The powerful chairman of the tax-writing Senate Finance Committee is questioning whether credit unions still deserve their tax-exempt status.

“I am concerned that the credit union industry is evolving in ways that take many credit unions further from their original tax-exempt status,” Senate Finance Chairman Orrin Hatch (R-Utah), said in a letter Wednesday to NCUA board Chairman J. Mark McWatters.

Hatch said that the NCUA has relaxed field-of-membership constraints, opened the door to the use of alternative capital and lifted limits on business lending.

“While these may be worthwhile pursuits, they should give us pause and cause a reflection on the core mission of credit unions and their tax-exempt status,” Hatch wrote.

This new threat to the credit union tax status comes at a time when credit union trade groups had declared victory since the tax overhaul bill that was enacted last year preserved the tax-exempt status.

However, Congress is likely to consider a technical corrections bill to the tax overhaul legislation, which could open the door to a renewed review of the credit union tax status.

And Hatch is not subject to the usual political pressure that comes from raising such a divisive issue, since he is retiring at the end of the year.

In the letter, Hatch said that the federal credit union common bond requirements have been watered down through “regulatory interpretations and a dearth of enforcement in recent decades.”

He said that while state credit unions and nearly all other tax-exempt organizations pay Unrelated Business Income Tax on income derived from outside activities, federal credit unions do not.

And he said that federal credit unions do not have to file an IRS Form 990 that would disclose executive compensation.

He said the NCUA did not implement a 2006 recommendation from the Government Accountability Office, which would have required that credit unions disclose their executives’ compensation.

And Hatch posed a series of questions about NCUA oversight that he requested McWatters answer by April 6.

Credit union trade groups immediately defended the tax-exempt status.

“As the only depositor-owned, democratically controlled option in financial services, credit unions' mission is to promote thrift and provide access to credit for members, particularly those of modest means,” CUNA President/CEO Jim Nussle said. “That’s a mission they have fulfilled for more than 70 years, through multiple financial crises, and it’s a mission that remains unchanged today.”

He added that the NCUA has ensured that its rules and regulations are compatible to the modern financial services marketplace—allowing safe and affordable products and services.

He said that CUNA research found that broader fields of membership create substantial benefits to credit unions and their members and enhance the overall safety and soundness of the financial sector.

In a letter to Hatch, Carrie Hunt, NAFCU’s executive vice president for government affairs and general counsel wrote, "The credit union tax exemption has long provided tremendous value to credit union members and the overall economy of the United States.”

And she added that credit unions are best regulated by an independent NCUA.

On the other hand, representatives of the banking industry applauded Hatch’s questions.

“Credit unions were chartered by Congress to enable people of small means with a ‘common bond’ to pool their resources to meet their basic deposit, savings and borrowing needs,” said Camden Fine, president/CEO of the Independent Community Bankers of America. “While some credit unions operate that way today, the NCUA has enabled others to grow their membership and their markets well beyond their statutory mission.”

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Senate Finance Chairman Hatch Says CU Tax Exemption May Be Outdated

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