Mr. Chairman and Members of the Committee, my name is Neil Mahoney. I am Chairman and
Chief Executive Officer of Woronoco Savings Bank, a mutual institution in Westfield,
Massachusetts. Woronoco Savings Bank was established 126 years ago and has $340 million in
I also am Chairman of America's Community Bankers. ACB is the national trade association for
2,000 savings and community financial institutions and related business firms. The industry has
more than $1 trillion in assets, 253,000 employees and 14,500 offices. ACB members have
diverse business strategies based on consumer financial services, housing finance and community
ACB appreciates the opportunity to testify on the credit union industry, particularly in light of
the haste with which the House has considered H.R. 1151. Within the context of the recent
Supreme Court decision and the credit union industry's ongoing evolution, a serious and
comprehensive policy discussion regarding the expansion of the common bond and continued
exemption of credit unions from federal taxation and the Community Reinvestment Act is
particularly appropriate. While most credit unions continue to operate in a manner that justifies
special regulatory and tax treatment, many credit unions have outgrown these privileges.
Congress should use this opportunity to look at the remaining differences between credit unions
and other insured depositories to determine whether, and under what circumstances, certain
advantages and differentiated regulatory and tax treatment are still justified.
The banking industry coalition, which includes ACB, the American Bankers Association, the Independent Bankers Association of America, the American League of Financial Institutions, the National Bankers Association, and the Association of Military Bankers, have jointly offered a legislative proposal that presents a reasonable and rational compromise to the problem caused by the unlimited expansion of a certain portion of the credit union industry. The three key points of this proposal are:
No current credit union customer should lose his/her relationship with his/her credit union.
The vast majority of credit unions (including community development credit unions) should
continue to operate as they are currently and should maintain their current regulatory treatment
and tax-exempt status.
Other bank-like credit unions should be able to continue their activities including expansion through new common bonds provided that they become subject to tax rules generally applied to cooperatives that are engaged in a business, community reinvestment requirements, and tightened safety-and-soundness regulations.
ACB recognizes the importance of credit unions to the diversity of our financial services landscape. However, credit unions which serve broadly defined geography-based, community-chartered or multiple-employer groups should be treated like any other banking institution and subject to federal taxation and the requirements of the Community Reinvestment Act. In addition, ACB supports:
amending the Federal Credit Union Act to prevent these institutions from continuing to be
insulated from state taxation by federal law; and
allowing individual credit unions to convert to a mutual bank or thrift charter without undue interference from the National Credit Union Administration. ACB strongly supports freedom of charter choice.
The traditional credit union continues to play an important role in today's financial services
market. The regulatory and tax treatment accorded these institutions is justified where credit
unions meet the special financial services needs of well-defined, generally smaller groups or
communities. It also is reasonable to expect that some credit unions that started out in this role
might grow or seek to expand beyond their original role. Product deregulation has allowed many
of today's credit unions to offer essentially the same services of any bank of comparable size.
According to the General Accounting Office (GAO), credit unions' powers since the late 1970s
have expanded significantly, giving them the ability to offer the same range of consumer lending
products, accounts and services as banks and savings institutions [GAO, Credit Unions: Reforms
for Ensuring Future Soundness, 1991].
The key concern is whether all credit unions are to remain distinct from other depository
institutions. Credit unions were granted special benefits, such as being exempt from federal
taxes, because they served individuals joined together by a single common bond. However,
when a credit union begins to engage in the same types of activities as a bank, serving and
competing for the same customers as a bank, then Congress should seek to assure that such credit
unions have similar obligations as other insured depository competitors.
ACB opposes legislation which would allow a single credit union to encompass ever-expanding,
multiple-employer groups without tax and regulatory treatment that is equivalent to banks. The
term "multiple common bond" must not become a euphemism for "no common bond". ACB
would, however, enthusiastically welcome larger credit unions into full citizenship in the
financial community, with all the rights, privileges and obligations that such status entails.
