There is little subtlety in this bumper sticker, with
its white on red color scheme:
YOU pay income taxes,
Why don't Credit Unions?
The North Dakota Bankers Association (NDBA) distributed those
bumper stickers to member banks, and the message has been generating
conversation among bank customers.
Of course, it's not just North Dakota banks that are targeting
the credit union industry. On April 15 this year, thousands of bankers
from across the country sent their congressional delegation a postcard
with this message: "My bank has paid its federal income tax. Did
you know that credit unions do not pay any federal income tax?"
In a speech this spring before the Wisconsin Bankers Association's
(WBA) annual meeting in Appleton, WBA's executive vice president,
Harry Argue, gave a clear picture of the banking industry's unity
and purpose on the subject of credit unions: "Dedicating top priority
attention to stop abusive credit union competition is a goal that
everyone in this room obviously endorses. So too have other state
bankers associations, the American Bankers Association, Independent
Bankers Association of America, and the S&Ls' national trade group,
America's Community Bankers."
But credit unions see the current public relations flurry by the
banks as little more than a smokescreen to shield what they say
is most damaging to banks: that credit unions provide better financial
service. Also, credit unions stress that they are granted a federal
income tax exemption because they are nonprofit, member-supported
institutions that pay no returns to stockholders, and whose goal
is to return any profits back to memberseither in the form
of dividends or in better-priced products.
Larry Hanna, president of First Community Credit Union in Jamestown,
N.D., cites the June 1996 study released by the Credit Union National
Association (CUNA) and the Consumer Federation of America, which
said that U.S. consumers could save billions of dollars by shifting
their credit card debt and their deposit accounts to credit unions.
"I think they should be looking in their own backyard," Hanna says
about banks. Besides, he adds, if bankers think that credit unions
have such an easy time in the marketplace, they should change their
charters and become credit unions. "If a bank wants to become a
credit union, it can," he says.
"Banks need a scapegoat," says Jerry Karbon, spokesperson for
CUNA in Madison, Wis. He says banking trade groups are using the
issue as a recruitment tool and to divert attention from their failure
on other legislative fronts, such as the repeal of Glass-Steagall,
the depression-era law that prohibits banks from engaging in the
securities business. He also says that the banking industry has
been performing very well in recent quartersin some cases
setting profit recordsand so banks' efforts against credit
unions are misplaced. "What more do they want?" Karbon asks.
Many consumers, who perhaps know little about the distinctions
between credit unions and other financial institutions, may wonder
what all the fuss is about. And that's part of the reason for the
banks' campaign, say bank industry officialsto educate the
public. Banks have always cast a wary eye toward credit unionslargely
because credit unions are exempt from federal income tax and most
state income taxesbut recently banking groups have planned
extensive marketing campaigns to educate legislators and the public
about the differences between banks and credit unions, and about
why banks feel that credit unions should not only pay federal income
taxes, but why they should also abide by the same regulations applied
"It's a hot button now," says John Cadby, executive vice president
of the Montana Bankers Association, who says the issue has been
growing in recent years because credit unions have begun to aggressively
seek new members, and in so doing credit unions are unfairly competing
with banks. Largely because of their federal income tax exemption,
credit unions are able to offer better loan and deposit rates, Cadby
says. "They're eating bankers' lunch in the marketplace," he says,
adding that this is an especially important issue with community
The fedgazette's recent poll
of Ninth District community bankers bears out Cadby's assessment:
When it comes to legislative objectives, few of the bankers have
interest in such "new powers" objectives as securities and insurance,
which have long been debated in the halls of Congress; rather, over
90 percent of the respondents would like to see legislative action
directed at credit unions. Specifically, community banks would like
to see credit unions pay federal income tax and would have them
subject to the Community Reinvestment Act, the 1977 law that requires
banks to lend within their market area.
A credit union, by any other name, is still not a bank
While a bank can indeed change its charter and become a credit union,
such a change would be in name only for most of the general public,
according to those interviewed for this story. As noted above, the
difference between a credit union and a bankeven among credit
union membersis lost on many.
