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26–372 2006

REVIEW OF CREDIT UNION TAX EXEMPTION 

HEARING 

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED NINTH CONGRESS 

FIRST SESSION 

NOVEMBER 3, 2005 

Serial No. 109–38 

Printed for the use of the Committee on Ways and Means 

( 


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COMMITTEE ON WAYS AND MEANS 

BILL THOMAS, California, Chairman 

E. CLAY SHAW, JR., Florida 

NANCY L. JOHNSON, Connecticut 

WALLY HERGER, California 

JIM MCCRERY, Louisiana 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

JIM NUSSLE, Iowa 

SAM JOHNSON, Texas 

PHIL ENGLISH, Pennsylvania 

J.D. HAYWORTH, Arizona 

JERRY WELLER., Illinois 

KENNY C. HULSHOF, Missouri 

RON LEWIS, Kentucky 

MARK FOLEY, Florida 

KEVIN BRADY, Texas 

THOMAS M. REYNOLDS, New York 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

BOB BEAUPREZ, Colorado 

MELISSA A. HART, Pennsylvania 

CHRIS CHOCOLA, Indiana 

DEVIN NUNES, California 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

BENJAMIN L. CARDIN, Maryland 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

WILLIAM J. JEFFERSON, Louisiana 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

STEPHANIE TUBBS JONES, Ohio 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

RAHM EMANUEL, Illinois 

ALLISON H. GILES, Chief of Staff 

JANICE MAYS, Minority Chief Counsel 

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to 

prepare both printed and electronic versions of the hearing record, the process of converting 

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process 

is further refined. 


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(III) 

C O N T E N T S 

Page 

Advisories announcing the hearing ........................................................................ 2 

WITNESSES 

National Credit Union Administration, the Honorable JoAnn Johnson, Chairman; accompanied by Robert Fenner, General Counsel ................................... 6 

Internal Revenue Service, Tax-Exempt and Government Entities Division, 

Steven T. Miller, Commissioner .......................................................................... 17 

U.S. Government Accountability Office, Financial Markets and Community 

Investment, Richard J. Hillman, Managing Director ....................................... 22 

American Bankers Association, and First National Bank of Waverly, Jeff 

L. Plagge ............................................................................................................... 116 

America’s Community Bankers, and Litchfield Bancorp, Mark E. Macomber ... 130 

Credit Union National Association, and Greater El Paso’s Credit Union, Harriet May ................................................................................................................ 93 

Independent Community Bankers of America, and Security Bank, Dyersburg, 

Tennessee, David E. Hayes ................................................................................. 124 

National Association of Federal Credit Unions, and Navy Federal Credit 

Union, Vice Admiral Cutler Dawson, retired ..................................................... 80 

National Community Reinvestment Coalition, John Taylor ................................ 174 

National Credit Union Administration, the Honorable Norman E. D’Amours .. 164 

Tulane-Loyola Federal Credit Union, Constance Kennelly .................................. 183 

University of Nebraska-Lincoln, College of Business Administration, Gordon 

V. Karels, Ph.D. .................................................................................................... 168 

SUBMISSIONS FOR THE RECORD 

Ayers, Walter, Virginia Bankers Association, Glen Allen, VA, statement ......... 197 

Bartlett, Steve, Financial Services Roundtable, statement ................................. 205 

Becker, Fred, National Association of Federal Credit Unions, Arlington, VA, 

letter ...................................................................................................................... 200 

Chatfield, David, California Credit Union League, Rancho Cucamonga, CA, 

letter ...................................................................................................................... 201 

Dawson, Cutler, Navy Federal Credit Union, Vienna, VA, statement ................ 199 

English, Phil, U.S. House of Representatives, statement .................................... 207 

Gillespie, Donald J., A.M. Community Credit Union, Kenosha, WI, letter ........ 207 

Gittens, Lane, West Haven, UT, letter .................................................................. 210 

Headlee, Howard, Utah Bankers Association, Salt Lake City, UT, letter .......... 210 

Heller, Thomas, Orlando, FL, statement ............................................................... 211 

Kerslake, Dale, Cascade Federal Credit Union, Kent, WA, letter ....................... 211 

Mica, Dan, Credit Union National Association, Washington, DC, letter ............ 212 

Minnesota Bankers Association, Edina, MN, statement ...................................... 216 

Oemichen, William, Wisconsin Federation of Cooperatives/Minnesota Association of Cooperatives, Madison, WI, letter ........................................................... 219 

Slach, Harold, Port Orchard, WA, statement ........................................................ 220 

Woodard, Thad, North Carolina Bankers Association, Raleigh, NC, letter ........ 220 


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(1) 

REVIEW OF CREDIT UNION TAX EXEMPTION 

THURSDAY, NOVEMBER 3, 2005 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:44 a.m., in room 

1100, Longworth House Office Building, Hon. Bill Thomas, (Chairman of the Committee), presiding. 

[The advisory and revised advisory announcing the hearing follow:] 


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ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1721 

October 27, 2005 

No. FC–15 

Thomas Announces Hearing on Review of Credit 

Union Tax Exemption 

Congressman Bill Thomas (R–CA), Chairman of the Committee on Ways and 

Means, today announced that the Committee will hold a hearing titled, ‘‘Review of 

Credit Union Tax Exemption.’’ The hearing will take place on Thursday, November 3, 2005, in the main Committee hearing room, 1100 Longworth 

House Office Building, beginning at 10:00 a.m. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witnesses only. Invited witnesses will include representatives from the U.S. Government Accountability Office, the Internal Revenue 

Service, the National Credit Union Administration (NCUA), as well as academic experts and other interested parties. However, any individual or organization not 

scheduled for an oral appearance may submit a written statement for consideration 

by the Committee and for inclusion in the printed record of the hearing. 

BACKGROUND: 

In 1934, the Federal Credit Union Act (FCUA) (P.L. 73–467) was signed into law, 

establishing a charter for Federal credit unions. Three years later, Congress provided for statutory tax exemption for Federal credit unions. At the time when the 

FCUA was enacted, there were approximately 2,350 credit unions operating in the 

United States with approximately 450,000 members and assets of $50 million. At 

the end of 2004, there were 9,483 credit unions with about 86.9 million members 

and assets totaling more than $674 billion dollars. 

There are varying explanations for why Congress granted tax-exempt status to 

credit unions. The most recent explanation can be found in the Credit Union Membership Access Act in 1998 (P.L. 105–219), where Congress stated in its findings 

that credit unions are tax-exempt because they ‘‘are member-owned, democratically 

operated, not-for-profit organizations generally managed by volunteer boards of directors and because they have the specified mission of meeting the credit and savings needs of consumers, especially persons of modest means.’’ 

Under current law, Federal credit unions are tax-exempt under section 501(c)(1) 

of the Internal Revenue Code (IRC). In order for a Federal credit union to be recognized as tax-exempt it needs to be chartered by the NCUA. State credit unions are 

tax-exempt under section 501(c)(14) of the IRC. This provision requires that the 

credit union not have capital stock, and that it be organized and operated for mutual purposes and without profit. 

Credit unions are limited under their authorizing legislation both in terms of who 

they may serve and the services they offer. However, as credit unions have grown 

over time, they have been allowed to expand their range of services and their fields 

of membership. Some have questioned whether these changes in the credit union 

industry mean that many credit unions do not serve the goals for which the tax exemption was granted. 

The hearing will examine the following issues: 

• The history of and Congress’ rationale for providing tax exemption to credit 

unions; 


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• Whether credit unions are serving the goals intended with their tax-exempt status; 

• The use of the tax benefit by credit unions; and 

• Changes in the credit union industry, including the growth in credit union 

membership and services. 

In announcing the hearing, Chairman Thomas stated, ‘‘This hearing continues the 

Committee’s examination of the tax-exempt sector. When credit unions were granted 

their tax exempt status, they provided an important benefit to people of modest 

means. Credit unions have been statutorily tax-exempt for almost 70 years now, and 

it is important that Congress understand whether there is a strong justification for 

the tax exemption. Congress has an obligation to ask questions to ensure that the 

country is receiving something in exchange for the benefit of tax exemption.’’ 

FOCUS OF THE HEARING: 

The hearing will examine the legal history of the tax exemption for credit unions, 

to determine whether credit unions are serving the goals intended with their taxexempt status. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://waysandmeans.house.gov, select ‘‘109th Congress’’ from the menu entitled, 

‘‘Hearing Archives’’ (http://waysandmeans.house.gov/Hearings.asp?congress=17). Select the hearing for which you would like to submit, and click on the link entitled, 

‘‘Click here to provide a submission for the record.’’ Once you have followed the online instructions, completing all informational forms and clicking ‘‘submit’’ on the 

final page, an e-mail will be sent to the address which you supply confirming your 

interest in providing a submission for the record. You MUST REPLY to the email 

and ATTACH your submission as a Word or WordPerfect document, in compliance 

with the formatting requirements listed below, by close of business Thursday, November 17, 2005. Finally, please note that due to the change in House mail policy, 

the U.S. Capitol Police will refuse sealed-package deliveries to all House Office 

Buildings. For questions, or if you encounter technical problems, please call (202) 

225–1721. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing record. As always, submissions will be included in the record according to the discretion of the Committee. 

The Committee will not alter the content of your submission, but we reserve the right to format 

it according to our guidelines. Any submission provided to the Committee by a witness, any supplementary materials submitted for the printed record, and any written comments in response 

to a request for written comments must conform to the guidelines listed below. Any submission 

or supplementary item not in compliance with these guidelines will not be printed, but will be 

maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word or WordPerfect 

format and MUST NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised that the Committee relies on electronic submissions for printing the official 

hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons, and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone and fax numbers of each witness. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://waysandmeans.house.gov. 


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The Committee seeks to make its facilities accessible to persons with disabilities. If you are in need of special accommodations, please call 202–225–1721 or 

202–226–3411 TTD/TTY in advance of the event (four business days notice is requested). Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to 

the Committee as noted above. 

f 

ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1721 

November 03, 2005 

No. FC–15–Revised 

Change in Time for Hearing on Review of Credit 

Union Tax Exemption 

Congressman Bill Thomas (R–CA), Chairman of the Committee on Ways and 

Means, today announced that the Committee hearing titled, ‘‘Review of Credit 

Union Tax Exemption,’’ previously scheduled for 10:00 a.m. on Thursday, November 

3, 2005, in the main Committee hearing room, 1100 Longworth House Office Building, will now be held at 10:30 a.m. 

All other details for the hearing remain the same. (See Full Committee Advisory 

No. FC–15, dated October 27, 2005). 

f 

Chairman THOMAS. If we could ask our guests to find seats, 

please. Today, the Committee continues its series of oversight hearings on the tax-exempt sector. At this hearing we will focus on the 

tax-exemption provided to Federal and State credit unions. Credit 

unions have been statutorily tax-exempt for almost 70 years. 

Today, they have approximately 87 million members and combined 

assets of more than $674 billion. Yet, their tax status has received 

little scrutiny from Congress. In fact, this is the Committee’s first 

hearing in 20 years devoted exclusively to credit union tax-exemption. Based upon e-mails sent around, newspaper articles generated 

and statements made, it appears as though some people think it 

is an affront to have the Committee ask the people who receive a 

benefit from the taxpayers of this country to come in and answer 

a few questions. They have even gone to the extent of apparently 

setting up a countdown calendar on how long I am going to remain 

chairman and how long they need to hunker down. 

Mr. RANGEL. How did that turn out? 

Chairman THOMAS. Several credit unions—far longer than you 

ever wanted it to, Charlie. 

[Laughter.] 

Mr. RANGEL. I just asked. 

Chairman THOMAS. I just answered. We are going to hear over 

and over that Federal credit unions were created in 1934, and then 

received their tax-exempt status in 1937. But what I really want 

to do, since many people do not remember the banking structure 

from 1934 and 1937 and what it looked like at that time, that was 

the era in which the industry was examined and credit unions were 


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established, because, no question, based upon the statute, Americans of modest means had difficulty obtaining credit at that time. 

Over the last 70 years, however, the financial service industry as 

a whole, and credit unions specifically, have changed a great deal. 

That is why it is important to periodically revisit the field and see 

if what did apply continues to apply. Or in evolving, in meeting 

those changing needs, the evolution, in fact, makes sense to the 

taxpayers who provide a very generous subsidy. 

If you examine what a credit union was when it first started and 

look at what credit unions are today, especially those that are the 

newest in emerging credit unions, you find out that you can have 

a credit union which is called the Congressional Federal Credit 

Union but supplies credit to a retail restaurant, to Legal Seafood, 

and to a law firm called Akin Gump, notwithstanding the fact it 

is called a ‘‘congressional credit union.’’ When you deal with community charters, whatever local means, I find it somewhat amazing 

that a credit union can be chartered to have as its local community 

the county of Los Angeles, which has a population greater than 42 

States in the country. While the original credit unions offered limited services, many modern credit unions offer a wide variety of 

services. Increasingly credit unions are offering business loans to 

members, and through some affiliates, credit unions offer services 

that seem to be quite unrelated to their original mission. For example, health and dental insurance, automobile sales, or even pet insurance. 

So, as we begin to look at this, one of the concerns I have is not 

so much, although we will inquire, about the question of what is 

it that they do to continue to get the tax-exempt status. For example, when we examined nonprofit hospitals, we found that at one 

time they were required to provide services to the poor. That was 

eliminated sometime ago—hospitals are not even required to do 

that. However, I do think it should be noted that the original statement from the thirties offering people of modest means financial 

services was restated as recently as 1998 in legislation. So, that 

seems to be an ongoing theme. The concern that I have in today’s 

world, as many of us were shocked in terms of things that were occurring in the corporate world, are focused primarily on the question of transparency, accountability, verifiability, the sorts of things 

that taxpayers if they were sitting here today would want to know 

to determine whether or not they are getting their money’s worth 

in terms of not just the activities or the services that credit unions 

provide, but the way in which they are run, who gets the benefits, 

to what extent they have a comfort level that the accounting procedures are aboveboard, and match up to some of the new accounting 

procedures that Congress has passed on to entities that pay taxes. 

So, that is really the direction that Congress ought to engage in 

once every two decades. With that, I recognize the gentleman from 

New York for any statement he would like to make. 

Mr. RANGEL. Thank you, Mr. Chairman. Seventy-five years ago, 

a great concept came into being, and as a result of that, the lives 

of people have improved throughout the United States and, indeed, 

throughout the world, because 75 years ago, Charlie Rangel was 

born, and he certainly has made a difference. 

[Laughter.] 


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Mr. RANGEL. Of course, at the same time credit unions were 

created, and so those were two great things that happened 75 years 

ago. It seems as though that they provided a great service to many 

people, and right here at Wright Patman I see the long line of 

members who are anxious to receive services here. I, like the chairman, welcome these positive, motivated hearings to see what we 

can do to improve the quality of service that we render. So, it is 

very interesting that hospitals would be on the same line of interest to the Chair that is the not-for-profits. But we do hope that at 

the end of this administration, if the public does not provide the 

service and we have not-for-profits providing the service, that 

something would be left for those people that are not among the 

powerful as relates to their lobbying interests. So, Mr. Chairman, 

let me thank you for openly having these hearings so that at least 

those of us who appreciate the great work that hospitals are doing 

and the credit unions are doing, we are able to let our constituents 

know the direction in which you are going. I reserve any other comments I might have. 

Chairman THOMAS. I thank the gentleman. Our first panel 

today consists of the Honorable Mrs. Johnson, who is the Chairman 

of the National Credit Union Administration (NCUA); Steven T. 

Miller, Commissioner in the Internal Revenue Service, who has visited with us before; and Richard J. Hillman, who is the Managing 

Director, Financial Markets and Community Investment, U.S. Government Accountability Office, who has visited with us as well. 

Each of you has submitted written testimony, and it will be made 

a part of the record, without objection. The Chair and the Members 

look forward to hearing from each of you present the information 

you have, in any manner you see fit in the time that you have 

available to you. Let’s start with Chairman Johnson and move 

across the panel. 

STATEMENT OF HON. JOANN JOHNSON, CHAIRMAN, NATIONAL CREDIT UNION ADMINISTRATION, ALEXANDRIA, 

VIRGINIA, ACCOMPANIED BY ROBERT FENNER, GENERAL 

COUNSEL, NATIONAL CREDIT UNION ADMINISTRATION 

Ms. JOHNSON. Chairman Thomas, Ranking Member Rangel, 

and Members of the Committee, on behalf of the National Credit 

Union Administration, thank you for the opportunity to be here 

today to present NCUA’s views on the credit union tax-exemption. 

The NCUA acknowledges the support of this and previous Administrations, and also of Congress, favoring the continued tax-exemption for credit unions as important public policy. The NCUA’s primary mission is to ensure the safety and soundness of federally insured credit unions. We fulfill this mission by examining, regulating, and insuring all Federal credit unions. In coordination with 

the State regulators, we participate in the supervision of federally 

insured State-chartered credit unions. As credit union cooperatives, 

federally insured credit unions vary in size. However, their cooperative structure and purpose is identical. They are strongly capitalized and present minimal risk to the National Credit Union Share 

Insurance Fund, the Treasury, and ultimately the American taxpayers. The Share Insurance Fund has never required taxpayer 

support. It is from this perspective that we have reviewed the imVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00010 Fmt 6633 Sfmt 6602 E:\HR\OC\26372.XXX 26372

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plications of the debate over continuing the credit union tax-exemption. 

Credit unions are today, as they were at their inception in the 

United States, member-owned, democratically controlled—that is, 

one member, one vote, and a volunteer board—tax-exempt cooperatives, fulfilling their mission of serving the credit and savings 

needs of consumers, especially those of modest means. This structure, begun as a financial service provider for the working Americans, remains intact today as credit unions fulfill their purpose of 

serving a broader base of American consumers, especially those of 

low and moderate income, even as both credit unions and other financial institutions have adapted to consumer demand for improved delivery of financial services. It is through this cooperative 

structure that the credit union system provides billions of dollars 

in annual benefits to consumers. The structure supports the incentive of credit unions to provide affordable services to their consumer owners rather than to maximize profits to outside investors 

or stockholders. 

Though credit unions comprise only 6 percent of federally insured institutions’ assets, essentially the same level since 1992, the 

effect of this minimal competition also assures better rates and 

services for users of all financial institutions. Critical to this discussion, it is the agency’s view that credit unions are fulfilling their 

mission of serving persons of modest means. Over 1,000 credit 

unions exist specifically for the purpose of serving designated lowincome fields of membership. Additionally, 640 Federal credit 

unions as well as many State-chartered credit unions have added 

underserved areas to their fields of membership. Industry-wide, 

savings and loan balances in credit unions are lower than in other 

institutions. Credit unions make a higher percentage of their 

HMDA-reported loans to low- and moderate-income borrowers than 

do other institutions. These and other facts reported in my written 

statement demonstrate that credit unions are actively fulfilling this 

aspect of their mission. Credit unions have modernized their methods of delivering services. This has been appropriate. It has been 

necessary for their survival, and it is consistent with the principle 

that those of modest means should not be restricted to modest services. 

Also important to this analysis is the fact that credit unions 

build capital only by setting aside a portion of their earnings. Taxation threatens to diminish that sole source of capital, resulting in 

changes that could undermine the continuation of the cooperative 

credit union system. When subjected to the additional expense of 

taxation on net worth in conjunction with the limitations on membership and powers, it may be difficult to justify retaining a cooperative credit union charter. A likely response, especially for larger 

credit unions, will be to convert to bank charters. The present 

structure is successfully serving 84.5 million credit union members 

and empowers many Americans, especially those outside the financial mainstream, to be introduced to the financial services marketplace. It is the same success that argues most strongly for the retention of this important statutory mandate if a viable financial alternative is the desired result. Due to their unique cooperative 

structure and in the interest of maintaining it, credit unions have 


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1 U.S. Department of the Treasury ‘‘Comparing Credit Unions and other Depository Institutions’’ (January 2001). 

had tax-exempt status since 1917. This status was affirmed and 

formally codifies for Federal credit unions in 1937 and reaffirmed 

by Congress in both 1951 and 1998. In 2001, the Treasury department reviewed, along with several other issues, the credit union 

tax-exemption. The resulting report offered now administrative or 

legislative changes regarding the exemption. 

The original justification for tax-exempt status remains valid. 

federally insured credit unions provide billions of dollars of benefits 

annually to all consumers, not just credit union members, by assuring that competitive rates are offered in the financial marketplace. 

Congress should carefully consider these facts in determining 

whether to repeal the credit union tax-exemption. Thank you for 

the opportunity to participate on the panel, and I will be happy to 

address questions. Thank you. 

[The prepared statement of Ms. Johnson follows:] 

Statement of Hon. JoAnn Johnson, Chairman, National Credit Union Administration, Alexandria, Virginia, accompanied by Robert Fenner, General Counsel, National Credit Union Administration 

Chairman Thomas, Ranking Member Rangel and Members of the Ways and 

Means Committee: on behalf of the National Credit Union Administration 

(‘‘NCUA’’), thank you for the opportunity to be here today to present the Agency’s 

views on ‘‘A Review of the Credit Union Tax Exemption.’’ NCUA recognizes and supports this and previous Administrations’ and Congressional policy favoring the continued tax exemption for credit unions as important public policy. 

NCUA’s primary mission is to ensure the safety and soundness of federally insured credit unions. It performs this important public policy function by first examining and insuring all Federal credit unions, and second, in coordination with the 

state regulators, participating in the supervision of federally insured state chartered 

credit unions. In its capacity as the administrator for the National Credit Union 

Share Insurance Fund (‘‘NCUSIF’’), NCUA provides oversight and supervision to approximately 8,800 federally insured credit unions, representing over 96 percent of 

all credit unions and 84.5 million credit union members. As credit union cooperatives, federally insured credit unions vary in size; however, their cooperative structure and purpose is identical. They are strongly capitalized and present minimal 

risk to the NCUSIF, the Treasury and ultimately to the American taxpayers. The 

NCUSIF has never required taxpayer support. 

Especially important to this discussion on credit union tax exemption is the Federal law that specifies strict system capital (‘‘net worth’’) standards known as 

Prompt Corrective Action. By law, written and overseen by the Financial Services 

Committee, federally insured credit unions are alone among insured financial institutions in how they can build and maintain net worth. Specifically, they are limited 

to using only their retained earnings to meet their statutory capital requirements. 

Taxation threatens to diminish that sole source of capital by reducing the ability 

to generate net income and cause other adverse changes. Eventually, as credit union 

net worth ratios decline to levels that require additions to retained earnings in 

order to meet statutory and regulatory capital requirements, taxation may result in 

behavior modifications that could undermine the continuation of the cooperative 

credit union system. 

Any consideration of repealing the credit union tax exemption should include a 

very careful analysis of the effects on the public policy benefits of the credit union 

system. From our standpoint as the insurer of member share accounts and the safety and soundness regulator for federal credit unions, NCUA believes that a thorough 

analysis leads to the firm conclusion that the tax exemption is sound Congressional 

policy and should remain in place if Congress desires to preserve the cooperative 

structure most capable of providing financial services to people of modest means. 

In 2001, the Treasury Department reviewed, along with several other issues, the 

credit union tax exemption. The report offered no administrative or legislative 

changes regarding the exemption.1


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2 Id. at 6–7 (January 2001) (citations omitted) (emphasis added). 

The billions of dollars in annual consumer benefits provided by credit unions are 

derived by the credit union structure being member owned, democratically controlled, tax-exempt cooperatives. This cooperative structure supports the organizational incentive of credit unions to provide affordable services to their consumer 

owners, rather than to maximize profits to outside investors or stockholders. Though 

credit unions comprise only a small segment of the financial services marketplace, 

approximately six percent of federally insured institutions’ assets, the effect of this 

minimal competition assures better rates and services for users of all financial institutions. 

The cooperative structure has remained unchanged since the inception of credit 

unions in the United States as financial cooperatives for working Americans, and, 

most importantly, it remains intact today as credit unions fulfill their purpose of 

serving a broader base of American consumers, especially those of low and moderate 

income. It is a structure that has remained unchanged as other financial intermediaries have entered the consumer financial services market, and as both credit 

unions and others have adapted to consumer demand for change in the methods of 

delivery of financial services. 

Review of this issue leads NCUA to conclude that repeal of the tax exemption may 

have consequences not intended by Congress, including altering the delivery of financial services to a broad range of Americans. 

A likely response to taxation, for many credit unions, would be to convert to bank 

charters. It may be difficult to justify retaining a cooperative credit union charter, 

with the associated limitations on membership and powers in conjunction with higher capital requirements, when subjected to the additional expense of taxation. The 

history of the mutual thrift industry and recent developments in the credit union 

system demonstrate there are financial incentives for management to convert their 

cooperative charters to bank charters. The probable effect of taxation would be to 

accelerate these conversions. The remaining credit unions subject to taxation will 

also likely seek expanded authorities and the removal of currently imposed limitations to offset the expense of taxation. The combined effect of these trends would 

clearly threaten the existence of the cooperative not-for-profit credit union system. 

The tax-exempt status of credit unions has enabled these institutions to provide 

Americans from all walks of life to have greater access to affordable financial services. The present structure is successfully serving 84.5 million credit union members 

and empowers many Americans, especially those outside the financial mainstream, 

to be introduced to the financial services marketplace. It is this same success that 

argues most strongly for the retention of this important statutory mandate if a viable financial alternative is the desired result. 

It is because of their unique cooperative structure, and in the interests of maintaining it, that credit unions have had tax-exempt status since 1917. This status 

was affirmed and formally codified for federal credit unions in 1937, and reaffirmed 

by Congress in both 1951 and 1998. The original justification for tax-exempt status 

remains valid, and should not be changed if Congress wishes to maintain a financially sound, cooperative credit union system. 