In 1934, Congress created a federal charter for credit unions to serve people of modest means as
voluntary associations of closely-linked individuals with a well-defined common bond, such as
being employees of the same company. Credit unions have been exempt from paying taxes and
meeting the regulatory responsibilities that apply to banks, such as those of the Community
Since then, however, the credit union industry has exploded into a $425 billion plus business, in
a number of cases providing diversified financial services to a wide array of customers. Since
1982, the National Credit Union Administration, the regulator for all federal credit unions and
insurer for most credit unions, whether state or federally chartered, has permitted natural-person
credit unions to expand almost without limit by adding "select employee groups" to their original
membership. In addition, a geography-based community charter has been developed. This
charter permits a credit union to accept as members all persons who live, work, worship, or go to
school in a specified geographic area. They often enroll individuals who do not share any other
common bond, offer product lines virtually identical to banks, operate from large publicly
accessible facilities, maintain extensive branch networks, and advertise in public media.
The largest and most aggressive credit unions are nothing more than financial services
conglomerates that are hundreds of millions and even billions of dollars in size. Ironically, it is
these institutions that receive most of the credit union industry's annual tax subsidy of one
billion dollars. That tax break is increasing, and within seven years, is likely to reach to three
billion dollars a year.
Credit union advocates would have you believe that they "deserve" this tax subsidy because they
are "special". They point to the cooperative nature of credit unions the fact that they have no
shareholders that they have a "social mission" to serve their members of "modest means." But
mutual savings institutions, like credit unions, were also created to serve people of modest
means. Perhaps the only real distinction is that mutual banks pay taxes and are subject to strict
requirements on community reinvestment, while credit unions do not. If a credit union operates
just like a mutual savings bank or any other bank, then it should be treated just the same.
Today, the more than 800 mutual savings institutions across the country are healthy, profitable,
tax-paying citizens of the financial services industry. They are cooperative in nature and
dedicated to serving their communities, and they will pay more than $600 million in taxes in
1997. The 11,500 credit unions in this country will not pay a penny in federal taxes.
The issue before the Committee today is simple: "Should the American taxpayer continue to
subsidize credit unions that have abandoned their original mission?" Let me cite an example.
The Citizens Equity Federal Credit Union (CEFCU) in Peoria, Illinois, now wants to be a
commercial lender. John Siefken, president and CEO of the $1.5 billion institution, said, "We
can handle a lot of the business loan needs of small- and medium-sized companies in this area.
We expect to be number one in business lending, as we are in most everything else we do. . .
$17 million is our [loan to one borrower business] limit today." [Interview in Inter-Business
Issues, December 1996]
Permitting credit unions to serve multiple unaffiliated groups has an enormous competitive
impact on other providers of financial services, such as banks and saving associations. In a
common example, an ACB member CEO received a solicitation from a large credit union several
towns away inviting him to transfer his home equity line to a credit union. Why did the credit
union issue this invitation? Simply because the CEO is on a mailing list of financially desirable
prospects. The ACB member's interest was sparked, and he called for an application. There
were no problems or questions about common bond or affinity of interest. It is banking business,
pure and simple.
Another ACB member wrote that near Appleton, Wisconsin, the expansion and improvement of
the Ridgeway Country Club is being funded by the Community First Credit Union. A tax-exempt organization is utilizing its government subsidy for the benefit of an exclusive and
affluent group. I may be wrong, but I do not believe that is what anyone member of Congress
contemplated when providing tax advantages to credit unions.
As we all know, the U.S. Supreme Court upheld the banking industry's contention that multi-employer credit unions violate the statutory common bond requirements. The Court held that the
National Credit Union Administration's 1982 policy permitting multi-employer credit unions
violated the requirement for a single occupational common bond. Writing for the majority,
Justice Clarence Thomas said NCUA's interpretation of the statute "is contrary to the
unambiguously expressed intent of Congress that the same common bond of occupation must
unite each member of an occupationally defined federal credit union." The ruling, however, does
not affect the majority of credit unions that always have been in compliance with the law.
In response to the decision, ACB, the ABA, and the IBAA have stated publicly that they will not
petition the district court to cause existing credit union customers to lose their accounts or credit
union access. Instead, the groups will seek a prohibition only against further, tax-subsidized
expansion of existing multi-employer credit unions beyond their permitted common bond.
