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Are Credit Unions Really Looking for a Free Ride?

Are Credit Unions Really Looking for a Free Ride? By Gina Ragusa
Published December 7, 2012
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Frank Keating, CEO of the American Bankers Association wrote an editorial in The Hill’s Congress Blog claiming that the credit union industry is a bunch of tax dodging “freeloaders” looking for an easy to way to dominate his industry.

In his article, Keating says that credit unions are actually a profit-machine, which generates a staggering $1 trillion a year, while other U.S. businesses pay their fair share of state and federal taxes. Furthermore, Keating is incensed that credit unions have the gall to ask lawmakers to raise the member business loan cap from 12.25% of a credit union’s assets to 27.5%.

He adds that the cap was established in 1998 because, “credit unions have limited business lending experience -- and as a reminder that credit unions were chartered to serve individuals of modest means, not developers of luxury condos and shopping malls.”

However, much has changed since 1998. The robust economy many Americans enjoyed in the late ‘90’s has reverted back to one that more closely resembles the 1920’s. It’s not shopping malls and luxury condo owners that credit unions are most concerned with helping; instead it's the small mom and pop shop owner who can’t seem to secure funding for vital equipment or necessary support that will keep dozens of employees still working.

According to The Huffington Post, a survey from Small Business Majority cited that more than 60% of small business owners find accessing credit to be a major challenge. Supporting this notion, a Pepperdine University study found less than one out of five business owners seeking a loan of $5 million or less were approved for financing.

Small businesses and the average American is becoming weary of big bank rhetoric. If community businesses continue to be denied financial support, how can the economy recover, especially as the country peers over the fiscal cliff?

A Credit Union CEO’s Retort

Greg Smith, President/CEO of PSECU ($3.5 billion, Harrisburg, PA) says that he found the Keating piece to mischaracterize the credit union industry.

Keating states that the credit union tax exemption status costs the U.S. Treasury Department $2 billion a year, however Smith contends that reducing the credit union’s net income through taxation could put member benefits at risk.

“PSECU's net income in 2012 will be slightly over $40 million,” he explains. “Assuming that we could whittle the corporate tax rate of 35% down to roughly 25%, that would be a $10 million tax bill. The effect of reducing our net income by 25% would significantly restrict our ability to grow assets given our capital requirements and limitations on how we raise capital.”

“At PSECU we also calculate the economic value that we provide to our members,” he adds. “This calculation takes into account the fact that we lead the market in terms of deposit rates, lead the market in terms of low loan rates, have few if any fees, return up to $20 per month in bank ATM surcharges to our members, don't charge foreign ATM fees, etc. Our last calculation indicated a $301 annual benefit for each member from these savings. With 400,000 members that works out to about $120 million in economic value for our members. I'd say that's a pretty good return for the government on the $10 million that they currently let us keep in reserves instead of paying into federal taxes. I suspect that most other credit unions could make an identical argument, which could be another reason the banks are so intent on changing the competitive landscape.”

In terms of the cap increase issue, Smith says that while some credit unions have pushed the envelope in terms of commercial lending, he believes that the evidence would show that banks make that mistake far more often than credit unions. “With banks and credit unions both having about 7,000 institutions each, I noted 19 credit union failures in 2011 compared to 92 bank failures in the same period. As for picking up the pieces, while there have been some spectacular credit union failures due to MBL activity, none of them have cost banks or the treasury a dime. The corporate losses that the industry suffered are being fully absorbed within the industry with the exception of a U.S. Treasury line of credit which credit unions pay a fair interest rate on.”

CUNA contends that there’s no downside to raising the MBL cap and that, “the proposed MBL cap increase could inject $13 billion in funds into the economy, creating as many as 140,000 new jobs in the first year following enactment.” Are bankers being fair or is the credit union industry simply asking for too much?

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