Seeking credit union party

Northwestern Financial Review, May 15-May 31, 2002 by Bengtson, Tom

Now may be best time for bankers to push for credit union taxation

Community bankers have long called on credit unions to comply with the Community Reinvestment Act, and now a wellknown Chicago-based non-profit group is doing the same. The Woodstock Institute, a 29-year-old organization that promotes economic development and community reinvestment for lower-income and minority communities, says the CRA should be amended to include credit unions.

After surveying some 3,000 people in the Chicago area, the Woodstock Institute concludes credit unions "serve much lower percentages of lower-income households than they do middle- and upper-income households." The Woodstock Institute's findings are published in a report released earlier this year. (Copy available at www.woodstockinst.org.)

"We were surprised by the degree to which credit unions under-serve lower-income people," said Malcolm Bush, Woodstock' Institute president.

The organization notes the credit union industry, with 10,365 institutions across the country, enjoys a federal income tax exemption worth about $6 billion per year. In a press release, Bush reminds people that credit unions receive tax benefits partly because they are supposed to serve people of modest means.

The Woodstock Institute's research is consistent with banking industry research that shows the typical credit union customer is wealthier than the typical bank customer.

Bush contends that if the Community Reinvestment Act - the 1977 law that requires banks to serve all groups of people in their market area - applied to credit unions, they would do a better job living up to their charter. "If credit unions were being examined on a regular basis for community reinvestment, that data would be very useful," Bush said. By collecting such data from banks, Bush said groups such as his have worked with banks over the years to expand the availability of credit. The credit union industry's regulator, the National Credit Union Administration, recently pulled the plug on an effort that would have required credit unions to comply with a CRA-like law.

Credit Unions: All Grown Up

The credit union industry has matured into a robust component of the financial services arena since Congress passed the Federal Credit Union Act in 1934. The Credit Union National Association, the industry's top trade group, reports that almost twothirds of all credit unions seek to be their customers' primary financial institution, with about 30 percent of them offering full retail banking services. Most credit unions remain small, but 37 of them have more than $1 billion in assets.

As credit unions grow to look increasingly like banks, their tax-exempt status becomes more difficult to justify. Lawmakers in some states, such as Texas, are considering taxing the income of credit unions and four states, including Indiana and Nebraska, already do.

Congress created the credit union charter in part to encourage thrift, and the industry's mainstay product for years was the share account. Keith Legget, an economist with the American Bankers' Association, points out, however, that in 1980 credit unions gained the power to offer share drafts, the equivalent of checking accounts. The shift away from savings accounts toward transaction accounts inherently made credit unions more like banks, Legget says. The increased customer contact that transaction accounts afford, give credit unions more cross-selling opportunities and facilitate the development of full-service financial institutions.

In the early 1990s, credit unions also gained the opportunity to join the Federal Home Loan Bank System, an opportunity that 546 credit unions are capitalizing on. Traditionally, credit unions have relied on the savings of their customers to fund loans but with Home Loan Bank membership, credit unions join banks and thrifts which use the wholesale funds to make loans to customers. Home Loan Bank membership generally includes larger credit unions, which currently have advances totaling more than $3.5 billion.

Furthermore, the NCUA has laid out aggressive growth goals for the credit union industry, including an annual increase in credit union membership by 2.5 million people. The NCUA encourages the formation of more community-based credit unions, and encourages credit unions to offer more online, interactive services.

Sen. Paul Sarbanes, (D-Md.) Chairman of the Senate Banking Committee, recently chided the credit union industry for seeking powers that would make credit unions indistinguishable from banks. "The more credit unions seek to be like other financial institutions in their powers of membership, they undercut the argument they are deserving of different treatment on taxation and regulations," he said at a committee meeting.

On the state level, credit unions continue to gain power. In Wisconsin, the NCUA approved the state's "member business lending" regulation in February. The rule would make it easier for state-chartered credit unions in Wisconsin to make real estate development loans and construction loans. It would also eliminate the requirement that borrowers give personal guarantees for all such loans. The regulation will become final if the state's legislature approves it.