Is CRA a Deal Breaker? Find Out for Yourself
Most credit union leaders agree that the taxation issue is a deal breaker. That is if credit unions were to lose their tax-exempt status, there would be very little reason to remain a credit union. Conversions to banks would be the order of the day. Credit unions would enjoy the advantages of more flexible capital options (the most important advantage in my mind), no field of membership restrictions, and fewer restrictions on business lending.
I agree that taxation is a deal breaker, though I argue if the tax-exemption were ever lifted, what we all know as a credit union would cease to exist and credit unions wouldn't need to convert to banks because there would be no credit union charter any longer. The charter could be wiped away all at once by Congress to avoid mass conversion costs.
The bigger question is whether some sort of CRA-like regulation imposed on credit unions would cause a wave of credit unions to vacate the charter.
Haven't thought about it yet? You should. It's not that a CRA reg is imminent, but it does have a better shot with the Democrats in control. Democrats are good for the taxation issue, but could be bad for CRA.
Barney Frank (D-Mass.) will likely chair the House Financial Services Committee next Congress and Christopher Dodd (D-Conn.) will chair the Senate Banking Committee. They are Democrats, but they also represent two states that impose CRA-like regs on state chartered credit unions.
This isn't to say CRA regs are likely, but I think good planning requires CUs to look at it. I have spoken to a number of credit union CEOs who have already done so and they say a CRA reg is not a deal breaker for the credit union charter. While they wouldn't look forward to the additional reporting requirements it would bring, they believe they could handle CRA. In fact, some credit unions actually go through the CRA rating process regularly to see where they stand.
Let's look at the politics of CRA. The bankers have clearly pushed the taxation issue more than CRA, but CRA is a more viable play for the bankers. Lawmakers who understand credit unions understand that if they ever voted for repealing the tax-exemption they would really be voting for the extinction of the credit union charter--they aren't ready for that.
But that's not the case for CRA. It's unlikely most credit unions would give up the tax advantage to avoid CRA.
Why haven't the bankers pushed harder? Maybe they are keeping it in their back pocket for an upcoming battle on the Credit Union Regulatory Improvements Act. The bankers might concede the expanded powers that CURIA brings CUs in exchange for moving CUs under CRA.
Banks have also received their share of breaks on CRA with changes in asset size limits for triggering more stringent CRA requirements. Maybe a CRA-like reg would only apply to large credit unions, the segment the bankers are really after.
So should the credit union lobby start gambling with CRA? Should they be willing to give in on CRA for large CUs in order to get CUs more business lending powers and alternative capital options?
No way. The GAO report (see front page story) has some damaging lines as to how CUs are serving people of modest means, but not enough to panic. And the report still doesn't change the fact that credit unions can only serve who they can serve. You can't change history and credit unions' occupational roots. Credit unions offer better rates and charge lower fees than banks and serve whom they can serve.
The other reason credit unions shouldn't give in on CRA is they don't have to. The fantastic lobbying and political outreach the industry has done in the last decade is paying off whether the average CU leader knows it or not. It's paying off by keeping things like CRA and taxation on the sidelines. Can a shift in power in Congress bring CRA more attention? Sure, but it can't change the stellar lobbying efforts of credit unions over the past decade, and in Washington old friends mean a lot.
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