Consistent with this approach, ACB supports legislation to grandfather any current credit union
If the common bond requirement were to be eliminated, as the credit union industry is proposing,
then the primary distinction separating credit unions from other depository institutions will, in
effect, have been obliterated. This would open the floodgates to unbridled expansion of credit
unions and their tax subsidy, allowing virtually anyone to join any credit union.
The legislative proposal developed by the banking trade groups to address credit union issues is
aimed at a relatively small percentage of bank-like credit unions. Most credit unions do not
resemble the AT&T Family Credit Union a huge financial organization with 150,000
customers and reportedly 560 subgroups. ACB sincerely seeks to work with Congress to assure
only that those credit unions abandoning their original mission will have the same obligation as
banks and savings institutions to pay taxes and to play by the same rules.
Large or small, mutual banks and credit unions are similarly organized. As financial
cooperatives they are controlled by their members. Their members are stakeholders in their
institutions. The major source of funding for both credit unions and mutual savings institutions
is retail deposits. Both traditionally serve smaller retail savers and over 95 percent of their
depositors have balances under $100,000. This core deposit base of stable money represents the
saver who is looking toward the future and building for a better life for his or her family. Credit
unions and mutual savings institutions each should recycle a high percentage of deposits by
lending in the local community.
Everything earned, after taxes, goes back into the institution and to its customers. The way credit
unions operate where income earned from borrowers is returned to savers after expenses and
required allocations to reserves is no different in substance from that of a mutually organized
savings and loan association or a mutual savings bank, except for the tax subsidy. Even a mutual
life insurance company has a great deal in common with credit unions, but they too pay taxes.
Mutual savings institutions in many ways were the forbearers of credit unions. Both were
founded along the same principles by individuals, for the collective good of themselves and
their neighbors, who likewise lacked the financial wherewithal required to gain access to the
commercial banking system of that time. Like credit unions, mutual savings institutions were
created by a banding together of like-minded individuals striving to meet a perceived community
The first mutual savings institution, the Provident Institution for Savings, was established in
Boston over 160 years ago. Provident had one clear goal: to encourage thrift among low- and
middle-income persons. In fact, its founders explicitly dedicated the institution to providing a
"means of contributing to the welfare of the working classes," remarkably similar to the purpose
subsequently expressed in the 1934 Federal Credit Union Act: to serve "people of small means."
Like credit unions, one of the reasons for the popularity of the new savings institutions was their
ease of use workers could deposit as little as five cents or a dollar and could withdraw their
monies as needed. Despite the many similarities between mutual savings institutions and credit
unions, there is now a distinct difference: mutual savings institutions, unlike credit unions, pay
Why? Because in 1952 Congress determined that although savings institutions provided many
benefits to the community, the savings industry had matured to the point that a tax exemption
was no longer warranted. As a result, savings institutions lost their tax exemption in 1952, but
remained in mutual form. Mutual institutions prospered, even after losing their tax subsidy.
Today, mutual savings institutions are taxed in exactly the same way as other savings institutions
and banks. Notably, among insured depository institutions, only credit unions remain untaxed.
The taxation of the mutual savings industry did not bring about its demise, nor would it unduly
hamper bank-like credit unions. Arguably, taxation brought about the more rapid economic
maturation of the savings industry, compelling it to operate more efficiently and compete without
the benefit of a government subsidy. While the majority of credit unions still fulfill their original
mission and deserve a continued tax subsidy, the large, mature ,bank-like credit unions surely do
Today's mutual savings institutions are vibrant contributors to the economy, paying their fair
share, no longer dependent on a government subsidized tax exemption. Why can't bank-like
credit unions do the same?
Previous administrations, representing both political parties, have suggested removing the tax
subsidy for bank-like credit unions. In 1978, the Carter Administration proposed that the tax-exempt status of credit unions be repealed in order to establish parity between credit unions and
savings institutions. The administration argued that the relaxation of rules regarding the
common bond, the expansion of credit union powers, and the rising median income of credit
union members indicated that credit unions were no longer serving only low-income workers
who had been excluded from banking services elsewhere.
