Mr. Chairman, I am Scott Jones, Chairman of the Board and CEO of Goodhue County National Bank, in Red Wing, Minnesota, and President-Elect of the American Bankers Association (ABA). The ABA brings together all elements of the banking community 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.
It is an understatement to say that the current debate over credit unions has emotions on both sides running high. The recent Supreme Court decision, which found illegal NCUA's policy of allowing "multiple" common bonds in a single credit union, has taken these emotions to a new level. In the midst of all the noise, it is important to remember that banks and credit unions each provide important services to our communities; there is clearly a place for a wide range of financial institutions in our local economies. I want to thank you, Mr. Chairman, for holding this hearing to help us get beyond the emotional rhetoric and focus on the important public policy issues.
Let me begin by pointing out that the court decision was about a very simple issue was the NCUA violating the law. It was not a close question. Both Courts of Appeals that ruled in the question said the NCUA was violating the plain English of the statute. And the vote of the Supreme Court on this issue was 5 to 0. The four dissents were on the issue of standing who can sue whom. There were no dissents on the common bond issue.
You will hear today from credit union representatives that unless Congress acts quickly to reverse the Supreme Court decision, the sky will certainly fall on the fortunes of the credit union industry and its members. Nothing could be further from the truth. The ABA and our fellow plaintiffs have pledged not to seek a remedy that should cause any current credit union customer to lose his or her account.
H.R. 1151, as modified by the House Banking Committee, goes way beyond ensuring that current credit union customers are fully protected. H.R. 1151 would, as a practical matter, wipe out the last vestiges of the credit union common bond, which has always been the hallmark of the credit union industry; and it would codify liberal business lending standards, inviting credit unions to expand their commercial lending activities. The bottom line is that H.R. 1151 would allow credit unions to use their tax subsidy to serve virtually everyone, everywhere including commercial enterprises with a full scope of financial products. This is a far cry from credit unions' original purpose of providing financial services to individuals of modest means who have a common bond.
This bill raises some very important public policy questions. Who should have access to government-subsidized financial services? What should be the scope of government-subsidized financial services? What standards of responsibility should credit unions have to serve their communities?
Credit unions were originally intended to serve people of small means. But the impact of H.R. 1151, as modified, is that everyone will have access to government-subsidized services, including the most affluent. Credit unions were originally intended to provide financial services to individuals. But under H.R. 1151, there will be no limits on the scope of credit union activities even commercial enterprises will have access to subsidized financial services. Credit unions were originally intended to have a single, narrow common bond people who knew each other well. But according to H.R. 1151, there should be virtually no limits on the number of groups that could join a single credit union only .1 percent of the nation's businesses would be unable to join a multiple common bond credit union, because they are big enough to create their own credit union, and even that toothless requirement can be waived.
Simply put, H.R. 1151 would, after being interpreted by NCUA, place no practical limitations on the membership or activities of credit unions and therefore there would be no limitation on the amount of the taxpayer subsidy it would grow and grow.
Moreover, H.R. 1151 leaves the false impression that important safety and soundness issues have been constructively dealt with. The fact is that the safety and soundness provisions of the bill do not adequately address the shortcomings in the current regulation of credit unions. The important, but minimal, recommendations of the Treasury, in a response to a report required by this Committee, have been, basically, gutted.
ABA is strongly opposed to H.R. 1151. We hope that after considering the implications H.R. 1151 has for taxpayers, this Committee will act to restore a meaningful common bond; limit the scope of credit union activities to serving people, not commercial enterprises; and refocus credit unions on meeting the needs of individuals of modest means. These are the characteristics that once set credit unions apart from other financial services providers, and for which the tax-exemption was granted in the first place.
Credit union supporters will argue that without H.R. 1151, credit union members will be hurt and credit unions themselves will not be viable. But this rhetoric is without foundation, intended only to create a crisis atmosphere. The evidence over the last year when the court injunction was in place clearly contradicts this "sky is falling" position. There is simply no reason to assume that any viable credit union will suddenly become unprofitable as a result of the Supreme Court decision. Congress has ample time to look into the broader issues of credit unions' special tax treatment and exemption from CRA to ensure that whatever action is taken will be fair not only to credit unions, but to the taxpaying public and taxpaying financial institutions as well.
We are prepared to work with members of Congress and credit union representatives to discuss what can be accomplished.
