A new policy by the National Credit Union Administration that makes it easier for groups to expand could open the industry to taxation, say industry observers - and some credit unions.
By opening their doors to more people, credit unions increasingly will resemble banks and lose the uniqueness that exempts them from taxation and banklike regulation.
"It's one small step from the ultimate acknowledgment that credit unions aren't as distinct as they used to be," said economist R. Dan Brumbaugh Jr. "It will increase pressure from other financial institutions to eliminate their special treatment."
Letters of Protest
Officials of some small credit unions protested the changes in comment letters to the agency. They said opening up customer bases would hurt them competitively and open the industry to taxation.
"We are losing our uniqueness by opening up the field of membership," said Janet Harris, president of Riverside Health System Employees Credit Union, a $4 million-asset institution in Newport News, Va. "An open field of membership makes you a bank."
The agency's policy, approved last week, makes it easier to expand in several ways.
* Federal credit unions can take in low-income groups, regardless of their location.
* Well-operated credit unions can immediately serve small groups within a 25-mile radius, without getting prior approval.
* Credit unions facing "distress" because of a downsizing sponsor can convert to a community charter and add occupational-and associational groups, regardless of location.
Agency Chairman Norman E. D'Amours said the changes should help credit unions with downsizing sponsors bring in new customers, and bring credit union services to more low-income people. He said the policy is conservative and adheres to the Federal Credit Union Act of 1934.
He added that it is the cooperative structure of credit unions- not limited customer-bases - that justifies the industry's regulatory status.
Wilfred Broxterman, president of $1.5 billion-asset Hughes Aircraft Employees Federal Credit Union, Manhattan Beach, Calif., said he was "elated" with the new policy.
"That flexibility has to be there," he said.
He said Hughes has been seeking new customer groups as its sponsor pares back.
The banking industry has long opposed credit union expansion, arguing that it undermines the common bond. If credit unions embrace more people, bankers say, they should pay taxes and comply with the Community Reinvestment Act.
The American Bankers Association has supported lawsuits by banks in several states over credit union expansion.
"The broader they expand, the more they look like banks," said Randy McFarlane, director of governmental relations for the Savings and Community Bankers of America.
The agency's new policy gives bankers more ammunition to lobby for credit union taxation, said Kenneth Guenther, executive vice president of the Independent Bankers Association of America.
The banking industry's chance to tax credit unions could come as soon as the next tax bill.
"It does run into the whole issue of the fact government needs revenue," Mr. Guenther said. "The banking industry is going to have to commit a lot of lobbying chips, but I think in the next Congress there will a more propitious climate" to get credit unions taxed.
The policy comes at a time when Congress is scrutinizing the industry and the regulator in the wake of U.S. Central Credit Union's $255 million investment in a troubled Spanish bank. The probe has widened its reach to many aspects of the industry, including its expansion.
"We're going to look at the actions they've taken to increase their tuff and whether it's a good idea for the agency to do it on its own without new legislation," said a House Banking Committee staff member.
House Banking Committee Chairman Henry B. Gonzalez said he plans to hold hearings on the industry this year.
Rep. Joseph P. Kennedy 2d will hold hearings over whether the industry should comply with CRA.
Edgar Callahan, former NCUA chairman and now president of San Francisco-based Patelco Credit Union, said the industry is safe.
As chairman in the early 1980s, Mr. Callahan relaxed the agency's interpretation of common bond. He said that for safety and soundness reasons credit unions must diversify their membership.
"The tax exemption has been under attack for more than 50 years and has managed to survive because of political clout," he said. "There are now more credit union members who vote than ever before. The argument that we're vulnerable fails to recognize that."
