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I am writing to share with you a letter that the California and Nevada Credit Union Leagues submitted for the record on Nov. 15 to Bill Thomas, Chairman of the House Ways and Means Committee. In it, we address several false and misleading claims made by credit union critics during the committee’s Nov. 3 hearing in Washington examining the credit union tax-exemption. I have excerpted some highlights below. The full letter is available online at www.ccul.org. I have excerpted some highlights below: Despite misleading claims to the contrary made during the hearing, credit unions are proactively serving their current members of modest means. A 2004 Filene Research Institute report showed that the average household income for those using only banks was $76,923, while the average household income for those using only credit unions was $42,664. Home Mortgage Disclosure Act (HMDA) data show that the approval rate for mortgages for low-income borrowers is 151% higher at credit unions than at other lenders. Numerous studies and reports show that credit unions charge fewer and lower fees than do banks for the same kinds of services. A Woodstock Institute report comparing the terms and conditions of the nation’s 10 largest banks and 10 largest credit unions found that credit unions performed better in terms of interest rates, late fees, over-the-limit penalties, grace periods, and disclosure in terms. The report cited two reasons for the disparity: credit unions’ nonprofit cooperative structure, which leads to a different cost structure than banks; and the credit union mission. For decades, most credit unions could generally only offer membership to people who were part of an occupational group. This limited their access to members of modest means. The passage of the Credit Union Membership Access Act in 1998 gave credit unions a greater opportunity to serve persons from all walks of life – including the lowest income levels. Since 1999, more than 650 federal credit unions have added 1,406 underserved areas to their fields of membership. We would like to address a misunderstanding introduced during the hearing that larger or more complex credit unions have strayed from their original mission and are therefore undeserving of their tax-exempt status. There is no legal or historical basis for this view. The tax-exemption Congress granted in 1937, and upheld in 1951 and 1998, was not related at all to the size of the institution benefiting from it. It was based primarily on the cooperative structure of credit unions (i.e., member-owned, democratically operated, not-for-profit organizations generally managed by volunteer boards of directors). Larger credit unions are still democratically controlled, not-for-profit institutions in every way that smaller credit unions are. A larger credit union may be more likely to offer a broader array of services, and have larger presence in a local market, but this does not make it less a cooperative organization than a smaller credit union. The argument that larger credit unions should be taxed simply because they offer similar services to many banks ignores the fact that the tax-exemption was granted and upheld based on the organizational form of credit unions and not on a credit union’s size or sophistication, or the degree of competition it may provide to other financial institutions. The economies of scale of larger credit unions make it possible for them to offer more affordable and responsive services to members of modest means. Larger credit unions are also more able to offer special programs benefiting low- and moderate-income households. During the hearing, some witnesses attempted to suggest that credit unions are no different from mutual savings banks and should be taxed, too. Although many savings banks and S&Ls are mutually owned, there are key differences in structure and operation that continue to make credit unions unique. Mutual savings banks lost their tax exemption in 1951 not because they had become “too big” or too similar to other financial services providers, but because they had lost their “mutuality,” in the sense that the institutions’ depositors did not exercise democratic control of the enterprise. Specifically, Congress found that mutual savings banks had evolved into commercial bank competitors, they had engaged in widespread proxy voting schemes, and they were not democratically controlled. Finally, the Community Reinvestment Act (CRA) is not appropriate for credit unions. Banks are subject to CRA for one simple reason: prior to the passage of CRA, banks accepted the deposits of low-income customers but many banks routinely “redlined” poor areas as too high-risk for lending. In response, Congress passed CRA in 1977 to require financial institutions to make credit available to those who deposited funds in a given financial institution. Congress exempted credit unions because credit unions – by law and in practice – can only lend to their members (i.e., those who belong to a given credit union). In closing, credit unions have by no means abandoned the statutory mandate Congress gave them in 1934 to remain modest-means focused and cooperative in nature. The federal tax exemption – its privilege and its responsibilities – motivates the decision process for all credit unions, whether they are decisions regarding members, products and services, or fields of membership. We believe the evidence clearly shows that credit unions – both large and small – remain true to their original mission of providing all members with the means to build a better way of life. David L. Chatfield President & CEO California and Nevada Credit Union Leagues Rancho Cucamonga, Calif.

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