In my testimony today, I would like to discuss three key points:
The Supreme Court decision on February 25, 1998 ended a seven-and-a-half year judicial process. Naturally, there has been considerable interest in the outcome of the case. While there was much speculation, the court decision in favor of the banking industry will not have the dramatic effects alleged by credit union lobbyists. In fact, it will be business as usual for current credit union members. We will not seek a remedy from the lower court that should cause current credit union members to lose their account relationships with their credit union.
Moreover, it is interesting what the Supreme Court decision does not do:
Also, it is critical to note that the case does not affect state credit unions, federal community bond credit unions, or federal single bond credit unions. In addition, many of those directly affected can avoid any impact by converting to another charter, and dozens have already done so or are in the process of doing so. Nevertheless, in the long run the court decision is not the best approach. That decision was about violating the law, but it is up to the Congress to decide what credit unions should look like in the twenty-first century.
According to statute and legislative history, the credit union concept is based on the notion that "people of small means" could come together to pool their resources in order to provide small loans for one another. In this limited, local membership, people knew each other well. This was critical to the "character" loans made by credit unions. The familiarity and commonality of interest, embodied by the common bond, was traditionally the essence of credit unions, and gave them a special and unique place in our financial system.
Many credit unions still abide by this original spirit. There are many examples of the successes of these credit unions in meeting needs of people of small means. Unquestionably, these traditional credit unions play an important role in our economy.
For many other credit unions, however, the uniqueness has been destroyed by policies that have enabled the conglomeration of hundreds of individual groups within a single credit union. These institutions look and operate like a bank or a thrift, not a traditional credit union.
Since 1982, when the NCUA began the policy of multiple common bonds, 156,999 select employee groups have been approved an average of over 200 groups per week for fifteen years! It explains much of why the credit union industry quadrupled in size since that time.
Moreover, a lot of the multiple common bonds have been formed by large credit unions gobbling up smaller ones. The result is fewer, but larger credit unions. In 1982, there were 16,400 insured credit unions; today there are 11,500. Over 77 percent of federal credit unions' assets are held by credit unions with multiple common bonds. What this consolidation means is that the credit union industry is becoming increasingly dominated by larger institutions, even though the intimacy of a common bond is supposed to be a defining characteristic of credit unions.
The Alaska USA Federal Credit Union provides a striking example of just how far the common bond and the government subsidy has been stretched. Alaska USA has $1.7 billion in assets, making it the second largest financial institution in Alaska. It now takes 135 pages to describe Alaska USA's 3,000 multiple bonds. Adding common bonds was apparently very easy: little more than a simple notice and virtually automatic approval. For Alaska USA, the result has been combinations of individual bonds that stretch from the Rent-A-Can Toilet Company to the accounting firm of Coopers & Lybrand. What common bond do these companies have? How can "common bond" have any meaning when the field of membership covers hundreds, or in this case, thousands, of distinct and unrelated groups? In fact, such linking of common bonds means there is no common bond. One would have to search and search to find someone in Alaska who is not eligible to join Alaska USA Federal Credit Union.
There are hundreds of other examples where the common bond has become meaningless. Chicken processors and petrochemical workers, sausage makers and steamfitters, opera companies and bowling alleys are among the odd combinations that currently belong to the same credit union. In the case of CUNA Credit Union, in Madison, Wisconsin, the apparent common bond is individuals who are taller than a cartoon character.
Some credit unions do not even worry about whether a potential customer fits within its common bond they simply find a way to "qualify" members. For example, take U.S. First Federal Credit Union in California. It has a program to sign up automobile dealerships to participate in its "Discount Loan Program." Once a dealership has been signed up for the program, it can fax to U.S. First the application for a loan of anyone who walks in off the street and wants to buy a car. If U.S. First decides that the potential borrower qualifies for a loan, the dealership signs up the borrower for membership in a specific common bond group of U.S. First that anyone can join in this case, apparently a charity. According to the credit union's own information, the first year's membership fee in that common bond group is paid by the credit union; the borrower, in all probability, never has any other relationship with the credit union and may never care to. Clearly, this is merely subterfuge to enable U.S. First to make loans to non-members.
Why should we care about this? As a banker I care because U.S. First has a tax advantage that enables it to pay the small membership fee and still under-price my taxpaying financial institution in making car loans, for anyone, regardless of common bond or need. This is not an isolated program. Similar ones with auto dealers are being set up by credit unions across the country.
