UBIT, Tax Bills, Conversions, Fraud, Threats, What's Next?
If you were a seasoned credit union professional who was under a rock for the last five years and suddenly woke up, you would be taken aback to say the least by the myriad of challenges facing credit unions.
Let's go up in the air and take a 30,000-foot look at what's staring back at us on the challenge front. It's good to do from time to time so we don't forget the vigilance needed to keep credit unions strong.
oUBIT Getting Ugly: The IRS for some reason thinks that credit insurance isn't substantially related to a credit union's business. How insuring a loan at the time of funding isn't related is hard to grasp. And that's only one of the areas it is questioning in its audits of state chartered credit unions. But the IRS is the IRS and the UBIT challenge has to be taken seriously. A recent Credit Union Times voting poll found that more than half of readers believe the UBIT threat is serious enough to lead to state charters converting to federal to avoid the UBIT headache.
The braintrust (and I say that with respect) of the UBIT Steering Committee--CUNA, CUNA Mutual, NASCUS and the American Association of CU Leagues--believes litigation is necessary to battle the IRS. It probably is, but again imagine you are waking up after a five-year sleep, would you really want to see CUs suing the IRS? Of course not and it's yet another "taxation" related story for the bankers to glom on to. Speaking of the bankers, very soon credit unions will learn of the considerable role that the bankers have played in getting the IRS to hone in on credit unions and UBIT. Not surprising, and it goes to the bankers' underlying strategy of weakening the credit union charter to spur conversions.
oFraught with Fraud. Here's an operational one that keeps many the credit union leader up at night. Every reader study Credit Union Times does indicates that fraud is one of the top three concerns of credit union leaders.
From the TJX breach to Pacific Rim credit card number heists, credit unions have deep fraud concerns, and are spending millions of dollars to protect their systems, yet so much of it is still out of their control. CUNA Mutual has done a good job of highlighting the plastic card fraud problem, but even it admits that the card security standards in place in America are inadequate to keep up with fraudsters. Scary stuff to awake to.
oConversion Conundrum. Credit unions converting to banks has become commonplace. The number (33 in total) is increasing and the assets at stake are as well. My big fear is the industry is getting numb to them. The outrage needs to continue because members lose and many of the reasons given for conversion (MBL cap, FOM limits, capital restrictions) could be legitimate, but the CUs that have touted theme in their conversion materials, didn't have these problems. So you would awake to greed of credit union insiders who profit from conversions as the prime driving force. Go back to bed! That's certainly not the credit union philosophy.
Throw into this mix the failed Wings Financial FCU hostile takeover attempt of Continental FCU, and there is a whole new set of worries. While that case was a CU-on-CU deal, the next one could very well be a bank attempt. Ouch.
oComply or Else! Another operational one here. The Bank Secrecy Act and other anti-terrorism regs have exponentially increased credit unions' compliance burden. Credit unions are spending more than ever--time and money--on compliance. The problem is it's a hard thing to aggregate. Credit unions have proven astoundingly ingenious in using their cooperative philosophy to drive efficiencies and tackle problems, but compliance is so individualistic to each credit union that must CUSO-minded folks say it's not something that can be tackled using a common back-end.
oBankers will be Bankers. The fact that bankers are still vigorously attacking credit unions wouldn't surprise anyone coming out of a coma, but what might is their newfound success. Think about it. They were key in getting former House, Ways and Means Chairman Bill Thomas to hold hearings on the credit union tax-exemption and for Congressman Patrick McHenry to delve into whether NCUA is too overbearing in the credit union-to-bank conversion process. Look at New York credit unions' surprise just last week when a state senator introduced a bill to tax credit unions (see page 1), with bankers clearly playing a role.
I believe bankers have made strides in their war against credit unions. They are putting a fear factor out there that has more credit unions than ever wondering if the grass is greener on the banker side. Although taxation threats make headlines, capital (need risk-based) is the one area the credit union trade associations have to get relief on or more credit unions will go the bank route.
Couple banker wins on Capitol Hill with credit union trade associations' ongoing political games and it's a potential recipe for disaster. CUNA and NAFCU need to be careful about trying to outdo each other (see page 1 CRA story) and get on the same page on the big issues in Washington.
I am out of room, but not of problems...stagnant membership growth, falling ROA, lack of new CU-bred leaders, new untraditional competitors.... --Comments? E-mail email@example.com