The American Bankers Association, the lobbying group that represents America’s banking industry, has recently launched an ad campaign across Washington D.C. aimed directly at the nation’s credit unions. The print version of the campaign is to the point, reading simply:
“Today credit unions are a $1 trillion industry that pays no income tax. That’s nearly $2 BILLION every year that could help shrink the federal deficit. Now, credit unions want even more perks. It’s time to end credit unions’ indefensible and outdated special treatment. Enough is enough.”
I think it’s worth noting the irony in such a campaign, given that the for-profit banking sector has recently benefitted from unprecedented amounts of government support. Then again, it shouldn’t come as a surprise to find lobbying groups seeking advantages for its members — it’s kind of their job. (Also it should be remembered that the ABA represents banks of every type and size, not just those that have benefitted from TARP and implicit guarantees.)
But what exactly is the ABA’s problem with credit unions? Earlier this month, bipartisan legislation was introduced in the House of Representatives that would increase the limit on the amount credit unions can lend to their small business members. This is an area where community banks compete directly with credit unions, so it’s understandable that the bank lobby would take umbrage at any effort to allow credit unions to compete more for that business.
And it’s not difficult to understand the banks’ argument, either. After all, credit unions are exempt from corporate income tax, a policy that puts them at a distinct advantage because credit unions can undercut taxed banks on the prices of their loans and other services.
So who’s right here? Should credit unions be able to increase the amount of business loans they issue? Or should we keep that restriction — and, for that matter, get rid of the credit union tax exemption altogether?
Credit unions have been exempt from paying income tax since 1916, when the income tax was first instituted, because they are, “organized and operated for mutual purposes and without profit.” Credit unions were also given this advantage because, like Grameen Banks, they were often the sole source of financing for disadvantaged communities whose members had few assets and no way to prove their creditworthiness.
This is the reason that credit union membership has traditionally been restricted to groups that had a single “common bond” — to members of local labor unions, for example, or specific ethnic communities. These common bond requirements were actually used as substitutes for collateral or other credit risk mitigation efforts. Joining a credit union owned by people who already knew you well meant you could more easily prove your creditworthiness. And borrowing from members of your immediate community meant it was more likely you’d pay back the loan.
But accessing banking services is generally much easier for many Americans, and over time the common bond restriction has been eased by Congress. Many credit unions still require members to belong to a certain community, but others do not. As a result, many credit unions look a whole lot like community banks, except for the fact that they funnel their profits back to their customers (really their owners) in the form of higher interest payments on deposits, lower fees, and the ability and willingness to offer reasonably-priced financial services to business and individuals in low income communities.
This last reason is the only compelling argument I find for allowing credit unions to keep their tax-exempt status. By any measure, there is still dire need in certain communities for access to affordable financial services. According to a recent report from the Pew State and Consumer Initiatives, approximately 12 million borrowers spend $7.4 billion on payday loans each year, saddling themselves with exorbitant interest payments that often drive them deeper into debt. This fact alone should tell us that there is a desperate need for more credit unions who take this role seriously, and taxing credit unions will mean there will be fewer serving communities that need them most.
But not all credit unions focus intently on bringing banking services to low-income communities. Which brings us back to the question of whether Congress should increase the statutory limit on credit union business lending, from 12.25% of the credit union’s assets to 27.5%. How this change will further credit unions ability to fill their public purpose is difficult to see. Fred Becker of the National Association of Credit Unions argues that the measure is needed to increase lending to small businesses, and that this lending will help further the economic recovery. But the problem with the economy generally isn’t that banks are unwilling to lend to businesses — commercial and industrial lending is up sharply in recent quarters. The economy’s problem right now is lack of demand for businesses’ products and services, and easing regulations on credit unions won’t change that.
In addition, 70% of credit unions make no small business loans whatsoever, and just a small portion of credit unions who make member business loans are hitting their lending limits. What’s more, loans up to $50,000 don’t count towards the cap. So the case for raising the cap, which was instituted to promote credit union stability and to focus credit unions on their traditional role of promoting access to consumer financial services, feels a bit shaky to me. With so many millions of Americans relying on check-cashing services and payday lenders, shouldn’t Congress be focusing on policies that aid credit unions in helping those folks?