But beyond my interest as a taxpaying banker, there is a bigger implication for public policy. In the example above, virtually any car dealership is eligible to join this program. This means that the government subsidy involved in such loans can be used by virtually anyone including wealthy doctors and lawyers to buy a Mercedes or a Lexus. Incredibly, it appears that older (pre-1993) used cars those most likely to be bought by lower income people are the only types of cars excluded from this lending program. Is this the type of tax-subsidized credit union activity that Congress believes is appropriate?
The chartered mandate of credit unions is to serve people of small means.(1) Having a common bond was the way of keeping the focus on this mandate. The tax-preference provided to credit unions was a way to subsidize financial services for people of small means. With the erosion of a meaningful common bond, however, it is clear that some credit unions are no longer meeting their mandate. If they are not, then taxpayer dollars are subsidizing people who can afford unsubsidized financial services.
Taxpayers deserve answers to basic questions: who is benefiting from the government's subsidy? People of small means or the affluent? Is there a compelling need for a special subsidy for all credit unions today? Should the taxpayers be asked to subsidize services when there are other taxpaying providers that can effectively meet the needs of many credit union members?
Communities also deserve answers to a basic question: shouldn't credit unions that serve the general public be subject to the same high standards of community reinvestment that apply to all other federally-insured depository institutions? In many, many communities across the country, the credit union is as big or bigger than the local bank. Clearly community common bond credit unions have no argument against also being subject to the same CRA requirements as banks and thrifts. Other credit unions should also be covered by special applications of CRA, just as there are special applications of CRA for credit card and wholesale banks.
Let me give you an example from my home state. In Minnesota, there are 541 banks, most of which are very small. Over one-quarter have assets below $25 million; half have fewer than 17 employees. Minnesota banks work hard every day to meet the needs of our communities and meet the high standards of the Community Reinvestment Act. Over the last five years, the banks in Minnesota paid over $2 billion in federal income taxes. On the other hand, the 205 credit unions in Minnesota that offer virtually the same products and services and compete for essentially the same customers are not subject to CRA and pay zero in federal income taxes, even though they had undistributed profits of $297 million over the same time period. Something is wrong here.
The same story is repeated again and again in communities around this country. While banks are often portrayed as large institutions, the vast majority are small institutions. In fact, IBM MidAmerica Employee Federal Credit Union in Rochester, Minnesota has more than 120 different employee groups and is bigger than 98 percent of the banks in Minnesota. Of the 9,500 banks in the country, almost half have less than 25 employees and 1,310 banks have fewer than 10 employees.
If the government subsidy is being used by credit unions to serve those truly in need of subsidized financial services, then it may be an appropriate use of a taxpayer subsidy. Many credit unions do just that. In these hearings, many such examples will, no doubt, be presented. I want to emphasize that the banking industry has no problem with that concept. For example, banks have actively supported, and will continue to support, community development credit unions.
Increasingly, the evidence shows that many credit unions are serving a population that does not need subsidized financial services. These are not the stories credit unions are likely to tell Congress. But they are not hard to find. For example:
The credit unions' own numbers dispel the myth that members are mostly people of small means. According to a recent demographic survey conducted by the Credit Union National Association (CUNA), credit union members have an average household income of $43,480 37 percent higher than nonmembers, who have average household incomes of $31,660.(2)
Credit union members also have more years of education, they are more likely to have full-time employment, and they are more likely to own their own home than non-members. Is this the profile of individuals who need taxpayer support to afford financial services?
|Credit Union Members||Non-Members|
|Average household income||$43,480||$31,660|
|Proportion employed full-time||61%||47%|
|Proportion college graduated||34%||26%|
Source: CUNA National Member Survey, 1996
Some credit union executives themselves seem disturbed by these facts. 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."
Some credit unions use their tax-preferred status to pay for fancy offices for themselves big credit unions with big subsidies, as the pictures on the next page illustrate.
The subsidy is not limited just to individuals. Increasingly, credit unions are also making business loans. We believe it is totally inappropriate for credit unions to extend their tax subsidy to finance commercial endeavors. The preamble to the Federal Credit Union Act states that credit unions are intended to "make more available to people of small means credit for provident purposes ". Simply put, credit unions are intended to serve people, not to finance commercial enterprises. Those credit unions that want to provide commercial loans have the option to do so by converting to a mutual savings bank or thrift.
