Credit unions' opposition to a Treasury Department proposal to eliminate the National Credit Union Administration goes beyond their reluctance to share a regulator with banks and thrifts, their bitter rivals.
They say the plan to combine banks, thrifts, and credit unions under a single regulator could strip many large credit unions of their federal tax exemption, which they argue could ultimately wipe out their industry.
Observers say that is unlikely to happen anytime soon. The credit union lobby is powerful, and most banking policy experts say the proposal unveiled as part of Treasury Secretary Henry Paulson's blueprint for revamping financial regulation is a long shot at best.
Still, the fact that the proposal is floating around at all has created buzz about what credit unions might look like under a so-called prudential regulator.
Eric Richard, general counsel for the Credit Union National Association, said that, as he interprets the plan, credit unions would have to demonstrate that they are meeting the needs of the underserved to retain their tax exemption.
The proposal says an institution would be eligible for the tax exemption only if it elected "community status."
The final determination could be based on "an unconditional maximum asset size test" and perhaps other criteria, such as the institution's restricting field of membership to employees of a particular company, having a defined geographic focus, or its presence in underserved areas. The Treasury did not specify this asset-size threshold.
Wayne Abernathy, executive vice president for financial institution policy at the American Bankers Association, said the Treasury proposal reaffirms what bankers have been saying for years: large credit unions with broad fields of membership should not be exempt from paying taxes. "The purpose of a credit union is to serve the underserved in a local community," Mr. Abernathy said. "That is the job of credit unions today; it is just not enforced. The NCUA has allowed them to stray."
Since they would be sharing the same regulator and charter, banks would theoretically be eligible to apply for the community status too, though Mr. Abernathy said most would not since banks do not want to narrow their focus.
The Treasury proposal seems to take the banking industry's view.
It says that the federal credit union charter was established to benefit people of small means, yet "some credit unions have arguably moved away from their original mission … and in many cases they provide services which are difficult to distinguish from other depository institutions."
The report says that the number of large credit unions, those whose assets top $100 million, has been on the rise since 2000, indicating a "movement toward a broader focus."
The community status under the plan differs greatly from the community charter many large credit unions now use.
The community charter allows credit unions to extend membership to those who live, work, or worship in a defined geographic area. But bankers often complain that the rule is interpreted too loosely and that the areas designated can be far too large.
The Treasury proposal's definition of community status is narrower, with a size limit being just one of several criteria.
Mr. Richard said imposing an asset cap to qualify for the tax exemption would force many credit unions to convert to banks. Though they could likely retain their cooperative structure — under which they would operate as member-owned nonprofit institutions with volunteer boards — without the exemption there would not be much motivation to do so, he said. "It would be the end of the credit union movement as we know it," Mr. Richard said. "And it would be a major disadvantage to consumers."
Credit union advocates say the blueprint bends too far to the banking industry's position and that they suspect banks had too much influence in its drafting. On Thursday, Mr. Richard submitted a Freedom of Information Act request to the Treasury, seeking any correspondence between the department and banking trade groups such as the ABA and the Independent Community Bankers of America during the development of the document.
CUNA chairman Tom Dorety, the president of the $6 billion-asset Suncoast Schools Credit Union in Tampa, said the Treasury proposal would "eviscerate" the credit union industry. He agreed that credit unions would have little incentive to remain credit unions if they were taxed.
Mr. Dorety also took issue with the contention credit unions should only serve people of modest means. He said Suncoast needs to serve higher-income customers in areas such as North Naples, Fla., in order to open branches in poorer communities such as Immokalee. Credit unions "were never chartered to serve poor people," Mr. Dorety said in an interview last week. "You can't just serve people of modest means and do a good job."
Beyond the issue of the tax-exemption, credit unions have other reasons for not wanting to be regulated by the same entity as banks. The major concern, Mr. Richard said, is that because credit unions hold far fewer assets than banks, regulators would pay less attention to them.
Credit unions were regulated by a unit within the Federal Deposit Insurance Corp. during the 1940s and "couldn't get the time of day," Mr. Richard said. "I think it would be very similar today."
Dan Berger, senior vice president of government affairs with the National Association of Federal Credit Unions, agreed.
"An independent regulator is much more effective," he said. "Bank examiners don't understand the uniqueness of credit unions."
Credit unions have a strong ally in Rep. Barney Frank, who chairs the House Financial Services Committee. At a hearing last week on an unrelated topic, the Massachusetts Democrat told a credit union official not to worry about the proposal "to abolish" credit unions. "We would never do that," Rep. Frank said. "We'll ignore that part of the Paulson plan."
