Credit unions won't soon forget 2018 – because the banks won't let them

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Plenty happened in 2018 to make credit unions eager to ring in the New Year.

To be sure, there were some positives for the industry – continued membership growth, loans topping $1 trillion and reductions in the compliance burden.

But credit unions also faced some bruising threats, including a court decision that limited field of membership rules and a significant push to increase taxes on credit unions in one Midwestern state. Banking trade groups could continue hammering those issues in 2019 after seeing some success this year.

“We’re in a period where the movement has been consistently gaining in financial strength and its overall impact in the economy, so … in some ways success begets resistance,” said Matt Cropp, a Vermont-based cooperative activist and credit union historian. “The more successful we are, the more we should expect the rhetoric and challenges to be pushed our way. In some ways I’m a little fatalistic about that – we’re doing well and this is a sign of us doing well.”

Winning playbook?

Credit unions made it through the 2017 tax reform with their tax status untouched, but it didn’t take long for the issue to come up again. Sen. Orrin Hatch, R-Utah, sent a letter to the National Credit Union Administration in January questioning whether the industry had outgrown its exemption. While that effort didn’t ultimately go anywhere – and was seen by some as simply a retiring senator's experiment with touching a third rail – it set a tone for the remainder of the year.

Not long after the Hatch letter surfaced, lawmakers in Iowa took up legislation that would have increased the taxes that the state’s credit unions pay. The bill passed in the Iowa senate before failing in the house.

While credit unions won that fight, bankers considered it at least a partial victory because they were able to advance the issue that far. It could also provide a roadmap on how bankers would tackle this issue in other states, said John McKechnie, a credit union consultant and former staffer at both NCUA and the Credit Union National Association.

“[Bankers] lost miserably in Washington – they didn’t have a single lawmaker offer even an amendment in committee to tax credit unions – and yet in some state legislatures they seem to be feeling like they made some headway,” McKechnie said.

But the credit union industry took notes as well during the Iowa fight. Credit unions and their allies mobilized a massive grassroots campaign to protect the tax exemption there, culminating in a rally that drew more than 700 supporters to the state capital, including Jim Nussle, president and CEO of CUNA, an Iowa native and former congressman.

Ryan Donovan, chief advocacy officer for CUNA, said he expects similar challenges to the tax-exempt status of credit unions to be bought up in other states, but the credit union trade groups would be prepared with an equally strong response.

“I do think we’ll see some of that replicated,” said Donovan. “I would anticipate state banking trades in other states will continue the more than 80-year effort to change the credit union tax status.”

That view, however, isn’t universally shared. Geoff Bacino, a credit union consultant and former NCUA board member, believes that the lawmakers in Iowa who pushed the legislation were unique because of their ties to the banking industry.

“They’re biased. And because of that, you’re not going to see that in a lot of other states,” Bacino said. “Credit unions do have to be aware of that … but in this case the deck was stacked against them from the way this was set up in terms of the folks pushing for it.”

Others have noted that while the fight in Iowa and its potential for replication bears watching, attempts to tax credit unions are nothing new. During the financial crisis, banks were too focused on improving their own financial conditions to worry about credit unions, said Carrie Hunt, EVP and general counsel at the National Association of Federally-Insured Credit Unions.

But now that the banking industry is thriving once again, bankers could return to pushing for changes to the credit union tax exemption. The fight in Iowa is just one example of that, Hunt said.

The good news for CUs is that while taxation is a hot button issue for trade associations, it’s “a non-issue for a policy standpoint,” she added.

“There are always these issues that get fought at the state level, but that doesn’t mean they’re going to spread to other states,” Hunt said. “I do expect the issue of the credit union tax exemption to be relevant this next year, but it always is. We have to stay vigilant and continue to fight back.”

FOM still unsettled

Field of membership remains the other major mixed bag for CUs in 2018. A federal judge struck down two of the four provisions to the rule after the American Bankers Association sued. Judge Dabney Friedrich found that automatically qualifying a combined statistical area with fewer 2.5 million people to be a local community and a provision that increases the population limit for rural districts to 1 million people exceeded the NCUA’s authority.

NCUA has filed an appeal, which was subsequently cross appealed by ABA. Credit union trade groups last week put forth an amicus brief supporting the agency, but the case won’t be resolved until sometime in 2019 – and it could be costly.

Not only does NCUA face the risk that an appeals court will uphold the judge’s original ruling, there are also concerns that all four counts of the FOM rule could be struck down.

“I acknowledge the need to stand up and fight for our side on the two counts we lost on – especially on that core-based statistical area, which I think the court made an unreasonable ruling on,” McKechnie said. “But the truth is, we could lose all of it. It’s not likely, I guess, but I’m not a great guesser.”

Regardless of what happens, FOM can be seen as an instance where the banking lobby has shifted its tactics away from taxation to areas where they believe their arguments might be more effective, observed Bacino,

“You bang your head against a wall for so long, you hope at some point somebody realizes the wall isn’t going away,” he said. “I think that’s what the banks have done.”

And even if NCUA does carry the day, suggested Cropp, it’s unlikely this will be the last time field of membership faces scrutiny.

“As long as credit unions continue to get bigger and seek larger footprints ... the target will keep getting bigger on [the FOM] front,” he said.

CEOs sleeping fine

The potential lingering effects of 2018 don’t appear to be weighing on credit union executives. Several CEOs who spoke to Credit Union Journal indicated that while things like FOM and tax battles are on their radar, they're much more concerned with the daily running of their institutions and serving members.

“I’m more concerned that credit unions are vanishing and have been vanishing for decades, and that there are only going to be a handful of small and super-large ones left,” said Mike Lord, president of State Employees’ Credit Union in Raleigh, N.C. “That kind of makes all the other conversations rather moot to my way of thinking.”

Similarly, Brandon Michaels, CEO of JSC Federal Credit Union in Houston and a member of the CUNA CEO Council’s executive committee, said he doesn’t lay awake at night worrying about banker tactics or the FOM appeal. Instead, he is haunted by data security and cybersecurity issues and competing with fintechs.

“There are so many bigger fish to fry in how we compete in the future than worrying about what the bankers association is going to do,” Michaels said. “I can’t control them. I can only control what I can control.”

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Disputes and judgments Tax exemptions Field of membership Law and regulation