Will Congress do anything about credit unions buying banks?
WASHINGTON — A recent uptick in credit unions buying community banks is triggering alarm from some members of Congress.
Credit unions have announced 16 deals this year to buy banks, doubling their 2018 total. Earlier this month the $747 million-asset Apollo Bank in Miami became the largest bank to announce it was being sold to a credit union.
While the banking lobby says the merger activity is another sign that credit unions — and their tax-exempt status — need to be reined in, legislative reform is unlikely. Still, a number of House Republicans are taking notice. One particular concern raised on Capitol Hill is whether some banks are striking the deals to benefit from credit union acquirers' tax status.
"There are some people starting to think outside the box, because they are looking at this as a tax loophole," Rep. Blaine Luetkemeyer, R-Mo., said at a House Financial Services Committee hearing on Dec. 5.
The banking industry, which argues that credit unions do not act like the nonprofit entities that should be limited by their tax-exempt status, is bristling at the merger activity. In addition to buying banks, credit unions finance high-end development projects and affix their names to high-profile sporting events as sponsors.
“Something has changed in the longstanding dynamic between banks and credit unions,” said Aaron Klein, economic studies policy director at the Brookings Institution. “A small number of credit unions are pursuing and achieving universal membership models in which they act like banks. These small number of credit unions are growing rapidly and spending money lavishly.”
While Congress is unlikely to do anything to rein in credit unions in the short term, Klein added, he said he is not surprised lawmakers have taken an interest in the issue.
"In an election year, absent of a crisis in the credit union space … the answer is no," he said regarding whether Congress will pass legislation in response to the merger deals. "Are there a growing number of people, myself included, ringing a bell that a very small number of credit unions are engaging in what has historically led to problematic outcomes? Yes. Is Congress paying attention to that? Yes. … Usually legislation is a lagging indicator of problems, not a predictor.”
A senior Republican staffer for the House Financial Services Committee said members are still in a "monitoring" stage in response to credit unions' bank acquisitions.
“I don’t think it’s hit that level yet" of legislation, the staffers said. "I think members are discussing it because they continue to hear from their banking trades back in their states that this is a concern."
But it is unclear whether inquiries by members will go further than that.
A former senior Democratic Senate staffer said lawmakers tend to avoid taking sides in banks' disputes with credit unions, which ultimately benefits the credit unions.
“They are not looking to pick winners and losers when it comes to credit unions and banks,” the former staffer said. “Credit union members are kind of willing to weigh in with members of Congress. Bank customers don’t tend to do that. … You hear from literally tens of thousands of credit union members. The grassroots sort of politics of this has always benefited the credit unions.”
At the House hearing, Luetkemeyer asked Treasury Secretary Steven Mnuchin whether credit union deals for community banks raise tax-evasion questions.
"It is not something that has caught my attention because fortunately it is on still a small scale," Mnuchin said.
Still, the issue came up at a House Financial Services Committee hearing the day before with leaders from the Federal Deposit Insurance Corp., Federal Reserve Board and National Credit Union Administration.
“I'm fearful of a war beginning to break out” between banks and credit unions, Luetkemeyer said at the earlier hearing.
At the same hearing, Rep. Steve Stivers, R-Ohio, suggested that some credit unions should be subjected to the Community Reinvestment Act.
“Should we have a consolidated approach in interagency review of CRA, to make sure that it works, for all institutions?” Stivers asked the heads of the FDIC and NCUA.
In response to questioning by Rep. Bill Huizenga, R-Mich., FDIC Chair Jelena McWilliams was sympathetic to community banks' concerns that the credit union deals exacerbate fears about consolidation.
“There is a great consolidation in the community banking sector and I am concerned about the communities that are losing a banking presence,” McWilliams said. “Congress set up credit unions in a certain way. They are not subject to taxation. And they also don’t have CRA requirements. … The playing field may not be exactly level.”
But when asked whether he saw a problem with the spike in credit unions buying banks, NCUA Chairman Rodney Hood downplayed any concerns.
“These are transactions that must be approved by both the FDIC and the NCUA,” Hood said.
Apollo Bank agreed to be sold to Suncoast Credit Union in Tampa, Fla., a deal announced Dec. 3. MidFlorida Credit Union in Lakeland announced in May that it was buying the $730 million-asset Community Bank & Trust of Florida in Ocala.
Banking industry representatives say the recent spike in credit union purchases of banks, as well as several high-profile financing deals pursued by credit unions, buttress their arguments that federal policy around credit unions needs an overhaul.
“There hasn’t been a hearing on the credit union tax exemption in 15 years,” said Paul Merski, group executive vice president for congressional relations and strategy at the Independent Community Bankers of America. “Given the latest development of credit unions buying banks and using their tax exemption … it’s well overdue that Congress at a minimum has a hearing on the credit union tax exemption and what that tax exemption is being used for."
Rob Nichols, the president and CEO of the American Bankers Association, said the acquisitions shine a bright light on credit union expansion for lawmakers who may be unfamiliar with that growth.
“We welcome the serious questions coming from Congress about the activities of large credit unions, which are increasingly operating just like banks without having to meet bank-like rules or pay any federal taxes," he said in a statement to American Banker.
"In particular, the recent spree of large credit unions buying up banks is a tipping point for a lot of policymakers who weren’t totally aware of what has been happening with large credit unions in this country. Once they start looking under the hood as to what’s driving that growth and the risk to taxpayers, we think those serious questions will only increase. “
But credit unions are standing firm that the uptick in community bank deals is not a sign of anything wrong with their regulatory framework.
Ryan Donovan, chief advocacy officer for the Credit Union National Association, said he thinks bankers’ complaints about credit unions acquiring banks is overblown.
“The latest sort of banker outrage surrounds the credit unions acquisitions of banks,” Donovan said. “There have been 2,000 bank mergers since 2012 and 30 credit union acquisitions of banks since 2012. … This seems to really have gotten the banking trades’ nose out of joint on Capitol Hill.”
He added that credit unions are still “subject to safety and soundness regulations,” noting that the shared credit union insurance fund “has never been insolvent,” while the bank insurance fund went insolvent “in the [1980s] and then again in the 2000s.”
“I think it’s a little rich when the banking community complains that credit unions are unsafe or unsound,” Donovan said.
And Dan Berger, president and CEO of the National Association of Federally-Insured Credit Unions, argued that credit unions’ acquisitions of banks have benefited the communities they are intended to serve.
“While there has been a small uptick in bank-led, credit union-bank mergers, they are a win-win for communities, as they help keep branches open, lending decisions local, and ensure that employees retain jobs and the property tax base remains,” Berger said in a statement to American Banker. “Data shows that the average community bank sale to a credit union is less profitable than a sale to another bank. The fact that some profit-seeking bank boards are choosing to sell to credit unions is something that banks should discuss within themselves.”