CREDIT UNIONS ARE UNIQUE 

Credit unions are distinguishable from other financial institutions in their structural and operational characteristics. As the U.S. Treasury Department noted in 

their 2001 study of credit unions:2

Many banks and thrifts exhibit one or more of the following five characteristics; 

but only credit unions exhibit all five together. 

First, credit unions are member-owned, and each member is entitled to one vote 

in selecting board members and in certain other decisions. Although other mutual 

institutions are also member-owned, voting rights are generally allocated according 

to the size of the mutual member’s deposits, rather then being ‘‘one member, one 

vote.’’ 

Second, credit unions do not issue capital stock. Credit unions create capital, or 

net worth, by retaining earnings. Most credit unions begin with no net worth and 

gradually build it over time. 

Third, credit unions rely on volunteer, unpaid boards of directors whom the members elect from the ranks of membership. 

Fourth, credit unions operate as not-for-profit institutions, in contrast to shareholder-owned depository institutions. All earnings are retained as capital or returned to the members in the form of interest on share accounts, lower interest 

rates on loans, or otherwise used to provide products or services. 


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3 12 U.S.C. § 1752(1). 4 31 Op. Atty. Gen. 176 (1917). 

Fifth, credit unions may only accept as members those individuals identified in 

a credit union’s articulated field of membership. Generally, a field of membership 

may consist of a single group of individuals that share a common bond; more than 

one group, each of which consists of individuals sharing a common bond; or geographical community. A common bond may take one of three forms: an occupational 

bond applies to the employees of a firm; and associational bond applies to members 

of an association; and a geographical bond applies to individuals living, working, attending school, or worshipping within a particular defined community. 

While credit unions provide many of the basic services that one would expect from 

a depository institution, including share (deposit) accounts, share draft (checking) 

accounts, personal loans, auto loans, mortgages, and small business loans, Congress 

limited the permissible activities of federal credit unions in many areas. 

These limitations serve to illustrate the very real differences compared to other 

depository institutions. These include, among other things, limitations on lending 

and investment authorities, rates of interest they may charge, constraints on capital, and field of membership restrictions. 

In addition to their distinctive structure and services, the basic role of credit 

unions is also very different from that of banks and thrifts. Most importantly, credit 

unions, unlike banks, are not motivated by profit or the desire to maximize the investment of their stockholders. Rather, credit unions focus on the mission of serving 

their members and enabling them to receive loan and share (deposit) rates on favorable terms. Pursuant to the Federal Credit Union Act, a federal credit union is specifically defined as ‘‘a cooperative association organized—for the purpose of promoting thrift among its members and creating a source of credit for provident or 

productive purposes . . .’’ 3

Throughout the history of credit unions in the United States, credit unions have 

been one of the first sources of financial services to working people. Many credit 

unions established their first offices within faith-based organizations, association 

halls, steel mills, factories, military bases, and other work places, providing basic, 

and later expanded, financial services to those not within the mainstream of the financial marketplace. In many instances, credit unions had been the only alternative 

to payday lenders, pawn shops, or loan sharks. 

As industry and the economy changed, communities expanded through improved 

transportation, and social and associational organizations waned in the United 

States, credit unions necessarily adapted in order to continue to fulfill their mission 

of providing cooperative financial services. 

With various industries shuttering their plants, credit unions relocated their offices outside of the work locations in order to continue serving their members. Many 

of these members, victims of plant closings and job losses in a shifting economy, became small business owners, with credit unions willingly providing the first source 

of capital to their venture. Many of these small business owners could not provide 

the same benefits received from large industrial companies, but still pursued the opportunity of providing the benefit of credit union ownership and financial service to 

their employees. 

Credit unions, like all financial institutions, have evolved to meet the basic financial needs of their members. Credit unions provide the financial services now available due to changing and improving technology while remaining true to the cooperative structure. They have successfully provided these services without abandoning 

their unique structure as member-owned, democratically controlled cooperatives. An 

underlying tenet to these advances was, and continues to be, the belief that those 

of modest means should not be restricted to modest services. 

HISTORY OF THE CREDIT UNION TAX EXEMPTION 

The cooperative nature of credit unions was the original basis for the credit union 

tax exemption. Importantly, credit unions have not abandoned this statutory mandate. 

When credit unions first appeared in this country they were purely creations of 

state law, and thus, until the passage of the Federal Credit Union Act in 1934, there 

were only state chartered credit unions. When a federal income tax was first passed, 

credit unions were not specifically exempted from tax, although other classes of organizations conducted for the mutual benefit of individuals were exempted. Credit 

unions received tax-exempt status in 1917, pursuant to an administrative ruling 

issued by the U.S. Attorney General. In his ruling, the Attorney General found that 

the tax exemption for these other organizations extended to credit unions as they 

‘‘are organized and operated for mutual purposes and without profit.’’ 4


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5Pub. L. No. 467, c. 750, 48 Stat. 1216 (June 26, 1934). 

6Pub. L. No. 416, c.3, § 4, 51 Stat. 4 (December 6, 1937). 7Testimony of Governor Meyer, Farm Credit Administration before a Subcommittee of the 

Committee on Banking and Currency, U.S. Senate, 75th Cong., 1st Sess. (May 11, 1937). 8 H.R. REP. NO. 1579, 75th Cong., 1st Sess. P.2. 

9 12 U.S.C. § 1768. 10This section of the Federal Credit Union Act was amended in 1959, however, the changes 

did not affect this particular part of the section. 11Pub. L. No. 105–219, 112 Stat. 913 (August 7, 1998). 

With the passage of the Federal Credit Union Act in 1934, the federal credit 

union charter was created. Though the Act did not specifically create a tax exemption for this new federal charter, the Attorney General’s ruling was extended to effectively provide an exemption. This exemption, however, did not apply to the taxation of federal credit unions by states in which the credit union is located. States 

could tax federal credit unions as long as the tax was in the same manner and did 

not exceed the rate imposed on other domestic banking corporations.5

In 1937, the Federal Credit Union Act was amended to create a specific tax exemption for federal credit unions.6 In his testimony in support of the tax exemption, 

the Governor of the Farm Credit Administration (who supervised federal credit 

unions at the time) stated: 

Many States tax domestic banking corporations in relation to their share capital. 

In view of the fact that federal credit unions may not accept deposits, their share 

capital represents a much greater proportion of their total resources than is the case 

in other financial institutions. Experience with Federal credit unions since the passage of the original act indicates that such taxation, therefore, places a disproportionate and excessive burden on them. Furthermore, these credit unions are mutual 

or cooperative organizations operated entirely by and for their members and in view 

of this fact it is appropriate, we feel that local taxation should be levied on the members rather than the organization itself.7

A Report from the U.S. House of Representatives delineated two reasons for ultimately granting federal credit unions a tax exemption. First, they found that taxing 

credit unions on their shares (deposits) in the manner that banks are taxed on their 

capital shares places a disproportionate and excessive burden on credit unions, because credit union shares function as deposits. Second, they found that credit unions 

are mutual or cooperative organizations operated entirely by and for their members.8

Pursuant to the changes made in 1937 the Federal Credit Union Act currently 

exempts all federal credit unions from: 

. . . all taxation now or hereafter imposed by the United States or by any State, 

Territorial, or local taxing authority; except that any real property and any tangible 

personal property of such Federal credit union shall be subject to Federal, State, 

Territorial, and local taxation to the same extent as other similar property is taxed.9

Thus, federal credit unions were exempted from most, but not all taxes. This is 

the current state of the tax exemption for Federal credit unions.10

For many years credit unions were not the only depository institutions exempted 

from taxation. Among others, mutual savings banks and savings and loan associations were also exempted. In 1951, Congress found that mutual thrifts had essentially lost the essence of their mutuality. Accordingly, mutual savings banks and 

savings and loan associations lost their tax exemption. However, the exemption for 

federal credit unions was left intact, and expresses statutory tax-exempt status was 

afforded to state-chartered credit unions, essentially affirming that credit unions remained true to their cooperative nature. 

In 1998, the tax treatment of credit unions was again affirmed. The Credit Union 

Membership Access Act of 1998 stated the findings and intent of Congress with respect to the tax exemption: 

Credit unions, unlike many other participants in the financial services market, 

are exempt from Federal and most State taxes because they are member-owned, 

democratically operated, not for profit organizations generally managed by volunteer 

boards of directors and because they have the specified mission of meeting the credit 

and savings needs of consumers, especially persons of modest means.11

CREDIT UNIONS’ MARKET SHARE HAS REMAINED CONSTANT 

More diversified fields of membership in both multiple group and community 

charters means that individual credit unions are more diversified in their loan assets and therefore present less risk to the NCUSIF. This is contrasted with the historical predominance of single-employer common bonds, which increased safety and 

soundness problems in the credit union system in the 1970s when numerous indusVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00015 Fmt 6633 Sfmt 6621 E:\HR\OC\26372.XXX 26372

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12Source: http://www.fdic.gov. As of December 31, 2004, JP Morgan Chase Bank, N.A. had 

$967.3 billion in assets, Bank of America, N.A. had $771.6 billion in assets and Citibank, N.A. 

had $694.5 billion in assets. 

trial companies failed and their ‘‘single sponsor’’ credit unions followed suit as unemployed members defaulted on their loans. 

Moreover, recent trends in field of membership expansions, including both conversions to community charters and expansions by adding underserved areas, allow 

credit unions to do a better job of fulfilling their historic and important mission of 

serving persons of modest means. Thus, recent field of membership trends have both 

reduced risk in the credit union system and enabled credit unions to better fulfill 

their statutory purpose. 

With this success, however, credit unions are not gaining market share at the expense of banks and thrifts. In 2004, federally insured credit unions held merely six 

percent of total financial industry assets; essentially the same level since 1992. 

While the percentage of industry assets held by smaller banks and thrifts is declining, this decrease did not result in an increase in market share for credit unions. 

The combined assets of all federally insured credit unions as of December 31, 2004— 

$647 billion in total—are less than the total assets of any of the three largest banks 

as of December 31, 2004.12

(Image not available) 

Source: FDIC financial call report data, NCUA financial call report data 

Along with a limited market share, the size of the credit unions within the system 

remains small. Average and median asset size of federally insured credit unions— 

as of June 30, 2005—reflects an average asset size of $75.5 million and a median 

asset size of less than $12 million in assets. 

All Federally Insured Credit Unions (FICUs) 

As of June 30, 2005 

# of FICU % of Total Assets % of Total 

<$10 Million 4,097 46.2% 15,396,929,628 2.3% 

$10–$50 Million 2,810 31.7% 66,684,864,271 10.0% 

$50–$100 Million 774 8.7% 54,445,882,179 8.1% 

$100–$500 Million 922 10.4% 198,115,394,051 29.6% 

$500 Million–$1 Billion 155 1.7% 105,889,848,338 15.8% 

$1–5 Billion 97 1.1% 166,321,482,089 24.8% 

>$5 Billion 6 0.1% 62,861,279,695 9.4% 

Total 8,861 100.0% 669,715,680,251 100.0% 

CREDIT UNIONS ARE SERVING PEOPLE OF MODEST MEANS 

Federal credit unions were formed during the height of the great depression to 

provide working people with access to affordable financial services through a cooperatively owned financial institution. This type of financial institution provided 

workers an opportunity to save a portion of their wages and have access to reasonably priced loans for ‘‘provident and productive purposes.’’ 

Credit unions have not deviated from their original structure and purpose, providing their members with an opportunity to improve their financial well-being 

through share and loan products designed to meet their financial needs in an ever 

changing financial and economic environment. The ability to meet the statutory purpose is dependent on a number of factors, including diversification of fields of membership. 

Recognizing the difficulty credit unions encounter in serving a greater proportion 

of low and moderate income members Congress, in 1970, established authority for 

low-income designated credit unions to accept non-member share deposits. This authority, which by NCUA regulation is available to credit unions who serve a majority of members with a median household income at or less than 80% of the national 

median household income, provides qualifying credit unions with an ability to raise 


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share deposits from outside of the credit union’s membership to support further 

lending, products and services to their members. 

Currently, approximately 12% of credit unions have received this designation from 

the NCUA. These more than 1,000 credit unions are providing their members the 

financial services identified as best meeting their needs at an affordable cost. 

Since 1994, NCUA regulations have authorized all Federal credit unions to add 

underserved areas to their fields of membership, using the terminology ‘‘low income 

communities.’’ In 1998, the Credit Union Membership Access Act was passed which 

authorized multiple group chartering previously overturned by the Supreme Court. 

In this Act, Congress recognized the authority of multiple group credit unions to 

serve ‘‘underserved areas’’ and established a specific definition for that term. For 

consistency, NCUA regulations were revised to apply this terminology to all credit 

unions when adding low income areas in need of service. Since 1999, more than 650 

federal credit unions have added 1,406 underserved areas to their fields of membership. This authorization has allowed credit unions to serve low and moderate income 

areas and facilitate affordable financial services to individuals who often have been 

left behind to predatory lenders. Many of these credit unions are of a sufficient asset 

size to provide these underserved areas with improved and an expanded array of 

financial products and services at reasonable costs. 

NCUA has also done much to encourage credit unions to serve the unbanked and 

those of low and moderate income. NCUA’s Access Across America Initiative promotes the benefits of the low-income designation for eligible credit unions and encourages credit unions to make use of the ‘‘underserved area authority.’’ Also, NCUA 

established in the mid-1990s the Economic Development Specialist (‘‘EDS’’) position 

to further credit union service in low-income and underserved areas. In 2001, the 

NCUA Board established a national small credit union program initiative and centralized the EDS position to the newly created Office of Small Credit Union Initiatives. Presently there are 15 EDS positions dedicated to working with groups interested in chartering credit unions and those credit unions serving or interested in 

serving members in underserved areas. This office also conducts workshops throughout the nation that provide smaller credit unions with best practices, potential service opportunities, and technical assistance on operations and staff training. 

Based on recent financial information collected by the NCUA in our quarterly call 

reports, average and median share deposit and loan balances in the credit union 

system demonstrate credit unions are serving members who hold low share deposit 

and loan balances. Of greater significance is the comparison of average and median 

share deposit and loan balances between low-income designated credit unions and 

the total population of federally insured credit unions. In general, average and median balances in federally insured credit unions mirror those in low-income designated credit unions. 

Average and Median Credit Union (CU) Share Deposit Balances 

As of June 30, 2005 

All Federally Insured CUs 

Share 

Deposits 

Share 

Drafts 

Money 

Market 

Share 

Certificates 

IRA/ 

Keogh 

All 

Other 

Shares 

All 

Shares 

Average Balance 3,293 2,491 23,127 17,320 11,110 40,440 3,279 

Median 2,916 2,028 21,034 13,186 9,866 824 2,905 

Low-Income CUs 

Average Balance 2,417 1,818 23,645 15,476 10,797 1,738 2,354 

Median 2,126 1,558 20,249 12,135 10,003 695 2,086 

All Community CUs 

Average Balance 3,037 1,969 22,198 14,881 10,371 3,034 2,999 

Median 2,891 1,764 21,191 13,461 9,527 807 2,863 


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Average and Median Credit Union (CU) Loan Balances 

As of June 30, 2005 

All Federally Insured 

CUs 

Loans/ 

Leases 

Credit 

Card 

Other 

Unsecured 

Loans 

New 

Vehicle 

Used 

Vehicle 

1st 

Mortgage 

Other 

Real 

Estate 

All 

Other 

Loans 

Average Balance 8,046 1,466 2,659 13,930 8,217 79,620 27,561 8,221 

Median 7,089 1,344 2,287 14,074 8,142 66,809 24,836 6,162 

All Low Income CUs 

Average Balance 6,327 1,256 2,293 13,679 7,396 49,818 26,387 7,637 

Median 5,800 1,150 1,999 13,919 7,371 42,085 22,950 5,253 

All Community CUs 

Average Balance 8,732 1,420 2,415 14,592 8,216 72,277 26,443 8,341 

Median 8,124 1,302 2,169 14,592 8,152 61,779 24,588 6,630 

The discrepancy between federally insured credit unions and low-income designated credit unions on average and median first mortgage balances seems to indicate federally insured credit unions make larger loans. However, based on data 

gathered from the Census Bureau’s American Housing Survey for the United States 

completed in 2003, the median mortgage loan balance is $82,010 for all occupied 

residential units compared to the $66,809 reported for median mortgage loan balances for federally insured credit unions. This information shows federally insured 

credit unions holding smaller balanced first mortgage loans. Collectively, the data 

supports the conclusion federally insured credit unions grant many smaller-balanced 

loans and are, therefore, serving members requesting lower balanced loans. 

Home Mortgage Disclosure Act (‘‘HMDA’’) data also reflects the continued focus 

of credit unions on making credit available to borrowers of low and moderate means. 

As shown in the following table containing 2003 HMDA data, credit unions deny 

fewer loans to both minority and white borrowers than other financial institutions. 

Although serving a smaller market base, credit unions focused on reaching out to 

all segments of their membership. 

Home Mortgage Disclosure Act (‘‘HMDA’’) data also reflects the continued focus 

of credit unions on making credit available to borrowers of low and moderate means. 

As shown in the following table containing 2003 HMDA data, credit unions deny 

fewer loans to both minority and white borrowers than other financial institutions. 

Although serving a smaller market base, credit unions focused on reaching out to 

all segments of their membership. 


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2003 HMDA Data Mortgage Denial Rates 

White Tot Min Am Ind Asian Black Hisp Joint Other N/A Total 

OCC Applications 6,373,248 1,931,002 33,509 377,521 532,776 632,830 221,805 132,561 1,086,700 9,390,950 1,091 Denial Rate 12.1% 21.8% 25.0% 12.0% 28.5% 25.6% 12.5% 18.2% 18.0% 14.9% FRB Applications 1,916,573 511,367 6,794 89,451 155,796 183,974 50,648 24,704 353,173 2,781,113 565 Denial Rate 9.1% 18.1% 19.7% 10.1% 22.2% 21.0% 9.3% 15.2% 14.8% 11.6% FDIC Applications 1,859,365 403,427 7,108 78,147 111,072 143,839 41,755 21,506 248,342 2,511,134 2,587 Denial Rate 10.1% 19.7% 20.6% 12.8% 27.6% 19.5% 11.8% 17.5% 19.8% 12.7% OTS Applications 2,993,023 968,616 10,435 236,263 227,144 345,828 96,002 52,944 637,048 4,598,687 674 Denial Rate 10.3% 17.7% 18.5% 13.3% 22.0% 19.1% 12.0% 17.7% 17.0% 12.8% NCUA Applications 685,145 161,138 3,656 24,851 51,469 43,925 30,013 7,224 138,853 985,136 1,920 Denial Rate 5.5% 13.2% 11.6% 7.5% 18.0% 15.2% 6.5% 12.6% 11.5% 7.7% HUD Applications 5,825,625 2,883,838 46,476 330,703 893,277 1,005,229 255,504 352,649 3,045,896 11,755,359 1,181 Denial Rate 19.6% 26.4% 30.5% 15.0% 31.2% 21.8% 17.6% 42.7% 29.5% 23.9% National Applications 19,652,979 6,859,388 107,978 1,136,936 1,971,534 2,355,625 695,727 591,588 5,510,012 32,022,379 8,018 Denial Rate 13.5% 22.5% 25.6% 13.0% 28.1% 22.1% 13.8% 32.6% 24.0% 17.2% 


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13 U.S. Department of the Treasury ‘‘Comparing Credit Unions and other Depository Institutions ’’ at 32 (January 2001); Congressional Budget Office, ‘‘Budget Options ’’ at 301 (February 

2005). 14The University of North Carolina at Chapel Hill, William E. Jackson III, ‘‘The Benefits of 

Credit Unions to North Carolina Consumers of Financial Services,’’ at 3 (April 2005). 15The American University, ‘‘An Analysis of the Benefits of Credit Unions to Bank Loan Customers,’’ (September 2004); Idaho State University, ‘‘An Estimate of the Influence of Credit 

Unions on Bank CD and Money Market Deposits in the U.S.,’’ (January 2005). 

In fact, as reported in the 2005 National Community Reinvestment Coalition 

paper, ‘‘Credit Unions: True to Their Mission?’’, HMDA data for calendar year 2003 

shows that credit unions made a higher percentage of single family mortgage loans 

to low and moderate income borrowers (24.2% compared to 23.2%) than banks. In 

addition, credit unions significantly increased home purchase loans to low and moderate income borrowers to 28.3% of their loan portfolios at 2003 from 23.6% at 2001, 

while bank lending in this area stayed relatively constant (28.6% in 2001 and 28.9% 

in 2003). 

In recent years, legislative, regulatory, and policy changes have resulted in more 

credit unions serving communities with low and moderate income borrowers. In fact, 

NCUA data demonstrates that credit unions are reaching out to serve low-income 

residents and are adopting underserved areas into their fields of membership. Those 

credit unions that have adopted underserved areas have more than doubled their 

membership growth as compared to the credit union system as a whole. 

As members from these areas become familiar with the products and services offered, credit unions will likely receive more loan applications and further improve 

their penetration of the low and moderate income lending market. 

NEED FOR THE CONTINUATION OF THE TAX EXEMPTION 

Credit unions are tax-exempt because of their cooperative structure and not-forprofit mission. While this cooperative structure, and not the other limitations on 

powers, is what entitles credit unions to a tax exemption, it is important to note 

that these limitations restrict credit union activities compared to other types of depository institutions. Despite these limitations, the tax exemption offers an incentive 

for credit unions to remain true to their mission of serving members of all income 

levels. If credit unions’ tax status was changed, credit unions would have less incentive to remain credit unions. If these not-for-profits were to be taxed, many credit 

unions would probably choose to convert to other types of institutions in order to 

have expanded powers. Without credit unions, predatory lenders may become the 

financial service provider by default for many Americans who now rely on credit 

unions for essential credit union services. 

An exodus of the larger, well-capitalized credit unions would have a detrimental 

effect on the entire credit union system. These institutions provide a support structure for the entire credit union system, as demonstrated in the aftermath of Hurricanes Katrina, Rita, and Wilma. 

Credit unions provide support to one another through credit union service organizations, shared branching networks, other partnership arrangements, and credit 

union league supported programs. If significant numbers of larger credit unions depart the system, the pressures related to earnings and capital accumulation would 

increase significantly for those credit unions remaining within the system. This may 

result in an increase in the number of credit union failures. 

Loss of critical mass of larger credit unions may also result in the credit union 

system no longer being economically viable. The largest 13% of federally insured 

credit unions (over $100 million in assets) hold almost 80% of the system’s assets. 

Conceivably, 87% of all federally insured credit unions would remain, but these 

would only hold 20% of the current financial resources of the system. 

The potential costs to the credit union system outweigh any anticipated revenue 

gains that may be realized by taxing credit unions. Estimates put annual tax revenue gains at between $1.2 billion to $1.5 billion annually.13 Using cost benefit 

analysis, leaving aside the mission of serving those of modest means, the dollar return to consumers and the economy far exceed these tax revenue estimates. One recent study of North Carolina financial institutions estimated that each credit union 

member saves $130 a year through lower loan rates, lower fees, and higher returns 

on savings.14 If applied to all members nationally this would equate to $11 billion 

in savings passed on to credit union members. 

Finally, if credit unions are taxed, all consumers, not just credit union members, 

will be detrimentally affected. It is estimated that by losing the positive influence 

of credit unions, bank customers will pay an additional $4 billion in higher rates, 

higher fees, and lower returns on deposits.15 This is in addition to a decline in servVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00020 Fmt 6633 Sfmt 6621 E:\HR\OC\26372.XXX 26372

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ice quality and convenience, reduced access to basic financial services, and no check 

on the proliferation of predatory financial service providers. 

CONCLUSION 

Credit unions exist for the purpose of promoting thrift and providing a source of 

credit for their members. Since their inception, credit unions have been organized 

as democratically controlled, not-for-profit cooperatives, managed by a volunteer 

board of directors elected by and from the membership. These characteristics define 

the uniqueness of credit unions that serves as the basis for their tax exemption. All 

of these characteristics are as true today as they were almost a century ago when 

the tax exemption was first extended to credit unions. 

As recently as 1998, Congress noted that the credit union system began as a cooperative effort to serve the credit needs of individuals of modest means, and that 

credit unions continue to fulfill that public purpose. Field of membership policy 

changes since 1998, and associated trends in charter expansions, have served to fulfill this special mission. Credit unions of all sizes continue their tradition of supporting one another through service organizations, shared branching networks, participation lending, inter-credit union deposits, technical assistance, and other methods of ensuring continuation of service to all segments of their membership, including low and moderate income members. 

Federally insured credit unions provide billions of dollars of benefits annually to 

consumers by assuring that competitive rates and services are offered in the financial marketplace. Repeal of the tax exemption would result in pressure on credit 

unions to move away from their not-for-profit cooperative structure causing a systemic risk throughout the system. Congress should carefully consider these implications in determining whether to repeal the credit union tax exemption. 

f 

Chairman THOMAS. Thank you, Chairman Johnson. Mr. Miller? 

