Thursday, August 5, 2010

Should Credit Unions Pay to Play?

Here is an idea that deserves debate by banks and credit unions alike.

Is it time to reconsider the tax exemption for credit unions that want to act like banks?

There are some credit unions that are seeking powers that go beyond the current charter for credit unions. These institutions want to do more business lending, to have access to alternative capital, and to engage in other activities that are currently not permissible or limited by the credit union charter.

However, these expanded powers move a credit union further away from its original purpose and the rational for the tax subsidy.

If a credit union wants greater ability to make business loans – in other words, exceed the aggregate member business loan cap of 12.25 percent – or the ability to raise alternative capital, the trade-off is that a credit union voluntarily surrenders its tax exemption. On the other hand, if a credit union is content with the limitations of its charter, its tax exempt status would be preserved.

Pay to play is a win for traditional credit unions, because they keep their tax exemption. It is a win for credit unions that want greater authority, because it creates a pathway to engage in those powers.

I would be interested in hearing what credit union leaders think.


  1. Your suggestion might be worthy on discussion if it's foundational premise were accurate ie. "these expanded powers move a credit union further away from its original purpose and the rationale for the tax subsidy". However, I don't believe it is accurate. I won't bother to comment on your use of the term "tax subsidy" but I do take issue with your characterization of expanded business lending authority as being "further from our original purpose". Prior to the passage of HR1151 in 1998 there were NO limits to a credit union's authority to make business loans to their members. Therefore, any "expansion" of our authority is nothing more than a partial restoration of what we already had.

  2. Keith, Our tax status is a reflection of our corporate structure, not the book of business we carry. Because we are member-owned and not a for-profit being held by investors trying to maximize their ROI, we should remain as such. If the CU model does not fit some of our brethren, they should return 100% of the capital that was built up over the years to their members and then take the new business plan down the road with the charter of their choice. The members should benefit from a change in charter, not the CEO and a few board members... but that's a different story.

  3. What you are suggesting sounds a bit like Wendell "Bucky" Sebastian's idea for a new financial cooperative. Excerpted from

    One thing most credit union leaders seem to agree on is that to thrive, the industry must find new powers through legislation and regulation. Bucky Sebastian, president/CEO of $2 billion asset GTE Federal Credit Union, Tampa, Fla., champions a completely new type of charter for credit unions.

    Dubbed a financial services cooperative, this concept would solve many concerns consumers have about the current banking system, he explains, and revolutionize consumer and small-business finance.

    “The name financial services cooperative is much more representative of what credit unions do than our current name,” Sebastian says. “The organizational framework would remain unchanged, but as a financial services cooperative, the organization would have new rules to live by, new authority, and new responsibilities.”

    Among Sebastian’s bold and controversial proposals for financial services cooperatives: taxation at the corporate tax rate on earnings in excess of operating expenses, dividends, and reserves beyond 12% of their total assets.

    “Under that formula, few if any credit unions would have a tax liability, but we would eliminate the banking industry’s argument of favorable treatment for our cooperatives,” he says.

    Financial services cooperatives also would voluntarily subject themselves to the provisions of the Community Reinvestment Act, he says. It would be one more regulatory hoop to jump through, but like the taxation issue, it would take a club out of the hands of the banking lobby and showcase the many fine contributions credit unions already make to their communities.

  4. To Anonymous:

    In 1998, Congress put in place the aggregate member business loan cap, because they wanted credit unions to be consumer lenders, not commercial lenders. Senator Kerry of Massachusetts stated from the Senate floor in 1998 that credit unions “were never intended to be simply alternative, tax-exempt commercial banks.”

    At that time, Congress recognized that a few credit unions were either chartered for the purpose of making business loans or had a history of primarily making business loans and grandfathered those few credit unions.

  5. Keith, Didn't know a few CUs were grandfathered for MBLs. Are they still around? How can I find their names?

  6. Keith, credit unions ARE “cooperative banks”. Therefore, there is nothing wrong with acting like a bank. You might need a more comprehensive education.

    Also, you may be well served to be careful quoting Congressional actions of the late 1990s. That period includes the stupid passage of Gramm-Leach-Bliley, or S.900; The Financial Services Modernization Act of 1999. It restored powers stripped from commercial banks after they caused the worst economic depression in the history of the United States. The results? Within 10 years of Congress passing GLB commercial banks once-again economically molested our nation, causing the second-worst economic collapse ever.

    Credit unions haven’t lost their way. The recently passed financial reform bill, however, proves big banks are hopelessly out of control. Now there are numerous big banks seeking hold onto powers that were clearly abused, and go beyond the past established banking charter boundaries set to protect the American public.

    You, and the ABA need a more up-to-date narrative. Pay to play? Hahaha. The financial world has changed. Those, like evolving credit unions, which are fit for survival are thriving. 2010 commercial bank failures are outpacing 2009—despite banks becoming the most tax-subsidized segment of American business that could be possibly envisioned.


  7. Are you talking about leveling the playing field, or just rearranging the chairs on the field? While CUs have the tax exempt status to which you refer, you fail to mention that in many ways CUs are much more highly regulated and restricted than banks. Give CUs the reduced regulation that banks enjoy all across the board, and the tax status will be a non-issue.

    I could not help but notice your suggestion was only to take away a CU advantage. You did not ever say how it would benefit consumers. One must assume that you did not mention consumers because 1) you don't care and 2) beating up on someone else is a great way to take the spotlight off the shortcomings of banks.

    Your suggestions reflect a real bias that benefits neither banks, CUs, or consumers. But it could hurt CUs and consumers. Have you ever heard the admonition in medicine that the physician should 'first do no harm?'

  8. Part of the discussion should also be about S Corporation banks. These types of banks also perform commercial (business) lending.

    Currently there are 2,440+ S Corporation banks that combined have assets of over $500 billion and net income of over $1.3 billion.

    For the reader who is unfamiliar with S Corporations, these are institutions that do not pay federal income tax as an entity, but distribute a portion of their net income as divided earnings to shareholders (of which there can be no more than 75) who, in turn, report that on their individual income taxes.

    Credit unions, as non-profits, perform a similar action. Their net income is distributed to their shareholders (members - of which there can be hundreds of thousands) who, in turn, report that on their individual income taxes.

  9. There is big difference between the credit union tax exemption and the tax treatment of Subchapter S businesses. The shareholders of Subchapter S banks pay the tax on the profits of the business whether or not the profits are distributed. Credit union members only pay the tax on income that is paid out in dividends. The members do not pay taxes on the retained earnings.

    That is a meaningful difference.



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