Credit Unions Having Their Cake and Eating it Too

It’s official: The nation’s credit unions get to have their tax-exempt cake and eat it too!

Federal regulators last Friday afternoon announced a multi-billion-dollar bailout of the credit union industry due to risky bets on subprime mortgages. Regulators will manage $50 billion in troubled assets and issue approximately $35 billion in taxpayer-backed bonds. In other words, a financial industry that has never paid a dime in federal taxes is enjoying a taxpayer-funded rescue because of their risky and overreaching lending practices.

Under the plan, regulators seized the three largest wholesale credit unions and introduced new restrictions to try to avoid risky practices at credit unions—the same regulators that were urging Congress to expand the lending powers of credit unions!! Well, that sure seems a day late and about $35 billion short.

ICBA has long called on Congress to reconsider the tax-exempt status of the nation’s credit unions. A 2005 Tax Foundation study found that the exemption is costing taxpayers more than $30 billion over 10 years. Last Friday afternoon, that tab just about doubled. With spiraling budget deficits, maybe this bailout is enough to get Congress to finally act to ensure that the rest of us don’t have to take a bite of what the credit union industry is cooking up.

12 thoughts on “Credit Unions Having Their Cake and Eating it Too

  1. Cam, I think this could be the time and the environment when taxation finally gets broad-based attention. If not now, why?? Can there be untouchable entities given the depth of the deficit and financial crisis we are in?

  2. We have some very competitive credit unions in our market area, one has marketed themselves as “a better bank”. If resources allow, I also think it would be a good time to lobby against this unfair treatment.

  3. So, if five corporate credit unions are conserved, that means the entire industry has poor risk management practices? Haven’t 196 banks failed in the same time? And you can mention the corporate stabilization plan without mentioning the government’s infusion into your own industry? That’ playing very, very loose with the facts. I’m not saying that credit unions are free from criticism, but your recent letter and this blog posting distort the facts in a blatant attempt to protect your turf. Regarding the unfair tax exemption and how credit unions are living on easy street, I’ll believe that line when I see folks lining up to either convert banks into credit unions or form new credit unions. Until that happens, this claim of “unfair favoritism” rings hollow.

    – Anthony Demangone
    NAFCU Director of Regulatory Compliance

  4. Cam does not reply to comments on his blog. He should NOT. He is a busy person. Debate is pointless because ultimate model is already decided. That model consists of 4-5 MEGA banks.

  5. @Jagdish – If an individual is too busy to take part in a debate that individual should not start a debate. Debate is not pointless. It is the foundation of an equitable and vibrant society. “Throw s@#$ and run” is not a viable or adult way to engage in public policy discussion.

    Taxation provides value to the citzenry. Tax dollars are used to provide public services and to create a safety net over which the financial marketplace performs its high wire act, balancing consumer needs and corporate profits. The past couple of years of government involvement in what is an allegedly free market demonstrates that.
    Credit unions provide value to the communities they serve through the provision of low cost loans, higher dividends on savings, and a cooperative profit sharing model WITHOUT resorting to the government as middleman. All members of credit unions benefit when a credit union does well. Members are taxed on the employment income they deposit into their credit union, they are taxed on the dividends they earn on those deposits, they pay sales taxes on the items they buy with money from their credit union share draft account, they pay property taxes on the vehicles and homes that they purchase with proceeds from loans granted by their credit unions. The funds that are pooled by the member-owners of credit unions are taxed. The communities in which credit unions operate are beneficiaries of the increased spending power and financial well-being of credit union members. As Mr. Demangone points out, if the tax-exempt status is such a game changer for community banks why aren’t community banks lobbying for exempt status themselves? Why is attempting to take a benefit from the millions of consumers of credit union financial services better than offering it to your own customers?

    Jason Clarke
    Compliance Officer
    DuPont Community Credit Union

  6. I think the debate has already begun. I assume that the last thing community banks and credit unions want to do is concede the industry model to 4-5 mega banks.

  7. Careful what you wish for….lets assume the tax exemption is repealed. Several thousand credit unions will most likely convert to banks. Given the ratio of bank closures to credit union closures, we can infer that many of these institutions are run more financially sound than their competition. Do community bankers really want several thousand new competitors with no business lending restrictions, no capital raising restrictions, no investment advisory restrictions, etc, etc? I see how this benefits the ICBA in increased dues potential but not community bankers.

  8. Cam:

    Your letter to Mr. Geithner is stretching the facts. You should have had your “fact-checkers” do a better job in research regarding this letter!

    You write, ‘the taxpayer bailout of the credit union system should cast doubt on the wisdom and the fairness of their tax exempt status.’ First of all, your “taxpayer bailout” comment is totally incorrect. We are not asking for any tax-payer money to correct our shortcomings. The last time I checked there were nearly 190 banks so far this year that have failed — on top of the TARP money they took from hard-working, tax payers in our country. Our plan calls for credit unions to take care of their own. While this may not be the most ideal for some credit unions, it is much better than having to accept TARP money!

    You also write, ‘…credit unions not only do not pay tax, but when they are troubled they get a taxpayer bailout.’ Again, you just do not get it. We do not want any tax-payer money. We contribute in our communities where we work and live and do not take from them!

    You need to come up with a new arguement for your “credit unions don’t pay taxes” mantra. It is tired and old — much like the blame coming out of Washington these day on past administrations regarding our economy.

    By the way, Mr. Clarke’s comments are spot on!

    Dave Shuey
    Financial Partners FCU

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