STATEMENT OF STEVEN T. MILLER, COMMISSIONER, TAX-EXEMPT AND GOVERNMENT ENTITIES DIVISION, INTERNAL 

REVENUE SERVICE 

Mr. MILLER. Chairman Thomas, Ranking Member Rangel, 

Members of the Committee, thank you for the opportunity to address the treatment of credit unions under Federal tax law. Our 

regulatory role in this area depends upon whether the credit union 

is chartered by the Federal Government or by a State. The Service 

has virtually no enforcement responsibility with respect to federally 

chartered credit unions. We have more but still rather limited engagement responsibility with respect to State-chartered credit 

unions. Credit unions were formed to encourage thrift among members and to create a source of credit at a reasonable rate of interest. Congress has stated that credit unions are exempt from tax because they are member-owned, democratically operated, not-forprofit organizations, generally managed by volunteer boards of directors, and because they have a specified mission of meeting the 

credit and saving needs of consumers, especially persons of modest 

means. Let me start my discussion of the tax rules with federally 

chartered credit unions. 

Federal credit unions were first chartered by an act of Congress 

in 1934 and were exempted from tax in 1937. They are chartered 

and regulated in their operation by the National Credit Union Administration. Once chartered, they are exempt from Federal income 

tax under the Federal Credit Union Act and are treated as instrumentalities of the United States under Section 501(c)(1) of the Internal Revenue Code. Federal credit unions are liable for Federal 

unemployment and Social Security taxes, but are not subject to the 

tax on unrelated business income, which is the tax imposed on inVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00021 Fmt 6633 Sfmt 6602 E:\HR\OC\26372.XXX 26372

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come derived from a trade or business that is not substantially related to the exempt purpose of an entity. Federal credit unions do 

not file information returns with the IRS, nor do they apply to the 

IRS for recognition of exemption. Other than employment taxes, we 

have no oversight over these entities. For State-chartered credit 

unions, the tax treatment is significantly different. Favored Federal tax treatment for these entities dates from a 1916 statute. The 

exemption of State-chartered credit unions from Federal income tax 

is now governed by sections 501(c)(14)(A). State-chartered credit 

unions are exempt if they are without capital stock, are organized 

and operated for mutual purposes, without profit and under a State 

law governing the formation of credit unions. 

State-chartered credit unions do not need to file with the IRS for 

exemption, but some do. In that event, they must show the State 

and date of their incorporation and that they comply with the State 

law applicable to loans, investments, and dividends. In addition, 34 

States have group rulings in which the State regulatory authority 

controls additions or deletions to the group and notifies the IRS of 

the names and addresses of new and departing members. Statechartered credit unions are also required to file an annual information return with the IRS. Like Federal credit unions, State-chartered credit unions are liable for employment taxes; however, unlike the Federal credit unions, they are subject to unrelated business income tax. As part of our overall examination program for 

tax-exempt organizations, we do examine State-chartered credit 

unions. We currently have about 50 such examinations underway. 

We are finding that not only are State-chartered credit unions engaging in traditional core credit union activities, but many are also 

engaging in a wide range of other activities, including marketing 

a variety of insurance products. We are working to determine 

which of the traditional activities are subject to the unrelated business income tax. 

Let me conclude. The IRS has begun to rebalance its efforts by 

placing greater emphasis on enforcement. This applies across the 

board, including the tax-exempt community. As we proceed in the 

tax-exempt sector, we have found that some areas have become difficult to administer because industry practice or the industry itself 

has changed over decades, while the tax rules have remained constant. The transformation of credit unions and other financial institutions is an excellent example of this kind of change, with credit 

unions offering new services and entering new markets. We take 

no position on whether credit unions should be taxable or whether 

the treatment of Federal and State-chartered credit unions should 

be conformed. What we can say is that, with respect to exemption, 

the IRS has a very limited role. However, industry changes do 

raise concerns for the IRS. As State-chartered credit unions offer 

new services, we have the responsibility of determining which of 

them generate taxable income. This is a factually intensive and difficult analysis. Thank you, and we look forward to working with 

you and your staff on these and similar issues. 

[The prepared statement of Mr. Miller follows:] 


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1La Caisse Populaire Ste. Marie (St. Mary’s Bank) v. U.S., 563 F.2d 505 (1st Cir., 1977), aff’g 

425 F. Supp. 512 (D. N.H., 1976). See also 31 U.S. Op. Atty. Gen. 176. In Pub.L. 105–219, sec. 

2(4), 105th Congress (1998), Congress found that credit unions are exempt from tax ‘‘because 

they are member-owned, democratically operated, not-for-profit organizations generally managed 

by volunteer boards of directors and because they have the specified mission of meeting the 

credit and saving needs of consumers, especially persons of modest means.’’ 2 12 U.S.C. § 1759 provides that federal credit union membership shall be limited to groups 

having a common bond of occupation and association, or to groups within a well-defined neighborhood, community, or district. State statutes vary as to the extent of the common bond requirement. 3Pub. L. 73–467, 48 Stat. 1216 (1934). 

4Pub. L. 75–416, 51 Stat. 4 (1937). 

5 12 U.S.C. § 1768. 

Statement of Steven T. Miller, Commissioner, Tax-Exempt and Government 

Entities Division, Internal Revenue Service 

Background 

Mr. Chairman, thank you for the opportunity to address this Committee on the 

treatment of credit unions under federal tax law. As I will explain, the rules governing this segment of the nonprofit community derive from various federal and 

state laws, not merely from the Internal Revenue Code. Our regulatory role is dependent upon the nature of the credit union. Credit unions may be chartered by the 

federal government or by a state. The Service has virtually no enforcement responsibility with respect to federally chartered credit unions. We have more, but still rather limited enforcement responsibility, with respect to state chartered entities. 

There is no definition of what constitutes a credit union in the Internal Revenue 

Code. The IRS looks to the National Credit Union Administration (NCUA), which 

administers the Federal Credit Union Act, to identify federal credit unions, and to 

applicable state law to identify state chartered credit unions. Notwithstanding the 

lack of a uniform definition and the variations in the statutes under which they are 

created, credit unions do generally share some common characteristics. These include operation on a mutual basis by and for the membership; ownership by the 

members of the shares on which dividends are paid; officers elected by the membership with each member having one vote regardless of the number of shares held; 

and the opportunity of members to deposit funds and receive loans from the institution. Nonmembers cannot make deposits with, or receive loans from, credit unions. 

Credit unions were formed to encourage thrift among members by holding member funds on deposit, making loans, and creating a source of credit at a fair and 

reasonable rate of interest in order to improve the economic and social conditions 

of credit union members.1

In general, credit union statutes (including the federal statute) require some sort 

of common bond among members. This usually is based upon working for a common 

employer, being employed in a similar occupation, or residing in a specific geographic locale.2 The common bond is a major factor distinguishing credit unions 

from other financial institutions such as banks and savings and loan companies, 

which are open for business with the general public without regard to employment, 

occupation, or area of residence. 

Applicable Legal Framework and Interaction with Internal Revenue Service 

History and Standards for Tax Exemption—Federal Credit Unions 

The federal credit union charter was created by act of Congress in 1934.3 Federal 

credit unions became exempt from tax in 1937.4 Federal credit unions are exempt 

from federal income taxes under the Federal Credit Union Act 5 and as a result are 

described in section 501(c)(1) of the Code, which refers to corporations, organized 

under an act of Congress, that are instrumentalities of the United States. Federal 

credit unions are chartered and regulated in operation by NCUA. NCUA determines 

the standards for qualification as a federal credit union under the Federal Credit 

Union Act, and determines which applicants qualify for federal credit union status. 

By operation of law, once NCUA makes this determination, federal law exempts the 

organization from tax, and the IRS accepts the finding as determinative of whether 

the organization is an instrumentality of the U.S. Government for purposes of section 501(c)(1). 

In recent decades, as a result of deregulation in the industry, the law governing 

federal credit unions has allowed expansion of the services federal credit unions 


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6Some examples of law changes to permit federal credit unions to expand their services include changes to the Federal Credit Union Act in 1977 (expanded savings, lending, and investment powers); the Monetary Control Act of 1980, P.L. 96–221 (share draft accounts); and the 

Garn-St. Germain Depository Institutions Act of 1982, P.L. 97–320 (expanded mortgage loan authority). 7The Credit Union Membership Access Act of 1998, Pub. L. 105–219, authorized credit unions 

to have multiple common bonds. The legislation overturned the holding of National Credit 

Union Administration v. First National Bnk & Trust Co., 522 U.S. 479 (1998). 8 31 U.S. Op. Atty. Gen. 176. 

9 Rev. Rul. 69–282, 1969–1 C.B. 155; Rev. Rul. 72–37, 1972 C.B. 152. 

10For purposes of federal tax law, the IRS is not precluded from challenging whether an organization meets state law common bond requirements or whether such state law requirements 

are adequate in defining a credit union. But see note 18 below. 11 IRC § 3308; IRC § 3112. 12 IRC § 511(a)(2)(A). 13 IRC § 513(a). 14See Treas. Reg. § 1.6033–2(g)(1)(vi); Rev. Rul. 89–94, 1989–2 C.B. 233, relating to information returns. IRC § 508(a) and IRC § 505(c) require designated organizations to apply for exempt 

status. These provisions do not designate federal or state chartered credit unions. Federal credit 

unions are subject to an independent application process with NCUA. 15 Rev. Proc. 56–2, 1956–1 C.B. 1017. State chartered credit unions may apply in order to have 

reliance on their exempt status with the IRS. 

offer to their members.6 At the same time, common bond restrictions have been relaxed to allow a wider membership base.7

History and Standards for Tax Exemption—State Credit Unions 

State chartered credit unions have existed at least since 1909, and favored federal 

tax treatment dates from a 1916 statute that conferred exemption on ‘‘cooperative 

banks without capital stock organized and operated for mutual purposes and without profit’’. (39 Stat. 766). In 1917, an opinion memorandum from the Office of the 

Attorney General interpreted this phrase to include credit unions.8 State credit 

unions were first expressly designated by statute as exempt from tax in the Revenue Act of 1951. 

The exemption of state chartered credit unions from federal income tax is governed by section 501(c)(14)(A) of the Internal Revenue Code. State chartered credit 

unions are exempt if they are without capital stock and are organized and operated 

for mutual purposes and without profit. The Service’s published guidance echoes the 

statute, adding that an entity also must be organized and operated under a state 

law governing the formation of credit unions in order to qualify for exemption.9 In 

general, state law determines the extent of the common bond required of the membership of a state chartered credit union.10

Applicability of Unrelated Business Income Tax 

As federal instrumentalities, federal credit unions remain liable for federal unemployment and social security taxes,11 but they are exempt from unrelated business 

income tax.12 State chartered credit unions are liable for employment taxes as well, 

but have no exemption from unrelated business income tax. The unrelated business 

income tax is a tax on income derived by a tax exempt entity from a trade or business that is regularly carried on and that is not substantially related to the exercise 

or performance of the purpose or function constituting the basis for the entity’s exemption.13

Filing and Reporting Requirements 

Federal and state chartered credit unions differ in their respective reporting requirements. Because federal credit unions are described in section 501(c)(1), they do 

not file information returns with the IRS, nor do they apply to the IRS for recognition of exemption.14 They are instead responsible to the NCUA for adherence to 

Federal Credit Union Act requirements. 

While optional, state chartered credit unions may file a notice with the IRS to be 

recognized as exempt, although there is no prescribed format. The IRS accepts a 

form furnished to applicants by the Credit Union National Association (CUNA) for 

this purpose.15 Applicants must show the state and date of incorporation, and that 

they comply with the state law applicable to loans, investments, and dividends. 

Thirty-four states hold group rulings, in which a state regulatory authority controls 

additions and deletions to the group and notifies the IRS of the names and addresses of new and departing members. 

State chartered credit unions are required to file annual information returns with 

the IRS (Forms 990). The IRS received over 1360 individual forms 990 from state 

chartered credit unions in 2003, the last year for which we have complete filing 

data. A state regulatory authority with a group exemption ruling may file a group 


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16 Rev. Rul. 60–364, 1960–2 C.B. 382. 17 As with other financial institutions, however, the IRS does monitor Bank Secrecy Act and 

currency transaction reporting compliance. 18The case presented what the IRS believed to be extremely favorable facts for the Government. There was no written common bond and the organization held itself out to the public as 

a full-service bank. See Action on Decision 1979–41 (May 4, 1978), which indicated that the loss 

of the case coupled with the expansion of the powers of federal credit unions ‘‘cast considerable 

doubt upon whether the Service will be able to ever successfully challenge the exempt status 

of credit unions.’’ See also GCM 37467 (1978) for a discussion of the A.O.D. The IRS also considered the sufficiency of a state chartered organization’s common bond in GCM 38345 (1980), 

without adverse action, stating that the IRS should only challenge exemption where there is 

no common bond, de facto or otherwise. 19 A technical advice memorandum in 1995 finds income derived from credit life and credit 

disability insurance to be UBIT. PLR 9548001. A series of three IRS information letters from 

the early 1970’s took the contrary position with respect to credit disability insurance. At this 

time we have thirty technical advice cases pending involving credit union activities. 20 United States v. American Bar Endowment, 106 S.Ct. 2426 (1986), which involved an organization described in section 501(c)(3); Louisiana Credit Union League v. United States, 693 F. 

2d 1097 (5th Cir. 1982), a section 501(c)(6) organization; Professional Insurance Agents of Michigan v. Commissioner, 726 F.2d 1097 (6th Cir. 1984), also a section 501(c)(6) organization. 

return for all exempt state chartered credit unions under its control and supervision.16 In 2003, 21 states out of the 34 states holding group rulings filed group 

Form 990 returns, covering over two thousand organizations. 

Examination Issues 

Unless employment tax issues are present, the IRS does not examine federal credit unions because generally there are no federal taxation issues to be resolved.17

We do examine state chartered credit unions and currently have about 50 examinations underway. These examinations all involve the application of the tax on unrelated business income. The IRS generally accepts the state’s recognition that an 

organization is a credit union and therefore we rarely challenge exemption of such 

organizations on that basis. An attempt by the IRS to revoke a state chartered credit union’s exemption based upon the expansive services it offered to its members and 

the sufficiency of the common bond of the organization’s membership was unsuccessful. La Caisse Populaire Ste. Marie (St. Mary’s Bank) v. U.S., 563 F.2d 505 (1st 

Cir.,1977).18

In our examinations, we are finding that state chartered credit unions are engaging in traditional core activities of providing savings facilities and loans to members, 

as well as offering more recently established services such as home mortgages and 

credit and debit cards. We are finding that many are also engaging in a wide range 

of other activities. Among these are: 

• The sale of optional credit life insurance and credit disability insurance to members who obtain loans from the organization. If the borrower dies or becomes 

disabled, the insurance pays off the loan balance. 

• The sale of GAP (‘‘Guaranteed Auto Protection’’) auto insurance. This pays the 

automobile loan balance in the event of loss or destruction of a vehicle to the 

extent it exceeds the value of the vehicle. 

• The sale of automobile warranties. 

• The sale of cancer insurance. 

• The sale of accidental death and dismemberment insurance. 

• ATM fees charged to non-members. 

• The sale of health or dental insurance. 

• The marketing of mutual funds to members. 

• The marketing of other insurance and financial products. 

We are working to determine which of these additional activities have a substantial relationship to the purposes and function of the state credit unions involved, 

and whether amounts derived from such activities are taxable.19

The IRS has asserted that an exempt membership organization engages in an unrelated trade or business when it sells insurance products to its members. The 

courts have endorsed that interpretation in multiple cases, although no court cases 

to date specifically involve sales by a section 501(c)(14)(A) credit union to its members.20

Conclusion 

In prior testimony before this Committee, we have discussed the extensive growth 

in the tax-exempt sector in recent decades, and the fact that there has been little 

change in the law governing organizations that qualify for tax-exempt status. 


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One of the four enforcement objectives of the IRS as outlined in the 5-year strategic plan published in 2004, is to deter the abuse and misuse of tax-exempt organizations. As a result, the IRS has begun to rebalance its efforts by increasing enforcement assets and activities directed at the tax-exempt community in general. 

As we proceed in this effort, we have found that some areas have become difficult 

to administer because industry practice, or the industry itself, has changed over the 

decades, while the tax rules have remained constant. The deregulation and resulting 

transformation of credit unions and other financial institutions is an excellent example of this kind of change. The credit union industry has evolved into something 

substantially different from what it was, offering new services and entering new 

markets. 

We take no position on whether credit unions should be taxable or whether the 

treatment of federal and state chartered credit unions should be conformed. What 

we can say is that with respect to exemption, the IRS has a very limited role. However, industry changes have raised issues. As the services provided by state chartered credit unions expand, we have the responsibility of determining which of them 

generate income that is subject to the unrelated business income tax. This is a factually intensive and difficult analysis. 

We appreciate the opportunity to provide this Committee with information. We 

have previously testified in support of a thorough review of the nonprofit sector, and 

this hearing is a welcome part of that review. 

We look forward to working with you and your staff on these and similar issues. 

f 

Chairman THOMAS. Thank you, Mr. Miller. Mr. Hillman? 

STATEMENT OF RICHARD J. HILLMAN, MANAGING DIRECTOR, 

FINANCIAL MARKETS AND COMMUNITY INVESTMENTS, U.S. 

GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. HILLMAN. Chairman Thomas, Members of the Committee, 

I am pleased to be here today to discuss issues regarding the taxexempt status of credit unions. My prepared statement today includes discussion on: one, the historical basis of the tax-exempt status and arguments for and against taxing these institutions; two, 

information on the extent to which credit unions offer services that 

are distinct from those offered by banks of comparable size; and, 

three, information from prior work assessing available information 

on the extent to which credit unions are serving low- and moderate-income individuals. The basis for continuing tax-exemption of 

credit unions, although not often articulated in legislation over the 

years, appears to be related to the perceived distinctness of credit 

unions and their service to people of modest means. More specifically, unlike banks, credit unions are member-owned, democratically operated, not-for-profit organizations generally managed by 

volunteer boards of directors, and these institutions have a specific 

mission of meeting credit and savings needs of people of small or 

modest means. 

Arguments for taxing credit unions centered on creating a level 

playingfield among financial institutions. Recent growth of the 

credit union industry is often cited as support for the argument 

that many credit unions now compete more directly with banks. 

Proponents of taxing credit unions also point to the potential revenue associated with repealing the tax-exemption with the Federal 

agencies estimating over $1 billion in potential annual revenues. 

Those in favor of taxation also question the extent to which the tax 

subsidy provided to credit unions is being used to serve people of 

modest means, especially in comparison with peer group banks. 

Opponents of taxation argue that credit unions remain distinct, 


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both organizationally and operationally, from other financial institutions. Opponents also point out that taxation could jeopardize the 

safety and soundness of credit unions since their net worth or capital levels are restricted to retained earnings only. Opponents also 

note that other depository institutions do have opportunities for tax 

relief such as S corporation status. 

As part of further addressing this issue, I would like to provide 

two slides and some contextual information on the size of the credit 

union industry and its distribution of assets, as well as to provide 

trend information on the changes in credit union membership. As 

of December 2004, the Federal Government chartered about 62 percent of the slightly more than 9,000 credit unions. Figure 1, shown 

on the screens, illustrates institution size and asset distribution in 

the credit union industry. The top bar reflects that as of December 

31, 2004, the 4,255 smallest credit unions, those with $10 million 

or less in total assets, constituted nearly half of all credit unions, 

but only 2.5 percent of the industry’s total assets. Conversely, the 

98 credit unions with assets over $1 billion, which is the shortest 

bar at the bottom of the figure, held 33 percent of the total industry assets, but represented just 1 percent of all credit unions. In 

an earlier 2003 report, we noted that as of December 31, 2002, 

there were just 71 credit unions with assets over $1 billion, and figures through June 2005 indicate that there are now 103 credit 

unions with over $1 billion in assets. So, the size of credit unions 

continues to grow. Despite this growth, the credit union industry 

remains much smaller than the banking industry, with credit 

unions representing around 6 percent of the total assets of both industries. 

As the credit union industry has evolved, the historical distinction between credit unions and other depository institutions has 

continued to blur. Since 1992, the number of credit unions has declined, but total assets of the industry have grown. The consolidation in numbers and concentration in assets have resulted in two 

distinct groups of credit unions: a few relatively large credit unions 

providing a wide range of services that resemble those offered by 

banks of similar size, and a number of smaller institutions that 

provide basic financial services. Among the more significant 

changes that have occurred in the credit union industry over the 

past two decades have been the weakening or blurring of the common bond that traditionally existed between credit union members. 

Credit union membership may be based on one of three types of 

common bond: a single bond, which is typically employer or occupation based; multiple common bonds, which allow for more than one 

single bond within an institution; and community bonds, which are 

comprised of persons or organizations within a well-defined local 

community, neighborhood, or rural district. 

The next figure, shown on the screens, provides additional information on the percent of assets of federally chartered credit unions 

by bond type. While multiple-bond credit unions have constituted 

on average slightly under 50 percent of all credit unions since 2000, 

they represented 57 percent of credit union assets. This chart also 

shows that the percent of community bond credit unions has more 

than doubled since 2000, growing from 9 percent of federally chartered credit unions in 2000 to 19 percent by the end of 2004. The 


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1Qualified financial institutions can elect to avoid federal corporate income tax as Subchapter 

S corporations (S-corporations). S-corporation tax status mainly allows small, closely held corporations meeting certain requirements to elect to eliminate corporate-level taxation. S-corporation shareholders are taxed on their portion of the corporation’s taxable income, regardless of 

whether they receive a cash distribution. For more information on S-corporations, see GAO, 

Banking Taxation: Implications of Proposed Revisions Governing S-Corporations on Community 

Banks, GAO/GGD–00–159 (Washington, D.C.: Jun. 23, 2000). 2GAO, Tax-Exempt Sector: Governance, Transparency, and Oversight Are Critical for Maintaining Public Trust, GAO–05–561T (Washington, D.C.: Apr. 20, 2005), and GAO, Nonprofit, 

For-Profit, and Government Hospitals: Uncompensated Care and Other Community Benefits, 

GAO–05–743T (Washington, D.C.: May 26, 2005). 

steepest growth of the assets in federally chartered credit unions 

also comes from community bonds, which comprise about $92 billion in assets at the end of 2004. In conclusion, the movement toward geographically based fields of membership and other expansion of the common bond restrictions, in conjunction with expanded 

lines of financial services, have made credit unions more competitive with banks. These changes have raised questions about the extent to which credit unions are fulfilling their perceived historical 

mission of serving individuals of modest means, yet limited comprehensive data are available on the incomes of credit union members. 

In prior work on the credit union industry, our assessment of 

available data suggested that credit unions served a slightly lower 

proportion of households with low and moderate incomes than do 

banks. To the NCUA’s credit, it has established a low-income credit 

union program and an underserved program that are intended to 

provide increased services to low- and moderate-income individuals 

and underserved areas. However, NCUA currently does not collect 

comprehensive data such as the overall income on individuals benefiting from these programs to allow for definitive conclusions about 

the information on incomes that the membership serves. As a result, we recommended in 2003 to NCUA that it develop more tangible indicators to determine whether credit unions have provided 

greater access to credit union services in underserved areas. The 

NCUA has yet to adopt any indicators but says it has established 

a working group to study credit union success in reaching people 

of modest means. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions you or the 

other members may have at the appropriate time. 

[The prepared statement of Mr. Hillman follows:] 

Statement of Richard J. Hillman, Managing Director, Financial Markets 

and Community Investment, U.S. Government Accountability Office 

Mr. Chairman Thomas and Members of the Committee: 

I am pleased to be here today to discuss issues regarding the tax-exempt status 

of credit unions. Credit unions are the only type of financial institution currently 

exempt from federal income taxes.1 As we have noted in a prior testimony before 

this Committee, the size of the tax-exempt sector has grown in recent years in both 

the number and assets of institutions.2 Today’s hearing on issues related to the 

credit union tax-exempt sector is timely in light of current and projected fiscal imbalances and renewed emphasis on accountability and governance in both the corporate and nonprofit sectors. A comprehensive examination could help determine 

whether exempt entities such as credit unions are providing services that are commensurate with their favored tax status, and whether an adequate framework exists 

for ensuring that these entities are meeting the requirements for tax-exempt status. 

The information that I am providing today is based primarily on prior work comVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00028 Fmt 6633 Sfmt 6621 E:\HR\OC\26372.XXX 26372

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3GAO, Credit Unions: Financial Condition Has Improved, but Opportunities Exist to Enhance 

Oversight and Share Insurance Management, GAO–04–91 (Washington, D.C.: Oct. 27, 2003) and 

GAO, Credit Unions: Reforms for Ensuring Future Soundness, GAO/GGD–91–85 (Washington, 

D.C.: Jul. 10, 1991). 4See Public Law 105–219 (Aug. 7, 1998), 112 STAT. 914. The Federal Credit Union Act of 

June 26, 1934 refers to ‘‘make more available to people of small means credit for provident purposes.’’ While these statutes have used ‘‘small means’’ and ‘‘modest means’’ to describe the type 

of people who credit unions might serve, these terms are not defined in the statutes. 

pleted on the credit union industry and on ongoing work underway for this Committee.3

Based on your request, I will discuss: 

• the historical basis for the tax-exempt status of credit unions; • arguments for and against the taxation of credit unions, including estimates of 

the potential tax revenues from eliminating the tax-exempt status of credit 

unions; • the extent to which credit unions offer services that are distinct from those offered by banks of comparable size; • the extent to which credit unions are serving low- and moderate-income individuals, including relevant programs of the National Credit Union Administration 

(NCUA) that target these individuals; and • the extent to which credit unions are required to report or make public certain 

information such as executive compensation and assessments of their internal 

controls for financial reporting. 