Today, more than 13 percent of the industry nearly 1,550 credit unions are currently involved in business lending. These 1,550 institutions hold almost $3 billion in outstanding business loans, and business loan growth has averaged over 7 percent per year since 1991. Over 45 percent of credit unions with assets of $100 million or more engage in commercial lending.
For example, look at Melrose Credit Union in Minnesota. This $133 million credit union has over 35 percent of its portfolio in commercial loans. They advertise that "All of your commercial lending needs can be satisfied by Melrose Credit Union. The credit union can help you with a loan to purchase or refinance, as well as with any operating needs you might have." Melrose offers personal property, real estate and SBA loans as well as business lines of credit. These services are virtually indistinguishable from what my bank and all other taxpaying banks and thrifts offer. But there is one very important difference: the credit union's services are subsidized by taxpayers.
Melrose is not the only Minnesota credit union that makes commercial loans thirty-five others also engage in business lending. In fact, eleven Minnesota credit unions have over 10 percent of their portfolios in commercial loans.
The fact is that credit unions across the country are actively seeking commercial lending opportunities. For example, John Siefken, former CEO of Citizens Equity Federal Credit Union in Illinois, said in an interview: "We expect to be number one in business lending, as we are in most everything else we do." In answer to the question of whether CEFCU could make a $5 million business loan, Siefken replied: "Sure with the proper collateral. Seventeen million dollars is our limit today." In fact, a banker reported that he competed with CEFCU to provide financing for a country club. Should country clubs and other businesses that can afford to borrow millions of dollars receive a tax subsidy? Is this the best way to use taxpayer dollars?
The ability of credit unions to engage in business lending is particularly disturbing in light of proposals including H.R. 1151 that would virtually erase the common bond requirement and allow credit unions to serve all comers. Moreover, H.R. 1151 as modified would codify the current rules regarding credit union commercial lending and further liberalize credit unions' lending limit by indexing the maximum loan size. (3)
This is a potent combination of new authorities and if history is any teacher, many credit unions will use them to quickly expand their commercial lending activities.
Recently, credit unions and their regulators have trotted out examples of credit unions that make start-up loans to buy a pickup truck, for example or which were set up specifically to finance very small businesses taxi medallions in New York, for example. Maybe these are legitimate credit union functions. However, it is clear that some credit unions are actively soliciting much larger commercial loans from established businesses businesses that are not, prior to the loan, members of the credit union. It is also clear that this trend is growing rapidly. This should clearly be stopped.
In addition to the public policy concerns of tax-exempt credit unions making loans to finance commercial enterprises, there are also safety and soundness concerns. Neither credit unions nor their regulators, at either the state or federal level, have demonstrated a strong track record of evaluating and managing the type of risks involved in commercial lending. The delinquency rate on credit union business loans is more than three times as high as the delinquency rate on their overall portfolio, and more than 4 times higher than the delinquency rate for bank commercial loans.
In a February speech to the Credit Union National Association, NCUA Chairman Norman D'Amours expressed concern that credit unions were drifting away from their chartered mission to serve low- and moderate-income individuals. He said: "It is amazing how much subtle and not so subtle resistance can be provoked in certain quarters by simply pointing out the social mission to which credit unions were dedicated by their founders, their history, and by federal statute. Why is there so much resistance to this defining principle?" He continued: "Clearly these founders had something in mind beyond providing the best high-tech financial system available and earning good salaries for themselves. It was this core belief that found expression in the Federal Credit Union Act's reference to serving 'people of small means'."(4)
We believe the time has come to hold credit unions to the same high standards of community responsibility as banks and thrifts. In fact, a reasonable case can be made that, because of their tax-subsidy, they should be held to an even higher standard. Today, credit unions serve those segments of the community they choose to serve. They are free to define and extend their constituency as they please, allowing them to "cherry pick" the areas and individuals they will include in their "community." The ability of credit unions to define their own community is, in effect, a license to redline.
Some credit unions do not even seem interested in serving low- and moderate-income individuals. Tom Randle, president of Sarasota Coastal Credit Union called serving low-income communities "the fad of the year." He said: "We have priorities. It's just not one of them, regardless of what Chairman D'Amours at NCUA has to say."(5) The bar is set high for banks and thrifts to meet community reinvestment needs; shouldn't the taxpaying public expect at least as much from government-subsidized credit unions?