In 1984, a Department of the Treasury report to the President included a proposal to repeal the
tax exemption of credit unions and tax them on the same basis as other thrift institutions.
President Reagan's comprehensive proposal to Congress for tax reform (The President's
Proposals to the Congress for Fairness, Growth and Simplicity, May 1985) would have
eliminated the tax exemption for credit unions with total assets of $5 million or more.
There is no longer a valid reason to continue the tax subsidy of those credit unions that compete
head-to-head with community banks. The tax subsidy of bank-like credit unions is not just
unfair to other depository institutions, it is unfair to all taxpayers who must pay more to make up
for this subsidy. It is an unfairness exacerbated by the fact that, according to several surveys,
credit union customers, on average, earn more than the rest of the population. It is difficult to
justify having all taxpayers subsidize financial services for an income group whose members are
more affluent than the average citizen.
Continued tax breaks are justified for those credit unions maintaining a "true" common bond.
But at some point, large credit unions that draw from a wide geographic area and sell every
financial product imaginable should face the same tax requirements as apply to banks and
In Massachusetts, the controversy over credit union expansion has been exacerbated by the fact that the state's general laws do not provide a clear statutory definition of what constitutes a common bond. Consequently, some state-chartered credit unions have abandoned the basic characteristic of the credit union concept: common loyalties and mutual interests. State chartered credit unions have been permitted to solicit members within wide geographic boundaries:
Geographic boundaries for community credit unions should not be so meaningless as to
encompass virtually entire states or multiple counties. A community credit union might, more
appropriately, encompass an area in which residents routinely interact, share related employment,
interests and activities, and otherwise maintain a well-understood sense of cohesion or sense of
If it looks like a bank, advertises like a bank, acts like a bank and competes with a bank, is it a bank? For years, credit unions have been saying, "No, we're clearly not banks." But a growing number of credit unions, by their own words and deeds, have moved into the mainstream of banking. These credit unions offer a full range of services, and often blanket whole communities with advertisements for all types of financial services. Here are a few examples:
Much of this advertising for loans and products does not indicate that credit union membership is
required. In many instances, the membership standards are so minimal that it is no restriction at
all. If these credit unions are so interested in identifying themselves as full-service banking
institutions, they should be equally prepared to have their tax subsidy ended and to comply with
Community Reinvestment Act requirements and other regulations, just as other insured
depositories do. Aggressive credit unions, banks in all but name, also are using their tax subsidy
in a way not intended by Congress, to siphon business away from tax-paying banks. As a result,
public resources that could be used to meet real community and economic needs are flowing to
these credit unions perfectly able, but simply unwilling, to pay their fair share.
Massachusetts has had a state CRA law since 1982. It uses an essentially identical rating system as the federal law. The state banking department evaluates community chartered credit unions as it does banks. For employee-based credit unions, examiners check for a fair distribution of services among customers according to income level instead of just where they live. Listen to the words of two credit union executives:
"We're trying to reach out. The Community Reinvestment Act requires us to seek out the credit needs in the marketplace we serve, and the marketplace we serve is Berkshire County." [James Lynch, president, Greylock Credit Union (MA), American Banker, August 26, 1994]
"When you think about it, credit unions were formed to help people in need. Credit unions ought to find it simple to meet CRA requirements." [Joseph Barbato, president, Millbury Credit Union (MA), American Banker, June 3, 1994]
Historical experience with state-chartered credit unions suggests that a properly crafted CRA
regulation for credit unions will not impede their operations. Since 1984, the Massachusetts
credit union industry has grown by 145 percent, roughly four times the growth experienced by
the state's federal tax-paying cooperative banks.
It is equally important to note that, based on state CRA examinations conducted from January
1994 to February 1996, banks in Massachusetts do a significantly better job than credit unions in
meeting the credit needs of their communities. One quarter of the banks examined received an
outstanding CRA rating compared to just three percent of the credit unions. Conversely, only
two percent of banks received a less than satisfactory rating compared to 12 percent of the credit
These results are related to data released under the Home Mortgage Disclosure Act for the year ending December 31, 1995, which reveals that African-Americans and Hispanics in Massachusetts are significantly less likely to apply for a home purchase loan at a credit union than they are at a bank, and are more likely to be denied such a loan by a credit union.