In summary, we found that: 

• The basis for continuing tax exemptions for credit unions, although not often 

articulated in legislation over the years, appears to be related to the perceived 

distinctness of credit unions and their service to people of modest means. Congress originally granted tax-exempt status to credit unions in 1937 because of 

their similarity to other mutually owned financial institutions that were tax exempt at that time. While the other institutions lost their exemption in the Revenue Act of 1951, credit unions specifically retained the exemption. The legislative history on the 1951 act did not articulate a rationale for the continued exemption of credit unions. However, more recent legislation (the Credit Union 

Membership Access Act of 1998 or CUMAA) states that credit unions are exempt from taxes because ‘‘they are member-owned, democratically operated, 

not-for-profit organizations generally managed by volunteer boards of directors, 

and because they have the specified mission of meeting the credit and savings 

needs of consumers, especially persons of modest means.’’ 4

• Recently, arguments for taxing credit unions have centered on creating a ‘‘level 

playing field’’ among financial institutions in terms of taxation, referencing the 

notable recent growth of the credit union industry to support the idea that credit unions compete more and more directly with banks. Proponents of taxing 

credit unions also point to the potential revenue associated with repealing the 

tax exemption. There is also some debate regarding the extent to which credit 

unions are serving people of modest means, especially in comparison with small 

banks. In response, opponents of taxation have argued that credit unions remain distinct—both organizationally and operationally—from other financial institutions, and that taxation would jeopardize the safety and soundness of credit 

unions by adversely impacting their net worth or capital levels, which are restricted to retained earnings. Opponents also note that other depository institutions do have opportunities for tax relief as S-corporations. Federal estimates 

of the potential tax revenues fall within a somewhat narrow range—$1.2 billion 

to $1.6 billion annually—while nongovernmental sources have produced higher 

estimates of up to $3.1 billion annually. 

• As the credit union industry has evolved, the historical distinction between 

credit unions and other depository institutions has continued to blur. The number of credit unions declined between 1992 and 2004, although the total assets 

of the industry have grown. As of 2004, credit unions with more than $100 million in assets represented about 13 percent of all credit unions and 79 percent 

of total assets. The consolidation in numbers and concentration of assets has 

resulted in two distinct groups of credit unions: a few relatively large institutions providing a wide range of services that resemble those offered by banks 

of the same size, and a number of smaller credit unions that provide basic financial services. For example, the loan portfolios of larger credit unions tend 

to hold more mortgage and real estate loans, resembling those of similarly sized 

banks. Smaller credit unions tend to carry smaller loans such as car loans. AdVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00029 Fmt 6633 Sfmt 6621 E:\HR\OC\26372.XXX 26372

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5GAO–04–91. 

6Most tax exempt entities annually must file a Form 990 with the IRS. Form 990 is publicly 

available and contains various revenue and expense information, including compensation data 

for officers, directors, trustees, and key employees. 7GAO–04–91. 

8See GAO/GGD–91–85 for additional background on the history of NCUA and state field of 

membership regulatory policies. 

ditionally, larger credit unions tend to offer a range of products and services 

similar to those offered by banks. 

• As credit unions have become larger and begun offering a wider variety of services, the issue of whether these institutions are serving households with low 

and moderate incomes has become a matter for debate. Yet, limited comprehensive data are available on the income of credit union members. In prior work 

on the credit union industry, our assessment of available data—the Federal Reserve’s 2001 Survey of Consumer Finances and other studies—suggested that 

credit unions served a slightly lower proportion of households with low and 

moderate incomes than banks.5 To NCUA’s credit, it has established programs 

that are intended for low-income individuals and underserved areas. However, 

NCUA does not collect comprehensive data such as the overall income of individuals benefiting from these programs to allow definitive conclusions about the 

membership served. 

• Most credit unions are not specifically subject to reporting requirements that 

would disclose information on executive compensation or assessments of internal controls for financial reporting—information that can enhance public confidence in tax-exempt entities. Publicly available financial reports reflect, and 

support, strong governance and transparency—essential elements in assuring 

that tax-exempt entities operate with integrity and effectiveness and maintain 

public trust. For example, public disclosure of revenue and expenses, such as 

the compensation of officers and directors, enhances transparency. However, 

most credit unions do not individually file the Internal Revenue Service (IRS) 

form that would provide such information—Form 990, Return of Organization 

Exempt from Income Tax—because of exclusions and group filings.6 Further, as 

we noted in a 2003 report, credit unions with assets over $500 million are not 

subject to internal control reporting requirements applicable to banks and 

thrifts under the Federal Deposit Insurance Corporation Improvement Act 

(FDICIA), which are similar to the reporting requirements of public companies 

affected by the Sarbanes-Oxley Act of 2002.7 As we suggested in 2003, making 

credit unions of $500 million or more subject to the FDICIA internal control reporting requirements would provide a commensurate tool to NCUA and appropriate state regulators to ensure that credit unions establish and maintain internal control structure and procedures for financial reporting purposes. 

Background 

Credit unions have historically occupied a unique niche among financial institutions. Credit unions differ from other depository institutions because they are (1) 

not-for-profit entities that build capital by retaining earnings (they do not issue capital stock), (2) member-owned cooperatives run by boards elected by the membership, and (3) tax-exempt. Like banks and thrifts, credit unions have either federal 

or state charters. Federal charters have been available since 1934, when the Federal 

Credit Union Act was passed. States have their own chartering requirements. As 

of December 2004, the federal government chartered about 62 percent of the slightly 

more than 9,000 credit unions and states chartered the remainder. Both federally 

and state-chartered credit unions are exempt from federal income taxes, with federally chartered and most state-chartered credit unions also exempt from state income 

and franchise taxes. 

Another distinguishing feature of credit unions is that they may serve only an 

identifiable group of people with a common bond. More specifically, credit union 

membership may be based on one of three types of common bond: single, multiple, 

or community. For example, a group of people that share a single characteristic, 

such as a common profession, could constitute the ‘‘field of membership’’ for a singlebond credit union. Field of membership is used to describe all the individuals and 

groups, including organizations, which a credit union is permitted to accept for 

membership.8 More than one group having a common bond could constitute the 

membership of a multiple-bond credit union. And, persons or organizations within 

a well-defined community, neighborhood, or rural district could form a communitybond credit union. Further, credit unions can offer members additional services 


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9 A CUSO is a corporation, limited liability corporation, or limited partnership that provides 

services such as insurance, securities, or real estate brokerage, primarily to credit unions or 

members of affiliated credit unions. Credit unions can invest up to 1 percent of their capital 

in CUSOs. CUSOs must maintain a separate identity from the credit union. See 12 C.F.R. Part 

712 (2003). 10 Internal Revenue Code section 501(c) describes 28 categories of organizations that are exempt from federal income tax. State credit unions are exempt in a category by themselves under 

section 501(c)(14)(A). Federal credit unions are exempt under section 501(c)(l). Section 501(c)(l) 

exempts certain corporations that have been organized under an act of Congress, designated as 

instrumentalities of the United States, and that are exempt from tax by the Internal Revenue 

Code or by certain congressional acts. 11Public Law 63–16. 12Public Law 64–271. 13Public Law 416. 14 H.R. Rep. No. 75–1579, at 2 (1937). 15Public Law 80–183. 16S. Rep. No. 82–781 (1951). 

made available by third-party vendors and by certain profit-making entities with 

which they are associated, referred to as credit union service organizations (CUSO).9

Rationale for the Historical Tax Exemption of Credit Unions 

The tax-exempt status of credit unions originally was predicated on the similarity 

of credit unions and mutual financial institutions; however, while Congress did not 

always cite its reasons for continuing this exemption, recent legislation mentions the 

cooperative structure and service to persons of modest means as reasons for reaffirming their exempt status.10 The Revenue Act of 1913 exempted domestic building and loan associations (now called ‘‘savings and loans’’), and mutual savings 

banks not having a capital stock represented by shares, from federal income tax.11

Further, the Revenue Act of 1916 exempted from taxation cooperative banks without capital stock organized and operated for mutual purposes and without profit.12

However, credit unions were not specifically exempted in either of these acts. Their 

tax-exempt status was addressed directly for the first time in 1917, when the U.S. 

Attorney General determined that credit unions closely resembled cooperative (mutual savings) banks and similar institutions that Congress had expressly exempted 

from taxation in 1913 and 1916. 

The Federal Credit Union Act of 1934 authorized the chartering of federal credit 

unions. The stated purpose of the act was to ‘‘establish a further market for securities of the United States and to make more available to people of small means credit 

for provident purposes through a national system of cooperative credit, thereby helping to stabilize the credit structure of the United States.’’ The 1934 act did not specifically exempt federal credit unions from taxation. In 1937, the act was amended 

to exempt federal credit unions from federal tax and limit state taxation to taxes 

on real and tangible personal property.13 Two reasons were given for the exemption: 

(1) that credit unions are mutual or cooperative organizations operated entirely by 

and for their members; and (2) that taxing credit unions on their shares, much as 

banks are taxed on their capital shares, places a disproportionate and excessive burden on the credit unions because credit union shares function as deposits.14

The Revenue Act of 1951 amended section 101(4) of the 1939 Internal Revenue 

Code to repeal the tax-exempt status for cooperative banks, savings and loan societies, and mutual savings banks, but it specifically provided for the tax exemption 

of state-chartered credit unions.15 While the act’s legislative history contains extensive discussion of the reasons why the tax-exempt status of the other mutual institutions was revoked, it is silent regarding why the tax exempt status of credit 

unions was not also revoked. 

The Senate report accompanying the Revenue Act of 1951 stated that the exemption of mutual savings banks was repealed in order to establish parity between competing financial institutions.16 According to the Senate report, tax-exempt status 

gave mutual savings banks the advantage of being able to finance growth out of 

untaxed retained earnings, while competing corporations (commercial banks) paid 

tax on income retained by the corporation. The report stated that the exempt status 

of savings and loans was repealed on the same grounds. Moreover, it stated that 

savings and loan associations were no longer self-contained mutual organizations, 

for which membership implied significant investments over time, risk of loss, heavy 

penalties for cancellation of membership or early withdrawal of shares, and in 

which members invested in anticipation of becoming borrowers at some time. Instead, investing members were simply becoming depositors who received relatively 

fixed rates of return on deposits that were protected by large surplus accounts, and 


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17While both banks and thrifts were subject to federal corporate income tax after 1951, some 

special provisions served to reduce their tax liability relative to corporations in other industries. 

Over time, Congress scaled back many of these provisions, including special deductions for additions to bad debt reserves. 18Public Law No. 105–219. 19See GAO, Banking Taxation: Implications of Proposed Revisions Governing S-Corporations 

on Community Banks, GAO–00–159 (Washington, D.C.: June 2000). 20See the President’s Tax Proposals to the Congress for Fairness, Growth, and Simplicity, 

May 1985, 247–248. 

borrowing members dealt with savings and loans in the same way as other mortgage lending institutions.17

More recently (in 1998), CUMAA amended the Federal Credit Union Act to, 

among other things, allow multiple-bond federal credit unions under certain circumstances (such as a general limitation on the size of each member group to 3,000 

members).18 In addition, CUMAA reaffirmed the federal tax exemption of credit 

unions, despite contentions that allowing multiple-bond credit unions would permit 

credit unions to become more like banks. Specifically, the findings section of 

CUMAA stated: 

Credit unions, unlike many other participants in the financial services market, 

are exempt from Federal and most State taxes because they are member-owned, 

democratically operated, not-for-profit organizations generally managed by volunteer 

boards of directors and because they have the specified mission of meeting the credit 

and savings needs of consumers, especially persons of modest means. 

Arguments for and against Taxation of Credit Unions 

At various times, the executive branch has proposed taxing credit unions, generally endorsing the creation of a ‘‘level playing field’’ among financial institutions 

in which organizations engaged in similar activities would be taxed similarly. Proponents of taxation contend that larger credit unions compete with banks in terms 

of the services they provide. Proponents also have questioned the extent that credit 

unions have remained true to their historical mission of providing financial services 

to persons of modest means. In response, opponents of the taxation of credit unions 

have argued that credit unions remain distinct organizationally and operationally 

from other financial institutions, providing their membership with services they 

would not receive from other institutions. Opponents also have argued that taxation 

would hinder the ability of credit unions to build capital (which is restricted to retained earnings), jeopardizing their safety and soundness. Finally, opponents have 

argued that other depository institutions, particularly smaller banks, also have opportunities for tax and regulatory relief such as S-corporation status.19 Some studies 

have attempted to quantify potential tax revenue from repealing the tax exemption, 

with estimates ranging from $1.2 billion to $3.1 billion, depending on the fiscal year 

considered, tax rates used, and other underlying assumptions. 

Arguments for Taxation 

Unlike income retained by most other financial institutions, income retained by 

credit unions is not taxed until it is distributed to members. Thus, tax exemption 

allows credit unions to utilize untaxed retained earnings to finance expansion of 

services. Proponents of taxing credit unions claim that this ability to use untaxed 

retained earnings provides credit unions with a competitive advantage over banks 

and thrifts. In 1978, the Carter Administration proposed that the tax-exempt status 

of credit unions be gradually eliminated to mitigate this advantage and establish 

parity between credit unions and thrift institutions. The Administration also argued 

that the relaxation of rules regarding field of membership criteria, the expansion 

of credit union powers, and the rising median income of credit union members indicated that credit unions were no longer true mutual institutions serving low-income 

workers excluded from banking services elsewhere. 

In 1984, the Department of the Treasury (Treasury) report to the President included a proposal to repeal the tax exemption of credit unions, which also argued 

that the exemption gave credit unions a competitive advantage over other financial 

institutions and its repeal would ‘‘eliminate the incentive for credit unions to retain, 

rather than distribute, current earnings.’’ In 1985, the Reagan Administration proposed taxing credit unions with more than $5 million in gross assets, but would 

have maintained the exemption on credit unions with less than $5 million of gross 

assets, since it was reasoned that taxing small credit unions would significantly increase the administrative burden for a relatively small revenue increase.20 Similarly, in the budget for fiscal year 1993 the first Bush Administration proposed taxing credit unions with assets of more than $50 million. 


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21GAO–04–91, p.16. 22 Representatives of the Credit Union National Association, the National Association of Federal Credit Unions, and the Consumer Federation testified before Congress in 1985 as well as 

in 2005. 

More recent arguments for the taxation of credit unions note the strong growth 

rates among large credit unions, which tend to offer a wider array of services. As 

a result, taxation proponents argue that larger credit unions compete with banks 

in terms of the services they provide and the households to which they provide these 

services. They question both the extent to which credit unions serve people of modest means and pass on their tax subsidy to members. While limited data are available to evaluate the income of credit union members—which precludes any definitive conclusion—some studies, including one of our own, indicate that credit unions 

serve a slightly lower proportion of households with low and moderate incomes than 

banks.21 We discuss this issue in more detail later in this statement. 

Arguments against Taxation 

Arguments against repealing the tax exemption for credit unions assert that the 

exemption does not offer competitive advantages and that it is justified by the 

unique services credit unions offer and by their capital structure. As we reported 

in 1991, credit unions as organizations are exempt from federal and state income 

taxes. However, the income that their members receive is taxed. Members who receive dividends on share accounts are taxed on that income, just as depositors at 

commercial banks are taxed on interest income from savings or checking accounts. 

If credit unions distribute all income to shareholders and do not retain earnings at 

the entity level, all income will be taxed at the individual level. In this case, credit 

unions would have little tax advantage relative to taxable mutual financial institutions, whose income is taxed once at either the individual or entity level. 

In 2005 and in previous testimonies, trade and industry groups and private individuals presented arguments supporting the tax-exempt status of credit unions, 

maintaining that tax-exempt status is justified because credit unions provide unique 

services, such as small loans, financial counseling, and low-cost checking accounts 

that for-profit financial institutions are unable or unwilling to provide.22 They stated that taxing credit unions would lead credit unions away from their mutual, nonprofit orientation and structure, leading to reductions in these types of services. 

They also testified that taxation would hinder credit unions in building reserves, 

and since credit unions do not have the ability to raise capital through the sale of 

stock, their safety and soundness would be jeopardized. They argued that while the 

number of large credit unions has grown over the last 10 years, they hold a relatively small share of overall depository institution assets. Opponents also argued 

that there is no clear rationale for targeting larger credit unions because, regardless 

of asset size, larger credit unions retain a distinct organizational structure and must 

still adhere to limits on their field of membership as sanctioned by Congress. Furthermore, they argued that larger credit unions, relative to smaller credit unions, 

were more stable and efficient and therefore better able to offer programs targeted 

to low- and moderate-income households. 

Opponents of credit union taxation also have argued that other financial institutions are not without tax privileges and tax relief. Specifically, credit union trade 

organizations have pointed out that an increasing number of banks have converted 

to S-corporation status and, thereby, have avoided paying corporate income taxes. 

In general, U.S. tax law treats corporations and their investors as separate taxable 

entities. Corporate earnings are taxed first at the corporate level and again at the 

shareholder level, as dividends if the corporation distributes earnings to shareholders, or as capital gains from the sale of stock. In contrast, the earnings of Scorporations are taxed only once at the shareholder level, whether or not the income 

is distributed. Corporations that elect Subchapter S status are subject to certain restrictions on the number of shareholders and capital structure. For example, an Scorporation may not have more than 75 shareholders, all of whom must be U.S. resident individuals (except for certain trusts and estates) and may issue only one class 

of stock. Prior to 1996, banks and other depository institutions could not elect Scorporation status. A provision of the Small Business Job Protection Act of 1996 repealed this prohibition. 

Like credit unions, mutual thrifts are owned by their depositors and their equity 

is derived from retained earnings. Mutual thrifts are permitted a tax deduction for 

amounts paid or credited to their depositors as dividends on their accounts if the 

amounts may be withdrawn on demand (subject only to the customary notice of intention to withdraw). These dividends are taxed only at the depositor level, whether 

they represent interest or a return on equity, so that mutual thrifts are taxed only 


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23There are three categories of cooperatives under the Internal Revenue Code: (1) exempt 

farmers cooperatives, described in section 521; (2) certain mutual or cooperative entities described in section 501(c)(12), which are exempt from taxation pursuant to section 501(a); and 

(3) taxable cooperatives, governed by subchapter T of the code (sections 1381–1388). 24 U.S. Department of the Treasury estimates as published in Analytical Perspectives: Budget 

of the United States Government, Fiscal Year 2005, (Washington, D.C.: 2004). 25 Joint Committee on Taxation estimates as published in the Congressional Budget Office’s 

Budget Options (Washington, D.C.: February 2005). 26 John A. Tatom, Competitive Advantage: A Study of the Federal Tax Exemption for Credit 

Unions (The Tax Foundation: Washington, D.C.: 2005). 27 Chmura Economics & Analytics, An Assessment of the Competitive Environment Between 

Credit Unions and Banks (Jefferson Institute for Public Policy: Virginia, May 2004). 

on retained earnings. Further, some farmer’s cooperatives are allowed additional tax 

deductions for dividends on capital stock and distributions to patrons. The earnings 

of a cooperative generally flow through to the patron and are taxed once at that 

level. Finally, some other similar entities, like rural electric associations and telephone cooperatives are tax-exempt.23

Estimates of the Potential Tax Revenues from Taxing Corporations Vary Widely 

Based on the Source and Underlying Assumptions 

Governmental entities have attempted to estimate the potential revenue to the 

federal government from repealing the tax exemption that ranged from $1.2 billion 

to $1.6 billion on an annualized basis. In a 2001 report, the Department of the 

Treasury estimated potential revenue between $1.2 billion and $1.4 billion 

annualized over the five year period from 2000–2004, and $1.4 and $1.6 billion over 

the ten-year period from 2000 to 2009, if all credit unions were taxed. More recently, 

in Analytical Perspectives, Budget of the United States Government Fiscal Year 

2005, Treasury estimated the potential tax revenue from repealing the credit union 

tax exemption at $7.88 billion from fiscal years 2005 through 2009, or $1.58 billion 

on average annually.24 However, according to Treasury officials, the 2005 Analytical 

Perspectives estimate did not account for any behavioral changes in response to taxation by credit unions in contrast with estimates from their earlier 2001 study. The 

Joint Committee on Taxation in a February 2005 Congressional Budget Office report estimated that taxing credit unions with assets greater than $10 million dollars 

would potentially raise $6.5 billion from fiscal years 2006 through 2010, or $1.3 billion on average annually over that five year period.25

Nongovernmental entities have produced estimates that tend to be higher than 

the estimates generated by government agencies. A study issued by the Tax Foundation, which was funded by the Independent Community Bankers of America, estimated the potential revenue from taxing all insured credit unions to be as high as 

$3.1 billion per year when averaged over the 10-year period from 2004 to 2013.26

Another private study conducted by Chmura Economics & Analytics for the Jefferson Institute for Public Policy estimated the revenue from taxing all credit unions 

to be $1.89 billion in 2002, when the same corporate tax rate as banks paid was 

applied to credit unions (in categories differentiated by asset size).27 In reviewing 

these studies, we note that assumptions vary on the tax rates imposed and the response of credit unions to the imposition of taxes (such as distributing higher dividends, lowering loan rates, or increasing deposit rates, which would reduce taxable 

income and therefore potential tax revenue). However, large credit unions, though 

small in numbers, are responsible for a disproportionate amount of the potential tax 

revenue as compared with small credit unions. 

Historical Distinctions between Credit Unions and Other Depository Institutions 

Have Continued to Blur 

Since 1992, credit unions have become less distinct from other depository institutions of similar size, particularly in terms of the products and services offered by 

larger credit unions. Between 1992 and 2004, the total assets held by federally insured credit unions more than doubled, while the total number of federally insured 

credit unions declined. As a result of the increase in total assets and the decline 

in the number of federally insured credit unions, the credit union industry has seen 

an increase in the average size of its institutions and a slight increase in the concentration of assets. Total assets in federally insured credit unions grew from $258 

billion in 1992 to $647 billion in 2004, an increase of 150 percent. During this same 

period the number of federally insured credit unions fell from 12,595 to 9,014. As 

of the end of 1992, credit unions with more than $100 million in assets represented 

4 percent of all credit unions and 52 percent of total assets; as of the end of 2004, 

credit unions with more than $100 million in assets represented about 13 percent 

of all credit unions and 79 percent of total assets. From 1992 to 2004, the 50 largest 


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credit unions (by asset size) went from holding around 18 percent of industry assets 

to around 24 percent of industry assets. 

This industry consolidation contributed to a widening gap between two distinct 

groups of federally insured credit unions—larger credit unions, which are relatively 

few in number and provide a wider range of services, and smaller credit unions, 

which are greater in number and provide more basic banking services. Figure 1 illustrates institution size and asset distribution in the credit union industry, with 

institutions classified by asset ranges. As of December 31, 2004, the 2,873 smallest 

credit unions—those with $5 million or less in total assets—constituted almost onethird of all credit unions but slightly less than one percent of the industry’s total 

assets. Conversely, the 98 credit unions with assets over $1 billion (up to just under 

$23 billion) held 33 percent of total industry assets but represented just 1 percent 

of all credit unions. In our 2003 report, we noted that as of December 31, 2002, 71 

credit unions with assets over $1 billion held 27 percent of total industry assets. 

Figure 1: Credit Union Industry Size and Total Assets Distribution, as of 

December 31, 2004 

Note: This figure depicts credit union industry distribution in terms of the number of federally insured credit unions in a particular asset size category and the percentage of industry assets that are held by credit unions in that category. 

As credit unions’ assets have grown in recent years, credit unions have generally 

shifted to larger loans such as mortgages. Between 1992 and 2004, the amount of 

first mortgage loans held grew from $29 billion to $130 billion, while that of new 

vehicle loans increased from $29 billion to $71 billion and that of used vehicle loans 

increased from $17 billion to $85 billion. In terms of the relative importance of different loan types, we compared the growth in the amounts of various loan types relative to credit unions’ assets over the same period. Amounts held in first mortgage 

loans grew from around 11 percent of assets in 1992 to around 20 percent of assets 

in 2004, while amounts held in used vehicle loans grew from just under 7 percent 

to slightly more than 13 percent. 

As shown in figure 2, larger credit unions generally held relatively larger loans 

(e.g., first mortgage loans) than smaller credit unions, which generally held relatively more small loans (e.g., used vehicle loans). Since 1992, the amount of first 

mortgage loans held relative to assets has more than doubled for credit unions with 

over $1 billion in assets, from around 12 percent to over 25 percent of assets, while 

it has grown less than 40 percent for credit unions with less than $100 million in 

assets, from around 9 percent to slightly more than 12 percent of assets. 


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Figure 2: Loan Types as a Percentage of Total Assets, Smallest verus Largest Credit Unions, 1992–2004 

The discrepancy between smaller and larger credit unions is more apparent 

through an analysis of more recently collected data on more sophisticated product 

and service offerings, such as the availability of automatic teller machines (ATM) 

and electronic banking (see table 1). While less than half of the smallest credit 

unions offered ATMs and one-third offered transactional websites, nearly all larger 

credit unions offered these services. 

Table 1: Credit Union Size and Offerings of More Sophisticated 

Services, as of December 31, 2004 

Percentage of institutions offering the following services 

Website 

Asset range Number 

Group 

assets 

(billions) 

Financial 

Services 

through 

the 

Internet 

Financial 

services 

through 

audio 

response 

or 

phone 

ATMs 

Electronic 

applications 

for 

new 

loans 

Informational 

Interactive 

Transactional 

$10 million or 

less 7,859 $138 37.8 44.3 47.0 25.3 16.0 4.0 32.9 

Greater than 

$100 millions 

to $250 million 644 $102 94.7 97.4 95.0 82.1 3.7 2.2 92.2 

Greater than 

$250 to $500 

million 266 $94 98.5 98.5 96.6 89.8 0.8 1.5 97.0 

Greater than 

$500 million to 

$1 billion 147 $100 98.0 98.0 98.0 92.5 2.0 1.4 95.9 

Greater than $1 

billion 98 $213 98.0 98.0 98.0 95.9 1.0 2.0 96.9 

Total 9,014 $647 51.2 51.2 53.3 33.1 14.3 3.7 40.7 

Source: GAO analysis of NCUA Form 5300 data. 

