WASHINGTON — For decades, credit unions' tax-exempt status has seemed sacrosanct.
But with the nation's largest corporate credit union needing help from the government, and the rest of the sector getting expanded deposit coverage, opponents of the tax exemption see an opportunity.
"It supports our arguments that credit unions have become so bank-like in their powers that they should be tax-paying institutions just like every other financial institution," said Camden Fine, the president and chief executive officer of the Independent Community Bankers of America.
Wayne Abernathy, the executive director of financial institutions policy and regulatory affairs at the American Bankers Association, agreed the need to rescue U.S. Central Federal Credit Union may revive the debate, "particularly if the assistance goes into taxpayer funds as opposed to the insurance fund."
Federal regulators said this week that the Lenexa, Kan., corportate credit union needs a $1 billion capital infusion to cover losses tied to its holdings of mortgage-backed securities. The National Credit Union Administration is to tap its $7 billion insurance fund for the aid and guarantee $80 billion of uninsured deposits that regular credit unions keep in accounts at their corporate counterparts.
The NCUA stressed that the bailout would be self-funding, with every credit union paying just over one-half of 1% of its total net worth to help finance the aid. Still, the deposit guarantee is backed by the full faith and credit of the federal government.
Banking industry sources said the developments hurt credit union arguments that they should not pay taxes.
"If you now start to have the United States government putting capital into it, you've changed the fundamental nature of the entity," said Oliver Ireland, a former Federal Reserve Board lawyer who is now a partner in Morrison & Foerster LLP. "I suppose Congress could come back and preserve their tax status, but you'd have a big fight about that. Banks would object."
Credit union advocates counter that the industry's tax-exempt status is unrelated to the aid plan. "Credit unions are tax-exempt because they are not-for-profit cooperatives," said Carrie Hunt, the director of regulatory affairs at the National Association of Federal Credit Unions.
U.S. Central announced a $1.1 billion fourth-quarter loss tied largely to a $1.2 billion other-than-temporary-impairment charge on its portfolio of residential mortgage-backed securities. In addition to its aid plan, NCUA issued an advance notice of proposed rulemaking calling for extensive changes in the structure of corporate credit unions. The proposal covers "membership structure, size, and type of services they offer," according to a copy of the notice.
NCUA Chairman Michael Fryzel said in an interview that the agency's moves are intended to "put some confidence back into the system."
Larry Fazio, the agency's deputy executive director, said Thursday that he thinks the agency has done enough. "Having said that," he added, "we are carefully evaluating the assets of all of the corporate credit unions, and if the situation dictates, down the road, we'll act to do what we need to do to stabilize the system."
But observers raised further concerns.
Mr. Abernathy said banks would not complain so long as the rescue is paid for by credit unions. But he added, "You pick up hints of: 'Well, maybe there needs to be a Treasury line,' or some kind of Treasury backstop. It points out an irony that you have institutions that have not paid any taxes that pride themselves on not paying any taxes that are asking for assistance from the taxpayer."
Still protesting could backfire, particularly since the government has invested about $350 billion in the industry.
"From the banks' standpoint," they "are getting capital" that "they are not paying for," said Gil Schwartz, a partner in the Washington law firm Schwartz & Ballen LLP. "Under the NCUA's program," credit unions "are paying premiums.
"If anything, the banks should lay low," he said.