Wednesday, February 8, 2012

Inconvenient Truth

Congress in 1998 reaffirmed that the credit union tax exemption is not only tied to their structure, but also tied to a mission of meeting the the financial needs of consumers, especially those of modest means.

Congress found:

"Credit unions, unlike many other participants in the financial services market, are exempt from Federal and most State taxes because they are member-owned, democratically operated, not-for-profit organizations generally managed by volunteer boards of directors and because they have the specified mission of meeting the credit and savings needs of consumers, especially persons of modest means."(emphasis added)

But the credit union lobby finds this linkage between their tax exemption and having a mission to serve people of modest means as a major inconvenience.

Many credit unions and their trade associations keep trying to distance themselves from this truth.

The Credit Union National Association (CUNA) regularly points out that credit unions are tax exempt because they are member-owned, democratically operated, not-for-profit organizations generally managed by volunteer boards of directors, but you will rarely hear CUNA mention the second condition for the tax exemption -- serving consumers, especially people of modest means.

Since the tax exemption is tied to the mission of serving people of modest means, credit unions should demonstrate whether they are fulfilling this mission. Unfortunately, no one knows how credit unions are doing in serving people of modest means; because they are not required to measure their performance.

If you do not measure, you cannot know whether you are accomplishing this mission requirement.

But any attempt to measure credit union service to people of modest means is met with hostility by the credit union industry.

I suspect that the reason the credit union industry is unwilling to collect this information on who credit unions serve is that they don't want to face the inconvenient truth, as the Treasury Department recognized in 2008, that "[s]ome credit unions have arguably moved away from their original mission of making credit available to people of small means." And if these credit unions are no longer fulfilling their mission, this raises the thorny question -- why are they still tax exempt?


  1. Keith -
    Quite true. Credit Unions are not for profit and as such hold a tax exempt status. I would like to observe with the NCUA imposition of continuing assessments this not for profit tax exempt status is getting very expensive to maintain. And we can continue to look forward to more NCUA assessments. With the increasing costs of these assessments we can no longer maintain our focus on the little people of modest means. When the assessments were modest this was never an issue. Now in this new normal period of assessments that border on criminal extortion we can no longer profitably pimp the folks of modest means to pay the Note. I hope this helps to explain things. Maybe the ABA can pass a collection plate on behalf of its credit union colleagues at the next extravagant ABA convention. I would love to attend but have this assessment to pay and it's not in the budget to do both.

  2. Keith, When I list my reasons for opposition or affirmation of a point, I usually put them in order of magnitude. What Congress stated in 1998 was a "comment". The Act of 1935 still stands unchanged. In fact, the CRA was formed because banks walked away from communities of need. That act was not applied to credit unions, because we do in fact, serve all members, even those of modest means. We are open to everyone within our FOM regardless of their financial status. What bank can say that? Lastly, there is the specific definition of Community Development Credit Union (of which my cu happens to be so designated). In addition to serving the members of our cu, we actually state our dedication to improving our community. Sir, your thorny question has been answered by our actions.... What say the banks in response? If it weren't for CRA compliance, where are they in the community? It seems Congress has it right as to who should be taxed and who shouldn't.

  3. Greg, perfect repsonse. great logic. you're right and the US Treasury is wrong. What's more, the vast majority of large asset CU business is with "modest means" folks.
    Heck, every CU I know laughs at the idea, they know better...but you seem to know their business better than them.
    and, of course, you're perfectly correct when you say banks arent involved in the "communities"...the 95% of us deposits that banks have are just all the rich folks. here is a suggestion for you. ask cuna to make it official and scale down to size and be the association and lobbyist for the CDCU's and smaller cu's that are still in the mission of the original charter. your fight is with that, not banks.

  4. Keith,
    I agree that credit unions do have a social mission to serve people of modest means and I believe that most of us are doing just that. However, measuring something that isn't clearly defined is almost impossible. So, we all get to apply our own definition. Mine calls of our credit union to focus on serving the middle 75%-80% of consumers using the theory that the bottom 10%-15% are un/underemployed and we are not able or expected to take care of them and the top 5%-10% can go anywhere and get anything they want from financial service providors. We design products and services to serve everyone else and if the top 10% want to use them, great. Measuring that would still be difficult and to what end? Small means/modest means, it is all in the eyes of the beholder and from my vantage point, we are serving our members as congress intended.



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