Monday, September 13, 2010

Round Up the Usual Suspects

Like Captain Renault in Casablanca the credit union industry’s first response to proposals to eliminate their tax exempt status is to “round up the usual suspects” and the usual suspects are bankers or their trade association. They cannot believe that policymakers can independently arrive at a conclusion that banks and credit unions with similar characteristics should be treated equally for tax purposes.

The President’s Economic Recovery Advisory Board (PERAB) listed eliminating the credit union tax exemption as one of the many tax-reform options.

“Unlike other financial institutions like banks and thrifts, credit unions do not pay corporate taxes on their income. This puts them at a competitive advantage relative to other financial institutions for tax reasons,” the report said. “Eliminating this exemption would raise revenue and level the playing field, but would clearly raise taxes on credit unions.”

This reform would ensure that businesses with similar characteristics are treated equally.

However, the editor of Credit Union Times weighed in saying that “[i]t was highly disappointing–and frankly disrespectful–to see the bankers’ shtick that taxing credit unions would "level the playing field" in the report. Not only is it obvious the bankers likely weighed in on this report, but it also shows a complete lack of understanding of the other restrictions credit unions operate under.”

There was a similar response from the credit union industry when in 2008 Treasury released its Blueprint for a Modernized Financial Regulatory Structure.

Treasury wrote: "Some credit unions have arguably moved away from their original mission of making credit available to people of small means, and in many cases they provide services which are difficult to distinguish from other depository institutions. While credit union size is not a perfect proxy for this trend, the increasing share of credit union assets held by larger credit unions indicates movement toward a broader focus."

Believing that the Blueprint was part of a nefarious plot by the banking industry to bring about the demise of the credit union industry, CUNA filed a request under the Freedom of Information Act (FOIA) for all material from the banking industry associated with the Blueprint.

In filing the FOIA request, CUNA wrote: “The general public and nearly 90 million credit union members have a right to know if special interests have attempted to influence Treasury policy, as expressed in the Blueprint, in order to eliminate not-for-profit cooperative financial institutions.”

However, more than two years later, I have not heard a peep from CUNA about its FOIA request and what they found.


  1. Keith, If you would, I'd love to see you expand on what you mean by "banks and credit unions with similar characteristics." Credit unions have limitations on member business loans, field of membership, the availability of outside capital, prepayment penalties, director compensation, interest rates on loans, and a limitation on the powers (and therefore the products and services) that they can offer. So again, I've very interested in exactly what you mean when you say "similar."

    In addition, I've always enjoyed the principle of Occam's Razor, which generally holds that when looking at an issue, the simplest explanation usually is the right one. For me, this entire issue boils down into one simple question: If credit unions have such an unfair advantage with their tax exemption, why hasn't some percentage of the bank and thrift industry taken advantage of the "massive" tax loophole by converting their charter into that of a credit union? Until I see that trend begin, I'll take claims of "unfair advantage" with a grain of salt.

    - Anthony Demangone
    NAFCU Director of Regulatory Compliance

  2. Keith.... It's our structure that has kept us from being taxed. Always has and always will. Only the uninformed make the request and it dies as soon as the facts come to light.

    As for CUNA.... do you really expect them to get back to you? You're not a credit union and not a paying member of CUNA... I and my members are glad they filed...

    Bankers continue to amaze me... they have 95% of the pie... are more profitable now than ever before, are given 8 years to comply with the cause of the GREAT RECESSION, and they ONLY and CONSTANTLY pick on cu's tax situation? Don't they have a life?

    If bankers did a better job of serving consumers, there wouldn't be any cu's.. 90+ Million folks out there like us better... but then we aren't sources of Energy Loans, 3rd World loans, big business loans... all the "stuff" banks like(d).

  3. To Everything Credit Union:

    You may believe your tax exemption arises from your structure. However, there are other democratically controlled cooperatives that are taxed. In fact, there is a whole section of the tax code dedicated to the taxation of cooperatives.

    Also, I did not expect CUNA to get back to me. But if there was a smoking gun, I expected they would have announced it.

  4. To Anthony Demangone:

    You asked the question about why banks don't convert to CUs, if they believe the tax exemption is such a big advantage.

    We have seen a couple instances where a mutual bank has converted to a credit union -- ESL in Rochester (NY) comes to mind.

    However, vast majority of banks are stock organizations. It is very difficult, if not impossible, for a stock entity to become a mutual.

    Moreover, if a stock bank was to become a mutual, the first step would include compensating the shareholders of the bank. This would eliminate most if not all the bank's capital. It is highly unlikely that bank regulators would view this favorably.

    Whie I recognize there are some limits associated with the credit union charter, some of these limitations have been vastly eroded. For example, some credit unions have virtually unlimited field of memberships. All you need to to do is pay a nominal sum to some association and you automatically qualify for membership. See Pentagon FCU and Digital FCU.

    Also, with regard to member business loans, there are substantial loopholes associated with the cap. Loans under $50,000 don't count, secured by 1-4 primary residence don't count, or guaranteed by state or federal agency don't count against the aggregate limit.

  5. If you're referring to the Farmer Cooperatives, they are taxed on the net with lots of gyrations involved.

    BTW... what is the effective tax rate paid by banks on their gross income? How much are they really paying?

  6. The effective income tax rate for banks can be computed from data provided by FDIC. In 2007, the effective income tax rate was 31.04 percent. The 2008 and 2009 effective income tax rates were 30.1 percent and 26.24 percent, respectively.

  7. Even if one were to agree with your premise, why would a credit union want a half-loaf of operating powers for 100% taxation? If you and your employer are serious, then why not introduce and support legal changes to make a mutual BANK an option? That way credit unions could become a for-profit institution with FULL banking powers for FULL taxation. Could it be that community bankers would be even more scared of the competition and focus on the consumer?

  8. To Anonymous:

    Our position is that credit unions should have a predictable path based upon the 1998 law to become a mutual savings bank. Legislation was introduced in 2005 that would have done this and the House Financial Srvices Committee held a hearing on Charter Choice, but the bill was never brought up for avote. NCUA and the credit union lobby opposed the bill.

  9. I asked for what was paid: "his tax season will be kind to Bank of America and Wells Fargo: It appears that neither bank will have to pay federal income taxes for 2009.

    Bank of America probably won't pay federal taxes because it lost money in the U.S. for the year. Wells Fargo was profitable, but can write down its tax bill because of losses at Wachovia, which it rescued from a near collapse. [...]

    "Oh, yeah, this happens all the time," said Robert Willens, an expert on tax accounting who runs a New York firm with the same name. "Especially now, with companies suffering such severe losses."

    Bob McIntyre, at Citizens for Tax Justice, said he opposes the government giving corporations such a break. [...]

    Wells Fargo was profitable in 2009, with $8 billion in earnings applicable to common shareholders. But its tax payments were reduced because of Wachovia's losses."

    I believe the proposed tax "suggestion" by banks was on gross income - No?

    So, again --- Who much in taxes were paid by banks on how much gross income?

    Are we somehow to believe that if cu's were taxed, that they wouldn't go through the same gymnastics banks do to lower the actual taxes paid? We don't have to play the games because we aren't taxed.

    If you want cu's to "share your pain".. I'll send some examiners over your way. Then we'll all be miserable!



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