Why we converted from a credit union to a bank

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At the community bank I lead in Washington State, we have one trait very few banks can claim: We used to be a credit union.

Why we converted is important for lawmakers and regulators in Washington to understand as they confront a wave of bank-buying by America’s largest and fastest-growing credit unions. These same credit unions enjoy a federal income tax exemption for reasons they mock by their behavior.

In 1989, I became president of a small federal credit union in Seattle, with $38 million in assets, founded to serve workers of a cooperative grocery wholesaler and their independent grocer clients. In subsequent years, we faced a dilemma: The “common bond” shared by our diminishing pool of members constrained our ability to serve them. By 2003, my board and I determined that we must convert into a bank if we were to grow.

While we gave up the federal income tax exemption, credit unions enjoy serving people of “small means” with a “common bond.” The change was a blessing.

We have grown to more than $700 million in assets while continuing to improve the lives of our customers and the towns and cities where we operate: also, where we pay taxes.

Unfortunately, a disturbing trend has emerged among America’s largest credit unions. Instead of looking at their own structures and deciding to abide by the rules and regulations that allow exemption from paying federal income taxes, these supposed not-for-profits are buying up banks at an alarming rate and taking them off the tax rolls.

Sixteen such deals were announced in 2019, up from seven in 2018 and three in 2017. Taxpayers didn’t get a say in these deals, but they unknowingly helped subsidize them. And the credit unions buying those banks will be able to grow well beyond their legitimate membership boundaries, while not paying taxes that would otherwise fund the nation’s schools, roads and infrastructure.

Unfortunately, it’s all about to get worse.

This week the government agency assigned to serve as the public’s watchdog over the industry, the National Credit Union Administration, is considering expanding the ability of credit unions to put outside capital on their balance sheets.

That means credit unions could move beyond the deposits of their members and tap for-profit investors, such as corporate debt markets, to expand into new and uncharted territory — without losing their tax-exempt status.

These nonprofits created with the intent of helping the poor and underserved risk becoming not just banks by another name, but banks without the regulations, restrictions, transparency or expertise to handle a massive influx of potentially risky debt.

Allowing the largest credit unions to use this new financial power to purchase even more banks will make them riskier, while reducing tax revenues from financial institutions. And all of this under the false premise that the old rules of governing credit unions should still apply.

When we converted to a bank, we never dreamed of a day when credit unions would gobble up banks; sponsor NFL teams; buy naming rights for NBA stadiums and college football bowl games; and pay their CEOs millions of dollars a year — all without paying a dime in federal income taxes.

Yet, I still believe we made the right call, in both the letter and the spirit of the law. I wish today’s credit union CEOs felt the same need to play by the rules.

Should the NCUA approve this proposal and do nothing to stop large credit unions from buying banks and shirking their tax responsibilities, then Congress should intervene. Lawmakers created credit unions in the first place, and they still have the power to return them to the legitimate purpose for which they were founded.

As a community banker who only asks to compete on a level playing field and is proud of the many ways our institution supports the communities we serve, I am watching closely and urge my fellow taxpayers to do the same.

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Community banking Consumer banking Federal credit unions Credit unions Federal Credit Union Act Law and regulation Laura Lee Stewart NCUA American Bankers Association Women in Banking