Credit Union Ruse

Digital Credit Union
Greylock Credit Union
Rockland Credit Union
Funny, isn't it?


The Credit Union Ruse

Credit unions are costing our taxpayers billions of dollars.

Many people and public policy makers might say, “Who cares if credit unions don’t pay taxes?”

Well, every individual taxpayer, every city, every town and every municipality should care. All across America, individuals and local governments are being cheated out of tax revenue that should be coming from large credit unions.

A study by the Tax Foundation, a Washington, D.C.-based nonpartisan educational organization with a reputation for independence and credibility, states that the credit union tax exemption is “an unjustified $31.3 billion tax break” over a 10-year span running through the year 2013: Moreover, it says “Credit unions were granted a tax exemption almost 70 years ago so that they could serve low-income people who had little access to financial services. Now credit unions are growing by leaps and bounds, serving middle- and high-income people. Why should the exemption continue?”

All the while, large credit unions are claiming they are not-for-profit. It’s a big credit union ruse, and here’s how it works:

How the ruse works:

The 1934 law establishing the federal credit union charter stated its purpose was “to make available to people of small means credit for provident purposes, through a national system of co-operative credit..."

Originally, members of a credit union all knew each other and pooled their resources to provide credit for their co-workers and/or neighbors. Today, this “common bond”-- the former hallmark of the credit union industry -- has been stretched beyond recognition while large credit unions still describe themselves as not-for-profit. Many credit unions have grown into highly profitable, billion-dollar institutions offering a full range of financial services, including commercial lending, to just about anyone. The common bond has ceased to exist.

Though these institutions look and act like community banks, they do not pay taxes or abide by the same rules as banks, depriving taxpayers out of millions of dollars. A few examples:

  • As credit union membership expands, so does the cost to American taxpayers who underwrite the credit union industry’s tax subsidy.
  • The credit unions’ regulator – the National Credit Union Administration – has steadily adopted policies that have expanded credit union membership beyond limits prescribed by Congress, yet Congress and local policy makers have done nothing about it.
  • Federal- and state-chartered credit unions are not required to meet the credit needs of low- and moderate-income people — with the exception of Massachusetts-based state-chartered credit unions — as banks are required to do. They have no Community Reinvestment Act (CRA) requirements, despite a huge taxpayer subsidy.
  • You would think that as tax-subsidized institutions, credit unions would be more transparent. In fact, much of their business is hidden from view. While the deposits of any bank branch are readily available from the FDIC, no such information is available from any regulator about credit union branches. Consumers are thus disadvantaged because the competitiveness and growth of credit union branches is not clear. Moreover, unlike bank branches, federally chartered credit unions can arbitrarily open or close branches without regulatory approval to the detriment of their members.

Points for Consideration

Bankers across the nation have challenged these policies and will continue to make the case that similar institutions ought to be treated similarly.  It’s not the majority of smaller credit unions that are objectionable; it’s those larger credit unions whose assets have exceeded $100 million, for example, and who no longer have a common bond among members. 

Over the past 20 years these credit unions have evolved to the point that they bear little resemblance to the traditional credit union, and their non-taxpaying status threatens the survival of small community banks—and even small credit unions.  What’s needed is a level playing field for all of these competitors.  Unfortunately, local municipalities, individual taxpayers, and small banks will be bearing a disproportionate burden until the large credit unions are taxed the same as banks.  A few points for consideration:

  • A study by the General Accounting Office (GAO) found that consolidation in the credit union industry has resulted in two distinct groups of credit unions:  larger credit unions that are similar to banks in the products they offer, and smaller, traditional credit unions that provide more basic financial services.
  • Nationwide, there are now 167 credit unions with more than $1 billion in assets each.  The number of billion-dollar credit unions has increased by more than 2300 percent in the past nineteen years—from seven in 1991 to 167 in 2010.
  • Large credit unions are misleading when they say they are not-for-profit. Most large credit unions have loads of profit (what they call retained earnings) which have not been taxed. They simply hold on to it, pay executive salaries, conduct branch expansion, and spend millions on marketing with the tax savings. For example, Massachusetts-based Digital Federal Credit Union spent $5.2 million for the naming rights to the Worcester Centrum, a sports and entertainment arena. This is a not-for-profit? Given it effectively receives a 35 percent tax break, individual tax payers are paying for almost $2 million of those naming rights. (By the way, Digital Equipment, the company for which the credit union was named, no longer exists, yet this credit union with $3.8 billion in assets continues to expand in four states. See the Digital profile on this web site.)
  • In Massachusetts there is one $3.8 billion credit union, one $1.8 billion credit union, and two just over $1 billion. Moreover, there are dozens of bank-like credit unions with assets greater than $100 million and balance sheets similar to community banks. 

  • In Massachusetts, all state-chartered banks must adhere to a law passed by the state legislature many years ago requiring banks to provide free savings and checking accounts to individuals 18 years or younger and 65 years or older. However, the 18-65 Law does not apply to taxpayer-subsidized credit unions. Why not?
  • The top 28 credit unions in Massachusetts with a minimum $325 million in assets, up to $3.8 billion, made more net profit last year ($88 million) than all of the co-operative Massachusetts banks combined, even though the co-operative banks -- who operate much like small credit unions but pay taxes -- outnumber the credit unions 2 to 1.  (56 co-operative banks last year had net income of $68 million.  The co-operatives paid $38 million in local, state, and federal taxes.  Co-operative banks are primarily mutual institutions – non-stock banks – like credit unions.)

