertion: Credit unions are not providing adequate financial
information to their members.
CUNA response: Credit unions are required by law to conduct an
annual audit, and credit unions with $500 million or more in assets
must have an audit conducted by an independent, state-licensed auditing
firm using generally accepted auditing standards, similar to the
requirement applicable to banks (12 USC 1782(a)(6)). A federal credit
union is required to publicly post its financial statements monthly at
its office, and the financial report on the condition of the credit
union is presented at the annual membership meeting. This is more
disclosure than required by closely held community banks.
Similar to banks, credit unions are required to file a call report
(Form 5300) quarterly with their regulators, which provides detailed
information about the financial condition and activities of the credit
union and includes aggregate information about employee compensation
and benefits. The call reports for all federally insured credit unions
are publicly available on the National Credit Union Administration's
website.
Assertion: The fact that all credit unions do not file Form 990 with
the Internal Revenue Service raises concerns.
CUNA response: As highly regulated depository institutions, credit
unions are quite different from other non-profit, tax-exempt
organizations in the United States. As discussed above, credit unions
are subject to detailed financial reporting and oversight by examiners
trained to make sure that credit unions are accurately reporting their
financial condition and use of their funds. We question why any credit
union should be subject to IRS Form 990 reporting.
In fact, at the November 3 hearing, we understood the IRS witness
to question whether the Form 990 provides information addressing the
questions raised by members of the committee. At one time, the IRS
relied upon a group 990 form from NCUA on behalf of federal credit
unions, and decided years ago that that form was unnecessary. And, as
authorized by the Service, 22 states today provide a group 990 on
behalf of state chartered credit unions in their state.
The 990 form does contain one line (line 78a) referencing the 990-T
filing responsibility. As explained in our testimony on page 8, credit
unions have been trying for a number of years to obtain guidance from
the IRS on the possible application of the Unrelated Business Income
Tax (UBIT) provisions to state chartered credit unions. UBIT is a
complicated area, and as depository institutions, credit unions have
some unique issues that need to be addressed. CUNA thinks it is
unreasonable to expect any credit union to be filing Form 990-T forms
until adequate, public guidance is issued.
Assertion: Because of possible concerns raised about some charitable
organizations misappropriating funds to pay exorbitant
salaries, credit unions should make public the compensation
they pay their senior officials.
CUNA response: We think there is an understandable sensitivity of
many credit union CEOs about having their salary publicly disclosed.
More importantly, we do not consider there to be a parallel between
charitable organizations which publicly solicit funds for a stated goal
of carrying out charitable activities and credit unions which receive
funds from their members for the stated goal of providing them a good
return on their deposits and a good rate on their loans.
Volunteer, unpaid credit union boards of directors set the salary
and benefits of their CEOs. They do so in a competitive environment,
and draw upon surveys, such as those done by CUNA, to determine
appropriate compensation packages.
Assertion: Credit unions are not subject to sufficient internal
control requirements.
CUNA response: There is no basis for any statement that credit
unions lack adequate internal controls, and an effective system of
internal controls is a very high priority for each credit union, credit
union regulators, the National Credit Union Share Insurance Fund, and
private companies that provide credit unions with fidelity bond and
other insurance coverage.
A review of the NCUA Examiner Guide shows that continual review and
monitoring of internal controls at credit unions is expected by the
credit union itself and by its examiner. Obviously, the specific
internal control system in place will vary based on the size of the
credit union, but the long history of the success of the credit union
movement and the soundness of the National Credit Union Share Insurance
Fund demonstrate that internal controls are not a problem in the credit
union movement.
II. SERVING PEOPLE OF MODEST MEANS
Assertion: Credit unions underperform banks in lending to low and
moderate-income and minority borrowers, and banks deny fewer
loan applications from underserved populations than credit
unions do.
CUNA response: The reality is that credit unions for the past two
years have granted a greater proportion of their loans to low- and
moderate-income (LMI) borrowers than other lenders have, in reviewing
Home Mortgage Disclosure Act (HMDA) data. In 2004, credit unions made a
greater proportion of combined loans to LMI borrowers (27.6%) than did
all other lenders (26.6%). The credit union advantage was even greater,
29% to 25.9%, in purchase loans, an even more important type of lending
to help people, including first timers, to buy homes.
