On behalf of the National Association of Federal Credit Unions (NAFCU), the only trade association exclusively representing the interests of our nation’s federally chartered credit unions, I write today to disarm another attack from a banking trade in their ongoing effort to distort the truth about credit unions.
As we have communicated to you before, the cumulative benefit credit unions provide the greater economy totals over $10 billion a year according to an independent study released by NAFCU last year. As the study also shows altering the tax status of credit unions would have a devastating impact, not only on credit union members across the country, but also on consumers and small businesses in general. Eliminating the credit union tax exemption would result in the loss of 150,000 jobs a year, a shrinking of the GDP and a net loss of revenue to the federal government.
Simply put, the tax exemption is an issue of survival for your credit unions. Despite what the bankers claim, there remain significant regulatory and statutory differences between not-for-profit member-owned credit unions and other types of financial institutions – including limits on who they can serve and their ability to raise capital. In other countries where the tax exemption has been eliminated for credit unions, the number of credit unions has declined dramatically. If the tax exemption was removed, many would convert to banks or just go away. Without credit unions, which serve to provide checks and balances in the marketplace, for-profit banks would likely increase rates and fees on consumers to enrich their shareholders at the public’s expense. Perhaps this is the ultimate goal of the bankers.
If credit unions, as banks claim, have such an extrodinary advantage, why aren't banks lining up to convert to credit unions? What the bankers won’t want to tell you is that nearly 1/3 of banks are Subchapter S corporations and pay no corporate income tax. Some estimates even put the value of their tax break as greater than the value of the credit union tax exemption.
It is true that Subchapter S banks pay other taxes, but so do credit unions and their nearly 96 million member-owners who pay personal income taxes on the dividends they get from their credit union. They also won’t tell you that credit unions actually pay many taxes such as payroll taxes, state and local taxes.
Another reason that banks may not want to convert to credit unions is that they have enjoyed their own taxpayer bailout, disguised as an effort to help small business – The Small Business Lending Fund (SBLF). A report released by the Special Inspector General for TARP this past April and subsequently reported in The Wall Street Journal, found that out of the 332 banks participating in the small business lending fund program run by the Treasury Department, 137 used more than half of about $4 billion disbursed by the program to help fund their exits from the Troubled Asset Relief Program. It was also found that a sizeable number of these banks didn’t increase lending at all. Christy Romero, special inspector general for TARP, said it best, stating, "Small-business loan levels by TARP banks in [the] Small Business Lending Fund came up short."
Those findings shouldn’t be surprising, as an October 20, 2011 Wall Street Journal article entitled "Tale of Two Loan Programs" that described how the ICBA sought this fund, had one community banker describe it by saying "It’s a bit of a shell game." While the banks are waiting for the next taxpayer giveaway, credit unions continue to do what they have always done – serve those within their field of membership – be it consumers or small businesses.
Finally, while the banks also want you to believe that credit unions threaten their ability to help create jobs and serve small business, this is simply untrue. While the bankers were playing this "shell game," credit unions were busy lending to small businesses. A 2011 study commissioned by the Small Business Administration’s (SBA) Office of Advocacy found that bank business lending was largely unaffected by changes in credit unions’ business lending, and credit unions’ business lending can actually help offset declines in bank business lending during a recession (James A. Wilcox, The Increasing Importance of Credit Unions in Small Business Lending, Small Business Research Summary, SBA Office of Advocacy, No. 387 (Sept. 2011)). The study shows that during the 2007-2010 financial crisis, while banks' small business lending decreased, credit union business lending increased in terms of the percentage of their assets both before and during the crisis.
While all financial institutions have grown since the passage of the Federal Credit Union Act in 1934, it should be noted that the credit union market share of household financial assets is roughly the same today as it was 30 years ago. The defining characteristics of credit unions remain unchanged today from when credit unions gained their tax exemption – they are not-for-profit cooperatives that serve a defined field of membership and cannot issue capital stock. These defining characteristics are the same for both the largest credit union and the smallest credit union.
If you have additional questions about the credit union tax exemption or other legislative issues impacting credit unions, please feel free to contact me at (703) 842-2836 or jpevo@nafcu.org.
Sincerely,
Jillian Pevo
Director of Legislative Affairs
National Association of Federal Credit Unions