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WASHINGTON- America’s Community Bankers has been cooking up some plans for credit unions in the weeks following the Nov. 3 House Ways and Means Committee hearing on the tax-exemption, but credit unions do not have the stomach for it. ACB has submitted proposed language for legislation to hold credit unions to a large portion of underserved members in exchange for the tax-exemption and require credit unions to file IRS 990 forms. One proposed piece of legislation would establish that credit unions would only maintain their tax-exempt status if: (i) the credit union has assets with a value of $25 million or less; or (ii) 75% or more of the income of the credit union consists of income earned from providing loans and deposit services to credit union members of modest means. A credit union member of modest means would be defined as at 80% or less of the area’s median income. “The free market is being disrupted by the tax subsidy provided to large and sophisticated credit unions that compete head-to-head with community banks.The credit union tax exemption is a competitive inequity and a burden to every American taxpayer,” the accompanying letter to House Ways and Means Committee Chairman Bill Thomas (R-Calif.), signed by ACB President and CEO Diane Casey-Landry, stated. The second bill would require credit unions to file 990 forms with the IRS, including income and expenses, such as executives’ salaries and other employees and professional fees to third-party vendors. The ACB also explained that while state-chartered credit unions are subject to Unrelated Business Income Tax (UBIT), federal credit unions are not as `instrumentalities of the United States.’ “Basic tax policy should not be based on the government issuing the charter,” an explanation of the proposal read. NAFCU Director of Political Affairs Murray Chanow said, “I see no prospects for this legislation.” He stated that ACB “magically made up some numbers,” wondering where the $25 million asset cut-off came from. “I don’t think there’s any thought process to this.I think it’s a shot across the bow and unsubstantiated lies,” he concluded. CUNA Vice President of Legislative Affairs and Senior Legislative Counsel Gary Kohn said the ACB proposal “doesn’t even pass the smell test.” He continued, “Once again, the bankers are using the spaghetti dinner approach in lobbying to urge a tax on credit unions. They take a bunch of ideas – like a plate of spaghetti – and throw them against the wall, to see if anything sticks. Well, this idea ain’t gonna stick. Chairman Thomas was clear that he did not want to remove the tax-exemption of credit unions.” CUNA Vice President of Communications Pat Keefe said he was unsure whether a credit union could survive with 75% of its income derived from low-income members, but probably not. CUNA did not have any research on “this unlikely scenario.” Keefe added, “The ultimate purpose of this proposal is to push credit unions toward mutual savings bank charters.” Bankers Pushing Salary Disclosure CUNA and NAFCU addressed the issue of transparency in the addendums to their original testimony. Both groups said that credit union financial disclosures on the 5300 Call Reports was far more detailed than the IRS Form 990. One thing that is absent from the 5300 is executive salary data. CUNA said there is no parallel between non-profit charitable organizations that solicit funds from the general public and credit unions, which receive funds from their members to redistribute in the form of better loan and deposit rates. “Volunteer, unpaid credit union boards of directors set the salary and benefits of their CEOs,” the follow up letter from CUNA President and CEO Dan Mica read. “They do so in a competitive environment, and draw upon surveys, such as those done by CUNA, to determine appropriate compensation packages.” NAFCU President and CEO Fred Becker pointed to the easy public access to the 5300 Call Reports from NCUA’s Web site (www.ncua.gov) and attached Navy Federal Credit Union’s, which NAFCU downloaded, as an example. Both national trade associations also countered Home Mortgage Disclosure Act data analysis presented at the hearing showing that banks provide more loans to minorities and low-income persons than credit unions. By CUNA’s analysis, credit unions made a greater proportion of combined loans to low- to moderate-income borrowers (27.6%) than all other lenders (26.6%). When considering purchase loans alone, the difference was 29% for credit unions versus 25.9% for other lenders. “We recognize the percent differentials are not dramatic, but there is a good reason why we expect to see greater increases in the near future,” Mica wrote. “Until quite recently, credit unions labored under rules that primarily limited membership to occupational groups large enough to support a credit union’s operations. In the 1980s, credit unions were permitted to add smaller employee groups, but significant growth