NCUA to Sen. Hatch: CUs Would Need a Taxpayer Bailout, If Taxed

In a March 28 letter to Senator Hatch (R - UT), National Credit Union Administration (NCUA) Chairman McWatters wrote that that eliminating the credit union tax exemption without addressing the remaining regulatory differences between banks and credit unions “would almost certainly have a detrimental effect on the credit union system and increase losses to the Share Insurance Fund, which could ultimately fall to U.S. taxpayers.”

The letter was in response to Senator Hatch's January 31 letter expressing concerns that credit unions may be operating beyond their tax-exempt purpose.

According to McWatters' letter, NCUA's analysis found that "without eliminating the field of membership restrictions, member business lending restrictions, investment capital restrictions, investment authority restrictions, and other restrictions", the elimination of the tax exemption would almost certainly create safety and soundness issues.

McWatters also mentioned that if credit unions were taxed, they "would need an appropriate transition period to incorporate any such changes into their business model" and credit unions should have the option of "something akin to an S corporation election."

However, the letter does not include any details from the agency's analysis.

In response to questions regarding what data the agency has on rejected associational common bonds and community charters, NCUA wrote that it has denied or deferred less than 10 percent of applications for new associational common bonds since its updated associational common bond rule became effective in 2015. The agency stated that it has approved nearly 80 percent of its applications with another 10 percent of applications pending.

“Instead of outright denial, the NCUA typically defers action on requests the agency cannot approve and, to the extent reasonably possible, offers alternative solutions consistent with the FCUA and the agency’s regulatory framework,” McWatters noted.

In response to a question from Hatch about the proposed community charter expansions that NCUA rejects, McWatters said that “NCUA’s tracking system does not distinguish between denials based on the geographic area requested as opposed to other reasons, such as safety and soundness,” thus limiting the agency’s ability to discern where credit unions are pushing field of membership boundaries.

With regard to the disclosure of executive compensation, NCUA noted in 2010 it required corporate credit unions to disclose executive compensation. In 2011, NCUA finalized a regulation eliminating most golden-parachute arrangements for troubled credit unions.

Unfortunately, NCUA has not acted on a staff recommendation to require all federal credit unions to disclose executive compensation.

Read NCUA's letter to Senator Hatch.