ACB strongly believes that the Community Reinvestment Act should be applied to all
geography-based or community chartered credit unions and to credit unions serving multiple
employer groups. It is in these "come-one, come-all" credit unions, where the common bond has
been severely, if not totally, diluted, that the application of CRA is needed to ensure that all
segments of the community are being served. There is no other way for these geography-based
credit unions to demonstrate that their lending programs benefit all segments of their local
communities. Credit unions should be required to reach out and serve all members of the
communities they serve, including low- and moderate-income customers.
When Congress adopted CRA in 1977, it exempted credit unions from the requirements for a
simple reason credit unions were small institutions with a small amount of assets serving a
small number of customers. At that time, they had significant field of membership restrictions in
place. Today, with those restrictions removed, credit unions that serve a broad customer base
should obviously come under some form of CRA review.
Credit unions say federal CRA rules should not be applied to them because of their membership
requirement. Credit unions can offer loans only to their members. While we appreciate that
sentiment, it presupposes that, because a bank can offer financial services to every individual in a
community, each member of the community automatically is a customer of the bank.
Community credit unions and community banks are no different in their ability to reach out to
their communities for customers. Yet the credit unions argue that they cannot be required to
reach out to that same community for borrowers of all types and income levels. If banks could
use this logic, then could we argue that banks should only be required to make loans to
individuals who are its depositors? That has not been a persuasive argument for banks, and it
should not be persuasive for community credit unions.
Credit unions also say they should not be involved in CRA because they already serve the
"common man." One must then ask, "If credit unions portray themselves as the great defender of
the common man, why are they so loathe to comply with CRA?" Perhaps credit unions are
concerned that a different self-image will be revealed.
The GAO concluded in 1991 that "there is no evidence that today's credit union members are for the most part of small means." [GAO, Credit Unions: Reforms for Ensuring Future Soundness, 1991]. Corporate welfare for credit unions such as the federal tax subsidy and CRA exemption perversely benefits those with higher incomes at the expense of those with lower incomes.
ACB strongly supports freedom of charter choice. Bank-like credit unions should pay taxes, but
also should be free to convert to mutual bank or savings association charter without undue
interference from the National Credit Union Administration. Unfortunately, credit unions
wishing to convert to a noncredit union status currently face severe roadblocks. Over the past
several years, the procedural requirements have become more onerous and do not reflect the
corporate governance provisions that are applicable to other financial institutions or to companies
that are subject to the federal securities laws. The federal bank regulators generally do not
impede conversions to another corporate form of the institutions they regulate. For example, the
OTS does not impose requirements or restrictions on savings associations that apply to convert to
a national or state bank.
While other bank regulators have clear and rational conversion guidelines, the NCUA has gone
out of its way to ensure that any credit union considering abandoning the flock must do so at its
peril. With each conversion over the last three years, the NCUA has raised the bar, to make it
more difficult for the next brave soul. The regulation that was effective during the AWANE
conversion in 1995 required that a majority of 20 percent of the members vote affirmatively for
the conversion, the current requirement for recently converted BUCS Federal Credit Union was a
50 percent plus one of the entire membership with every "non-vote" counting as a "no vote".
To date, four credit unions have chosen to switch to a savings bank charter to take advantage of
additional or different lines of business. A number of others have pending applications. The first
two credit unions to convert Lusitania FCU and AWANE CU cited membership-driven
reasons for converting rather than "field of membership" issues. Lusitania FCU was faced with
great membership demand for residential and commercial real estate loans, and AWANE CU
cited the need to serve the needs of small business owners in multiple states with business and
real estate loans. In both cases, a savings bank charter provided flexibility with regulators who
are experienced with this mix of business.
In June 1997, a Wisconsin credit union began the process of converting to a state bank charter. However, the credit union failed to obtain the 50% voting return by a small margin, although those voting overwhelmingly approved the transaction. Nevertheless, NCUA refused to allow more time for voting, despite the fact that the NCUA had previously authorized a provision in the disclosure document for an adjournment (time extension). These adverse regulatory practices should be ended.
