Independent Banker - November 2019 - 45

banks, whose activities mirror credit unions in
many aspects.
them. Meanwhile, credit union failures outpaced
banks 50% of the time between 2005 and 2018.
Outgrowing an exemption
Unlike diamonds, tax exemptions are not forever.
For years, savings and loan companies, like credit
unions, enjoyed a tax exemption. That exemption
was eliminated by the Revenue Act of 1951, when
regulators recognized that loan and savings companies
had grown beyond the bounds of their
original mandate, according to a 1979 IRS whitepaper
that evaluated the issue.
Credit unions' tax exemption stems from
their similarity to savings and loan companies.
Logic dictates that if credit unions evolve in a
way inconsistent with their mandate, their tax
exemption should be revoked, too.
ICBA's study shows that credit unions haven't
stuck closely to their mandate of serving people
of modest means, restricted fields of membership
and avoiding high-risk, high-yield investments. It
quantifies just how far credit unions have strayed
from this mandate.
An evaluation of credit union activities shows
that only a minority of credit unions focus on
serving people of modest means. ICBA looked
at the consumer credit scores based on credit
union auto lending. When it comes to lending to
higher-risk consumers-those with credit scores
below 659-there isn't a huge difference between
the activities of community banks and credit
unions. It's just 6%.
Credit union applications over the past decade
show a large decline in the number of single common
bond applications, such as employment or
association. Multiple common bonds and community
bonds make up an increasing number
of credit union memberships. It's a move that's
technically legal but violates the intended purpose
of credit unions.
Credit unions are also engaging in increasingly
high-risk activities that aren't in the best interest
of their members. Just look at the recent closure
of credit unions engaged in risky taxi medallion
lending. Or look at the settlement between the
Consumer Financial Protection Bureau (CFPB)
and a credit union service organization (CUSO)
that provided high-cost loans to students of a forprofit
school who didn't understand the terms and
conditions of their loans and weren't able to afford
Largest credit unions see biggest tax benefit
ICBA estimates that credit unions would have
been responsible for paying an average of
$2.1 billion in taxes between 2005 and 2018.
This well-known figure is on par with estimates
from the U.S. Treasury, the Joint Committee on
Taxation and the Congressional Budget Office.
Yet ICBA's study takes it one step further by
calculating the estimated tax burden for each
individual credit union, uncovering a huge disparity
among credit unions. Just 500 credit
unions, typically those with more than $1 billion
in assets, would have been responsible for 74% of
the overall tax burden. These are the same credit
unions that are buying community banks and
stadium naming rights.
Quick stat
$2.1
billion
The estimated
tax burden credit
unions would have
been responsible
to pay, on average,
per year between
2005 and 2018
Not all tax savings get passed to consumers
ICBA estimates that between 20% and 30% of
credit unions' tax exemption is lost in mismanagement.
That comes to between $500 million
and $1 billion a year.
Using a regression
model, ICBA calculated
how much of the tax
exemption was applied
to loans, securities, labor
and deposits. The good
news is that the majority
of the tax burden went
to deposits and loans,
as intended. However,
credit unions are chanHow
you can help
Visit icba.org/
advocacy/reports
to read ICBA's study
or review a list of
talking points to help
you make your case.
neling a sizable percentage of their estimated
tax burden to securities and labor. These include
things like high-risk investments, management
salaries and employee compensation.
Breaking it down, this means that credit unions
aren't forced to be as efficient as possible with
their resources. The credit union mandate that
was intended to let them operate below the optimal
level of market efficiency was designed to help
them serve people of modest means. Yet it creates
the unintended consequence of allowing credit
unions to be more cavalier with their choices.
ICBA is dedicated to ending this disparity and
credit unions' continual overreaching.
independentbanker.org Q 45
http://www.icba.org/ http://www.independentbanker.org
Independent Banker - November 2019

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