Federal credit unions are buoyant about recent legislation enabling them to expand more easily, but bankers warn that the new law only subsidizes what they say is a growing, “parallel” banking industry.
The Credit Union Membership Access Act, which became law last month, negates a 5-4 Supreme Court ruling last February that said U.S. law prohibits federal credit unions from expanding beyond their core membership.
The new law restores that right, allowing groups such as Bayside Federal Credit Union in Providence, which serves Federal Products Corp. employees, to accept members outside the company. More members means more stability, experts say.
“We’re a viable credit union, but we haven’t grown significantly because we’re confined to this one employee group,” said Leonore Misner, Bayside’s manager/treasurer, which has fewer than 1,000 members. “We have no intention of becoming a big credit union. We just want to offer our members a unique service.”
Better loan and deposit rates make credit unions unique. Owned by its members, a credit union pools its funds to make loans. A volunteer board of directors runs it. Unlike banks, it is tax-exempt. Also unlike banks, it has no shareholders to appease.
“For those reasons, generally speaking, (they offer) better deals,” said Bob Loftus, public affairs director for the National Credit Union Administration, the federal agency that will implement the new law, “which distresses banks to no end.”
Enough to prompt heavy lobbying against the bill, which still passed easily. The inequity, bankers say, is that large credit unions now offer the same services as banks — home equity loans, car loans, and in some cases, business loans — and remain tax exempt.
“The disappointment arises mainly from the fact that what Congress has done is legitimize a tax-exempt, parallel banking system,” said Robert Fichter, senior vice president of the Massachusetts Bankers Association. “It’s not a quarrel with the church-basement credit union, it’s with the bank-like credit unions. If you want to be a bank, no problem. But please, behave like one.”
That is, pay taxes like one. Congress should have considered a system by which credit unions that grow to a given size and offer the same services as large banks lose their exemption, bankers say.
“It’s like pornography: You know it when you see it,” said Keith Leggett, senior economist for the American Bankers Association. “It’s the same with credit unions. Once they hit a certain size they are no longer credit unions, they become banks. And they should pay taxes like banks.”
But officials say growth is what gives credit unions stability. Loftus noted that the Eastern Airlines credit union is still in business — though the airline is not — because it diversified its membership.
Since 1982, federal credit unions expanded under the credit union administration’s select employee group policy, meaning that “multiple groups, each having a separate common bond, could be part of a federal credit union,” according to the administration.
But in National Credit Union Administration v. First National Bank & Trust Co. et al., the Supreme Court Feb. 25 invalidated this policy, saying it violated the intent of the Federal Credit Union Act.
The new law re-authorizes multiple group chartering, but limits new community charter applications to “well defined, local, communities,” and requires the administration to define “immediate family member.” Before, individual credit unions chartered to accept employees and their immediate family determined that definition. Some exploited the law.
“Some credit unions had abused that by taking in everybody’s 25th cousin,” Loftus said.
Officials say credit unions need 500 members to be viable, and a few thousand to be considered stable. The Membership Access Act, therefore, is hailed as a victory by small credit unions.
“First and foremost, the legislation is going to restore the ability of federal credit unions to grow and thrive,” said Mark Wolff, vice president of public affairs for CUNA & Affiliates, a Madison, Wis. and Washington, D.C. based trade association for credit unions. “It’s also a key small business issue: Most of the businesses that are driving this economy are small businesses.”
The law, however, also limits credit unions’ ability to make business loans. Federal credit unions may now use only 12.25 percent of their total assets for business lending. Sen. Chuck Hagel, R-Neb., had proposed to make the percentage 7 percent. Hagel voted against the bill, a spokeswoman said.
Though Wolff said business lending is a small part of the credit union industry, the new cap is still not enough to please bankers. They point to its exceptions. For example, a credit union may loan up to $50,000 to a business without it counting against the new aggregate limit.
Also, credit unions established primarily to make business loans and those with a history of business lending — such as credit unions set up to loan to the agriculture or fishing industry — are exempt.
“There’s enough caveats in there that you can drive a truck through it,” Leggett said. “I don’t think credit unions should be making business loans; it’s not what they were set up to do.”
Officials at several small, closed credit unions — such as Frelco Employees Federal Credit Union in Fall River, Mass., which serves Eastern Utilities Associates Service Corp. employees — said the new legislation has no effect on them because they have no plans to expand. It’s the large credit unions that will be most affected, they said.
“They really would have been put behind the eight-ball,” said Robert C. Benz, chief financial officer for the Rhode Island National Guard Technicians federal credit union, of the effect the February Supreme Court ruling would have had on large credit unions if it were not for the new law. “Their large-scale operations would have been scaled back.”
But bankers insist that small credit unions and banks will also suffer. Competition from large credit unions could lure customers from the small credit unions which cannot offer as many services, they say. Misner, for instance, said Bayside credit union is now too small to afford ATM and debit card service.
The new legislation also further pits local banks against local credit unions — with credit unions having the advantage because of their tax exemption, bankers say.
“It’s the death knell of small credit unions,” Leggett said. “Chase and Citicorp, they’re not competing with credit unions. It’s the local community banks that are.”
But Charles Simpson, president of First Citizens’ Federal Credit Union, a federally chartered community credit union with offices in New Bedford, Raynam, Hyannis, and Orleans, Mass., said such predictions are unwarranted without documentation. Simpson, a banker of 32 years, is a former chairman and chief executive officer of Quincy, Mass. Savings Bank.
“I would like to see the study that caused those conclusions to be generated,” Simpson said. “There is a distinct difference between how we operate here and how we operate in a bank environment. I just don’t feel it’s reasonable for me to respond to general, inflammatory statements.”
The main difference has been that credit unions were limited in whom they may accept. Now, that restriction has been lessened.
“I’m really looking forward to the possibility of expanding (our) field of membership,” Misner said. “If we can bring on other employee groups we can anticipate growth. I’m really glad this thing went through the way it did.”