It is particularly shocking that even credit unions with a geographic common bond whose field of membership is based on a town, a county, or even an entire state have no obligation to serve low- and moderate-income neighborhoods in their service area. A comparison of Federal Reserve data on mortgage lending shows that the credit union industry as a whole has a lower proportion of home mortgage loans to low-income borrowers than do other lenders. As subsidized lenders, credit unions would be expected to do more than unsubsidized lenders. If credit unions are not meeting their objectives, then why are taxpayers sacrificing so much each year to subsidize credit unions?
In considering legislation, Congress should address the fundamental policy questions: Who should have access to government-subsidized financial services? Where should the line be drawn? What standards of responsibility should credit unions have to serve their communities? We believe that a line should be drawn that requires credit unions to focus on their original chartered mandate to serve low-and moderate-income individuals and that limits taxpayers' obligations.
H.R. 1151, as modified by the House Banking Committee, meets neither of these requirements. If Congress enacts this bill, there will be, as a practical matter, no constraints on the extension of the government subsidy. It is not just a matter of reversing the decision of the Supreme Court. Enacting H.R. 1151 would be like removing all speed limits on our highways. It would, in many ways, be like creating a new tax-subsidized entitlement program for financial services for all consumers and all businesses.
We urge this Committee to draw the line to protect taxpayers from large and unlimited obligations. This can be accomplished while preserving the traditional role of credit unions. Without such limits, aggressive growth will be the norm. It will start a credit union arms race to get market share at the taxpayer's expense. Big, multiple common bond credit unions will quickly take advantage of the government's subsidy to grow rapidly. And as this competition increases, is it reasonable to believe that these aggressive credit unions will be competing to provide services to people of small means? The uniqueness and spirit of credit unions will be crushed in the stampede to attract new members.
Alaska USA Federal Credit Union demonstrates just how rapidly the flood of government subsidies will spread if the credit union industry's bill is passed. In just eight months following the decision by NCUA to allow multiple common bonds, Alaska USA added over 1,000 different occupational and associational groups.
Opening the floodgates to the provision of subsidized services will not come cheap. In 1982, when the multiple common bond policy was implemented, it cost taxpayers $100 million. Two years later, the cost to taxpayers more than doubled. Today, it's about $1 billion.
As large as this is today, it will be small compared to the taxpayer obligation that is likely if the credit union industry's "growth" bill is enacted. Over the four years following the 1982 decision, credit union assets grew at an average annual rate of 19 percent. If the credit union bill is passed, it would be reasonable to assume that the growth would be at least 15 percent. If this is the case, the credit unions will be a trillion dollar industry in just eight years. The estimated cost to taxpayers: $3 billion.(6)
Before detailing the banking industry's suggested approach, I would like to take the opportunity to discuss the failings of H.R. 1151, as modified by the House Banking Committee, to adequately draw the line to protect taxpayers. ABA strongly opposes this bill. It would:
Moreover, there are some critical omissions from H.R. 1151, as modified.
The ABA strongly opposes H.R. 1151, as modified. We believe that a line must be drawn that places an effective limit on the taxpayer obligation, and imposes meaningful common bond requirements, safety and soundness regulation, and community reinvestment responsibilities. We suggest below an approach to do this.
The ABA has been working on this issue with a broad group of bank trade associations, including ACB and IBAA. We have put forth a joint proposal. Let me emphasize that all of us are willing to sit down with Congress and credit union leaders to discuss and develop an appropriate approach. I would like to detail this approach for you. Before I do, I think it is important to understand our philosophy and the principles that guide our approach.
We believe that a legislative approach can be crafted that is consistent with this philosophy and these principles. The legislation should do two things: First, it should establish criteria for determining whether an institution functions as a small, traditional credit union for which an exemption from taxation is justified and Community Reinvestment Act (CRA) obligations are unnecessary. Second, it should mandate that those credit unions which do not meet these criteria be subject to taxation, to appropriate safety and soundness and consumer regulations, and to CRA.
More specifically, to receive the exemptions, an occupational credit union would have to meet (and continue to meet) all of these tests:
To receive the exemptions, a community credit union would have to meet (and continue to meet) all of three tests:
In addition, credit unions that are set up solely to serve low-income neighborhoods would also receive the exemptions.
