Chris Cole: The credit union tax exemption gains D.C.’s attention

Senate Finance Committee chairman Orrin Hatch (R-Utah) leaves a news conference following the Senate Republican policy luncheon at the U.S. Capitol on April 17.

Congress is suddenly raising red flags on the credit union tax exemption.

By Chris Cole

After being largely ignored by Congress during the tax reform debate of 2017, the credit union tax exemption is suddenly getting a lot of attention on Capitol Hill.

Senate Finance Committee chairman Orrin Hatch (R-Utah) is raising questions about the costly exemption as he prepares to retire, and the credit union industry’s response seems only to raise further questions.

Most recently, Hatch called for large credit unions to report financial information to the IRS like other tax-exempt institutions. In an April letter to IRS acting commissioner David Kautter, Hatch wrote that current laws requiring tax-exempt organizations to annually file Form 990s help ensure they operate within the scope of their tax-exempt purpose.

ICBA said it was a great idea. Amid concerns that credit unions have grown beyond their statutory mission of serving people of modest means with a common bond, requiring at least some of them to report to the IRS would provide needed information on how these financial firms are using their tax subsidies.

Overreliance on subsidies
Hatch released his proposal at the same time that news broke of a startling admission by National Credit Union Administration (NCUA) chairman Mark McWatters. Responding to concerns that Hatch raised earlier this year, McWatters acknowledged in a letter that eliminating the credit union tax exemption would create a “safety and soundness issue” in the industry’s Share Insurance Fund, which insures deposits held in credit unions. Acknowledging the reliance of the insurance fund on taxpayer subsidies only raised new concerns about the growth of the credit union industry and management of the fund.

The McWatters letter was a response to a January message from Hatch expressing concern that credit unions might be operating beyond their tax-exempt purpose. Noting that the credit union tax exemption is valued at approximately $2.9 billion this year alone, Hatch stated that foregone revenue requires the federal government to closely oversee the credit union industry and ensure it is fulfilling its intended purpose.

ICBA responded by noting that tax-exempt credit unions have for too long enjoyed the benefits of competing with taxpaying community banks. In an April 24 news release, then-ICBA president and CEO Cam Fine noted that total business lending by credit unions ballooned from $13.4 billion in 2004 to $56 billion in September 2015, an annualized growth rate of 14 percent.

Quick stat

$2.9 billion

Value of credit union tax exemption for 2018

Subsequently, ICBA called on Hatch to convene a hearing on the credit union industry’s tax exemption. In a letter to the committee chairman, ICBA said modern credit unions have failed in every aspect of their public mission and pose a threat to the American tax base. “It is widely understood but rarely acknowledged that the tax exemption has outlived its purpose,” ICBA wrote. “Now is the time to have that discussion.”

An overdue reckoning
The discussion has finally arrived due in no small part to the NCUA’s conduct. ICBA has waged a years-long fight against the captive regulator’s lax and outright benevolent treatment of the industry it is charged with overseeing. In his January letter to McWatters, Hatch cited several of the NCUA’s ICBA-opposed actions, including rules easing federal standards on credit union fields of membership, commercial lending and alternative capital.

These initiatives have begun to get pushback not only from Capitol Hill but also from the federal judiciary. In March, a federal judge vacated two provisions of the NCUA’s field-of-membership rule. The ruling in an ICBA-supported lawsuit against the NCUA limits the agency’s October 2016 final rule, which significantly expanded the service areas in which community credit unions can do business.

ICBA has waged a years-long fight against the captive regulator’s lax and outright benevolent treatment of the industry it is charged with overseeing.

The ruling overturned two key provisions of the rule. One automatically qualified combined statistical areas with fewer than 2.5 million people as local communities. The other increased the population limit for rural districts to 1 million people. The ruling left in place two other provisions challenged in the lawsuit: one on serving core-based statistical areas without serving their urban core, and another on adding “adjacent areas” to existing community fields of membership.

In a friend-of-the-court brief, ICBA and its state affiliates said the agency’s deliberate violation of statutory restraints to enlarge credit unions’ geographic reach is part of an ongoing campaign to promote the credit union industry—one that has led to more than $1 billion in legal fees to private law firms.

Established as not-for-profit institutions to serve individuals of modest means, the $1.36 trillion credit union industry now earns billions of dollars in profits every quarter and features outsized CEO salaries while remaining tax-exempt. ICBA continues to challenge both the tax exemption and the NCUA’s attempts to drastically increase the powers of these tax-exempt financial firms. Those efforts appear to be making headway in the nation’s capital.

Chris Cole ( is ICBA executive vice president and senior regulatory counsel.