Note: Data are based on all federally insured credit unions filing call reports. 

Despite the growth in credit union assets over recent years, the credit union industry remains much smaller than the banking industry, with credit unions repVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00036 Fmt 6633 Sfmt 6621 E:\HR\OC\26372.XXX 26372

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28 Credit union assets grew from $438 billion at year-end 2000 to $647 billion at year-end 2004—an increase of 48 percent—while banking industry assets grew from $7.5 trillion at yearend 2000 to $10.1 trillion at year-end 2004—an increase of 35 percent. Credit unions represented 6.0 percent of the combined assets of the banking and credit union industries as of 

December 31, 2004, versus 5.6 percent as of December 31, 2000. 29Given the disproportionate size of the banking industry relative to the credit union indus- try—the average credit union had $72 million in assets versus $1.1 billion in assets for the average bank at year-end 2004—we developed peer groups by asset size to mitigate the effects of 

this discrepancy. We constructed five peer groups in terms of institution size as measured by 

total assets, reported as of December 31, 2004. We further refined the sample of FDIC-insured 

institutions to exclude those banks and thrifts we determined had emphases in credit card or 

mortgage loans. The largest bank included in our analyses had total assets of nearly $23 billion 

at year-end 2004, and the average bank in this peer group sample had $359 million in assets. 30The Federal Credit Union Act defines an ‘‘underserved area’’ as a local community, neighborhood, or rural district that is an ‘‘investment area’’ as defined by the Community Development Banking and Financial Institutions Act of 1994. An investment area includes locations experiencing poverty, low income, or unemployment. 

resenting around 6 percent of total assets of both industries.28 For example, at the 

end of 2004, the largest credit union had nearly $23 billion in assets, while the largest bank, with $967 billion in assets, was larger than the entire credit union industry combined. 

Although credit unions are on average much smaller than banks, larger credit 

unions and banks of comparable size tend to offer the same products and services 

(see fig. 3).29 In particular, nearly all banks and larger credit unions reported holding first mortgage loans, while a majority of the smaller credit unions did not. 

Figure 3: Percentage of Credit Unions and Banks Holding Various Loans, 

by Institution Size, as of December 31, 2004 

Notes: Data are based on all federally insured credit unions, banks, and thrifts 

filing call reports. We excluded insured U.S. branches of foreign-chartered institutions and banks that we determined had emphases in credit card or mortgage loans. 

Credit union data on other consumer loans may include member business and agricultural loans. Agricultural and business loans for credit unions include both member business loans and participation in nonmember loans. 

The Extent to Which Credit Unions Serve Persons of Modest Means Is Not Definitively Known because of Limited Data and Lack of Indicators 

While credit union fields of membership have expanded, the extent to which they 

serve people or communities of low or moderate incomes is not definitively known. 

In 1998, CUMAA affirmed preexisting NCUA policies that had allowed credit unions 

to expand their field of membership and include underserved areas.30 After the legislation was passed, NCUA revised its regulations to enable credit unions to serve 


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31 National Credit Union Administration v. First National Bank & Trust Company. 522 U.S. 

479 (1998). 32See 12 U.S.C. § 1759(b), (d), as amended. 33With the exception of the statistics provided for multiple-bond credit unions for 1996, NCUA 

cannot provide us data on federal chartering trends before 2000. However, NCUA was able to 

report that by 1996, about half of all federally chartered credit unions were multiple-bond credit 

unions. 

larger communities or geographic areas. As they have become larger and begun offering a wider variety of services, questions have been raised about whether credit 

unions are more likely than banks to serve households with low and moderate incomes. However, limited comprehensive data are available to evaluate the income 

of credit union members. Our assessment of available data—the Federal Reserve’s 

2001 Survey of Consumer Finances (SCF) and other studies—provided some indication that, compared with banks, credit unions served a slightly lower proportion of 

households with low and moderate incomes. Although NCUA has undertaken initiatives to enhance the availability of financial services to individuals of modest means, 

as of October 15, 2005, it had not implemented our 2003 recommendation to develop 

indicators to evaluate the progress credit unions made in reaching the underserved. 

Credit Unions Can Serve More People and Larger Areas because CUMAA Permitted 

NCUA to Continue Preexisting Policies That Expanded Field of Membership 

In 1998, the Supreme Court ruled against NCUA’s practice of permitting federally 

chartered credit unions based on multiple bonds.31 Subsequently, Congress passed 

CUMAA, which specifically permits multiple-bond credit unions. The act permits 

these credit unions to retain their current membership and authorizes their future 

formation.32 Figure 4 provides additional information on the percent and assets of 

federally chartered credit unions by bond type. While multiple-bond credit unions 

have constituted on average slightly under 50 percent of all credit unions since 

2000, they tend to be larger than the other two types of credit union bonds in terms 

of asset size.33 For example, at year-end 2004, multiple bond credit unions made up 

45 percent of the total number of federal credit unions but represented 57 percent 

of federal credit union assets. 

Figure 4: Percent and Assets of Federally Chartered Credit Unions, by 

Bond, 2000–2004 

Note: NCUA provided revised data for the year 2000 from that previously provided for our 2003 report. 

In addition to permitting multiple-bond credit unions, CUMAA further qualifies 

the definition of community bond. The act adds the word ‘‘local’’ to the preexisting 

requirement that community-based credit unions serve a ‘‘well-defined community, 

neighborhood or rural district,’’ but provides no guidance on how ‘‘local’’ or any other 


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34Pub. L. No. 105–219 § 101. See 12 U.S.C. § 1759(c)(2), as amended. 35The Credit Union National Association, a trade association, collects information about the 

characteristics (for example, income, race, and age) of credit union members but not specifically 

the income levels of members who actually receive mortgage and consumer loans or use other 

services. Also, Massachusetts and Connecticut collect information on the distribution of credit 

union lending by household income and the availability of services because their state-chartered 

credit unions are subject to examinations similar to those of federally regulated institutions. 

Massachusetts established its examination procedures in 1982 and Connecticut in 2001. 36 CRA requires federal bank and thrift regulators to encourage depository institutions under 

their jurisdiction to help meet the credit needs of the local communities, including low- and moderate-income areas, in which they are chartered, consistent with safe and sound operations. See 

12 U.S.C. φφ 2901, 2903, and 2906 (2000). Federal bank and thrift regulators conduct CRA examinations to evaluate the services that depository institutions provide to low- and moderateincome neighborhoods. However, CRA provides for enforcement only when regulators evaluate 

an institution’s application for a merger or new branch, requiring that the agencies take an institution’s record of meeting the credit needs of its community into account. 37The SCF is an interview survey of U.S. households conducted by the Federal Reserve Board 

that includes questions about household income and specifically asks whether households use 

credit unions or banks. It is conducted every 3 years and is intended to provide detailed information on the balance sheet, pension, income, and other demographic characteristics of U.S. 

households, and their use of financial institutions. 38See GAO–04–91, pages 19–23, for a more detailed discussion of our analysis and limitations 

of the SCF data. 

part of this requirement should be defined.34 However, after the passage of CUMAA, 

NCUA revised its regulations to make it easier for credit unions to serve increasingly larger areas (e.g., entire cities or counties). As a result, NCUA approved a 

community-based charter application in July 2005 covering Los Angeles County 

with a potential membership of 9.6 million. 

Limited Comprehensive Data Are Available to Evaluate Income of Credit Union 

Members 

While it has been generally accepted that credit unions historically have emphasized service to people with modest means; currently, there are no comprehensive 

data on the income characteristics of credit union members, particularly those who 

actually receive loans and other services. Industry groups and consumer advocates 

have debated which economic groups benefit from credit union services, especially 

in light of the credit unions’ exemption from federal income taxes. As stated in our 

1991 report, and still true, none of the common-bond criteria available to federally 

chartered credit unions refer to the economic status of their members or potential 

members. 

Information on the extent to which credit unions are lending and providing services to households with various incomes is scarce because NCUA, industry trade 

groups, and most states (with the exception of Massachusetts and Connecticut) have 

not collected specific information describing the income of credit union members who 

obtain loans or benefit from other credit union services.35 Credit unions—even those 

serving geographic areas—are not subject to the federal Community Reinvestment 

Act (CRA), which requires banking regulators to examine and rate banks and thrifts 

on lending and service to low- and moderate-income neighborhoods in their assessment area.36 Consequently, NCUA and most state regulators do not require credit 

unions to maintain data on the extent to which loans and other services are being 

provided to households with various incomes. 

Federal Reserve Board Data Suggest That Credit Unions Serve a Slightly Lower 

Proportion of Low- and Moderate-Income Households Than Do Banks 

Our prior work, which included an analysis of data from the Federal Reserve 

Board’s 2001 SCF, suggested that credit unions overall served a lower percentage 

of households of modest means (low- and moderate-income households combined) 

than banks.37 More specifically, while credit unions served a slightly higher percentage of moderate-income households than banks, they served a much lower percentage of low-income households. We combined the SCF data into two main groups— 

households that primarily and only used credit unions versus households that primarily and only used banks.38 As shown in figure 5, this analysis indicated that 

about 36 percent of households that primarily and only used credit unions had low 

or moderate incomes, compared to 42 percent of households that used banks. Moreover, our analysis suggested that a greater percentage of households that primarily 

and only used credit unions were in the middle and upper income grouping than 

the proportion of households that primarily and only used banks. 


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Figure 5: Income Characteristics of Households Using Credit Unions versus 

Banks, and Low and Moderate Income versus Middle and High Income 

Note: We used the same income categories as used by federal regulators in their 

CRA examinations. 

We also looked at each of the four income categories separately. As shown in figure 6, this analysis suggested that the percentage of households in the low-income 

category that used credit unions only and primarily (16 percent) was lower than the 

percentage of these households that used banks (26 percent). In contrast, more 

moderate- and middle-income households were likely to use credit unions only and 

primarily (41 percent) than banks (33 percent). Given that credit union membership 

traditionally has been tied to occupational- or employer-based fields of membership, 

that higher percentages of moderate- and middle-income households using credit 

unions is not surprising. 


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39 Credit Union National Association 2002 National Member Survey and Woodstock Institute, 

Rhetoric and Reality: An Analysis of Mainstream Credit Unions’ Record of Serving Low Income 

People (February 2002). 

Figure 6: Income Characteristics of Households Using Credit Unions versus 

Banks, by Four Income Categories 

Note: We found no statistical difference in the percent of upper-income households 

when the ‘‘primarily and only’’ using credit union group and the ‘‘primarily and 

only’’ using bank group were compared. 

We also attempted to further explore the income distribution of credit unions 

members by separately analyzing households that only used credit unions or banks 

from those that primarily used credit unions or banks. However, the results were 

ambiguous and difficult to interpret, due to the characteristics of the households in 

the SCF database. For example, because such a high percent of the U.S. population 

only uses banks (62 percent), the data obtained from the SCF is particularly useful 

for describing characteristics of bank users but much less precise for describing 

smaller population groups, such as those that only used credit unions (8 percent). 

Other relatively recent studies—notably, by the Credit Union National Association and the Woodstock Institute—generally concluded that credit unions served a 

somewhat higher-income population. The studies also noted that the higher income 

levels could be due to the full-time employment status of credit union members.39

Officials from NCUA and the Federal Reserve Board also noted that credit union 

members were likely to have higher incomes than nonmembers because credit 

unions are occupationally based. A National Federation of Community Development 

Credit Unions representative noted that because credit union membership is largely 

based on employment, relatively few credit unions are located in low-income commuVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00041 Fmt 6633 Sfmt 6621 E:\HR\OC\26372.XXX 26372

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40The National Federation of Community Development Credit Unions represents and provides, among other things, financial, technical assistance, and human resources to about 215 

community development credit unions for the purpose of reaching low-income consumers. 41Section 701.34 of NCUA’s Rules and Regulations defines the term ‘‘low-income members’’ 

as those members who (1) make less than 80 percent of the average for all wage earners as 

established by the Bureau of Labor Statistics or (2) whose annual household income falls at or 

below 80 percent of the median household income for the nation as established by the Census 

Bureau. The term ‘‘low-income members’’ also includes members who are full—or part-time students in a college, university, high school, or vocational school. 42 A ‘‘secondary capital instrument’’ is either unsecured debt or debt that has a lower priority 

than that of another debt on the same asset. These subordinated debt instruments are not 

backed or guaranteed by the federal share insurance fund. 

nities.40 However, without additional research, especially on the extent to which 

credit unions with a community base serve all their potential members, it is difficult 

to know whether the relative importance of full-time employment is the primary explanatory factor. 

NCUA Has Established Initiatives That Target Low-Income Individuals and Underserved Areas 

NCUA recently has established two initiatives to further enhance the availability 

of financial services to individuals of modest means: the low-income credit union 

program and expansion into underserved areas. According to NCUA, its Low Income 

Credit Unions (LICU) program is designed to assist credit unions whose members 

are of modest means in obtaining technical and financial services. LICUs grew in 

number from more than 600 in 2000 to nearly 1,000 by the end of 2004. To obtain 

a low-income designation from NCUA, an existing credit union must establish that 

a majority of its members meet the low-income definition.41 According to NCUA, 

credit unions that meet this criterion are presumed to be serving predominantly 

low-income members. Also, newly chartered credit unions can receive low-income 

designation based on the income characteristics of potential members. 

Credit unions that receive a low-income designation from NCUA are measured 

against the same standards of safety and soundness as other credit unions. However, NCUA grants benefits that other credit unions do not have, including: 

• greater authority to accept deposits from nonmembers such as voluntary health 

and welfare organizations; 

• ccess to low-interest loans, deposits, and technical assistance through participation in NCUA’s Community Development Revolving Loan Fund; 

• ability to offer uninsured secondary capital accounts and include these accounts 

in the credit union’s net worth for the purposes of meeting its regulatory capital 

requirements;42 and 

• a waiver of the aggregate loan limit for member business loans. 

NCUA has stated that one of its goals is to encourage the expansion of membership and make quality credit union services available to all eligible persons. It has 

done so in part by allowing credit unions to expand into underserved areas in recent 

years, from 40 in 2000 to 564 in 2004 (see fig. 7). 


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43Quoted from NCUA Chartering and Field Membership Manual, March 2003, p.3–4 & 3–5 44GAO–04–91, p. 83. 

Figure 7: Credit Union Expansions into Underserved Areas, 2000—2004 

CUMAA and NCUA’s Interpretive Ruling and Policy Statement (IRPS) 03–1, the 

Chartering and Field of Membership Manual, allows credit unions to include in 

their fields of membership, without regard to location, communities in underserved 

areas. The Federal Credit Union Act defines an underserved area as a local community, neighborhood, or rural district that is an ‘‘investment area’’ as defined by the 

Community Development Banking and Financial Institutions Act of 1994—that is, 

experiencing poverty, low income, or unemployment.43 In order to expand into an 

underserved area, credit unions must receive approval from NCUA by demonstrating that a community qualifies as an investment area. Credit unions must 

also provide a business plan describing how the underserved community will be 

served. Finally, although the underserved and LICU initiatives are intended to help 

serve the underserved, NCUA does not collect data such as overall income levels of 

individuals using specific credit union products. 

NCUA Has Not Fully Implemented Our Recommendation to Develop Indicators to 

Evaluate Credit Union Progress in Reaching the Underserved 

Although NCUA has targeted underserved individuals and areas, in our 2003 report on credit unions we found that NCUA had data on potential—but not actual— 

membership of low- and moderate-income individuals in underserved areas adopted 

by credit unions. We recommended that NCUA use tangible indicators, other than 

potential membership, to determine whether credit unions have provided greater access to credit union services in underserved areas.44

As of October 15, 2005, NCUA had not adopted any indicators. According to 

NCUA, it has established a working group to study credit union success in reaching 

people of modest means. NCUA indicated that the working group was exploring 

meaningful measures of success for this objective, determining how to best quantify 

the measures with available or readily obtainable data. The working group has also 

been evaluating the impact of other regulations, such as the Privacy of Consumer 

Financial Information, on the collection and use of such data. According to NCUA 

officials, as of October 15, 2005, the working group had not issued its report or recommendations. 


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45 12 U.S.C. § 1831m; 12 C.F.R. Part 363 (2003). 

Credit Unions Lack Transparency on Executive Compensation and Larger Credit 

Unions Do Not Have to Report on Effectiveness of Internal Controls 

Most credit unions are not subject to IRS and other federal reporting requirements that would disclose information such as executive compensation and assessments of internal controls for financial reporting—information that can enhance 

public confidence in tax-exempt entities. Public availability of key financial information (that is, transparency) can provide incentives for ethical and effective operations as well as support oversight of the tax-exempt entities. At the same time, the 

disclosure of such information helps to achieve and maintain public trust. 

Recognizing the importance of transparency for tax-exempt entities, Congress 

made returns of the IRS Form 990 (Return of Organizations Exempt from Income 

Tax) into publicly available documents. Since tax exemptions are granted to entities 

so that they can carry out particular missions or activities that Congress judges to 

be of special value, the public availability of Form 990 promotes public oversight. 

Most tax-exempt organizations, other than private foundations with gross receipts 

of $25,000 or more, are required to file Form 990 annually. The form contains information on an organization’s income, expenditures, and ‘‘activities’’ including compensation information for officers, directors, trustees, and key employees. IRS also 

uses these forms to select organizations for examination. 

However, most credit unions do not individually file Form 990. In 2002 and 2003, 

credit unions filed 1,435 and 1,389 Form 990s, respectively. On August 23, 1988, 

IRS issued a determination that annually filing Form 990 was not required for federal credit unions because of their status as tax-exempt organizations under section 

501(c)(1) of the Internal Revenue Code. Depending on the state, some state-chartered credit unions file through a group filing process. For these states, IRS receives 

only the names and addresses of individual credit unions. As a result, scrutiny of 

the compensation of credit union executives and other key personnel is difficult. As 

you are aware, we have ongoing work in this and other areas, and we hope to provide you with additional information on the compensation of credit union executives 

and officials as part of this follow-up work. 

As noted in our 2003 report, the Federal Credit Union Act, as amended, requires 

credit unions with assets over $500 million to obtain an annual independent audit 

of financial statements by an independent certified public accountant. But, unlike 

banks and thrifts, these credit unions are not required to report on the effectiveness 

of their internal controls for financial reporting. Under FDICIA and its implementing regulations, banks and thrifts with assets over $500 million are required 

to prepare an annual management report that contains: 

• a statement of management’s responsibility for preparing the institution’s annual financial statements, for establishing and maintaining an adequate internal control structure and procedures for financial reporting, and for complying 

with designated laws and regulations relating to safety and soundness; and 

• management’s assessment of the effectiveness of the institution’s internal control structure and procedures for financial reporting as of the end of the fiscal 

year and the institution’s compliance with the designated safety and soundness 

laws and regulations during the fiscal year.45

Additionally, the institution’s independent accountants are required to attest to 

management’s assertions concerning the effectiveness of the institution’s internal 

control structure and procedures for financial reporting. The institution’s management report and the accountant’s attestation report must be filed with the institution’s primary federal regulator and any appropriate state depository institution supervisor, and must be available for public inspection. 

The reports, with their assessments and attestations on internal controls, allow 

depository institution regulators to gain increased assurance about the reliability of 

financial reporting. Also as we stated in our 2003 report, the extension of the internal control reporting requirement to credit unions with assets over $500 million 

could provide NCUA with an additional tool to assess the reliability of internal controls over financial reporting. 

Moreover, bank and thrift reporting requirements under FDICIA are similar to 

the public company reporting requirements in the Sarbanes-Oxley Act of 2002. 

Under Sarbanes-Oxley, public companies are required to establish and maintain 

adequate internal control structures and procedures for financial reporting; the company’s auditor is also required to attest to, and report on, the assessment made by 

company management on the effectiveness of internal controls. As a result of 

FDICIA and the Sarbanes-Oxley Act, reports on management’s assessment of the 


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effectiveness of internal controls over financial reporting and the independent auditor’s attestation on management’s assessment have become normal business practice 

for financial institutions and businesses. 

In a letter dated October 2003, NCUA’s Chairman stated that while the SarbanesOxley Act does not apply specifically to federal credit unions, certain provisions may 

be appropriate to consider for some federal credit unions. Federal credit unions are 

encouraged (but not required) to consider the guidance provided and are urged to 

periodically review their policies and procedures as they relate to matters of corporate governance and auditing. 

Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions you or other Members of the committee may have. 

f 

Chairman THOMAS. Thank you very much, and to determine 

whether or not there are any Members who wish to inquire, the 

Chair’s inquiry will be withheld until the end of the Members’ responses. The Chair would recognize the gentleman from Florida, 

Mr. Shaw. 

Mr. SHAW. Thank you, Mr. Chairman. Ms. Johnson, in your testimony you gave us a good overview as to the structure of memberowned—as to credit unions. Do the members receive complete financial statements from the credit unions such as they would in 

a corporation? 

Ms. JOHNSON. Members receive monthly statements, just 

like—— 

Mr. SHAW. Now, I am not talking about their own account. I am 

talking about—— 

Ms. JOHNSON. There is an annual report and the regular statements on a monthly basis. The monthly financials are posted 

monthly. 

Mr. SHAW. All right. That is of the overall structure itself? 

Ms. JOHNSON. Correct. 

Mr. SHAW. This would be reported to them. Do they get—do accountants come in and do—CPAs come in and do opinion reports 

on them? 

Ms. JOHNSON. They have their regularly scheduled audit, opinion audits. The examining from the regulator is done on a regularly 

scheduled basis, typically either annually or up to 18 months. But, 

yes, they are required to have audits on a regular basis. 

Mr. SHAW. Does that information include salaries paid by the 

credit union to the officers of the corporation, of the credit union? 

Ms. JOHNSON. We do not collect salary information specifically. 

It has not been required. Federal credit unions are not required to 

fill out the 990Ts, and so that information is not gathered individually. 

Mr. SHAW. Can the individual members get that information? 

What I am trying to do is establish ownership rights here. Can the 

individual get that information if they request it? 

Ms. JOHNSON. The credit unions are managed by a volunteer 

board, and the salaries, and so forth, are set by that volunteer 

board, and the audit and supervisor Committee and the board of 

directors take care of that part of the management. It is set by the 

volunteers who are elected by the members of the credit union. 

Mr. SHAW. Thank you. Thank you, Mr. Chairman. 

Chairman THOMAS. Does the gentleman from New York wish 

to inquire? 


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Mr. RANGEL. Thank you. Mr. Hillman, with your Government 

Accountability investigation, could you share with us whether the 

for-profit banks—what salaries they pay to the executives and employees? 

Mr. HILLMAN. We have not gathered information on the banking industry as part of this review, but all publicly owned companies are required through SEC filings to provide information on 

salaries of key officers and directors. 

Mr. RANGEL. Ms. Johnson, do you know whether or not your 

salaries are competitive or in line with the salaries that are paid 

in similar institutions that operated for profit? 

Ms. JOHNSON. As I said, we don’t collect individual salary information. The only bit of information I could give you, on a recent 

website of one of the firms that is working on behalf of those that 

are looking perhaps to convert from a credit union to a bank charter, they do have on their website, according to their information, 

that credit union CEOs are paid approximately 57 percent less 

than their counterparts. 

Mr. RANGEL. Well, throughout your testimony, it seems as 

though you were advocating a position that credit unions should 

not be taxed. Are there any reasons politically that you believe that 

there is any consideration about doing that? If so, what is it? 

Ms. JOHNSON. Congressman, the rhetoric is around all the 

time, I guess. I know when I served as Chairman of the Senate 

Ways and Means Committee back in Iowa, the rhetoric was happening back then as well. I believe the questions that are asked 

today about the validity of the tax-exemption are very—they are 

necessary. I did the same thing in my role back home. But I would 

tell you that when you are looking to see whether you are getting 

your money’s worth for this tax-exemption, I would assure you that 

you are getting a lot of bang for the buck. If you set the stage a 

little bit with the bank versus credit union stature as it is, it is important to note that credit unions only comprise about 6 percent of 

the industry, of the assets. 

Mr. RANGEL. Yes, but what I am getting to is that Mr. Miller 

would agree that even though the IRS does not have a policy, that 

the Secretary of the Treasury has publicly stated that he is opposed to taxing credit unions. The President of the United States 

and the leader of the free world has indicated that he opposes taxing of tax-exempt. So, who would you think represents the concept 

that would threaten you politically? 

Ms. JOHNSON. Only the competition that would like to see competition go away. 

Mr. RANGEL. So, you do not feel that threat coming from the 

Congress or this Committee. 

Ms. JOHNSON. I have never had it expressed by a Member of 

Congress, no. 

Mr. RANGEL. You have not? 

Ms. JOHNSON. Not directly. 

[Laughter.] 

Chairman THOMAS. Does the gentleman yield back the time? 

Mr. RANGEL. Yes, I do, Mr. Chairman. 

Chairman THOMAS. Does the gentlewoman from Connecticut 

wish to inquire? 


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Mrs. JOHNSON. Thank you. Mr. Miller, in your testimony you 

say that credit unions are not required to file the IRS forms that 

most other tax-exempt entities are required to file, and I would like 

you to enlarge on that. Then I would like you to enlarge on your 

claim that credit unions are not subject to internal control reporting requirements that are applicable to banks and thrifts. 

