Banks and credit unions have operated side by side for more than 80 years but — like neighbors who share a fence yet have different views and agendas — they don’t always get along.
Banks are the traditional financial institution, still the place where most people have checking and savings accounts, a home mortgage, maybe a car loan and other interests.
Not-for-profit credit unions offer all those services too, and have increasingly grabbed more of the competitive market. Banking officials have taken notice of the encroachment on their market shares, and insist some credit unions have undercut bank rates because of unfair advantages.
Credit unions were given a tax exemption in 1935 — 26 years after credit unions began in the United States and a year after the Federal Credit Union Act created a body to charter and supervise the institutions.
The regulation gives credit unions about a 35 percent break on their income taxes.
“Credit unions are paying nothing while the banking industry pays a 35- to 40-percent corporate tax rate,” said ANB Bank Regional President Tom Ashley. “So it’s like bankers and credit unions are running a race and credit unions have a 40-yard head start.
“That is difficult for us, as an industry, to swallow. It’s more difficult to compete with.”
Don Childears, president and CEO of the Colorado Bankers Association, summed up his frustration with many credit unions: “They want to play like a bank, but they don’t want to pay like a bank.”
Credit unions have seen steady asset growth, but the tax exemption remains in place.
“The big credit unions are who we’re concerned with,” Childears said. “They’re operating as tax-
Last month’s Treasury Department report estimated the federal government will forgo about $35.3 billion during the next 10 years, thanks to the credit unions’ tax exemption. That’s a big jump from the 2016 estimate of $26.7 billion.
“That would be evidence that credit unions are growing,” said William Craighead, a Colorado College economics professor. “But being unfair is in the eyes of the beholder.”
Credit unions say they’re just following the rules of the game, and they argue the tax exemption actually adds money to the economy, as lower rates save members money and leads to increased spending.
“Lower rates mean people can afford a bigger house or a better car,” Craighead said. “More competition in the marketplace is good for consumers.”
He’ll get no argument from Mountain West Credit Union Association President and CEO Scott Earl, who has offices in Denver and Phoenix.
“The tax exemption is not something I apologize for,” Earl said. “The bottom line is it benefits individual consumers, and points to why it’s still valid today. That tax exemption was given to credit unions so it would pass through to consumers.”
According to a Credit Union National Association report, the Joint Committee on Taxation’s most recent estimate of the credit union “tax expenditure” is $2.7 billion in 2017. CUNA claims the benefits credit unions provided members and nonmembers in 2016 far exceeded that, with $14 billion in savings when it came to lower rates and fees, higher yields and helping keep bank rates low.
“If you gave that same tax exemption to [banks], it probably wouldn’t flow to consumers, but to the stockholders,” Earl said.
That’s one of the basic differences between banks and credit unions, said Cutler Dawson, a retired vice-admiral who is president and CEO of Navy Federal Credit Union, the world’s largest credit union.
“We have an advantage over the banks because we’re essentially owned by the members that use us,” Dawson said. “Banks have customers, but then they have shareholders, so they have to pass some of the value back to their shareholders. We can return all the value we have to our members and we do that through low rates. We try to keep our fees low.”
APPLES AND ORANGES?
Banks also have some advantages, said Jon Paukovich, senior vice president of lending and chief lending officer for Colorado Springs-based Ent Credit Union, Colorado’s largest.
“We operate under different regulatory environments, so it’s kind of apples and oranges in some respects,” Paukovich said.
“We certainly have more restrictions in other areas. We have restrictions on member-business lending, commercial loans, certain types of investment property type loans.”
For instance, credit unions can’t charge more than 18 percent interest on credit cards, can’t have tier 2 supplemental capital, can’t have subordinated debt (riskier loans) and are capped at 12.5 percent of their assets for business loans.
“Banks will always see the tax exemption as an advantage for credit unions,” said Dennis Dollar, who was appointed by President George W. Bush as chairman of the NCUA in 2001 and is now a credit union consultant. “But if it’s such an advantage, why don’t banks change to become credit unions? To my knowledge, only two have changed in the last 40 years.”
Credit unions accounted for 5.5 percent of the market in 1992 and are now at 7.9 percent, Dollar said. While credit unions have grown, he said it doesn’t match the growth in banks. The largest 100 banks had 41 percent of the market share in 1992 and 75 percent in 2015.
“It’s the big banks that are hurting the community banks,” he said.
Neither Ashley nor Childears expects Congress to strip credit unions of their tax exemption anytime soon.
But they do harbor hope for change.
“I don’t think it would come as a standalone item to get rid of the tax exemption, but as part of major tax reform,” Childears said. “Everybody’s got to have some pain in this as we try to put the federal government on sound financial footing.”
That’ll take more than getting rid of the credit union tax exemption, Dollar said.
“That $3.5 billion a year won’t help much when the national debt is $20 trillion,” Dollar said. “That would be like trying to empty the Pacific Ocean with a Dasani water bottle.”
Still, Ashley contends that credit unions have strayed from their original purpose.
“Over time, I would argue — and many bankers would — that as the credit unions grew, they lost sight of what that original purpose was, to help that tight community that was under-served,” Ashley said. “Competition is good, but competition on an unlevel playing field is tough.”
Still, both can prosper.
“It seems from the time that credit unions and banks have co-existed that the market is big enough to support both models,” said Victoria Selfridge, Ent’s vice president of corporate communications. “And banks have had record profits so far this year. This [credit union] model has a solid track record, and the fact that Ent and other credit unions are growing shows that there is an appetite and that we are meeting a slice of demand that is in the market.”
Mark Martinez, regional manager of Navy Federal Credit Union and a Springs resident, doesn’t see this as banks versus credit unions.
“I think there’s something for everybody and it’s really a matter of personal preference and you should go where you get treated right,” he said. “I don’t think there’s a winner or a loser or a right or a wrong. There are different strokes for different folks.”