of community based credit unions and permission to expand into underserved areas are a much more recent events. Thus, until very recently, unless one worked for a relatively large employer, one was unlikely to be eligible to join a credit union. Under these rules, credit unions developed into powerful sources of financial services for working Americans. It’s no wonder that credit union membership became concentrated in middle and upper middle-income groups.” In addition, NAFCU said that credit unions approve real estate loans that are smaller in size, approve a greater percentage of conforming real estate loans and have a greater percentage of real estate borrowers with less than $40,000 in income. Becker pointed out the irony that the banking representatives presenting at the hearing made a total of 13 mortgage loans to minority households in 2004, according to HMDA data. Mica’s letter added that 74.1% of low- to moderate-income mortgage applications were approved by credit unions, while other lenders only had a 51.1% approval ratio for the same group. He also pointed out that while the banks are telling lawmakers that credit unions are not doing enough to serve the underserved, the American Bankers Association filed a lawsuit against NCUA to try to repeal underserved areas adopted by a credit union. “As we stated at that time, this shows that the banking industry’s only real agenda is to squelch competitions from more consumer-friendly institutions,” Mica concluded. The ABA did not provide further comment on the tax-exemption hearing. Documentation Issue Takes Center Stage Though the hearing was supposed to focus on the tax-exemption, much of it came down to the lack of documentation by credit unions to demonstrate what they are doing to serve underserved consumers. However, CUNA said there are many reasons why credit unions should not be subject to bank-type Community Reinvestment Act (CRA) standards. Credit unions do not have a history of “redlining” nor do they have the tendency-because they are local in nature-found in large banks pre-CRA to receive deposits from one community and lend them elsewhere. Additionally, CRA only takes into account lending while credit unions offer many low-cost depository services to promote thrift, a fundamental purpose of credit unions. Finally, Mica wrote, CRA was designed for institutions authorized to serve the general public, but the vast majority of credit unions remain occupationally based and have less opportunity to serve those of modest means. Contrary to the bankers’ assertions that credit unions now are just like the mutual savings banks from the 1950s that lost their tax-exemption. “Untaxed credit unions are not like taxed mutual banks. If they were alike, the simple solution for the mutual bank would be to convert to a credit union to eliminate taxation. So Congress should ask the mutual bank why it does not just convert to a credit union if both institutions are similar, rather than ask a credit union to try to explain why it’s not like a mutual bank. “A mutual bank would have to limit its market, curtail its investments, stop permitting weighted voting, stop paying its directors, stop having proxy voting, and so forth. Credit unions are driven by service to their members. While mutual banks do not have the divided loyalties that banks with stockholders demonstrate, mutually organized banks clearly do not have the same mission as credit unions do.” In contrast, Casey-Landry’s letter asserted, “And, contrary to credit union industry statements forecasting that taxation will lead to their untimely demise, the mutual savings industry has continued to prosper while paying their fair share of taxes.” With respect to size, CUNA wrote-seemingly prophetic of ACB’s proposed legislation, “For a financial cooperative to operate safely and soundly, it must have members who can save in order to have members who can borrow. In fact, economies of scale make it more likely for a larger credit union to offer more affordable and consumer-friendly services to members of modest means.” NASCUS, which did not testify at the hearing, stayed out of the fray of the substantive argument, but did submit written testimony that carefully laid out the differences between the state and federal charters and how the dual chartering system works. “The dual chartering system provides credit unions with a choice for regulatory and operational standards,” the group wrote. “State law allows state regulators to grant specific powers and authorities to state-chartered credit unions that may be different from federal laws and regulations.” NCUA, as the insurer of most state-chartered credit unions, would not have authority over CRA-type regulation for state charters as a non-safety and soundness issue. The Independent Community Bankers of America did not reply to a request seeking any additional comments submitted to the Ways and Means Committee prior to deadline. -

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