  • The credit unions in Massachusetts have almost doubled their assets from $14.6 billion in 2000 to $28.4 billion in 2010.  During the same period, Massachusetts co-operative bank assets increased only 45% from $9.6 billion to $13.9 billion because they were less profitable, of course, after paying taxes.

    assets of credit unions

  • In nearly half the states, a credit union would rank among the largest 10 banking institutions.  (This growth usually occurs at the expense of local community banks and small, traditional credit unions.)
  • Large credit unions offer a full range of services, including commercial lending – not exactly the stuff of common-bond criteria.  Credit unions were never supposed to be about commercial lending, which could put their federal insurance and members at greater risk.  In fact, the credit union tax exemption has enabled them to rapidly increase their own market share and double their business lending in the past five years (it grew by almost 30 percent in the last five years).
  • Despite their tax-exemption and, ironically, as they invest in commercial lending, many bank-like credit unions are no longer fulfilling their mission of serving people of modest means. The GAO reported that 36 percent of households using credit unions had low or moderate incomes, compared with 42 percent of households using banks.  GAO also found that credit unions make fewer mortgage loans to low- and moderate-income consumers than banks of comparable size.
  • A demographic survey by the Credit Union National Association shows that the average household income of credit union members is 20 percent higher than nonmembers -- $55,120 versus $45,790. Credit union members are also more likely to own a home, be employed full time and have a college degree than nonmembers.  Where is their commitment to low- to moderate income communities that banks must demonstrate to regulators through the requirements set forth in the Community Investment Act (CRA)?

  • A comparison of the CRA ratings of banks versus credit unions in Massachusetts from January 2009 – May 2011 shows that while 42% of banks received an Outstanding/High Satisfactory rating, only 29% of credit unions received the same rating.

CRA Rating

  • Some credit unions now serve areas as large as the state of Maryland, yet have no requirement to reinvest in their communities.  Consumer groups like the Woodstock Institute have recommended that CRA -- rules that require banks to reinvest in their communities -- be applied to some if not all credit unions.  The essential question:  Why should credit unions that morph into full service financial institutions, be allowed to retain their tax and CRA exemptions?

Time for a Change

It’s hard to think of a better time to start taxing large credit unions than right now.  Our nation is within the throes of a severe revenue shortage.  Isn’t it time credit unions paid their fair share? 

As for taxing large credit unions, there is precedent for a policy change:  Congress removed other financial co-operatives’ tax exemption after they had outgrown their mission. After concluding in 1951 that mutual savings banks, co-operative banks and savings and loans were in “active competition” with taxable institutions, Congress removed their tax-exemption.  Lawmakers can consider a number of other “comparables” and other ways to level the playing field if they want to create credit union parity:

  • Member-owned, not-for-profit organizations like farmer co-operatives, REI (a consumer co-operative) and Co-bank (a financial co-operative), all pay taxes.
  • Nationwide, other organizations that are tax-exempt are generally subject to limits that restrict their size or breadth of membership.
  • Credit unions will tell you that they don’t have the powers that banks have today and, therefore, they should not be taxed.  However, they operate much the same as banks do today.  Ironically, in 1951 when Congress decided to tax the mutual, co-operative and savings institutions, those institutions did not have nearly the powers that credit unions have today.   (Most bankers would advocate giving credit unions full powers if they paid taxes.)
  • Today large credit unions are asking Congress for permission to make more business loans.  If their bill, the Credit Union Regulatory Improvement Act, were to be enacted, this would significantly grow the commercial lending capacity well beyond the traditional credit union membership.


Bankers do not object to those credit unions that have adhered to their original charters, only those that have moved beyond the scope of their original intentions. If it walks like a bank, talks like a bank, it should be taxed like a bank. Credit unions always say if banks want to compete better why don’t they become credit unions? In fact, under law, banks could not convert to a credit union charter and receive tax-free status. It’s not hard to predict how lawmakers would react if any company asks to be removed from the tax rolls.

Using Massachusetts as an example, last year the Bay State’s banking industry employed approximately 62,000 people, contributed substantially to economic development and helped create consumer wealth throughout the state. Local banks’ small business lending actually grew throughout the recent recession. Moreover, the commonwealth’s banks contributed more than $62 million to local charities and non-profits. Such largess, and the survival of many community banks and thousands of jobs is in question over the long term if small banks are perennially forced to try and compete on an un-level playing field with large, non-taxpaying credit unions.

What if you found out that Wal-Mart, the retail operation that has driven thousands of local companies out of business, was also not paying any taxes? You would, undoubtedly, be outraged.

Large credit unions that claim to be not-for-profit have perpetrated this ruse on hard working, taxpaying Americans long enough. It is time for large credit unions to stand up and do what’s right. 

Contact your local elected representative and let him or her know that you do not wish to subsidize large credit unions any longer.

Presented by the Massachusetts Bankers Association.





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