Marlborough-based Digital Federal Credit Union is among the institutions cited by bankers as being “bank-like.”
Launching another salvo in the ongoing battle to prevent credit unions from infringing on their territory, the Massachusetts Bankers Association recently sent a letter to Congress listing grievances committed by three of the local tax-exempt institutions.
While the MBA doesn’t object to the tax-exempt status for most credit unions, it has traditionally vigorously opposed granting that status to “bank-like” credit unions, those institutions that are sizable, advertise aggressively and offer many of the same products and services found at banks. According to Kevin F. Kiley, vice president of the MBA, the vast majority of credit unions fulfill an important mission, but when they step into the territory of banks and directly compete with smaller banks – those with assets under $250 million, for example – the tax-exempt status gives credit unions an unfair competitive advantage.
On July 29, MBA President Daniel J. Forte sent a letter to U.S. Rep. Richard E. Neal, D-Massachusetts, expressing the association’s opposition to the “credit union enhancement provisions” of the Financial Services Regulatory Relief Act of 2002.
The letter listed examples to “illustrate the far-reaching growth of these tax-exempt entities.” Three specific instances were mentioned.
The first concerned an inadvertent violation of advertising rules by Needham-based Direct Federal Credit Union that was first reported by Banker & Tradesman. The second referenced an employment advertisement placed in a Boston paper by Manchester-based St. Mary’s Bank (a credit union). Lastly, the letter hints at the lavishness of a game room constructed for employees by Digital Federal Credit Union.
Robert B. Kimmett, senior vice president of the Massachusetts Credit Union League, summed up his thoughts regarding the MBA’s letter by saying, “It’s a sad attempt to pander to a certain portion of the membership and certain banks.” He added that no new issues have been raised in the letter.
“It’s really grasping at straws when there are no real issues. These issues have even less substance than they typically do and they [the MBA] are picking up anything that they see and looking to smear a credit union,” said Kimmett.
But Kevin F. Kiley, executive vice president of the MBA, said that the point of the letter was not any renewed focus on the issue but rather a continuing effort to “educate” politicians on inconsistencies involving the mission of credit unions and when those institutions cross the line into bank-like practices.
“The vast majority of credit unions continue to serve a very small, focused group of individual members, but there is another segment that for all intents and purposes are full-service banks,” said Kiley. Such entities receive the benefit of tax-exempt status while using their additional resources to heavily advertise their products and services. That type of head-to-head competition with community banks turns the tax-exemption into a kind of government subsidy, he said.
In the letter to Neal, Forte wrote that Digital Federal Credit Union’s new operations center in Marlborough is “Replete with waterfalls and billiards tables … This new 83,000-square-foot building is testament to the credit union ‘movement’s’ threat to small tax-paying community banks.”
“We do have a game room,” said Tim Garner, vice president and marketing officer for the $1.7 billion-asset Digital. “It has one pool table, a dart board, an air hockey game and a [Sony] Play Station. It’s basically an all-employee lounge where people can relax on breaks,” he said. The operations center was opened in October of 2001, consolidating 260 employees from three other locations, including the credit union’s former headquarters in Maynard, which Garner described as “bursting at the seams.”
Although Garner admits the game room might be an unusual feature, in no way does he think it’s opulent. “I’m not surprised by that kind of message,” said Garner of the MBA letter. “To be able to give [our customers] the kind of service they deserve, we have to have the best and the brightest employees we can find. To get those and to hang onto them, we have to give them good benefits and a nice place to work,” he said, calling the letter’s description of the operations center an “overstatement.”
While Kiley admitted there’s nothing “wrong” per se with a game room in a credit union, he suggested the money would be better spent elsewhere. “We think what would be a better benefit would be to expand the availability of funds for affordable housing or some other specific purpose for the benefit of either their members or the citizens of the commonwealth,” said Kiley.
Terminology Tussle
Kimmett said the latest missive was aimed at satisfying the core members of the MBA – community bank executives. “I know this isn’t done to make Fleet [FleetBoston Financial] and Sovereign [Bank] happy. There are certain people who have a misplaced desire to blame credit unions for marketplace issues,” he said.
“This is nothing new, just a variation of the same tired, anti-credit union propaganda routinely spewed out by the banking industry and their lobby groups,” said Mark Wolff, senior vice president of communications at the Credit Union National Association. “Mind you, this is the same banking industry that’s enjoyed record profits 11 out of the past 12 years, that nationally holds 93 percent of market share compared to credit unions’ 7 percent, that lobbies for expanded tax breaks without passing the savings on to their customers … Frankly, Congress has heard it before, sees it for what it is and pays it no mind. We expect that will hold true in this instance as well.”
That could very well be true, according to banking strategist Jim Clarke, principal of Villanova, Pa.-based Clarke Consulting and an expert in the banking field. While the MBA is more aggressive than other associations, Clarke said the issue raised by the association is a valid one.
“Credit unions have varying influences across the country, but there are markets in Massachusetts where they are gaining market share, particularly the Worcester area and in the Berkshires … MBA has tried to take the high road and appeal to politicians on the tax issue … but that argument just does not resonate,” said Clarke.
The larger issue operating is the fact that some large banks have behaved in ways that have sullied the image of all banks, engaging in predatory lending, charging high fees and selling customer lists. Banks associated with high-profile failures such as Enron Corp. have been a further black eye for the industry, said Clarke.
Credit unions come off as friendlier and can charge lower fees and pay rates higher on deposits because of their tax advantage, said Clarke.
“This issue is difficult because Congress won’t touch credit unions,” said Clarke. “Maybe as they do more risky lending and wind up with problems things will change, but in the meantime I’m not sanguine.”
Neal’s office did not respond to phone calls requesting his reaction to the letter. Neal’s spokesman said he responds to all mail, however.
Another problem listed in the letter involved the issue of whether the term “bank” can be applied as a generic term to the services offered by credit unions as well as banks. The name St. Mary’s Bank and an advertisement by Direct Federal Credit Union were cited as improper uses of the word “bank” by credit unions. But St. Mary’s was chartered with its name in 1909, according to Kimmett – it is the oldest credit union in the country. And while Direct Federal corrected an omission regarding deposit insurance contained in its radio ad, the National Credit Union Administration, the governing body for credit unions, found that the omission was an “oversight.” Further, the letter dated March 19 from NCUA Chairman Dennis Dollar to MBA’s Forte opined that the term banking services is substantially the same as financial services.
“It is a word in common use – that’s the category,” said Kimmett. As an example, Kimmett cited the Banking and Lending section of Banker & Tradesman, which features news coverage related to banks and credit unions. “It’s really a very hollow issue that hasn’t struck a chord with anyone and it’s a meaningless argument,” he said.