Simply put, a bank is an institution that accepts demand deposits
and makes loans. Of course, a credit union does the same thing,
but banks are owned by stockholders who provide assets to operate
the bank, while a credit union is owned by members who share a common
field of membership, such as where they work or live. Essentially,
banks can do business with anyone, while a credit union's business
is limited to its members. Both banks and credit unions are regulated
by federal agencies, and institutions in both industries contribute
to a fund that insures deposits up to $100,000.
Like other commercial businesses, a bank works to earn a profit
and to provide a return to its stockholders, and this profit is
taxed by the federal government and most state governments. A credit
union is a nonprofit cooperative that is exempt from federal income
tax and most state income taxes. US credit unions first appeared
in the early part of this century and were based on the 19th-century
European idea of "people's banks." By 1935, 39 states had credit
union laws and in that same year, Congress passed the Federal Credit
Union Act, which permitted credit unions to be formed anywhere in
the United States.
Today, there are about 10,000 banks in the United States and about
12,200 credit unions. The numbers of both banks and credit unions
have been shrinking in recent years, mainly due to consolidation.
Measured by total assets, though, both industries have grown in
recent years: Bank assets grew, on average, by 5.08 percent annually
from 1991 through 1995, while credit union assets grew 7.52 percent,
averaged annually, over the same time.
However, even though credit unions have more offices than banks
and have been growing at a faster rate over the past five years,
a large gap still remains between the total assets of banks and
credit unions. As of year-end 1995, banks had a total of about $4.3
trillion in assets, compared to about $317 billion for credit unions;
in other words, the average credit union is much smaller than the
Banks say this,
credit unions say that
But the total size of banks vs. credit unions is not the issue,
bankers maintain; the real issue is the competitive impact on Main
Street, U.S.A., of two financial institutionsone a credit
union with a broad field of membership and one a community bankthat
are often competing for the same business and that operate by different
rules. What follows are the banking industry's main arguments against
credit unions, with responses from the credit union industry.
1. Size and membership
In about half of the states, a credit union would rank among the
top 10 banks in the state, according to the American Bankers Association.
Although many credit unions are still very small, the trade group
claims that the larger ones have abandoned credit unions' original
purpose: to serve select groups of people and to provide deposit
and loan services to "people of small means."
The top eight credit unions in Wisconsin are larger than 90 percent
of the banks, says J. Stephen Hamilton, president of the State Bank
of La Crosse, Wis. There are 12 credit unions in La Crosse, and
four of those now have a field of membership that includes anyone
who lives in La Crosse, he says. "That's my market, too."
Field of membership and "common bond" are also sore points with
bankers. Common bond refers to the common characteristic that members
of a credit union share; for example, they might all work for the
same employer or attend the same church. But a credit union's field
of membership may include more than one common bond. As some credit
unions have consolidated and as others have requested changes to
their common bond status, their membership has grown. "They used
to be small mom-and-pop stores for employee groups," says Larry
Jochim, president of Flathead Bank of Bigfork, Mont.
In a paper completed this spring, James Schlosser, executive vice
president of the North Dakota Bankers Association, expressed the
banking industry's frustration with the common bond issue: "The
common bond, once the hallmark of the credit union industry, has
been stretched beyond recognition. Once, members of a credit union
knew each other, and pooled their resources to provide credit for
their co-workers and neighbors. Under today's interpretations, the
common bond allows hundreds of unrelated groups to belong to the
same credit union, and geographically based credit unions can serve
Further, Hamilton says that credit unions no longer play second
fiddle to the more sophisticated banks; credit unions are building
new facilities, offering products that are similarif not identicalto
banks, employing state-of-the-art technology and luring good workers
with better salaries. Consequently, he says credit unions are shopping
for more sophisticated customers. "The concept of credit unions
serving the small guy is no longer valid," Hamilton says.