Mr. MILLER. Well, Congresswoman Johnson, as to the first item 

on the filing requirements, again, we need to divide our world between the federally chartered and the State-chartered entities. The 

federally chartered entities, by reason of being an instrumentality 

of the U.S. Government, do not have to file Forms 990 with the 

Service, like any other instrumentality. The States do have to file 

with us. Now, we received in, I think, 2003 something in excess of 

1,360 Forms 990 from some States. We also receive because we 

have a process that allows for the filing of a group consolidated return, from 21 States we receive consolidated returns, and that contained aggregate information on another 2,000 entities. So, we do 

have, you know, something in the range of 3,500 or something in 

the range—of entities that file with us, 2,000 of those are filing on 

a consolidated basis. I do not, unfortunately, have an answer for 

you on the internal controls, but perhaps my colleague from the Accountability Office could help out. 

Mrs. JOHNSON. Mr. Hillman? 

Mr. HILLMAN. Yes, the Federal Deposit Insurance Corporation Improvement Act requires banks and thrifts with assets over $500 

million to prepared an annual management report that contains a 

statement of managers’ responsibilities for preparing the institution’s annual financial statements, and for establishing and maintaining an adequate internal control structure and procedures for 

financial reporting. Management assessments are also required on 

the effectiveness of the institution’s internal control structures and 

procedures for financial reporting. Indeed, internal auditors and external reviewers are required to attest to management’s assertion 

of their internal control standards. As it relates to credit unions, 

they currently are not required to provide for those management 

assertions or for their external auditors to provide for independent 

attestations of the effectiveness and quality of the internal control 

structures. In a report that we provided to the NCUA and to the 

Congress, we recommended that the NCUA consider requiring 

their entities to have external reviews of their internal control 

structures. Indeed, we recommended to the Congress that they 

amend the Federal Deposit Insurance Corporation Improvement 

Act to cause such things to occur. That action is currently under 

consideration within the Congress. 

Mrs. JOHNSON. Without that, what kinds of abuses are possible? 

Mr. HILLMAN. Having a properly structured internal control 

function was very important in considering recent legislation in the 

Sarbanes-Oxley Act for public companies, for example, financial 

statements were being prepared that were not accurately reflecting 

the financial position of the entities, and management was basically indicating that they had no knowledge of the extent to which 

those numbers were accurate or correct or could be held to any 

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agers with an affirmative responsibility to know what their internal control structures were and to know that the financial information that they are providing to the public was accurate. Indeed, 

doing something of that nature for credit unions is something that 

would make good public policy as well. 

Ms. JOHNSON. I understand that Sarbanes-Oxley provisions, 

however, have been bearable for larger banks, but they are very expensive and would be very heavy for small independent institutions. Does your recommendation accommodate to that? 

Mr. HILLMAN. You are absolutely right. There is continuous debate going on today about the extent to which entities and at what 

size ought to be providing for these internal control assessments. 

The current limit is organizations with $500 million in assets and 

above. They are looking at raising that level to address some burden issues with smaller organizations, and that is a debate also 

taking place in Congress today. 

Mrs. JOHNSON. Thank you. 

Chairman THOMAS. The gentleman from California, Mr. Stark. 

Mr. STARK. Thank you, Mr. Chairman. Mr. Miller, please recognize the limitation of my understanding of the technical differences 

between (c)(1)s up through (c)(50)s or (20)s or whatever come under 

your purview. But based on the underlying initial reason for granting the tax-exemption, could you give us a little insight? I am just 

going to go down some that come to my mind, and you will probably know a lot more, but irrigation districts, municipally owned 

electric companies, USAA, a reciprocal insurer, agricultural co-ops, 

rural electric co-ops, on down the line. In their genesis, was there 

any great difference in these types of organizations and the (c)(1)s 

that I guess are credit unions? 

Mr. MILLER. Well, again, Mr. Stark, the (c)(1)s are only the federally chartered credit unions. 

Mr. STARK. I understand that, but I am just—— 

Mr. MILLER. In terms of the cooperative nature of the endeavor, 

they are all a little different. 

Mr. STARK. But would you say they are all similar in the reason 

they hold a tax-exemption or are tax free, from a lay person’s—— 

Mr. MILLER. I would say they are similar, that the rural electric 

cooperatives obviously are another group of entities that started up 

because there was no electricity in certain areas of the country. Agricultural co-ops started up because of a need for that business as 

well, so—— 

Mr. STARK. But would it be also safe to say, however long ago 

many of these things started, that the initial reason for their beginnings no longer holds true? I think that former members of the 

armed services can buy their auto insurance from GEICO or Allstate or anybody they want, and it is a question of whether they 

pay more or less for it. But it may have been difficult—when my 

Ranking Member got out of the service, it may have been a different time than it is for those of us who are younger veterans. 

[Laughter.] 

Mr. STARK. I am just trying to see if in our thinking, as we review this—I do not think it has been stated, but the banks are out 

to get credit unions taxed because it will make it more difficult for 

them to compete. I would presume then that my Pacific Gas and 


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Electric would like to see the rural electric co-ops taxed because 

then they would have a better competitive edge. But is there any 

reason for us, outside of the very technical differences, to think 

about credit unions as distinct from all these other groups, health, 

education services. There are, I guess, providers of medical care 

that come under the cooperative rubric. Any reason we should sort 

those out, or can we think of them as one group? 

Mr. MILLER. Well, I would hesitate to put them all in one 

group, Congressman, because I do think they are different industries and they should be looked at separately. 

Mr. STARK. For tax policy, how should we look at them differently? 

Mr. MILLER. Tax policy you may be correct, they may be very 

similar. But, again, if the underlying discussion here is let’s take 

a look to see where the industry is today, then in terms of the Internal Revenue Service’s view, that is a useful thing because, as I 

have mentioned in my testimony, industries change, the laws remain the same, and sometimes that creates difficulties for us in administration. 

Mr. STARK. I will come back at you with tax policy. I think what 

I heard you say is that within all of these, the underlying tx policy 

is probably the same or very similar. 

Mr. MILLER. I think it is going to depend on the particular provision and the particular code provision. And, again, I cannot say 

in a general fashion that they are all the same, Congressman. 

Mr. STARK. One more try. Between (c)(1) and (c)(13), are the 

tax-exempt rules pretty similar, no unrelated business, I mean—— 

Mr. MILLER. Not really. 

Mr. STARK. Not really, okay. 

Mr. MILLER. It really depends. Along the edges they are different. You know, the (c)(12)s, the rural co-ops, the rural electric 

and rural telephone cooperatives have some very different rules 

than do Federal credit unions. They go in and out of status on an 

annual basis, depending on their income sources. They are similar 

to credit unions in one fashion; that is, they have expanded from 

their original list of public sector. So, the rules do vary depending 

on the provision. 

Mr. STARK. Thank you. 

Chairman THOMAS. Would the gentleman yield briefly? 

Mr. STARK. Sure, I would be glad to yield. 

Chairman THOMAS. On that point, one of the things, I think— 

sometimes Members go more deeply into these areas than others. 

One of the things that I will ask you on my time, but since it was 

brought up, I want you to think about, is the argument that the 

(c)(1)s are instrumentalities of the United States in which you then 

dismiss looking at them because of that categorization as opposed 

to a 501(c)(3), which is a charitable organization, which allows you 

based upon what particular category they are in, your ability to do 

certain things or not do certain things. So, when you say that you 

do not do this or you do not do that, it is because of the structure 

as an instrumentality, not that it should or should not be done 

based upon trying to understand what is going on in an organization. That is something that I think needs to be discussed, and we 

will look at that a little bit later. But the gentleman is right. When 


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you looked at (c)(1)s, (c)(3)s, on through the various (c)s, it is based 

upon what they are, which then indicates the relationship between 

those organizations, notwithstanding the fact they are within the 

501 section, and the IRS and the responsibilities associated with 

the IRS in overseeing those particular structures. Sometimes it just 

happens to be the category that they are in that they, therefore, 

do not receive scrutiny and, therefore, cannot get answers to questions that Members would ask. They do not file 990s, so you do not 

know certain things about them. Why? Because they are instrumentalities of the United States. It begins to get circular in terms 

of trying to get an answer should we, not do you, and the ‘‘should 

we’’ is what we should at some point pursue. The gentleman from 

California, Mr. Herger. 

Mr. HERGER. Thank you, Mr. Chairman. Mr. Miller, if you 

could tell us just as historical background, generally the history of 

the tax-exempt sector, Congress usually provided exemption to certain entities because they were providing a service that the government could not provide. In the case of credit unions, could you tell 

us what social good or public benefit do they provide in exchange 

for the exemption? 

Mr. MILLER. Congressman, I think it is certainly true with respect to many provisions in the exempt sector that there is an underlying rationale of public good in providing general benefit to the 

community at large. A little more murky with respect to credit 

unions. They were based on a cooperative structure, and the early 

legislative history talks about a cooperative enterprise which is offering opportunities for savings, opportunities for credit to those 

who otherwise might not have it who have joined as members. 

That is sort of the underlying rationale in the credit union area. 

Mr. HERGER. Would either of the other two of our witnesses 

care to comment? Ms. Johnson? 

Ms. JOHNSON. Yes, Congressman, I would like to speak to the 

public good because I think that is the big question here. Are you 

receiving the public good in exchange for the exemption? I can very 

strongly say that the 84.5 million members of the federally insured 

credit unions benefit from higher rates on their deposits. They benefit from lower fees. They benefit from lower interest on the loans 

that they take out as members. There was a study done in April 

of this year by the University of North Carolina in Chapel Hill that 

estimated that the members of credit unions in North Carolina 

save an average of $130 a year, and if you were to multiple that 

nationwide, that could be an eventual savings in the $11 billion 

category just for the members of the credit unions. 

But I would not stop there. There are actually benefits to those 

that use the services of other financial institutions as well. This 

limited competition that is in the marketplace helps offer competitive rates for everyone. In fact, there was a statement by a CEO 

of a large bank earlier this year after their record profits were reported. He said that they would have been higher had it not been 

for the credit unions because they had to pay higher interest on 

their deposits. So, it is estimated that saving the customers of 

other institutions may be as high as $4 billion. I know the estimate 

has been given that there may be a billion, $1.2, $1.3 billion that 

could be realized in tax revenue if credit unions were taxed, but I 


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would offer that is far offset by the amount that is saved by the 

consumer simply by having a minimal competition in the marketplace. Credit union members do pay taxes at the ordinary income 

level on the dividends they receive, just like bank customers pay 

taxes on the interest they receive. The exemption really results in 

a return to the local economy in far excess of what would be realized by any tax revenue, I believe. 

Mr. HERGER. Thank you. 

Chairman THOMAS. Does the gentleman from Michigan wish to 

inquire? 

Mr. LEVIN. Thank you, Mr. Chairman. I think truth may be 

somewhat relative in this area, so let me just ask Mr. Hillman, because you have presented a number of charts, and it might be useful for us to try to put these figures in a broader perspective. I 

think there has been—at least we have seen this where I come 

from—very substantial consolidation in financial services. Indeed, 

most of the banks that we once knew are now part of larger entities. So, if you look at Figure 1, for example, in terms of industry 

size and total assets distribution, do you have data, useful data, 

that tell what has happened to financial services more broadly? For 

example, if you had a chart like this for financial institutions other 

than credit unions, what do you think that chart would show? 

Mr. HILLMAN. Congressman, it would show probably different 

numbers but pretty much the same pictures in terms of bars. What 

you are seeing in the banking sector today is a much more—larger 

groups of organizations that are much more competitive and much 

more complex. 

Mr. LEVIN. Also I take it—you say the bars would be the same, 

but in terms of assets, I would think you might see a different picture in terms of the size of the assets, would you not? I mean, you 

would have to have a somewhat different chart than is here. 

Mr. HILLMAN. In order of magnitude, absolutely. 

Mr. LEVIN. For example, there may be one, there may be more 

financial institutions that have more assets than all of the credit 

unions combined. 

Mr. HILLMAN. Yes, that would be true. The largest banking institution has vastly far more assets than the industry as a whole. 

Mr. LEVIN. Do you think you could supply us that? 

Mr. HILLMAN. Absolutely. 

Mr. LEVIN. If you would, go through the charts and just see— 

there is some information here as to the types of loans, but where 

you can—and I do not want you to do endless basic research, but 

if you can, go through your charts one by one and supply us with 

the picture in these regards as to the entire financial services area. 

Because I do think—the chairman, for example, did point out a few 

instances, and I do not mean to minimize them or mimic them, but 

I do think rather than trying to pick out one or two or three or a 

few examples, we really need to look at the total picture as it relates to financial services as to who is served, as to the kind of 

competition, as to who does what. You cannot simply take one area 

without relationship to what is going on generally in the world. 

For example, it would be interesting to know what has happened 

to smaller financial service entities other than credit unions. I 

mean, you have a fairly large number in Chart 1 of credit unions 


jcorcoran on PROD1PC62 with HEARING
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with assets $10 million to $100 million, and that is, roughly speaking, as I gather—I did some math—what, about 40 percent—I do 

not know exactly. Maybe a third of them are in that size category. 

It would be interesting to know what it is like with other financial 

institutions to really get some kind of a feel as to who is doing 

what where. 

Mr. HILLMAN. As part of our analysis of the credit union industry, we did run comparisons of credit unions at these various sizes 

and assets to banks of—peer group banks of comparable size. In 

our prepared statement that we submitted for this hearing, on Figure 3 we provide a variety of information about the types of products and services that credit unions of that size provided, that peer 

group banks of similar size provided. In addition, in our report in 

November 2003, we provide a variety of other graphics, which does 

provide information comparing credit unions to banks as it relates 

to products and service and as it relates to other forms of activities. 

Mr. LEVIN. Okay. So, if you would put this together in as succinct a form as possible, will you? 

Mr. HILLMAN. It would be my pleasure. 

[The information follows:] 

Figure 9: Assets (in billions) of Financial Institutions as of 

June 30, 2005 

f 

Mr. LEVIN. Thank you. Thank you, Mr. Chairman. 

Chairman THOMAS. The Chair would say that would be very 

useful, but in beginning to examine the area, I think you will find 

that it just runs away from you very quickly. With banks, one of 

the key attractions was the fact that you could write a check. We 

created share drafts with credit unions, which are, in essence, a 

check. But as we saw through the eighties and the nineties, more 


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49 

and more structures like stock brokers, you can write what 

amounts to a check. So, when you say financial institutions, it is 

not just banks. A lot of the studies I have seen solely use a credit 

union or solely use a bank. There are very few people, I think, that 

are in that category of solely doing this or solely doing that. So, I 

agree with the gentleman. I think we should begin to see that kind 

of data. But when you say financial institutions, you may have to 

define it in a way that encompasses all of the various current 

structures, just as what money has changed, what the financial institution and services provided from them have changed. 

Mr. HILLMAN. As well as my initial response to Congressman 

Levin in dealing with the consolidation in the financial services industry as a whole, there is also a significant convergence within 

the financial services industry where individual organizations are 

providing like products and like services, and the competition is becoming fierce. 

Chairman THOMAS. Which was not the case in 1937 or 1934 

during the Depression. 

Mr. HILLMAN. That is correct. Exactly right. 

Chairman THOMAS. Does the gentleman from Louisiana wish to 

inquire? 

Mr. MCCRERY. Mr. Hillman, can you explain why Congress revoked the tax-exempt status of mutual insurance companies, mutual savings banks, and mutual savings and loan associations? 

Mr. HILLMAN. Mutual savings banks, cooperative banks, and 

savings and loan associations were originally tax-exempt. In the 

Revenue Act 1951, before this Committee, Congress removed their 

tax-exempt status. Committee reports that we reviewed accompanying the legislation indicate that the mutual savings banks 

were in competition with taxable financial institutions, and the 

taxation, it was determined, would level the playingfield with their 

competitors. Similarly, Congress found that savings and loans were 

no longer self-contained cooperative institutions, and there was little difference between the savings and loans and other financial institutions, and for that reason they chose to provide them with taxation. 

Mr. MCCRERY. Is there a similarity today between some credit 

unions and their competitive position vis-a-vis other financial institutions and what Congress found with mutual savings associations 

and so forth in 1951? 

Mr. HILLMAN. Well, certainly with an increasing—the expansive membership, you are beginning to see blurring lines of distinction between credit unions and entities such as these, which have 

a tax-exempt status. 

Mr. MCCRERY. What about in terms of services offered? 

Mr. HILLMAN. Services offered typically by at least the largest 

credit unions tend to mirror those services offered by peer group 

banks. There are, as shown, though, in our first slide, almost half 

of the industry being made up of smaller credit unions, and those 

credit unions continue to provide more basic services. 

Mr. MCCRERY. In your research as to the rationale for revoking 

the tax-exempt status of those other entities, was there any discussion of the relative sizes of those institutions, any consideration 


jcorcoran on PROD1PC62 with HEARING
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given to revoking or modifying the tax-exempt status based on 

size? 

Mr. HILLMAN. I am not familiar with any indication that that 

was a consideration, but I would be happy to take a second look 

and provide that information for the record. 

Mr. MCCRERY. Thank you. 

[The information follows:] 

Our review of the legislative history of the Revenue Act of 1951, in particular Senate Report 82–781, did not identify any documented discussion of institution size as 

a factor or consideration in the revocation of the tax-exempt status of mutual savings banks and savings and loan associations. 

f 

Mrs. JOHNSON. Would the gentleman yield? 

Mr. MCCRERY. Sure. 

Mrs. JOHNSON. Mr. Hillman, the 50-mile limit that mutual 

banks have to live with, is that more or less restrictive than the 

geographic limits on credit union—than the membership limits on 

credit unions, would you say? 

Mr. HILLMAN. The 1998 act added a term ‘‘local’’ to define the 

boundaries within which a geographically based community credit 

union could offer services. That act, though, did not provide any 

further delineation of what was meant by that term ‘‘local.’’ So, determination of geographic boundaries or community-based credit 

unions have been left up to the interpretation of the NCUA. Those 

credit union decisions in some instances have exceeded a 50-mile 

radius. 

Mrs. JOHNSON. But isn’t there a 50-mile radius that governs 

mutual banks? 

Mr. HILLMAN. I am not familiar with that. I would like to do 

some research and provide that. 

[The information follows:] 

Federal savings associations (including mutual savings banks) historically evolved 

as local home-financing institutions, and limitations reflecting this evolution were 

initially incorporated in the governing statutes. At one point in time, the Home 

Owners’ Loan Act referred to ‘‘local’’ home-financing institutions and the act generally limited real estate lending by Federal savings associations to property that 

was within fifty miles of their home offices. In 1964, the lending area was expanded 

to property within one-hundred miles of the home office. In 1970, the restriction was 

expanded to include property within the state in which the home office was located 

or within one-hundred miles of the home office. In the eighties, Congress began to 

remove the geographic restrictions on the lending authority of Federal thrifts. Title 

IV of the Depository Institutions Deregulation and Monetary Control Act 1980 deleted the geographic restrictions on lending authority by federal savings and loan 

associations. 

f 

Mr. MCCRERY. Just in the time that I have left, would either 

of the other two panelists like to comment on my initial question 

and the question of competitiveness and whether that should play 

a role in our examination of tax-exempt status? 

Ms. JOHNSON. I would, Congressman. The initial tax-exemption 

was granted on the structure of the institution itself. The structure 

of credit unions has not changed. It is still that cooperative, that 

not-for-profit institution. There is nothing in the statute concerning 

the size of the institution, the products or services offered. If one 


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would want to paint the credit unions back into the corner where 

they were in 1934 when they were first started for the working 

population, you would be limiting to those of modest means to very 

modest services. It has been necessary over the years—consumers, 

credit union members demand the same types of services that 

other financial institutions provide, and to not provide those services to those who need them most I believe is the wrong direction. 

I would also say that banks and credit unions have both changed 

over the years, there is no question, because both are serving their 

customers, are serving their members in the best way they can. 

But I would also mention that it was the credit unions that were 

doing the consumer lending in the thirties, and that is now an area 

where banks are doing more consumer lending as well. So, there 

has been a blending going both directions. There is nothing wrong 

with that, in my opinion. I think providing the best services for 

your members or for your customers is what every institution 

strives to do. 

Mr. MCCRERY. Thank you. 

Chairman THOMAS. I thank the gentleman. The gentleman 

from Maryland will be the final questioner prior to the Committee 

recessing for a few minutes to run over and vote. 

Mr. CARDIN. Let me thank you and let me thank all of you for 

your testimony. I strongly believe in a competitive market for financial services, and I was just going to ask a question of Ms. 

Johnson, and you can respond or respond for the record. You have 

already touched upon this. The Consumer Federation of America 

found that the benefits that the credit unions deliver to the public 

far exceed the costs in the report that they did, and they cited interest rates, higher interest rates, lower service costs for the niche 

in which they perform their services within the financial community. You have touched upon that in some of your replies. I am 

wondering whether you can quantitate that more definitively as to 

the benefits that credit unions are providing versus the value of the 

tax-exempt status that they enjoy. 

Ms. JOHNSON. The statistics that I pointed to are from some individual studies such as the North Carolina study, and there are 

other studies out there. I have no doubt that the benefits far outweigh what the tax-exemption would bring in. 

Mr. CARDIN. If you could make those studies available for our 

Committee, I am sure we could get them. 

Ms. JOHNSON. I would be glad to do that. 

Mr. CARDIN. Any other information you have that quantitates 

that would be useful for us. 

Ms. JOHNSON. Thank you. I would be glad to do that. 

[The information is being retained in the Committee files.] 

Mr. CARDIN. Thank you. Thank you, Mr. Chairman. 

Chairman THOMAS. The Committee stands in recess, probably 

until noon. 

[Recess.] 

Chairman THOMAS. If I could ask our guests to find seats 

quickly? Does the gentleman from Georgia, Mr. Lewis, wish to inquire? 

Mr. LEWIS OF GEORGIA. Thank you very much, Mr. Chairman. Mr. Chairman, I would like to try to solicit a little more inforVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00055 Fmt 6633 Sfmt 6602 E:\HR\OC\26372.XXX 26372

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mation from members of the panel. I think when my colleagues 

raised the question earlier about what is the redeeming social 

value of credit unions, I think maybe Mr. Miller or maybe someone 

said when it comes to tax-exemption for credit unions, maybe it is 

a little murky. Ms. Johnson, maybe you could tell the Committee, 

what is the real redeeming social value of credit unions? Is there 

a greater need today than 40 or 50 or 60 years ago? 

Ms. JOHNSON. I would be pleased to address this topic because 

I think it is probably the heart of the whole issue. The redeeming 

social value of credit unions is that they provide an option for affordable financial services in the marketplace. There are many 

folks today that continue to be un-banked, and credit unions have 

a special mission of reaching those of modest means, and that is 

an opportunity for them to reach out. You know, as credit unions 

were initially formed, they were made up of employee groups. That 

means people that have jobs and that are working. So, most credit 

unions were actually formed by working people. In the last few 

years, in particular, credit unions have begun to take on underserved areas, and we have low-income designated credit unions 

now. We have some that have gone to community charters, which 

is now allowing them to reach out into the community and reach 

some of those folks that aren’t necessarily the member of an employee group but that are now eligible for membership. There are 

many in the community that have to rely on predatory lenders, either check-cashing, payday lenders, others that charge much higher fees than credit unions. Credit unions are the only financial institutions that are actually held to a statutory interest rate level, 

a usury rate. Credit unions cannot charge more than 18 percent. 

Find me a payday lender that charges less than 18 percent. It just 

doesn’t exist. 

Credit unions, I think the mission is even greater today than 

what it has been in the past, and though they have made great 

strides over the last few years by being able to reach out in the 

community, I would admit there is more to be done. I believe, especially in this day and age, when in this economy—in particular, I 

look at two of our largest credit unions, our military credit unions. 

Two of the three largest credit unions serve the military population. You show me a group of people that are of more modest 

means than what our military personnel are, and with these credit 

unions being able to offer financial services at an affordable rate, 

I think it is one of the best things that we can do for our military 

in particular at this time. So, I think the social mission is still very 

much intact. It is something that the credit unions take very seriously and continue to look for ways that they can fulfill that mission. 

Mr. LEWIS OF GEORGIA. Thank you, Ms. Johnson. Mr. Miller? 

Mr. Hillman? 

Mr. MILLER. Mr. Lewis, the only thing—— 

Mr. LEWIS OF GEORGIA. To be clear for me, was it you who 

said that the tax-exemption for credit unions may be a little—or 

did Mr. Hillman—may be a little murky? What do you mean? 

Mr. MILLER. It was in response to the question as to what the 

public benefit is of these organizations. 


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Mr. LEWIS OF GEORGIA. But what do you see as a public benefit? What do you see as a redeeming social value of credit unions? 

Mr. MILLER. I can only speak to what the legislative history 

talks about in the thirties, and that is that it is a cooperative-based 

opportunity for people to save and to get credit. That is, I think, 

the underlying premise. 

Mr. LEWIS OF GEORGIA. You would not care to elaborate and 

say how you really feel? 

[Laughter.] 

Mr. LEWIS OF GEORGIA. You are going to stick to the letter 

of the law. You are not going to—— 

Mr. MILLER. I think, Mr. Lewis, that that is my job here, is to 

stick to the letter of the law. 

Mr. LEWIS OF GEORGIA. I appreciate that. Mr. Hillman? 

