As a credit union executive, I’m going to say something so blasphemous I’ll probably lose friends and colleagues in the credit union movement and have bankers cheering: Senator Orrin Hatch may be right.
On January 31st, Hatch (R-UT), the chairman of the Senate Committee on Finance, sent a letter to NCUA Chairman J. Mark McWatters expressing concern “…that the credit union industry is evolving in ways that take many credit unions further from their original tax-exempt purpose.”
Predictably, the trade associations countered with their well-practiced response to any hint of taxation talk by touting credit unions’ not-for-profit structure, and their mission to promote thrift and access to credit for members of modest means.
The problem with these well-worn arguments is they do not address the core issues raised by Senator Hatch, which are similar to my concerns. And while they remain reticent to admit it publicly, I have colleagues from other small credit unions who share my frustrations. 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.
It’s no secret that for decades the credit union movement has been shrinking by nearly one institution each day as the result of mergers. However, since H.R. 1151 was signed into law by President Clinton in 1998, 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 to smaller credit unions that have stayed true to their original fields of membership.
The overlap problem
NCUA is contributing to this decline with their laissez-faire approach to overlapping fields of membership. Several years ago, I spoke with an NCUA staffer about the requirements for overlapping fields of membership and was disheartened to learn most overlapping FOM requests are granted. Despite the instructions in the chartering and field-of-membership manual, NCUA gives more weight to whether or not the overlapping FOM will have a negative financial effect on the existing credit union serving an employer group. By “negative financial effect,” they mean any potential risk to the National Credit Union Share Insurance Fund. Unless the existing credit union can prove a negative financial effect, NCUA will generally grant the overlapping field of membership.
NCUA’s approach to overlapping fields of membership has never sat well with me. Why should the burden be put upon the existing credit union serving its members to prove an overlap would have a negative financial effect? How can a credit union even possibly quantify the negative financial effect a field of membership overlap would cause when the full impact takes years to occur? The most likely outcome from this scenario is the overlapped credit union will make a strategic decision to also expand its FOM in order to counter the loss of members from an overlap, which has led us to where we are today. As Senator Hatch stated in his letter, “…federal credit unions’ common bond requirement seems to have been significantly watered down.”
In 2016, along with CEOs from two other small and mid-size credit unions, I met with then-NCUA Board Member J. Mark McWatters in a private room at the Walter E. Washington Convention Center during the annual CUNA Governmental Affairs Conference to express our concerns about the predatory expansion of large credit unions into our existing fields of membership. Mr. McWatters, now the agency's chairman, listened to our concerns and asked me if I was seeking protectionism. I was taken aback by his question because my libertarian views detest the idea of protectionism.
I told Mr. WcWatters I wasn’t seeking protectionism for my field of membership; what I wanted was for the NCUA to shift the burden of proof from the existing credit union serving its members to the credit union requesting the overlap so there would be no negative financial impact to the existing credit union because of the overlap. The institution seeking an overlap should also have to prove, using a preponderance of evidence, that the existing CU was not able or willing to serve its existing employer group.
Given the widespread availability of multiple common bond and community-chartered credit unions, most consumers have access to a credit union. Therefore, NCUA granting overlapping fields of membership should be rare and not a streamlined process for FOM expansions, regardless of the size of the SEG being sought for multiple common bond credit unions.
No longer a movement, now an industry
The day before Senator Hatch’s released his letter, I was expressing my displeasure to the CEO of a $7 billion-asset multi-state and multiple common bond federally chartered credit union about his desire to expand his institution’s field of membership. This credit union wants to overlap the FOM of my credit union’s original sponsor and primary employer group, which happens to be educators and their students. This same executive told me a couple of years ago he felt his credit union was too small to survive in the long run when they were a mere $5 billion in assets. Which begs the question, survive against whom: banks, fintech or other credit unions? When does “large enough to survive” become too large to be considered a tax-exempt credit union, especially when they operate in the same manner as taxable banks?
The largest bank headquartered in my home state of Idaho holds $1.3 billion in assets, which is less than half the size of the largest credit union based here. This bank has never been in direct competition with my credit union for consumer loans or deposits, even though we have branches in the same cities. However, every day we compete vigorously with the aforementioned credit union for consumer deposits and loans from overlapping members. It’s also well known that this bank and credit union compete head-to-head with each other for commercial loan business.
Now, here is where it’s going to get ugly for me and where I lose friends. 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,” because the credit union movement doesn’t need them. We stopped being a movement and became an industry when H.R. 1151 was signed into law. The credit union trade associations who want to preserve the tax exemption for all of us must stop trotting out smaller CUs before members of Congress to “tell our story” – which is not the story of bank-like credit unions – when it’s clearly a disadvantage for smaller credit unions to support a tax exemption for bank-like credit unions.
I’m not convinced a credit union’s asset size should be the only determinant of whether or not that institution should receive a tax exemption, but it is a good starting point. Senator Hatch has hit upon something at least as important as asset size or types of services offered, and that is common bond. After all, there are still very large credit unions serving a tight common bond of members, and their taxation would serve no purpose because they have stayed true to their original fields of membership and are not a threat to other credit unions.
If taxation is in our future, then let it be with the large bank-like credit unions so the entire movement doesn’t suffer from the actions of a few.