Don't tell that to Debra Mathern, president of the Fargo Public
Schools Federal Credit Union, which is an $8.5 million asset institution
with over 2,000 members that still gives out $100 or smaller loans
for such things as college textbookswith little regard to
the personal wealth of the loan applicant. "Everybody gets one chance,"
It's that kind of service that typifies a credit union and is
still a very important part of what it means to serve as a credit
cooperative, she says. "Banks should not really feel threatened
by credit unions," she says of those bankers who say that credit
unions are infringing on their market share. Many of the loans that
credit unions provide are not necessarily the loans that banks are
interested in, according to Mathern. Fargo has over 30 financial
institutions, 14 of which are credit unions, and many of those are
so small that they have just one employee.
Mathern does say that credit unions offer more products than in
the pastsuch as mortgagesbut it's because their members
demand those services. Besides, all financial institutions have
to grow and change with the times, she says, or they will fail,
and it was never intended that credit union services should be limited.
The demands of change can also bring difficult challenges for credit
unions, according to Mathern. Credit union memberslike other
financial institution customerswant speed and certain technology
from their financial services provider, but Mathern's credit union
can't even afford to install ATMs; and the only way her credit union
could afford to provide the convenience of a branch is to share
the cost with another credit union, she says.
Mathern has praise for many banks in Fargo that she says not only
work to provide the best loan and deposit rates"they give
us great competition"but that are also very involved in the
community, especially the schools. "I give the banks credit for
those efforts," she says. Mathern says that both banks and credit
unions have their place in the community and, in the end, she finds
it difficult to believe that so many banks are so concerned about
the presence of credit unions.
It's not the small credit unions that concern bankers, according
to those interviewed for this story, it's the larger ones with fields
of membership that include such geographical borders as cities,
counties and states. "We do not have standing to object to the expansion
of common bond," NDBA's Schlosser says.
In some states, banks are challenging common bond expansions in
the courts. In one long-running case in Montana, a group of banks
has asked the US District Court for the District of Montana to render
a summary judgment ruling that the National Credit Union Administration
(credit unions' federal regulator) acted illegally in granting a
charter expansion for Missoula Federal Credit Union. In the meantime,
an attorney representing NCUA has asked the court to dismiss the
case in favor of the NCUA, arguing that the agency's actions were
within the allowances of the Federal Credit Union Act.
Harry Argue, who represents Wisconsin's bankers, points out a
particular ad for the CUNA Credit Union in Madison that includes
the following: "And you'll become a member as soon as you understand
the strict qualifications for joining CUNA Credit Union: 1. You
have to live somewhere. 2. Murray, the CUNA Credit Union monkey,
has to like you. (Don't worry, Murray likes everyone.)"
"Credit unions have exceeded the boundaries of common bond," Argue
Nonsense, says Jerry Karbon, CUNA's spokesperson. Common bond
was never intended as a means of limiting credit union membership,
but was intended to help credit unions get started and remain viable.
Viability was also the reason that the NCUA, in 1982, allowed credit
unions to serve multiple fields of membership, according to a CUNA
policy statement: "This policy change is fully consistent with the
Federal Credit Union Act. As a result, many credit unions were able
to survive recessionary periods and provide their members with affordable
financial services exactly when they needed help the most."
For Russell Plunkett, president of the 45,000-member St. Paul
Postal Employees Credit Union, there is one reason that explains
the growing membership in credit unionsit's the service they
provide, and it's a service that he thinks should be open to all.
"Anyone should have a right to belong to a credit union," Plunkett
says. "Their [bankers'] concerns are misguided. It's just that we're
an easy target."
When bankers talk about regulations for credit unions, they are
usually referring to the Community Reinvestment Act (CRA). According
to NDBA's Schlosser, credit unions that are expanding their common
bond and offering full financial services should at least have to
comply with CRA, which was passed to ensure that banks lend to their
entire market, including low-income areas.
"Even credit unions with a geographic common bondwhose field
of membership is based on a town, a county, or even an entire statehave
no obligation to serve low- and moderate-income neighborhoods in
their service area," writes the American Bankers Association in
"Credit Union Reality Check," a publication that describes the banking
group's complaints about credit unions.
The CRA issue is a "total red herring," says CUNA's Karbon. CRA
was passed because some banks were redliningthat is, not lending
to certain areasand therefore CRA is a "bank-created problem,"
Karbon says. "Credit unions weren't redlining," Karbon says. He
adds that if banks are unhappy with CRA they should work to have
Congress change the law, rather than trying to pass it to other
financial institutions. Credit unions, he adds, are formed to serve
the needs of their members, who are their community.