Mr. HILLMAN. Well, the Federal Credit Union Act 1934 refers 

to making credit available to people of small means as one of the 

primary impetuses behind the establishment of credit unions. More 

recently, the Credit Union Membership Access Act 1998 refers to 

serving the productive and provident credit needs for individuals of 

modest means. While these terms are used to describe the types of 

people who credit unions might serve, these terms are not well defined in the statutes. The NCUA has defined ‘‘modest means’’ or 

‘‘small means,’’ to us, anyhow, as meaning individuals who are 

wage earners or who must work in order to make a living, individuals such as these who can provide a benefit from a credit union’s 

services. 

Mr. LEWIS OF GEORGIA. Thank you. Mr. Chairman, I yield 

back my time. 

Chairman THOMAS. I thank the gentleman. Does the gentleman 

from Michigan, Mr. Camp, wish to inquire? 

Mr. CAMP. Mr. Chairman, thank you very much. Ms. Johnson, 

the GAO report talked about credit unions not having the same reporting requirements as other financial institutions, and my question to you is if you could comment on that statement, and then 

if you could also elaborate how the GAO report said the so-called 

lack of transparency makes it difficult to evaluate the effect credit 

unions might have on average Americans. Could you just elaborate 

on what the tax-exempt status of a credit union does for average 

Americans? 

Ms. JOHNSON. Okay. You had kind of two parts, in responding 

to the GAO and also the second—— 

Mr. CAMP. It is a two-part question, how the lack of transparency—if you could comment on that statement in the GAO report, I would like to get your opinion of that. 

Ms. JOHNSON. Okay. 

Mr. CAMP. The so-called lack of transparency. Then just in general, what benefits for average Americans does the tax-exempt status of credit unions have. 

Ms. JOHNSON. Okay. Two good questions. Thank you. In response to the question about the GAO report and the lack of transparency, back in 1998 Congress debated very thoroughly the suggestion or the idea of whether CRA requirements should be required of credit unions. At that time it was reaffirmed that there 

did not appear—that there was no need to put CRA requirements 


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on. In our work with GAO, the question has arisen about transparency and the opportunity or the ability to really put in hard 

numbers what credit unions are doing. I would suggest that credit 

unions are basically CRA in action. They are taking deposits and 

using those deposits to make loans to other members that need 

loans. They can only serve their members, and that is the only way 

the credit union will grow and survive, is to serve those members. 

It is very difficult—and we have struggled with this—whether 

some type of a hard reporting is necessary. I look to the nursing 

home in my hometown who, because of the burdensome regulatory 

requirements had to take a full-time nurse off the nursing floor in 

order to just do the paperwork. That is the danger that we run 

with the credit unions, especially when almost half of our credit 

unions are less than $10 million in assets. 

The reporting requirements, if we are not careful, could heavily 

outweigh any benefits from the actual reporting itself. You are taking away from the time and the resources, in particular, serving 

the people that you are supposed to be serving. We do have a Committee working to see if we could arrive at something that would 

not put the burden on the credit union. Is there some additional 

data that we could collect on the 5300 report? But, again, it has 

never been put forth by Congress that a CRA-type report is needed, 

and at this time I would have to agree with that. Credit unions, 

we believe, are serving the very members who they are supposed 

to serve. Let’s see. What was the last? On the lack of transparency, 

it is kind of—is it in regard to this type of reporting? 

Mr. CAMP. Well, I was interested in what are some of the filings 

that you do do as an institution. Certainly there are audits, and 

you mentioned earlier in your testimony about posting online. 

What are some of the filing requirements that you do fulfill? 

Ms. JOHNSON. The credit unions file their 5300 reports quarterly. The credit unions themselves do CPA audits every year. They 

have an annual audit and supervisory Committee report that is 

also done, as I said, annually. I am not exactly sure what type of 

information you or other Members of Congress would see as the 

most beneficial of what type of information you are trying to glean 

that you think would be the most beneficial. 

Mr. CAMP. Well, I just wanted to point out for the Committee 

that there are public filings that credit unions do engage in, and 

so I appreciate your going through some of those, and that they are 

filed with regulators of both banking and credit union—both parts 

of the financial industry. So, thank you very much. Thank you, Mr. 

Chairman. 

Chairman THOMAS. Thank you. Does the gentleman from Pennsylvania wish to inquire? 

Mr. ENGLISH. Thank you, Mr. Chairman. I do indeed. Chairman Johnson, does the NCUA measure in what capacity credit 

unions are serving people specifically of modest means, and if not, 

can you offer an explanation of whether this would be an administratively feasible task to take on, and in your opinion, would such 

measures be helpful to Congress in making policy decisions, as well 

as to consumers? 

Ms. JOHNSON. Well, we know credit unions are serving members of modest means by the very fact that they are serving their 


jcorcoran on PROD1PC62 with HEARING
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Members. We do have some—and I am trying to find my figures 

here. I have too many pieces of paper. They were some of the stats 

that Chairman Thomas had actually alluded to earlier. We know 

those that use only credit unions have lower incomes and lower 

median wealth than those who use only banks, and I would agree 

that many of us use both types of institutions. Back home there is 

not a credit union that I am eligible to join, and so back home I 

also—I will put in a pitch for my local banker. But we know that 

credit unions are serving those Members, and we know that those 

balances, the wealth is lower, so to speak, the wealth of those 

members is lower. We also know that the member business lending 

done by credit unions, the average member business loan is much 

lower than that of someone attaining a business loan or a commercial loan from a bank. The average member business loan for a 

credit union member is $155,000. That is much lower, that is the 

average. 

Mr. ENGLISH. How exactly do we know that? What is the 

source and reliability of those figures? 

Ms. JOHNSON. That information comes in on our 5300 reports, 

which are issued on a quarterly basis. 

Mr. ENGLISH. Very good. Commissioner Miller, credit unions 

have, since their inception, had a mission of targeting low- and 

moderate-income families, and this continues today through programs like the Low-Income Credit Union program and the Underserved Areas program. I, for myself, know from experience in my 

district that credit unions serve people of moderate means, and I 

think do a good job. It seems to me though that we still do not have 

access to many statistics that show the impact of credit unions on 

low- and moderate-income families on a nationwide basis, and I 

just had that exchange with Commissioner Johnson. I wonder, in 

your opinion, what policies could Congress implement to either better track credit union service to families of moderate means and to 

help us shape policies that would encourage those sorts of opportunities? 

Mr. MILLER. Well, Congressman, again, we have talked about 

it, and we do have to divide our world into the Federal charter 

versus State charter. As to tax issues, you know, we are the tax 

agency, and in general, while our Forms 990 have as one of their 

purposes transparency, that the public can see what these organizations are doing, ultimately they are tax forms. With respect to 

Federal credit unions we have no tax issues. It would be purely for 

other purposes that we were making people file this. With respect 

to State chartered, they do file Forms 990 with us. The Form 

9nineties, I do not believe, at this point probably has a meaningful 

impact on your inquiry here, to be frank. 

Mr. ENGLISH. In that case, may I shift, while I have time? Mr. 

Hillman, same question. What policies could Congress implement 

to better track precisely who is being serviced by credit unions, 

whether that service is disproportionately, as the mission indicates, 

to families of moderate or modest means, and help us shape policies? 

Mr. HILLMAN. We have raised this question with the National 

Credit Union Administration, and they have developed a working 

group to study this issue, and we encourage them to develop more 


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tangible indicators that would provide information on who credit 

union members are actually serving. When you look at how credit 

unions serve individuals, you look at the products and services that 

individuals might be procuring from credit unions. Those might be 

individuals who might be procuring loans of some sorts or another. 

In order to make credit decisions on those loans, there is likely to 

be information available within their files in order to determine the 

income levels of those individuals, and I would suggest that that 

would be one source that could be explored as possibly obtaining 

some information on the extent to which credit unions do serve individuals of modest means. Second, you could perhaps also come up 

with a mechanism to provide for a sampling, a stratified sample 

that cuts across the population of individuals that credit unions are 

serving, and indeed obtain credible, accurate information on the 

membership base that credit unions serve. It is not something that 

is an impossible thing to do. 

Mr. ENGLISH. Thank you. Thank you, Mr. Chairman. 

Chairman THOMAS. Thank the gentleman. The gentleman from 

Washington wish to inquire? 

Mr. MCDERMOTT. Thank you, Mr. Chairman. Since I know the 

President and the Secretary of Treasury have said that they are 

not interested in taxing the credit unions, the question has to arise, 

why are we having this hearing? I know all the bankers are in 

town, and so I believe it is a revenue question. It is a revenue question. It could be raising revenue for a variety of sources, but it 

seems to me that there is all kinds of evidence that this issue is 

not something that is pressing anybody. I really believe that the 

reason we are here having this hearing is because the government 

is financially and morally broke. Now, the DeLay Congress is one 

that has enacted a tax cut every year in the face of budget deficits 

in times of war. Now they are starting to look under rocks for revenue, and you folks are a rock. 

Last week this Committee took some revenue out of the hides of 

foster children living in low-income families. Last week we found 

revenue by reducing child support enforcement funding by $20 billion. Other Committees have found money by reducing food stamps. 

The Education and Work force Committee has reduced the availability of student loans to low-income students. That is the way the 

Republicans view sacrifice in a time of war, and budget problems 

go after the vulnerable. They sacrifice morality for tax cuts. The 

DeLay Congress pursued reckless tax cuts and an unjust war at 

the same time. Instead of watching the news from Iraq or reading 

the CBO budget reports and realizing a change in course is necessary, this Congress continues in its same folly. They are continuing to fight a war and balance a budget on the backs of the economically disadvantaged. It seems contradictory given the Republicans proclaiming themselves as the party of morality and prudence. 

But if you remember, last spring they launched an assault on Social Security, the program that single-handedly lifted millions of 

people out of poverty. Last week the Republicans launched an assault against low-income people. Now today, we have the credit 

unions up here. I don’t know which of the co-ops they will go after 

next, whether it will be the electrical co-ops or whoever, but it is 


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really a frontal assault on the middle class’s ability to financially 

make it. The co-ops came into existence because the banks wouldn’t 

do it, and now we have this assault going on here. So, I have to 

ask the question, and somebody has to give me some reason. How 

many billion dollars are they going to get if they begin taxing credit unions? Anybody there who has an idea or has any data, I would 

like to hear it. 

Mr. MILLER. Well, I guess I can start, Congressman. I think 

that there are two, at least two or more revenue estimates out 

there. One stems from a 2001 Treasury study, and I think over a 

10-year period that was between $13 and $16 billion, and I think 

more recently a CBO 2005 document, which actually attributes the 

number to the joint Committee, had it at about $15 billion, so 

roughly—— 

Mr. MCDERMOTT. Over a 10-year period? 

Mr. MILLER. Ten-year period. 

Mr. MCDERMOTT. I saw in the GAO report something from the 

Tax Foundation. Who is that? 

Mr. HILLMAN. That was a study that the Tax Foundation did 

funded by the Independent Community Bankers Association of 

America that estimated revenue of about $3.1 billion per year from 

2004 to 2013. 

Mr. MCDERMOTT. So, that would be around 13 billion, so they 

are sort of falling in the same category. Ms. Johnson, are you 

aware what the revenue figure is that they are after? 

Ms. JOHNSON. I will accept my colleague’s—the taxation, that 

is their area of expertise. However, I would say it pales in comparison with what the consumer is going to save over those same 10 

years. We estimate that the credit union members are going to 

save up to $11 billion a year just in lower rates, lower fees, better 

interest on deposits. We estimate that the banking customers are 

going to save 4 billion, or do save 4 billion a year. Because of the 

minimal competition that is available, the banking customer also 

benefits. It is my opinion that if you have a bank and a credit 

union in the same community or serving the same people basically, 

both institutions are better for it than if you had a single institution there. That bit of competition is enough to make institutions 

better and it is the consumer that benefits. The money that is 

earned on dividends is taxed at the ordinary income level, so those 

individuals do pay taxes on dividends that they receive from their 

credit union accounts. The money that is saved by the consumer 

and stays in the consumer’s pocket, is turned over in the economy, 

and hopefully a few of them will save a bit of it. 

Mr. MCDERMOTT. Thank you. Thank you, Mr. Chairman. 

Chairman THOMAS. Does the gentleman want unanimous consent to place his written statement in the record? 

Mr. MCDERMOTT. Thank you very much, yes. 

[The information was not received at the time of printing.] 

Chairman THOMAS. The gentleman from Illinois wish to be recognized? 

Mr. WELLER. Thank you, Mr. Chairman, and appreciate the opportunity to participate in today’s particular hearing. Credit unions 

are a recognizable institution in the communities that I represent 

south of Chicago, and to be up front, I am a member of a credit 


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union, like a lot of my colleagues, and like a lot of the staffers that 

are in this room as well. When I visit the local credit union back 

in Morris, Illinois, the Morris Community Credit Union, I see regular folks who are participating and standing in line, immigrants, 

working people, small business people, people in the community, 

that are participate in credit unions. I know my good friend from 

Washington State was trying to suggest that someone out there is 

trying to take away the tax-exempt status, and I am certainly not 

aware of much support for that idea. In fact, I recall we had a vote 

I believe in the Congress sometime in the last 10 years on that, 

and I believe less than 10 Members of this House voted yes to take 

away the tax-exempt status. So, I think that is an idea that does 

not have much support. What I would really like to truly understand is exactly what does the tax-exempt status for a credit union, 

what does it really mean to the bottom line of a typical credit 

union, such as the Morris Community Credit Union? And, Ms. 

Johnson, if you could discuss that from the bottom line of the operations of a local credit union, what does the tax-exempt status 

mean, and if it were not there, what would the difference be? 

Ms. JOHNSON. Well, credit unions are the only financial institution that must earn their capital. They are not allowed accesses 

other than some low-income designated credit unions, don’t have 

access to secondary capital. They are not stock-held institutions. 

So, the effect of taxation on a credit union would have behavioral 

changes for the management. It is because there are other restrictions on credit unions in the products and services and of how they 

can operate that though the tax-exemption isn’t a quid pro quo for 

the restrictions and the exemptions, it isn’t a quid pro quo. However, it is tenuous because of the incentive that it gives the management to do the best they can for their members. It is the members’ capital. It is the members’ money. Their sole purpose is to 

meet the needs of their members. It is not to meet the profit, so 

to speak, of the stockholders. So, everything is poured back into the 

credit union. The taxation I think would change behavior. Credit 

unions are held to a higher capital standard than other institutions. They are conservative by nature, but certainly by taxing 

credit unions you are going to reduce that capital, and credit 

unions would have to be thinking about raising rates, taking in 

more income in order to balance that that they have had to reduce 

through taxation. So, I think it is a direct detriment to the members as far as what would happen with the rates and benefits. 

Mr. WELLER. Could you just elaborate further on the differences 

between a traditional bank, which may be on one corner, and down 

the street you have a credit union, and the structure and how the 

tax affects either the bank versus the structure of the credit union, 

of those institutions? 

Ms. JOHNSON. I guess I would have to turn the taxation issues 

of the banks over to my colleagues. The dividends are taxed for 

credit union members, just like interest is taxed for bank customers. Let me see—— 

Mr. WELLER. I was going to say, Mr. Miller, perhaps you can 

help with that? 

Mr. MILLER. Commercial banks, mutual thrifts and credit 

unions are all taxed differently. With respect to commercial banks 


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and mutual thrifts, those two are taxed differently because mutual 

thrifts, under some circumstances, are able to deduct amounts that 

are distributed to their members, whereas banks are not. Both of 

the for-profit side of this are treated as C corporations generally, 

but they do have very detailed rules on taxation depending on 

which way they go on that. The credit union doesn’t have that 

issue. Its income is tax-exempt. Now, as I have mentioned, depending on what the activity is and whether it is a State or Federal 

chartered credit union, there may be a different tax implication 

there, but on their business, general core business, they are simply 

not taxed. 

Ms. JOHNSON. They still do pay payroll taxes, property taxes, 

other taxes of that nature. 

Mr. WELLER. Thank you. I see I have run out of time. Thank 

you, Mr. Chairman. 

Chairman THOMAS. Thank the gentleman. Gentleman from 

Kentucky, wish to inquire? 

Mr. LEWIS OF KENTUCKY. Yes. Thank you, Mr. Chairman. I 

would just like to start out by making a comment about the gentleman from Washington, Mr. McDermott. He seems to like to 

make politically erroneous commercials from time to time here 

when we are trying to do serious business for the DCCC and the 

left wing, extreme left wing fringe, and I think if Mr. McDermott 

would have had his way, I believe Saddam Hussein would still be 

the President of Iraq, so thank goodness he didn’t have his way. 

Mr. MCDERMOTT. Mr. Chairman, the gentleman is out of order. 

You want to debate the Iraq war, let us start right here. 

Mr. LEWIS OF KENTUCKY. I think you started. 

Mr. MCDERMOTT. No, I didn’t raise that. I raised your fiscal 

policies—— 

Chairman THOMAS. The Chair has indicated that he is trying 

to allow Members to make statements they wish to make. The gentleman from Washington made a statement he wished to make. 

The gentleman from Kentucky is making a statement he wished to 

make. 

Mr. LEWIS OF KENTUCKY. Getting back to business—and by 

the way, the tax relief that we have given the American people has 

allowed the deficit to drop by almost $100 billion in the last year. 

So, I think that is a very credible and a very worthy thing that we 

have accomplished here in Congress for the American people. By 

the way, when I was a young married man in 1966, I worked for 

Armco Steel Company in Ashland, Kentucky, working my way 

through college. I took advantage of the credit union there. I was 

a member. It allowed me to purchase an automobile, to get a lowinterest loan that allowed me to have the transportation to do what 

I needed to do. I believe that what credit unions do today is still 

just as valid as what they did in 1966 and before. The only change 

that seems to have happened is that there is more access for people 

that are in similar circumstances to what my circumstances were. 

I assume that the interest rates, the loan rates, and the services 

and the fees are still pretty much on par with what I experienced 

in 1966. Would that be true? 

Ms. JOHNSON. I believe you would find that true. 


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Mr. LEWIS OF KENTUCKY. I think what was provided for me 

was a tremendous help in allowing me to accomplish some of the 

goals that I had early in life, and I am hopeful that that is providing the same opportunities for people today that I enjoyed. 

Thank you. 

Chairman THOMAS. Thank the gentleman. Gentleman from 

Connecticut, Mr. Larson, wish to inquire? 

Mr. LARSON. Thank you, Mr. Chairman. I have written remarks 

that I would like to seek unanimous consent to revise and extend. 

Chairman THOMAS. Without objection. 

[The prepared statement of Mr. Larson follows:] 

Opening Statement of The Honorable John B. Larson, a Representative in 

Congress from the State of Connecticut 

I appreciate Chairman Thomas calling this hearing to help people understand 

why it is important that these financial institutions continue to be recognized as 

tax-exempt organizations in order to ensure their services continue in our communities. 

Since the economic crisis of the Great Depression, credit unions have played a 

fundamental role in providing financial assistance to people throughout the state of 

Connecticut and the United States. As a financial cooperative, credit unions provide 

many of the same products and services as banks and thrifts. Their unique operational structure, however, distinguishes them from other financial institutions. 

Since credit unions are owned by their membership, all the earnings are retained 

as capital or are returned to the member in the form of lower loan rates, higher 

rates on savings or to provide products and services. Credit Unions have been able 

to provide these substantial and valuable benefits, in part, because of the tax-exempt status they receive from the Treasury Department. 

Currently, credit unions in the state of Connecticut are required by the Connecticut Department of Banking to maintain specific levels of capital for security 

purposes. Both state and federally chartered credit unions already pay taxes including payroll taxes, real estate taxes and personal property taxes. In the state of Connecticut, state chartered credit unions also pay Connecticut sales taxes as well. If 

credit unions were also required to pay federal income taxes it could hamper the 

ability of these institutions-to-provide sound financial assistance and reduce credit 

unions’ abilities to build capital, restricting their ability to meet the needs of their 

current members or add new members. 

Community banks from which many of us here and our parents received their 

first mortgage from or deposited their paychecks at have been one of the cornerstones of 20th Century American community development. However, over the last 

decade, most traditional community banks have all but disappeared from our neighborhoods, bought out, debts transferred, closed down, and turned into ATM machines on the side of shopping centers by larger and larger regional and then national banking conglomerates. Somewhere along the way, the ‘community’ was left 

behind. Credit Unions on the other hand have been serving their community members for decades, and have for many filled the void that departing community banks 

have left over the years. 

There are still a few community banks out there, and they are still doing good 

work. But comparing their operating structure to credit unions is still comparing apples to oranges. In a struggling economy like we find ourselves in today, the valuable financial services that credit unions provide must be protected to ensure greater opportunities for Americans to investment in our economy. 

f 

Mr. LARSON. Thank you, sir. Just an observation. The history 

of credit unions in my State has been exemplary in terms of the 

service that they provide. I know, Ms. Johnson, you have been 

through this several times already in the questioning, so I will forego all of the benefits that I believe that are directly received on behalf of the constituents that I serve and represent in the State of 

Connecticut, and I submit my written remarks for the record, and 


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thank all the panelists for their attendance here this morning and 

this enlightening conversation. Thank you, Mr. Chairman. 

Chairman THOMAS. Thank the gentleman. The gentleman from 

Texas, Mr. Brady, wish to inquire? 

Mr. BRADY. Thanks, Mr. Chairman. For 18 years before coming 

to Congress I ran Chambers of Commerce in three different communities, and in various economies, in different recessions and 

boom times, I have seen how critical capital is to small business 

growth in a community. There tends to be an ebb and flow to it, 

times where as major banks merged, there seemed to be a major 

tightening up of credit for small businesses. I have seen somewhat 

a resurgence of community banks and credit unions now offering 

capital to small business. I am most interested in the role of credit 

unions. I want more capital to valid, solid entrepreneurial efforts 

at the local level. What and how we get there is a good debate. Can 

I ask each of the panelists, what is the role of credit unions in providing capital to small business start-ups at the community level, 

and how does that role compare to that of a community bank and 

the larger type banks? 

Ms. JOHNSON. Many people don’t realize that credit unions 

were originally formed for business purposes, whether it was agriculture, a lot of small business, but there were commercial—small 

business lending was a major part of credit unions from the very 

beginning. It continues to be a very important role for credit unions 

to play, for small businesses to have access to capital. We see a 

number of folks—take the military, for example. When you have 

someone retiring from the military after 20 years, they are just 

ready to begin their own small business, and having access to that 

capital to begin that small business with the credit union that they 

have been doing their transactions with for perhaps their entire 

military career, it makes sense for the credit union to be able to 

continue to serve them. The small businesses are the heartbeat of 

the economy, and credit unions have an important role to play in 

that. 

Mr. BRADY. Can you address—thankfully, we have far more 

home-based businesses than ever before. We have far more women 

and minority-owned entrepreneurs entering the market than ever 

before, thank goodness. To each of the panelists, do credit unions 

play a special role in meeting the needs of that new market? 

Ms. JOHNSON. Absolutely. That is where we see a lot of the 

growth, especially in these underserved areas, who are in many 

areas comprised of the minorities and the very people that you are 

talking about. Those are the people, the women that are perhaps 

coming to get the equipment for their hair salon, or someone coming in for a vehicle for their small business. Credit unions see a lot 

of that and that is a segment of their membership that they are 

reaching out now to serve. I think the whole community is better 

for it. There has been a sore need for access to capital for these entrepreneurs. 

Mr. BRADY. Thank you. Mr. Miller or Mr. Hillman? 

Mr. MILLER. Actually, I will let Mr. Hillman handle this one because the Service doesn’t really have very much information on 

that unfortunately. 


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Mr. HILLMAN. We have gathered information over the years 

from 1992 to 2004, which shows that there is a very much a different perspective when you look at smaller credit unions and you 

look at larger credit unions. What we are seeing is that for larger 

credit unions, you are seeing them much more actively involved in 

first mortgage loans than that of smaller credit unions than they 

have been in the past. Smaller credit unions continued to tend to 

provide for a loan such as new vehicle loans or used vehicle loans 

and the like, as Congressman Lewis indicated as part of his past. 

As it relates to member business loans, there is current restrictions 

that credit unions have about the extent to which they can provide 

those types of loans, and over the years, since 1992 through 2004, 

they have been a relatively small portion of the portfolio of credit 

unions. 

Mr. BRADY. Did you do any comparison on community banks? 

To a person in the community it is hard to know who is filling that 

need objectively. It is more anecdotal. Do you have any views or 

studies on who is filling the need for start-ups, home-based businesses, women-, minority-owned entrepreneurs? 

Mr. HILLMAN. Not as part of this study, the credit union history, no. 

Mr. BRADY. Thank you, Mr. Chairman. 

Chairman THOMAS. Thank the gentleman. Gentleman from Colorado, Mr. Beauprez, wish to inquire? 

Mr. BEAUPREZ. Thank you, Mr. Chairman. In the spirit of full 

disclosure, I am a former community banker. 

Ms. JOHNSON. At least you said former. 

Mr. BEAUPREZ. My wife is still chairman of the board of a bank 

that I still own stock in. 

Ms. JOHNSON. That is fine. 

Mr. BEAUPREZ. Well, thank you. I appreciate that. 

[Laughter.] 

Mr. BEAUPREZ. I appreciate your very, I guess, ecumenical attitude toward that. I also came to Congress with a pretty clear 

pledge. I didn’t come here to raise taxes, and I have consistently 

told my credit union friends—and they are friends from Colorado; 

they have been very supportive of me and I appreciate that. I have 

told them that I did not come here to raise taxes on them or anybody else for that matter. I am pretty proud of the record we have 

had on this side of the aisle on actually reducing the tax burden 

on the vast majority of people, in fact, I think all people that actually pay taxes out there. I think the record is pretty clear on what 

effect that has had for our economy. I say all that just so people 

don’t get scared as soon as a community banker, who happens to 

also be a Republican, opens his mouth, saying, he must be planning to tax me. The place I would like to go though, and this is 

the same message I have given my credit union friends, is you have 

to help us. So, I want to pursue in the time I have, a clear distinction that allows Congress to straight-face say this tax-exempt status makes sense. 

