Several applications for credit union expansions and mergers are pending across the state – and banks seem strangely quiet on the subject.
Has the climate changed? Credit unions appear to be busier than ever, and their circle of customers growing ever larger. Yet hardly a peep of protest has been heard from the banking industry, contrasting sharply with its past behavior.
The Credit Union Membership Access Act was passed just over two years ago, giving credit unions the freedom to expand their memberships, despite strong opposition from banks. And credit unions have apparently been taking advantage of that new freedom.
Just approved last month by the Massachusetts Division of Banks was the establishment of a Westford branch office for the Joanne D’Arc Credit Union of Lowell, as well as the expansion of membership in the Worcester Credit Union.
Several other credit unions have pending applications. Gas & Electric Employees Credit Union of Melrose and Cape Cod Gas Employees Federal Credit Union are looking to merge, as are Kelko Credit Union in Springfield and Twin Meadows Federal Credit Union in East Longmeadow.
Meanwhile, General Electric River Works Employees Credit Union in Lynn, Landmark Credit Union in North Adams, Tremont Credit Union in Boston and Springfield’s Western Massachusetts Telephone Workers’ Credit Union are all seeking permission to expand membership eligibility.
“With the adoption of – the overwhelming passage of – the Credit Union Membership Act, clearly we suffered a setback,” said Kevin F. Kiley, executive vice president and chief operating officer of the Massachusetts Bankers Association. “We are continuing to evaluate what’s the best approach to take.”
Kiley attributed the increased credit union activity in part to increased opportunities for credit unions to participate in mergers and acquisitions.
“It seems we have more and more credit unions looking to consolidate or put two together,” Kiley said.
Robert B. Kimmett, senior vice president of the Massachusetts Credit Union League, agreed that credit unions have been able to explore new options in recent years, accounting for new growth.
“There was a certain amount of pent-up activity with the whole H.R. 1151 [bill] and the credit union access act, which stalled a lot of credit union plans,” said Kimmett.
Tax Tussle
The tussle between banks and credit unions began in 1996, with an injunction to stop credit unions from signing on new member groups. Credit unions were held in limbo until the passage of the credit union parity act two years later.
Kimmett maintains that increased credit union activity is more than just a function of the legal freedom to expand membership.
“The increase in applications is actually, first and most importantly, because of consumer demand,” he said. “People have shown a willingness and desire to use the credit union alternative, maybe because they’re not as satisfied with their other choices, especially in view of the big bank mergers and the increasing fee loads of larger institutions.”
But Kiley contends that increased credit union membership and activity translate into loss of market share for banks.
“It siphons off business from community banks that continue to have an extremely heavy tax burden and continue to invest in their communities through their Community Reinvestment Act responsibilities,” said Kiley, touching on a major bone of contention between the two types of institutions.
As not-for-profit institutions, credit unions are not subject to taxes or to CRA requirements, as are banks. Kimmett charges that credit unions should remain tax- and CRA-free because they are “fundamentally different” types of institutions, with a mission to provide high-quality financial services at low costs to consumers, regardless of the size of membership.
“We weren’t made tax-exempt as long as we remained small and inoffensive to banks. We were made tax-exempt because we are nonprofit institutions,” Kimmett said, pointing out that several bills to tax credit unions have been drafted, and defeated, time and again over the years.
As far as CRA requirements, Kimmett argues that credit unions are, by their very nature, involved in serving the community.
However, the National Credit Union Administration is examining ways to impose CRA-like regulations on credit unions, having proposed a Community Action Plan last year. The plan was vehemently opposed by credit unions as well as by Senate Banking Committee Chairman Phil Gramm of Gramm-Leach-Bliley Act fame.
“The position of the MBA is that credit unions, for all intents and purposes, are banks, and ought to be subject to taxes just as community banks are,” Kiley said. “If they’re not going to pay taxes, they ought to have CRA requirements, or, in lieu of tax requirements, at least a requirement to commit to assisting and supporting local community charities and activities that justifies their tax exemption.
“The exemption is no longer justified,” Kiley continued. “We’re not talking about the small little church-basement credit unions anymore.”
However, according to statistics gathered by the Credit Union National Association, the national trade group for credit unions, banks have paid more in dividends to stockholders than they paid in income taxes each year for the past seven years.
And as far as size is concerned, the average bank in America holds $668 million in total assets, compared to the $38 million in total assets of the average credit union. All together, total bank assets amount to $5.7 trillion, nearly 14 times the size of total credit union assets of $423 billion, according to the CUNA.
In the past five years alone, U.S. bank assets grew by $1.7 trillion, while credit union assets grew by $124 billion, one-fourteenth of that amount.
Kimmett foresees, and would like to see, expanded membership and services in credit unions in the future; a statewide advertising campaign is already underway. But, according to Kiley, there is a breaking point for credit union growth.
“The world is continuing to see competitive pressures across the board for all financial institutions,” Kiley said, adding a prediction that credit unions will be more regulated in the future, at least in terms of taxes or community investment requirements.
“Mutual banks, at one point in time, weren’t subject to taxation either. People will start to see, once they put aside all the rhetoric, that [credit unions] are full-service banks. I think that, ultimately, [taxation] will happen,” Kiley said.
Until then, Kiley stressed that the industry has not changed its position on credit union expansion, and is merely being “selective” in the battles it chooses to fight. Where that selective eye is roaming now, Kiley would not say.
“We’re continuing to monitor applications on the expansion of … credit unions and others. We’re continuing to do so where we think it’s appropriate – and we think it’s appropriate,” he said.