3. Tax-exempt status
This is the granddaddy of bank vs. credit union issues. A 1953 headline
in the Florida Credit Union League's monthly newsletter read: "Bankers
Attack Credit Unions' Tax Exemption."
CUNA uses that newsletter example in one of its papers to show
how the banking industry has always had it in for credit unions'
federal income tax exemption. But that doesn't mean that credit
unions should relax, CUNA warns, acknowledging that the latest effort
by the banking industry is more intense than 43 years ago and involves
the courts, the arena of public opinion and Congress.
Much has changed over those 43 years to raise bankers' concerns,
Schlosser argues in his recent paper. The introduction of federal
insurance for credit union deposits in 1971, changes in the interpretation
of common bond through the 1970s and '80s, congressional authorization
to make mortgage loans in 1978 and transaction (checking) accounts
in 1980, have all served to blur the lines between credit unions
and banks and means that large credit unions should at least be
required to pay federal income tax, Schlosser says.
In a letter last year to Montana Congressman Pat Williams, Flathead
Bank's Larry Jochim detailed his concerns about the tax exemption
issue. He described how a credit union and a bank would have the
same costs in providing a $10,000 loan, but the credit union would
only have to charge 10 percent interest to net $1,000 on the deal,
while a bank would have to charge 17.16 percent interestthe
extra 7.16 percent would be needed to pay state and federal income
taxes. "We have lost opportunity on credit products because of the
tax rate differential," Jochim says. He says his bank pays 6.75
percent state income tax and 35 percent federal income tax and must
build those tax payments onto its loan ratescompeting credit
unions pay zero corporate income tax. "It's contrary to the free
enterprise system," Jochim says.
"We recognize the 'sacred stature,' and the political environment
protecting credit unions," Jochim wrote to Williams, "however, common
sense is common sense. Please review this matter in light of 'What
And what is fair about taxing the members of a nonprofit cooperative?
asks Simon Hellermann, president of Melrose Credit Union, Melrose,
Minn. "We have 17,000 stockholders, they're our members," Hellermann
says about the $110 million asset institution, adding that credit
union members already pay their own taxes. "Credit unions have merited
this tax status and continue to deserve it because we're nonprofit
and democratic. We'll still make a $25 or a $50 loan."
Hellermann worked for 18 years with Commercial State Bank in St.
Paul before joining the Melrose Credit Union, and he has praise
for his former bank employer. After joining the credit union, though,
he realized that the "member-owned" status is particularly appealing
to people and that is why credit unions are growing. "Members know
us, we know them," he says.
The banking industry is also suggesting to Congress that credit
unions should be taxed to provide some relief for the national budget.
If credit unions were taxed, about $1 billion would be added to
the federal government's budget. During this era of budgetary constraint,
the federal government has to consider the credit union exemption
as a revenue loss, Jochim says.
The battle is joined
Banking officials, who are veterans of legislative battles in both
the state houses and Congress, know that any attempt to change laws
pertaining to credit unions will not be easy and will take a long
time. According to Harry Argue, who chairs a credit union task force
for the ABA on this issue, the banking industry has a three-step
- Launch a "massive" educational effort.
- Introduce a credit union taxation bill in Congress at the appropriate
time. This bill would, possibly, require federal income taxation
for all credit unions over $25 million in deposits or any sized
credit union with a community-based charter.
- Introduce legislation at the state level according to the "needs
and political realities" of each state.
"We must go beyond just deeming this a top priority and expecting
'someone else' to deliver it. Every one of us must commit to going
the extra mile for the next several years, not just months, to ultimately
succeed," Argue told Wisconsin bankers this spring.
And the credit unions are ready to wage their own educational
effort, according to Jerry Karbon of CUNA. A recent report from
CUNA, "Credit Unions: The Consumer's Choice," fires back at the
banking industry. "Banker attacks against credit unions are unprovoked,
unjustified and without merit," states the report's executive summary.
"Still, the banks persist."