The leader of a small Idaho credit union has found himself in agreement with U.S. Senate Finance Committee Chair Orrin Hatch, who has raised questions about whether large, bank-like credit unions have grown beyond the proper role of tax-exempt institutions.
As Finance chair, Hatch, R-Utah, is used to disagreements between banks and credit unions. But now he’s witnessing a new fight: small credit unions vs. big credit unions.
Hatch has raised questions about the lucrative federal tax exemption that large, bank-like credit unions enjoy (worth about $2.9 billion a year). Writing to both the National Credit Union Administration (NCUA) and the Internal Revenue Service (IRS), Hatch asked questions about the operations of the largest credit unions and whether they are operating within the scope of laws granting the tax exemption.
He said he is “concerned that the credit union industry is evolving in ways that take many credit unions further from their original tax-exempt purpose.” Many large credit unions, he said, “appear to operate in the same manner as taxable banks.” They are “now offering a variety of services that some argue are beyond the scope of their original mission.”
In his letters, Hatch noted that credit unions were originally granted their tax exemption “for the purpose of promoting thrift among members with a common bond,” especially serving people “of modest means” who were unable to obtain bank credit.
Hatch naturally received responses from the credit union industry arguing that even large credit unions deserve their tax-exempt status and are operating properly.
However, those arguments were dramatically undercut by Robert Taylor, the president & CEO of ISU Credit union in Pocatello, Idaho. Taylor wrote an opinion article in the Credit Union Journal supporting and illustrating Hatch’s concerns.
Taylor referred to Hatch’s letter to the NCUA and said he and colleagues from small credit unions are enormously concerned about the large credit unions that are expanding and competing with small credit unions and even absorbing them. He wrote, “The problem with our movement is most of us have been indoctrinated to believe our common enemy are bankers – with their constant thump of the taxation war drums – when in fact the real threat to our future lies within our own industry . . . I agree with Senator Hatch that many larger credit unions operate in the same manner as taxable banks, and I believe it’s time for them to convert to bank charters and be taxed like the ‘big boys’ . . .”
Taylor and many others in the financial services industry note that given the size and expansion of large credit unions, the “common bond” requirement is being violated. “. . . large, multiple common bond credit unions have continued to get larger by expanding their fields of membership, sometimes overlapping in predatory ways to the detriment of smaller credit unions that have stayed true to their original fields of membership,” Taylor said.
He noted that in Idaho, a $7 billion-asset credit union he competes with is much larger than the largest bank headquartered in Idaho, which has only $1.3 billion in assets. “Every day we compete with the aforementioned credit union for consumer deposits and loans from overlapping members.” This large credit union also competes with banks for commercial loans.
He said the largest credit unions should be taxed “so the entire (credit union) movement doesn’t suffer from the actions of a few.”
He said he knows his opinion about the large credit unions is “so blasphemous I’ll probably lose friends and colleagues in the credit union movement and have bankers cheering . . .”
I’ve been watching this issue for many years, since consulting with the banking industry back in the days of state legislative battles. This is the first time I’ve seen a small credit union take on the large CUs in such a direct manner.
Hatch spokesperson Matt Whitlock said Hatch will have “continued dialogue” on the credit union taxation issue. Hatch’s concern “revolves around whether some of the largest federal credit unions are evolving in ways counter to their intended tax-exempt purpose.” Appropriate follow-up is being assessed, Whitlock said.
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