ACB supports the Treasury Department's recommendations for more regulation of larger credit
unions. In particular, ACB endorses Treasury's recommendation that larger credit unions have
specific risk-based capital requirements and annual audits by outside public accountants.
Treasury's recommendations also make it clear that credit union regulation should be
strengthened to meet the uniform standard of supervision and regulation currently applied to all
other federally insured financial institutions. ACB endorses Treasury's recommendation that
would utilize "prompt correction action" as an early warning system to identify problems at
ACB also believes that the Treasury report should have renewed a 1991 recommendation by the General Accounting Office to separate NCUA as the regulator of credit unions from the National Credit Union Share Insurance Fund.
The credit union industry also is allowed to double count insurance premiums paid to the
National Credit Union Share Insurance Fund. Credit unions still count these amounts as assets at
the same time that the NCUSIF counts them as part of the insurance fund. If these premiums
truly are assets for the credit union deposit insurance fund, how can they also be assets for the
individual credit unions? This is double counting: it raises safety and soundness concerns and
blurs a clear understanding of the capital position of both the industry and the insurance fund.
Banks and savings institutions pay deposit insurance premiums based on a specific percentage of
their total domestic deposits. Each bank or saving institution treats the premiums as an operating
expense, not as an asset, in their financial statements, and therefore does not double count.
The credit union industry's accounting methods are genuine cause for concern. The General
Accounting Office has recommended that Congress require credit unions to expense the one
percent deposit insurance premium over a reasonable period of time, to be determined by the
NCUA. The NCUA should require credit unions to exclude these amounts from both assets and
net worth when assessing capital adequacy. This would have the effect of excluding those
dollars from credit union capital adequacy measures.
The process of expensing premiums should start now with the bank-like credit unions, at a time when neither the industry nor NCUSIF is under stress, and when favorable industry capitalization and earnings would make this change relatively easy for most credit unions to absorb.
In order to protect depositors, federally insured credit unions should also be required to use licensed accountants to perform external audits. Currently, the Federal Credit Union Act does not require insured federal or state credit unions to prepare financial statements in accordance with generally accepted accounting principles or to have an independent audit performed by an independent licensed accountant. Also, the FCUA does not require credit unions to prepare certifications of the institution's compliance with laws and regulations.
ACB strongly recommends that the Committee amend the Federal Credit Union Act to allow states to make their own decisions regarding state taxation. Unlike credit unions, banks and savings institutions pay state income taxes, state sales taxes, and even taxes on hotel rooms. Eliminating this provision of the law will allow states to impose taxes where that decision should be a state prerogative, and would be a significant step toward having all financial institutions playing by the same rules. This is a matter wholly within the purview of banking law, not the federal tax law.
The House credit union bill, H.R. 1151, is a real disappointment to those who believe that conglomerate credit unions have matured to the point where they should assume the responsibilities of full-fledged members of the financial community. The bill:
On the separate provisions requiring the Federal Reserve System to pay interest on the sterile reserves banks, thrifts and credit unions hold at Federal Reserve Banks, H.R. 1151 does not include the other equally important part of the proposal that would benefit smaller institutions by allowing them to pay interest on business demand deposits. These related policy issues are properly linked in S. 1405, introduced by Senators Richard Shelby (R-AL) and Connie Mack (R-FL).
ACB does not believe in more laws, more regulations, or more controls, and certainly does not
believe in more taxes. But, we believe in playing by the same rules.
Bank-like credit unions are worthy competitors that offer beneficial services to the public.
However, their managers should have the confidence to operate without undeserved, special
Bank-like credit unions seem unwilling to accept a CRA commitment to make our communities
better. Perhaps worse, they are robbing the taxpayer to pass on benefits to members that are
better off than the average American. Congress and the voters, when they realize the truth of the
matter, should not permit either situation to continue.
America's Community Bankers stands ready to assist in any way possible to address these issues.
I will be happy to answer any questions you may have.
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