Those credit unions that do not meet these criteria would be subject to:
In addition, all community credit unions, even those that meet the criteria, would be subject to CRA requirements, since they, by definition, are set up to serve the needs of a geographic area and, therefore, should have the same requirements as banks to address the credit needs of that community.
We believe it would also be appropriate to remove artificial roadblocks the NCUA has set up to discourage conversion of credit unions to mutual savings banks. This would provide another option for credit unions wishing to expand.
Our proposal would meet the twin goals of assuring that credit unions are meeting their original chartered mandate to serve low-and moderate-income individuals and placing limits on taxpayers obligations. It accomplishes the first goal by providing the greatest benefit for credit unions that are established for (and meet) the express purpose of serving low-income neighborhoods and requiring that credit unions above some size to demonstrate that they are meeting obligations to their members in a way consistent with the CRA obligations of other depository institutions. It accomplishes the second goal by taking into account the size of any institution that would receive tax-subsidies and does not extend those subsidies to commercial firms. The proposal has the additional benefit of applying generally accepted safety and soundness and consumer regulations to larger credit unions.
Another aspect of a comprehensive approach would be to enact the proposed Treasury statutory language regarding credit union safety and soundness regulation.
Note that under our proposal, credit unions could expand and serve any common bond or group of common bonds. However, those that wish to act like banks in that regard would be subject to taxation, CRA and other rules.
There are, of course, many details to work out. Moreover, there are certainly a number of options that can also be explored. We pledge to work with Congress and credit union representatives in that process.
Some will say that taxation and meeting the CRA requirements will be devastating to the industry. This is simply not true. Taxes are only paid after all expenses, including interest on deposits are paid. The remaining profits are placed in reserves for future expansion. But here is what credit unions do not want Congress to understand credit unions do not oppose taxation to benefit current customers, they oppose taxation because it would limit their ability to use a tax-free build-up of reserves to fund expansion.
Does paying taxes mean that credit unions would not grow? The answer is no. They would make decisions to grow just like any other taxpaying institution. In fact, credit unions in Canada have paid taxes since 1972 and have still grown rapidly and prospered. In spite of taxation, the average return on equity (ROE) for the Canadian credit union industry has exceeded the ROE for the Canadian banking industry for the past 10 years, according to the Canadian Department of Finance.
Let me give you an example from a banker from Dubuque, Iowa. He noted that recently Dubuque voters defeated a tax initiative to improve Dubuque community schools. He pointed out that if two of the large credit unions in Dubuque with combined profits of over $2.8 million had paid their fair share of taxes, it would amount to about $930,000 annually. He went on to say that: "[If] these taxes were used for education, think of the positive results more teachers, reduced class sizes, expanded libraries, the list could go on and on. All paid for from untaxed profits, without any negative impact on credit union customers, but with a positive impact on all Dubuque schools."
Nationally, the credit union tax exemption costs taxpayers nearly $1 billion per year. To put this into perspective, $1 billion is about what the federal government spent on school breakfasts for low-income kids last year and it is more than the federal payment to the states to provide for day care.
Does paying taxes affect credit unions' mutual form of ownership? The answer is no. About 900 mutual savings banks compete successfully today, while being subject to federal income tax and all the banking laws, including CRA. These mutual savings banks paid $700 million in federal taxes last year.
Mutual savings banks did not always pay taxes. Up until 1952, they enjoyed the same government subsidy as credit unions. But in that year, Congress determined that even though savings institutions provided many benefits to the community the industry had matured to the point where it was appropriate to give it the full responsibilities of their commercial bank brethren. Since then mutual savings banks have competed successfully, serving their communities and their customers well.
The option of converting to a mutual savings bank is available today for those credit unions that choose to go beyond the credit union mandate. These institutions can continue to serve their existing customers and seek new ones without sacrificing the mutual form of ownership, the good rates they may provide, or the good service they may offer, by becoming a mutual savings bank. In addition to a federal mutual savings bank or mutual S&L charter, 30 states also have some form of mutual charter. In fact, three credit unions have already taken this route, and several more are reportedly considering such action. Unfortunately, NCUA has put in place rules that make such a conversion unnecessarily complex and costly, thus discouraging credit unions from pursuing this option to better serve their customers.