We recognize the percent differentials are not dramatic, but there
is a good reason why we expect to see greater increases in the near
future. Until quite recently, credit unions labored under rules that
primarily limited membership to occupational groups large enough to
support a credit union's operations. In the 1980s, credit unions were
permitted to add smaller employee groups, but significant growth of
community based credit unions and permission to expand into underserved
areas are a much more recent events. Thus, until very recently, unless
one worked for a relatively large employer, one was unlikely to be
eligible to join a credit union. Under these rules, credit unions
developed into powerful sources of financial services for working
Americans. It's no wonder that credit union membership became
concentrated in middle and upper middle-income groups.
With the passage of the Credit Union Membership Access Act of 1998
(PL 105-219), adding additional select employee groups, taking on a
community charter, or adding underserved areas to the field of
membership became more feasible. However, this could not have been
expected to lead to an immediate change in the income distribution of
credit union members. It takes time for credit unions to reach out to
new markets. It also takes time for potential members to learn of and
take advantage of what credit unions have to offer.
Bankers and some community groups are misinterpreting the HMDA data
if they conclude that banks deny fewer loan applications from
underserved populations than credit unions do. Since credit unions
actually deny far fewer mortgage loan applications across the board
than other lenders, from both lower income and other applicants, the
denial disparity ratio is a misleading measure of performance of
lending to LMI borrowers. In 2004, 74.1% of applications from LMI
applicants were approved by credit unions compared to only 51.1% at
other lenders. CUNA will provide the committee with a detailed analysis
of HMDA data upon request.
We note with interest that on October 31, 2005--in the same week
that the banking industry testified to the committee about credit
unions' ``inadequacies'' in serving low-income people--the banking
industry sued NCUA to stop federal community credit unions from adding
underserved areas to their charters. As we stated at that time, this
shows that the banking industry's only real agenda is to squelch
competition from more consumer-friendly institutions.
Assertion: Credit unions should not engage in business lending
because it detracts from lending they can do to lower-income consumers.
CUNA response: On the contrary, the type of business lending by
credit unions is very likely to create jobs for people of modest means.
A credit union business loan averages about $150,000. As the U.S.
Treasury Department 2001 study on business lending by credit unions
reported, credit union member business loans are disproportionately
made to businesses owned by households with modest incomes. Treasury
reported that 25.3% of member business loans were made to members with
household incomes of less than $30,000 and another 20% were to
household incomes between $30,000 and $50,000.
A credit union business loan can very well be that key ``helping
hand'' for a person of modest means to reach the American dream.
Assertion: Credit unions do not want any measurement standards
imposed to evaluate their service to people of modest means.
CUNA response: When a federal credit union applies for a community
charter, or adds a low-income area to its field of membership, it must
submit a business plan showing how it plans to serve all segments of
the community. The credit union's subsequent implementation of this
plan is subject to review by NCUA examiners. Credit unions welcome this
kind of oversight.
Credit unions' objections to past proposals for data collection on
service to low- and moderate-income people hve been based on flaws in
those specific proposals, not from any categorical rejection of some
form of tailored, appropriate, and not unduly burdensome form of
measurement. Application of bank-type Community Reinvestment Act (CRA)
standards on credit unions is inappropriate for several reasons:
Credit unions do not have the history of ``redlining''
that the banking industry does, and CRA's approach was designed largely
to deal with that history.
CRA was intended in part to address the tendency of large
banks to receive deposits from one community and lend them elsewhere,
even in other countries, whereas credit unions are overwhelmingly local
in nature, with few opportunities to engage in this abuse.
CRA's measurements take into account only lending
activities and investments, completely ignoring the provision of low-
cost depository service to promote thrift among the underserved, which
has always been a fundamental purpose of credit unions.
CRA was designed for financial institutions that can
serve any customer who comes in the door, whereas the vast majority of
credit unions remain occupationally based, and thus have less
opportunity to serve low-income people.
The Community Action Plan (CAP) eventually by NCUA several years
ago included many of the same flaws as CRA, and was rejected by the
NCUA Board. The comments made by various members of the Ways and Means
Committee during the hearing earlier this month will certainly
encourage further discussion on this subject within the credit union
movement about a system of measurement that takes into account the
unique structure, history, mission, and regulatory restrictions on
credit unions.
III. COMPETITION
Assertion: Credit unions are like mutual savings banks, which pay
federal income taxes, so credit unions should be taxed too.
CUNA response: Untaxed credit unions are not like taxed mutual
banks. If they were alike, the simple solution for the mutual bank
would be to convert to a credit union to eliminate taxation. So
Congress should ask the mutual bank why it does not just convert to a
credit union if both institutions are similar, rather than ask a credit
union to try to explain why it's not like a mutual bank.
