Billion-Dollar Question

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The powerful banking lobby made its long-awaited best pitch last week to congressional tax-writers to consider repeal of the credit union tax exemption.

The bankers pressed their case during the first congressional hearings into the credit union exemption in 70 years that large, diversified credit unions have abandoned their mission of serving the underserved and now resemble "tax-free banks," and as such should pay the same federal income taxes as banks.

"Congress has repeatedly recognized that there are limits to tax exemptions and has acted to eliminate them for entities that stray from their intended public policy goals. Credit unions that have abandoned their core mission should be taxed or required to convert to bank charters," Jeff Plagge, president of First National Bank of Waverly (Iowa), who was representing the American Bankers Association, told members of the tax-writing House Ways and Means Committee.

The bankers were joined by a panel of non-partisan critics of credit unions, including the National Community Reinvestment Coalition-and a surprise witness, former NCUA Chairman Norman D'Amours-who called on Congress to enact a Community Reinvestment Act-like law for credit unions to require them to serve the underserved in exchange for continuation of the tax exemption.

Bill Thomas, the California Republican who chairs the tax-writing panel, insisted last week's hearing was part of an overall review of the validity of tax exemptions for more than 1.4-million organizations, including credit unions, hospitals, religious and charitable groups under section 501(C) of the Internal Revenue Code. "We're just asking questions, why else would you hold hearings?" Thomas told The Credit Union Journal during a brief break in the session. He insisted he has no plans to introduce legislation to tax credit unions.

But the hearings come at a perilous time for credit unions, as Congress is desperately searching under every rock and tax exemption to help deal with huge federal budget deficits. D'Amours, who has been absent from credit unions since he left NCUA six years ago, testified as he has before several banking groups in recent months that he was still perturbed that shortly after his departure from the agency, credit unions overturned his initiative to require service to the underserved-a CRA-like rule.

"Whatever actions might be taken to refocus the credit union system, on its traditional core value, I am absolutely certain of one reality that I hope can adequately convey to this committee and to the Congress," said the former credit union regulator. "That reality is that any effective effort to get credit unions as a whole to do a better job serving low-income households will not come from within the credit union power structure as it exists today. If this Congress doesn't demand it, it won't happen."

The National Community Reinvestment Coalition, a group that has issued two separate reports criticizing credit unions' service to lower income neighborhoods, joined D'Amours call. "NCRC concludes that federal CRA must be expanded to large, mainstream credit unions," said John Taylor, executive director of the group.

But Navy FCU President Cutler Dawson insisted the world's largest credit union is no different than the world's smallest, when it comes to adhering to its mission to serve the underserved. "Because of their cooperative not-for-profit structure, credit union members find that product offerings remain widely available to them irrespective of economic or stock market conditions," said Dawson, whose credit union pledged earlier in the week to provide $125 million in subsidized mortgages under CUNA's new affordable mortgage program.

Harriet May, president of Government Employees CU, El Paso, Texas, said no matter the size or ability of the credit union, the tax exemption continues to flow back to a broad base of Americans. "Credit unions employ the tax benefit by passing it through to their members, primarily lower rates on loans, lower fees and higher returns on savings," said May. "The nation's 87 million credit union members benefit by $6.3 billion a year as a result of paying fewer and lower fees and lower loan rates and earning higher rates on deposits compared to banking institutions. This $6.3 billion is not retained by just a few large stockholders. Instead it is distributed across all 87 million members based on their usage of the credit union."

May also pointed out the indirect benefits of the credit union tax exemption. "There are also significant financial benefits to consumers that are not members of credit unions," she said. "Recent studies have shown that bank customers benefit in aggregate by $4.3 billion a year as a result of lower loan rates and higher deposit rates at banks as a result of the existence of credit unions. In total, then bank customers and credit union members benefit to the tune of at least $10.6 billion a year merely because credit unions exist."

Dawson was testifying on behalf of NAFCU and May for CUNA.

Last week's hearing followed a fevered political lobby by both the credit unions and banks. CUNA started the week introducing its $1-billion subsidized housing program then distributed endorsements of the tax exemption from a number of consumer groups.

The American Bankers Association filed suit in two separate courts two days before the hearings claiming that large diversified credit unions have illegally expanded in Utah and Pennsylvania (see related story, page 1).

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