Hatch wades into war over credit union tax exemption

The chairman of the Senate Finance Committee expressed fears in a Wednesday letter to a top U.S. regulator over whether credit unions are sticking to their intended purpose while they’re still exempt from federal corporate income tax.

Sen. Orrin Hatch (R-Utah) pressed National Credit Union Administration (NCUA) Chairman Mark McWatters on his efforts to loosen restrictions on credit union activities.  

Hatch wrote that he’s “concerned that the credit union industry is evolving in ways that take many credit unions further from their original tax-exempt purpose.” He cited moves by McWatters to loosen the field of membership constraints and allow credit unions to lend to businesses and expand their financial portfolios. 

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

{mosads}Hatch’s letter comes as the long-running feud between credit unions and community banks reignites over regulatory relief.

Credit unions, established as nonprofit cooperatives meant to provide credit and basic financial services to a tight-knit community, are exempt from corporate income tax. Their tax-exemption is premised on a deep knowledge of their customer base, relatively low-risk portfolio and focus on clients with limited means.

Community banks have long said credit unions have an unfair advantage, insisting small banks serve the same purpose but face steeper regulatory and tax burdens.

Hatch wrote that credit unions are treading into territory “beyond the scope of their original mission” and argued that large ones “appear to operate in the same manner as taxable banks.” He ended his letter with a series of questions for McWatters on how he plans to keep credit unions accountable.

The Independent Community Bankers of America (ICBA), a trade group representing smaller banks, praised Hatch for speaking out against the “credit union power grab.”

“Large, multi-bond and geographic-based credit unions have exceeded their statutory mission and use their tax-exempt, government-subsidized status to gain competitive advantage over taxpaying community banks,” ICBA President Camden Fine said in a Wednesday statement.

“Sen. Hatch’s comments echo ICBA’s belief that the credit union model has become outdated and that its charter, purpose and tax-exempt status should be reviewed by Congress,” he said.

The two top credit union trade groups jumped to defend their industry, insisting the firms they represent are following federal guidelines and need the tax exemption to thrive.

The National Association of Federally Insured Credit Unions (NAFCU) argued in a letter to Hatch the credit union tax exemption yielded major benefits for the economy, citing a 2015 study it commissioned.

Carrie Hunt, NAFCU’s executive vice president of government affairs, argued that stripping the credit union tax exemption could cost $38 billion in federal tax revenue, $142 billion from the national GDP and 900,000 jobs over ten years, citing the study.

“The credit union tax exemption has long provided tremendous value to credit union members and the overall economy,” Hunt wrote.

“NAFCU is confident that NCUA’s rules and regulations are legal and in accordance with the Federal Credit Union Act,” she wrote.

Jim Nussle, president of the Credit Union National Association (CUNA), defended the expansion of credit unions in a statement responding to Hatch’s letter.

“NCUA has done nothing more than ensure its rules and regulations are compatible with the modern financial services landscape,” said Nussle, “allowing credit union members and member business easier access to safe and affordable products and service.”

Nussle and his counterpart, NAFCU president Dan Berger, also criticized Fine’s stance against the current credit union tax structure. Both argued that ICBA would do better focusing on threats from regulation, big banks, financial technology companies.

“Credit unions aren’t holding small banks back. Rather it’s the one-size-fits-all regulations. That’s why we are working with @ICBA to get a full Senate vote on S. 2155, the Economic Growth bill. Focus on what matters,” Nussle tweeted, referring to a bipartisan bill to reign in the Dodd-Frank Act.

“Big banks and fintech are eating your lunch Cam, not credit unions,” Berger added on Twitter.  “Focus on the real problem, not on the political optics.”