The honest answer is that credit unions and mutual banks differ,
and differ significantly. The differences are not in the powers and
services offered to consumers, because consumers everywhere expect a
modern array of financial services. As our testimony explains in
detail, the differences are fundamentally in structure. A mutual bank
would have to limit its market, curtail its investments, stop
permitting weighted voting, stop paying its directors, stop having
proxy voting, and so forth. Credit unions are driven by service to
their members. While mutual banks do not have the divided loyalties
that banks with stockholders demonstrate, mutually organized banks
clearly do not have the same mission as credit unions do.
Assertion: Many credit unions have broadened their fields of
membership in recent years and grown quite large, and therefore should
be taxed.
CUNA response: Larger or more complex credit unions have not
strayed from their mission of providing financial services on a
cooperative basis. Navy Federal Credit Union, the largest credit union
in the United States, and GECU, a community credit union serving El
Paso, Texas, testified about the diversity of programs they offer to
meet the financial needs of members at all levels of the income
spectrum. At they pointed out, for a financial cooperative for operate
safely and soundly, it must have members who can save in order to have
members who can borrow. In fact, economies of scale make it more likely
for a larger credit union to offer more affordable and consumer-
friendly services to members of modest means.
As CUNA's testimony discusses at length, the credit union tax-
exemption was not granted because of small size, limited fields of
membership, or limited services to the membership. Credit unions grow
large because of the nature of their field of membership and their
success in serving the people eligible for membership. A large credit
union as measured by its aggregate assets does not mean that it is
serving richer people, but more people. The largest credit unions in
the country today have grown based on service to millions of workers
from the military services, the airlines industry, federal, state and
local governments and utility companies, among other consumers.
Assertion: Mutual thrift institutions and mutual insurance companies
are taxed and have thrived, and there is no reason to believe
that credit unions, if taxed, would not fare as well.
CUNA response: Taxing credit unions would erode credit unions'
ability to build and maintain their net worth through retained
earnings. Over time and under certain economic conditions, this erosion
could present safety and soundness problems. Moreover, taxation would
lead many credit unions to seriously consider whether they should
convert, via a mutual bank conversion, to a stock bank. The reality is
that many mutual thrift institutions have converted to stock banks over
time. In fact, credit unions are getting sales pitches about the merits
of conversion to mutual banks from law firms who have built a book of
business on conversions and have found their potential client base
notably shrinking.
The erosion of credit unions' ability to maintain solid net worth
should be of particular concern to the Congress because of the unique
federal share insurance program Congress created in 1984. Mutual
insurance companies are not covered by a federal insurance program, and
deposits in mutual thrift institutions are insured by the FDIC. Both
the FDIC and the National Credit Union Share Insurance Fund are backed
by the full faith and credit of the United States government.
Unlike the FDIC program, however, the NCUSIF by law requires credit
unions to deposit an amount equal to 1% of their federally insured
funds with the U.S. Treasury and to replenish the 1% from their
retained earnings if financial troubles throughout the credit union
system requires large NCUSIF payouts. As a credit union grows, it is
required to add more funds to maintain the 1% level. The FDIC insurance
program has no such continual support structure from the banking
industry. Taxation of credit unions would require reconsideration of
whether the unique NCUSIF's funding mechanism, which is beneficial to
the American taxpayer, should continue.
Unlike mutual thrifts and mutual insurance companies, credit unions
are run by volunteer boards, a fundamental characteristic of credit
unions. This volunteerism helps ensure that management decisions are
made for the benefit of members, not for the benefit of the decision-
makers' own pockets. Taxation would undoubtedly also erode volunteerism
since paying board and committee members would become a deductible
expense.
Again, thank you for the opportunity to submit additional
information for the November 3, 2005 hearing record. I will be happy to
respond to any further questions you may have.
Sincerely,
Daniel A. Mica
President & CEO
Statement of Minnesota Bankers Association, Edina, Minnesota
Introduction
Chairman Thomas, Ranking Member Rangel and members of the
Committee, all of us at the Minnesota Bankers Association (MBA)
appreciate that the Ways and Means Committee is holding a hearing on
whether credit unions should continue to enjoy their current tax
advantages. We are pleased to have the opportunity to provide our
comments on this very important subject.