Meeting CRA responsibilities should not be a problem for credit unions that have been true to the chartered mandate of serving people of small means. A state-wide CRA law for credit unions has been in effect in Massachusetts for many years. There is no reason to believe that such a program would not be workable and effective on a national scale.
Recently, credit union lobbyists have been arguing that not-for-profit cooperatives are automatically tax-exempt, that Subchapter S corporations' taxation is equivalent to credit union tax exemption, and that small businesses have too few members to form their own credit union. These arguments are simply not true. Let me address each briefly.
Credit union trade associations seem to believe that being a not-for-profit cooperative means automatically that you are entitled to a tax-exemption. This is simply not true. In fact, the general rule is that not-for-profit cooperatives that compete generally with other businesses are taxed. Credit unions have their own specific tax-exemption that says flatly that credit unions are not taxed no matter what they do. Basically, all we are asking is that the general tax principles applicable to not-for-profit cooperatives be applied to credit unions.
I have already commented on the specific change Congress made with respect to mutual savings banks. Similarly, Congress removed the tax-exemption for mutual insurance companies. Both these types of mutuals are functionally very similar to credit unions. Would any one agree that Prudential a mutual insurance company should be tax-exempt?
Credit union lobbyists are trying to equate Subchapter S taxation with the credit union tax exemption. This is certainly not true. Some small banks, like other small businesses, are taxed under Subchapter S of the code. But there is a big difference between being taxed under Subchapter S and being tax-exempt. To find out if the credit unions really believe their own argument, we would simply ask members of the Committee to ask credit unions if they would agree to have Subchapter S applied to them.
Credit unions are arguing that their bill is necessary to allow groups of less than 500 people access to credit unions. First, note that the banking industry's proposal would permit small groups to be linked, just as the credit unions' proposal would; it is just that under our proposal, large credit unions would have to pay taxes and be subject to CRA.
Second, it is ironic indeed that credit unions, which were created for the very purpose of serving such small groups in a single common bond as the Supreme Court just ruled without dissent are now arguing that they cannot serve these very groups without expanding into large institutions that look like banks.
Third, the 500-person threshold set up by NCUA for serving common bond is a bootstrapping operation. We believe the argument that a credit union cannot serve a single common bond of less than 500 would come as quite a surprise to the over 2,000 credit unions (roughly 20 percent of all credit unions) that currently have less than 500 members and are doing quite well.
Mr. Chairman, it is time for Congress to reconsider where the line should be drawn. These hearings begin this process. All taxpayers have a stake in this decision it is important thatgovernment subsidies be carefully targeted to those who truly need them. The government subsidy to credit unions already costs taxpayers plenty nearly $1 billion a year. If the credit union industry's bill is enacted, the last vestiges of the common bond will be swept away and the subsidy will grow, substantially increasing the cost to taxpayers.
We also believe that it is time to take a fresh look at the CRA treatment of credit unions. Credit unions which take federally insured, local deposits should be included under CRA. Credit unions offer the same services my bank offers, they are federally insured, and they compete for the same customers. There is no reason why they should not be held to the same high standards of community responsibility as my bank.
Finally, Mr. Chairman, I want to reiterate that this is not a time of crisis as the credit union
lobbyists would have you believe. Rather, there is time for Congress to consider the broader
issues of credit unions' special tax and regulatory treatment and to develop a response that would
be fair to credit unions and to the taxpaying public and taxpaying financial institutions. We stand
ready to work with you, Members of Congress, and representatives of the credit union industry to
achieve this goal.
1 The preamble of the Federal Credit Union Act is: "AN ACT 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."
2 Source: CUNA National Member Survey, 1996. The average household income of credit union members is also 18 percent above the national average household income of $36,740.
3 The limit on the size of a credit union business loan is 15 percent of capital or $75,000 whichever is greater. This means that small credit unions could have significant exposure to a single commercial borrower. Moreover, there is no limit on business loan concentration. This current practice would be codified by the House bill.
4 "The Future of Credit Unionism" by NCUA Chairman Norman E. D'Amours before the CUNA Governmental Affairs Conference, February 23, 1998.
5 Sarasota Herald Tribune, February 4, 1996.
6 This assumes a return on assets identical to the credit unions actual average performance over the last five years (1.24 percent) and an estimated effective tax rate of 24.6 percent (using OMB tax expenditure estimates for 1996).
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