The MBA represents more than 460 Minnesota banks, ranging in size
from small community banks with $10 million in assets up to large
regional banks. Of our 460 member banks, the median size is roughly $58
million in assets. Given the fact that we have such a strong community
banking tradition, the credit union issue is especially important to
bankers in Minnesota.
The Minnesota banks do an excellent job of serving their consumer,
business and agricultural customers. Our bankers are extremely active
in their communities. They give their time and resources to help make
their communities stronger. And of course our banks and bankers pay
their fair share of local, state and federal taxes to support our
government programs.
We believe that it is absolutely crucial that Congress consider
whether today's credit unions should continue to enjoy their tax
advantages. Our bankers support reviewing whether there is still a
solid public policy justification for the credit union industry's tax
exempt status, given the significant changes that have occurred in that
industry. It is important to question whether the credit union tax
exemption really benefits the American public and whether it is
consistent with our overall tax policy.
This issue is challenging because there are some credit unions that
remain true to the original credit union concept. These true credit
unions serve a fairly tight-knit group and work to meet the needs of
low- and moderate-income persons. On the other hand, many high-
visibility credit unions have dramatically changed. These ``morphed''
credit unions bear little resemblance to the original credit union
concept. We would argue that these morphed credit unions should
therefore lose their tax advantages.
The MBA is affiliated with both the American Bankers Association
and America's Community Bankers. Both these national groups have
submitted testimony on this issue. We support that testimony, and we
will not repeat all the arguments included in their statements. Our
statement will primarily address two major points, focusing on the
Minnesota marketplace.
I. Many complex credit unions operate in a manner that is not
consistent with the original credit union concept, meaning they should
lose their tax exemption
II. Organizationally, mutual savings banks are very similar to
credit unions, but mutual savings banks pay taxes
I. Many Complex Credit Unions Operate in a Manner That Is Not
Consistent With the Original Credit Union Concept, Meaning They
Should Lose Their Tax Exemption
Morphed Credit Unions No Longer Focus on People of Small Means
Traditionally, credit unions have served people of small means.
Credit unions were formed so that all working-class people would have
access to credit. That focus on low- and moderate-income persons has
long been held out as the public policy reason that justifies the
credit union industry's tax advantages.
However, some credit unions have lost their focus. Studies show
that banks do a better job of serving low- and moderate-income persons
than credit unions do. The Credit Union National Association conducted
a national member survey in 2002. The survey showed that the average
credit union member has higher income, is better educated and is more
likely to be in a professional occupation than an average non-member.
Specifically, that study showed that the average household income of
credit union members is 20 percent higher than that of non-members,
$55,120 versus $45,790.\1\
---------------------------------------------------------------------------
\1\ CUNA Membership Survey, 2002.
---------------------------------------------------------------------------
The Government Accounting Office (GAO) also reached the same
conclusion in a recent study. The GAO stated that credit unions have
had a historical emphasis on serving people of modest means. However,
after reviewing currently available data, the GAO found that banks more
effectively serve low- and moderate-income persons than credit unions
do. The GAO report stated that 36 percent of households that only or
primarily used credit unions had low or moderate incomes, while 42
percent of households that only or primarily used banks had low or
moderate incomes.\2\ Similarly, credit unions made a higher percentage
of HMDA-reportable loans to middle- and high-income borrowers and a
lower percentage of these loans to low- and moderate-income borrowers
than banks did.\3\
---------------------------------------------------------------------------
\2\ Credit Unions: Financial Condition Has Improved, but
Opportunities Exist to Enhance Oversight and Share Insurance
Management. General Accounting Office, October, 2003 (GAO-04-91), p. 20
\3\ GAO-04-91, p. 23.
---------------------------------------------------------------------------
Consistent with those national statistics, we see specific examples
where Minnesota credit unions specifically target wealthy people.
Think Federal Credit Union is headquartered in Rochester,
MN. That credit union's 2003 Annual Report states, ``Yesterday our
challenge was to provide financial services to members who could not
get services elsewhere. Today our challenge is to provide financial
services to members who can get services anywhere.'' This $1.1 billion
credit union has clearly lost its focus. Should it continue to receive
tax advantages so that it can compete directly against tax paying
financial services providers for the same customers?
Topline Federal Credit Union is headquartered in Maple
Grove, MN, a fast-growing suburb of Minneapolis. This credit union
actively markets its ``Big Toy Loans'' so that its wealthy members can
buy expensive luxury items like motor homes, powerboats and sailboats.
www.toplinecu.com/services/loans.htm.