Chairman Johnson, you have said that they exist to help people 

of modest means. I understand that. I think we all understand 

that, that that was part of the original charter. But you are not 

really suggesting that those are the only customers of credit unions 


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now, are people of modest means, nor once people get out of whatever modest means status means and move on, that they no longer 

can be a member of a credit union, are you? 

Ms. JOHNSON. Absolutely not. 

Mr. BEAUPREZ. So, then credit unions don’t exist only for people of modest means, nor, I am assuming—I don’t want to lead the 

witness—but I am assuming you are not suggesting that people of 

less than modest means can’t belong to a credit union? 

Ms. JOHNSON. Congressman, the term ‘‘modest means’’ is certainly open for interpretation, but I would probably assume that 

most of us in this room and our families consider themselves people 

of modest means. There are others that think credit unions should 

serve only, quote, ‘‘the poor.’’ I would contend that you can’t have 

a common bond of the poor and have a successful credit union. So, 

you need folks that can put in deposits in order to serve those that 

need the loans. 

Mr. BEAUPREZ. I accept that. Some banks serve people of modest means as well, right? 

Ms. JOHNSON. Right. 

Mr. BEAUPREZ. Same basic financial services? 

Ms. JOHNSON. That is right. 

Mr. BEAUPREZ. Make loans, deposits, checking accounts, that 

sort of thing. 

Ms. JOHNSON. Right. 

Mr. BEAUPREZ. Where we struggle—and Mr. Hillman, I would 

like to go to you next because of a statement you made—where I 

think we do struggle and part of the reason I think we are having 

this hearing, is making that clear distinction again beyond the obvious one, different ownership structure between banks and credit 

unions. Where we struggle is where is the service, the clear service 

differentiation that allows us to say, well, there is an obvious reason for tax-exempt status here. I think the statement you made— 

and again, I want to make sure all you credit union folks out there 

hear me, I am not here to raise taxes on anybody. What I am here, 

trying to make sure we always understand, is that there is a clear 

distinction as to why one is taxed and one is not. I think your closing comments went something to this effect: services are provided 

by State chartered—and I accept that—State chartered credit 

unions expand, we have the responsibility to be determining which 

of them generate income that is subject to unrelated business income tax and thus, which ones are not. I think you kind of set the 

stage. So, how do we continue doing that? I would suggest to you, 

Chairman Johnson, that is a test. It is a test as much for your 

membership as it is for us, is that that distinction that those lines 

don’t get blurred to the point where somebody can’t tell the difference. I think that is part of what we struggle with up here is 

the difference. Mr. Hillman, you want to respond as to what I 

wrote down as kind of a blurring of those lines? 

Mr. HILLMAN. I think you hit the nail right on the head, and 

in fact, that is one of the two main reasons why credit unions enjoy 

their tax-exempt status, and it is also something that is very undefined in legislation. It is very vague. There is no clear standard out 

there as to what the requirements are, or defining an individual of 

smaller, modest means in order to ensure that credit unions are 


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providing the public good that Congress is expecting, clarity in that 

standard would be important. 

Mr. BEAUPREZ. I will just close, Mr. Chairman, if I might, that 

I think it is a very natural evolution from 1934 or 1916 to where 

we are today, that those lines have gotten blurred, but it is also 

a responsibility of those in Congress to make sure that—and I 

think that is why we are having this hearing, just asking the questions—is can we still justify what the original intent was? Thank 

you, Mr. Chairman. 

Chairman THOMAS. Thank the gentleman. The gentleman from 

Georgia wish to inquire? 

[No response.] 

Chairman THOMAS. Gentlewoman from Pennsylvania wish to 

inquire? 

Ms. HART. I do briefly, Mr. Chairman. I have a question mostly 

centering around some of the law as it is today that doesn’t necessarily lead us to the point where we would want to remove a taxexemption. I represent an area where there are many active credit 

unions, most of which are small and represent a very small segment—I am sorry—their members are a very small segment of the 

community. In communities that are what I think most people 

would think of as traditional credit union communities, that had 

lots of employees of one company. They belonged to the credit 

union for generations. They don’t have a lot of money. They are 

what I think most people would consider people of modest means 

who belong to a credit union. I met with some of the credit union 

folks at home, and asked them directly, do they believe that they 

are still fulfilling the original mission of credit unions, and they, 

without hesitation, said, yes, the original mission being to provide 

access to people who might not really have it, and I believe that 

for the most part these organizations do that. 

The one thing that is in the law that they enjoy, and I think one 

of the things that actually may cause a little bit of discomfort 

among my colleagues, is the issue of transparency, because the 

credit unions do enjoy this opportunity to not disclose a number of 

things. What I am curious about mostly, why are they excused 

from filing the forms such as 990? What purpose does that really 

serve? Would, perhaps, changing that part of the law, alleviate 

some of the concerns that people seem to have about credit unions? 

I think Mr. Miller may be able to help me with that. 

Mr. MILLER. Congresswoman, the Form 990, again, we need to 

divide our world, as I have said almost every time I have spoken, 

into the State versus the federally chartered. The federally chartered, by regulation of many decades at this point, exempts, excuses from filing a Form 990 any instrumentality of the U.S. Government, and one of the types of instrumentalities is the Federal 

credit union. If we were to require that—and I do believe we could 

require it; we would have to modify a regulation, but we could require it—the question is why? If Congress said because we want 

transparency into that sector, notwithstanding the fact that that 

transparency doesn’t lead to any tax impact, then we could do that. 

But again, with respect to Federal chartered credit unions, that 

990 is not going to provide us with virtually any information of a 


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tax nature. It may provide the public with transparency into the 

workings of an organization, but not tax information. 

Ms. HART. That is okay. My goal is not tax information as much 

as it is to have them be responsible for providing information as 

other financial institutions would be. Mr. Hillman, you look like 

you want to say something. 

Mr. HILLMAN. Yes. The GAO has noted in prior testimony to 

this Committee earlier this year, the need to improve governance, 

transparency and oversight of the tax-exempt sector. The public 

availability of key information about the entities, i.e., transparency, 

can enhance incentives for ethical and effective operation and support public oversight of tax-exempt entities, while helping to 

achieve and maintain public trust. The good thing about the Form 

990 that you referred to are that they are public documents, and 

individuals, therefore, have an ability to review those documents, 

and that helps to maintain the public trust. 

Ms. HART. Thanks, I appreciate that. The discussion with my 

constituent credit unions, one of the things they said that is so very 

important and one of the reasons why I really don’t want us to be 

jumping to any conclusions here, is that if someone does need a 

$250 loan, they are certainly not going to go to a commercial bank 

and be able to get one. But there are credit unions in the communities I represent that do that, and I think that is a very important 

service. Since I have probably a minute left, Ms. Johnson, can you 

tell me of any reason why the organization would object to this 

form? 

Ms. JOHNSON. What I would respect to is that currently it is 

not required and so we don’t require it. The volunteers that serve 

as directors are the ones that set the salaries. The only time that 

we have seen a need to take a closer look is for safety and soundness reasons, if there is a credit union that we are examining for 

safety and soundness reasons, that there are problems, then we 

would look into that, but otherwise it is the purview of management. We don’t set salaries, and so—— 

Ms. HART. So, the disclosure would present no extra burden? 

Ms. JOHNSON. I don’t know that it is not a burden, other than 

the time for reporting, but it isn’t anything that we require, and 

therefore don’t. 

Ms. HART. Okay. Thank you for your indulgence, Mr. Chairman. 

Chairman THOMAS. The gentlewoman from Ohio wish to inquire? 

Mrs. TUBBS JONES. Mr. Chairman, Thank you very much, and 

thank you for hosting this hearing. For the record, I am pleased 

to be a part of a discussion with regard to credit unions. My prior 

Committee service was on financial services, and was glad to be a 

supporter and a founder, in fact, of a credit union in my congressional district. My first question goes to Mr. Hillman. Mr. Hillman, 

there are roughly 9,000 credit unions of all sizes. Of the 9,000 credit unions, have there been any issues—and maybe this should be 

Mr. Miller as well—with regard to credit unions compliance with 

any IRS or GAO regulations, or any issues with regard to that, in 

complying with what is the rules that are laid upon them? 

Mr. HILLMAN. As part of this study we haven’t looked into the 

enforcement actions that NCUA has taken against credit unions for 


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certain activities and transgressions, but I suspect that the enforcement unit has had some activity in that area, but I am not aware 

of—— 

Mrs. TUBBS JONES. Surely any enforcement unit is going to 

have some activity in some area, or else they wouldn’t be an enforcement unit. They probably would say, well, we don’t need any 

money there. But what I am asking, trying to get an understanding, is that most credit unions meet the compliance requirements that are laid upon them. Any of you can answer the question. 

Mr. MILLER. Let me say, Congresswoman, that that I think is 

generally the case. We have one area I think we have under investigation right now, and that is with respect to State-chartered credit unions. The array of activities that we see, particularly in the insurance area and the sale of insurance products, whether income 

derived from those sources is taxable under unrelated trade or 

business. 

Mrs. TUBBS JONES. Excepting that part of that, if they are 

State chartered, some of the regulation actually will come under 

the State, not under your jurisdiction; is that fair? 

Mr. MILLER. I believe that with respect to State chartered, they 

are regulated by the State regulator, but for Federal tax purposes 

on UBITs, on the unrelated business income tax, that would fall 

within our purview. 

Mrs. TUBBS JONES. Well, lest we leave this hearing with a 

cloud over the heads of the credit unions of America, you are saying you believe something is being looked at, but apparently it 

must not be too big of a deal because credit unions continue to operate with great success and support for their members across the 

country. 

Mr. MILLER. Let me clarify my comment, that we were talking 

at the edges with respect to some income. It does not go to the exemption, the tax-exemption of these entities. It goes to whether 

they owe some income tax. 

Mrs. TUBBS JONES. Let me move on, and just say, roughly, in 

Ohio, that the number of credit unions in Ohio translates into 

about 2.7 million Ohioans that are members of credit unions. Collectively Ohioans have $6.5 billion worth of assets invested in credit unions. So, needless to say, I am getting lots of calls from my 

constituents about what is happening with credit unions. One is 

great, it is the Wright-Patt, it is our largest credit union. Then 

there is one in my congressional district called Safe Community 

United Credit Union, that stepped in to fill a void created by the 

desertion of traditional commercial banks from inner city areas. 

Again, I think there is enough room at this financial table for community banks, large banks and credit unions, and in my 7 years 

of being here at this table—well, not this table, but a table of the 

Congress, that we continue to kind of push and shove, and I just 

want to be on record saying there is room enough for all of you all. 

Let us go on to something more about. Thank you very much. I 

yield back my time, Mr. Chairman. 

[Applause.] 

Chairman THOMAS. Thank you. Obviously, that influences us. 

Gentleman from Texas? 


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Mr. DOGGETT. Thank you, Mr. Chairman. I certainly would not 

question the appropriateness of looking at the tax-exempt status 

and the tax-paying status of any business entity, but it does strike 

me that the priorities here and the rationale here are somewhat 

peculiar. We have ample evidence of commercial corporate tax 

dodging as the amount of corporate taxes continue to decline as a 

percent of our overall revenue package. We have ample evidence of 

abusive tax shelters, some of which involve what are called tax in 

different parties, or non-tax-paying parties. None of that has been 

considered in this Committee. We have an increasing number of 

commercial entities that bear a great similarity with credit unions 

in that they are no-tax corporations, who year after year, though 

they have ample multinational operations, don’t pay a penny of 

taxes. We have some corporations that have chosen to reincorporate abroad in order to avoid any of their responsibilities. We 

have substantial involvement of the investment banking community in abusive corporate tax shelters along with firms that of 

course are facing criminal charges like KPMG. 

None of those matters have been made the subject of today’s 

hearing or other hearings. Indeed, I think it has been since 1999 

that this Committee ever had a hearing that really focused on extensive abusive corporate tax shelters. Fortunately, the Senate, 

under the leadership of Senator Grassley, has explored some of 

these issues and come up with some good ways of addressing it in 

a bipartisan fashion, and has even dared to look at the abuses that 

were so costly to investors and taxpayers that Enron and similar 

companies have engaged in. This all, of course, does involve a substantial amount of money. I think that it would be appropriate if 

the goal is to really reevaluate all of these areas and their contribution to the community, to the Federal Treasury, that we look 

first at those who have been the subject of the greatest abuses, 

even though we might eventually want to get to charity hospitals 

and credit unions. The second thing I would note about today’s 

hearing is that rarely does this Committee deviate from the Bush 

Administration party line, and I am thinking that perhaps today 

may be an exception. You made reference, Ms. Johnson, to a Treasury Department study that was done in 2001 concerning credit 

unions. Have there been any Treasury studies about credit unions 

since that time? 

Ms. JOHNSON. That is the latest study that I am aware of. I 

would say, however, that your assumption is incorrect about the 

support of the exemption. Both President Bush and Secretary of 

the Treasury Snow, have both reiterated strong support for the taxexemption for credit unions, as have pervious Administrations. 

Mr. DOGGETT. Usually at a hearing of this nature, we would 

have an Administration witness that would testify, but as far as 

the Treasury Department is concerned, the 2001 study has never 

been questioned. The Treasury Department has never come forward and asked for legislation in this area, and the Secretary of 

the Treasury has spoken out in favor of maintaining the existing 

exemption? 

Ms. JOHNSON. That is correct. 

Mr. DOGGETT. As has the President of the United States? 

Ms. JOHNSON. Yes. 


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Mr. DOGGETT. Let me ask you, Mr. Miller, has there been any 

requests from the Internal Revenue Service for legislative action 

concerning credit unions? 

Mr. MILLER. Well, Congressman, legislative action and one of 

the reasons why my testimony takes no position is because we are 

not the tax policy arm of the Administration. That is a different 

piece, and that is where legislative suggestions would come from. 

But I am unaware at this point of legislative requests in this area. 

Mr. DOGGETT. So, it would be Secretary Snow’s Department to 

make the recommendations for policy changes? 

Mr. MILLER. We are all in Secretary Snow’s Department, Congressman, but it would be the Office of Tax Policy within his office 

that would push forward on tax policy matters. 

Mr. DOGGETT. He is, of course, the individual who has voiced 

a position favoring no change in the taxation of credit unions; isn’t 

that correct? 

Mr. MILLER. I have read the speeches. That is all that I know 

on that topic. 

Mr. DOGGETT. Thank you very much. Thank you, Mr. Chairman. 

Chairman THOMAS. Thank the gentleman. It is indeed an interesting hearing that the gentleman from Texas finds comfort and 

protection in the Bush Administration and the Secretary of the 

Treasury in the Bush Administration, knowing that we know so 

much about the activity here, and that therefore, they could reach 

that conclusion. I would also remind the gentleman that the President and Secretary of Treasury are not charged with writing the 

Tax Code. We are. They aren’t charged with overseeing it. We are. 

They are not charged with changing it. We are. That is why this 

Committee, the Committee responsible in the House of Representatives for the Tax Code, is holding the hearing. 

Mr. DOGGETT. Mr. Chairman, may I ask unanimous consent at 

this time to insert the letter and the speech of the Secretary of the 

Treasury, Mr. Snow, and the President on this issue into our 

record? 

Chairman THOMAS. Certainly, without objection. 

Mr. DOGGETT. Thank you. 

[The information follows:] 

PRESIDENT GEORGE W. BUSH 

April 30, 2004 

Hon. Daniel A. Mies 

President and Chief Executive Officer 

Credit Union National Association 

601 Pennsylvania Ave, N.W. 

Suite 600 

Washington, D.C. 20004 

Dear Dan: 

My Administration’s pro-growth policies have spurred strength and vitality in our 

economy, and America’s credit unions have played an important role in that success. 

By increasing lending opportunities to small businesses, families, and workers, credit unions are contributing to our economic recovery and increasing opportunities in 

our communities. 

I support strongly the tax—exempt status of credit unions, and will continue to 

highlight the important contributions that credit unions make to our financial system. As service-oriented, member-owned financial cooperatives, credit unions should 

continue to invest in a safe and sound manner in America’s future. 


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I look forward to continuing to work together to ensure a bright future for all 

Americans. 

Sincerely, 

George W. Bush 

——— 

FROM THE OFFICE OF PUBLIC AFFAIRS 

September 10, 2004 

Hon. John W. Snow 

Prepared Remarks: 

National Credit Union Administration 

Health Savings Accounts Event 

Lima, OH 

Thank you so much for having me here today. It’s always great to come home to 

Ohio, and I always appreciate the chance to meet with credit union managers . . . 

you are such an important partner, such a valued member of the financial community. 

It’s wonderful to be here with my good friend Mike Oxley. Chairman Oxley is 

someone I regularly turn to for insight and counsel on a broad range of matters impacting the Treasury Department. I consider him to be a leader of great substance; 

the Financial Services Committee clearly benefits from his leadership, and the people of Ohio are lucky to have his representation in Congress. 

I appreciate that credit unions are in business to do good, as well as to do business. That’s clear from your motto: Not for charity, not for profit—but for service. 

So before I go any further today, let me say to you: I value the fact you are for service. Which is the fundamental reason why talk of taxation of your industry, and 

what you do, is something the Bush Administration opposes. We know that you always get less of anything you tax. And we don’t want to get less of what you do. 

We have a lot of things to talk about today, but I wanted to make that point clear 

up front. 

Americans know and trust their credit unions, and this makes your role in our 

country’s economic growth especially important. You’re there for your customers 

whether they are opening a checking account or a small business. Whether they’re 

saving for extra holiday spending or their child’s education, you’ve been there. 

And while our Nation’s economy is doing quite well—and enormously better than 

it was just a few years ago—there is still much to be done, and much that credit 

unions will be doing to help. 

Your dedication to small-business lending is one of the major reasons why I say 

that. 

Small business is at the foundation of this great economy, and credit unions have 

been there for entrepreneurs when they needed you the most. 

As of 2003, under the leadership of SBA Administrator Hector Barreto, credit 

unions were welcomed into the SBA lending programs for the first time. I hope that 

has helped out both you and America’s entrepreneurs as much as this Administration hoped it would. 

You know as well as I do: small business is where the jobs come from. We estimate that between two-thirds and three-quarters of recent net new jobs are coming 

from that sector. 

That’s why we want to make small business tax cuts permanent, and that’s why 

I want to commend the credit union community for financing America’s hard-working small-businessowners! 

In addition to providing your small-business customers with the capital they need 

to start and grow, there is a new product that I would encourage you to market 

to them, and that’s what we’re focusing on here today: Health Savings Accounts 

(HSAs). 

The recently enacted Medicare prescription drug bill created HSAs, an innovative 

new program to empower consumers to make better health care choices. HSAs are 

really super-charged IRAs that put patients back in charge of their health care. You 

own it, you control it, you can leave it to your heirs. 

It’s a new option for health coverage that is good news for individuals and employers who are struggling with their health-care costs. 

I have good news for Credit Unions when it comes to offering this new product. 

First, insured credit unions are automatically qualified to handle HSAs. 

Second, the reporting on these accounts is minimal. You only need to report on 

them once a year—to the customer and the IRS—one form to report contributions 


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to the account and another form to report the amount that has been taken out of 

the account. 

Best of all: you won’t need any new forms. Treasury has model forms that you 

can use, or you can adapt the forms you use for IRAs for HSAs. 

In terms of the market for this product, I believe the future is bright. As smallbusiness customers research the services you offer, adding HSAs to your portfolio 

are bound to make you more attractive as the small-business financial service provider of choice. 

Federal employees will also be a rich market for HSAs. Soon, they will have the 

option of opening HSAs and they are likely to come to their credit unions for that 

service. 

I believe the business opportunity for you is great. Just ask the Mid-American 

Credit Union in Wichita, Kansas or HealthAmerica Credit Union in Jacksonville, 

Florida—both of whom have gotten into the HSAs business early! 

And I know that you also appreciate that HSAs are good policy, a mechanism that 

will bring more Americans into the ranks of the insured. This speaks to your motto 

. . . not for charity, not for profit, for service. And affordable health insurance is 

a service the American people need. 

HSAs are a critical step toward increasing the availability and affordability of 

health insurance for all Americans. They are also helping to put individuals in 

charge of their own health care . . . and that’s something that is good news both 

for the American family and for the American economy as a whole. 

Rising health-care costs are one of many factors that can act as a drag on our 

economic health. And while our economy is the strongest and most resilient in the 

world, it is important that we keep the burdens on free enterprise as light as possible. 

We want fairness and freedom for America’s small-businessowners. It’s not fair 

to add additional burdens to their already-heavy load. Lightening those burdens 

gives them the freedom they need to open a business, expand it . . . or, if an entrepreneur wants to . . . to close the doors and go fishing. 

Lower costs for health insurance reduces one of the top burdens on America’s 

smallest employers—the employers who are also creating most of the new jobs. 

Lowering their tax burden is critical for their health as well, and that’s why the 

President’s tax cuts paid particular attention to small business. 

The President’s tax cuts allowed well over three-quarters of a million smallbusinessowners to keep more of their business income, and encouraged them to invest in the growth of their companies. For example, nearly 860,000 business taxpayers here in Ohio will save money on their 2004 taxes. 

Similarly, the tax cuts have allowed individuals to keep more of their income. 

More than 4.4 million Ohio taxpayers will have lower income tax bills in 2004 

thanks to the tax relief. Those tax cuts helped to offset the serious blows to the U.S. 

including in rapid succession the bursting of the stock market bubble back in March 

of 2000, the economy in steep decline which President Bush inherited, the terrible 

behavior by high ranking corporate executives who forgot their duties to shareholders, workers and pensioners, and of course September 11th which took such a 

toll. President Bush saw the urgent need to act, to put oxygen into the economy and 

because of his leadership the American economy is now getting back onto a good 

course. 

I am often asked: what is the most important thing I can do, as Treasury Secretary, to strengthen the American economy? And I think that people appreciate the 

economic significance of tax cuts . . . that is the obvious answer. But it strikes me 

that this question is even better answered by Education Secretary Rodney Paige. 

For nothing will have a bigger, more lasting impact on the American economy than 

educating and preparing America’s work force for the jobs of today and tomorrow. 

Primary, secondary and continuing education—for generations to come—are by far 

the most important efforts toward achieving continued economic prosperity. 

While recent economic recovery and growth has been impressive—with 1.7 million 

new jobs created in the last year, strong GDP growth, and home ownership at an 

all-time high—we are not satisfied, and we must always seek ways to increase 

growth and job creation. 

You have lost jobs here in Ohio. No one knows the value of new jobs better than 

the people of this state. 

Ohio’s is an economy grounded in manufacturing, and recent years have been 

hard. I know what you are going through, what you have been through, and I know 

that it hasn’t been easy. I grew up less than 100 miles from here—in Toledo, another heavily industrial town. 

The people of this state have lost jobs; getting them back to work is a top priority 

for President Bush, and for me. We understand that the manufacturing recession 


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that began in 2000 hit Ohio hard. And the effort to get the economy of the state 

on solid footing, to a place where Ohio businesses can expand, grow and create more 

jobs, is awfully important. 

Some things we know for certain—like the fact that new jobs cannot come soon 

enough for the people of Ohio. The question is: where will those jobs come from? 

While no one can really predict what the next high-growth industry will be, in 

a country where innovation is so wonderfully strong we know there will be plenty 

of jobs for our families. The state of Ohio overall has had some good news recently 

on jobs, with 3,400 new jobs created in July. 

But much remains to be done. We need to return Ohio to its rightful prosperity. 

I remember when Ohio was a Mecca for jobs and it drew people from all across the 

country. I want those days to return. 

I am optimistic that times will get better in Ohio. You will not be left behind; 

the U.S. economy is too strong for that and Ohio’s workers and businesses have a 

long tradition of excellence and success. We’re going to keep growing as a country, 

and Ohioans will be part of that growth. 

And I know that Ohio’s credit unions will be helping, every step of the way. 

You understand the value of working together to achieve important goals. This 

quality makes you valuable to your customers, and makes you valuable to your 

country. More valuable because we are working together to fight the war on terror. 

Because while hatred fuels the terrorist agenda, money makes it possible. 

As we mark the third anniversary of September 11th, I am once again reminded 

of the tremendous resolve in the financial community that came out of that day . . . 

resolve to cut off the terrorists’ lifeblood: their money. 

Institutions large and small have committed themselves to the task. 

America’s credit unions have done everything that the Treasury Department has 

asked of you during this fight, and I want to personally thank you for your efforts. 

Your compliance with section 314 of the Patriot Act—which requires everyone to 

share information—has been exemplary. 

We’ve asked that you cross-check a list of terrorists and their partners, sent to 

you by Treasury’s Financial Crimes Enforcement Network (FinCEN), every 2 weeks, 

against your customer databases. 

It’s a big job to keep up with these lists, and it’s one that is never finished. You’re 

doing it, and our country is safer because of it. 

The list that comes to you from FinCEN is an important tool—but it would be 

useless without your partnership. We’re in this together. 

We’ve also asked you to comply with section 326 of the Patriot Act, which has 

to do with recordkeeping. And I want you to know that you do have flexibility under 

those regulations . . . we’ve worked hard to make sure that your customers are able 

to use as many forms of identification as possible under those rules. We hope the 

flexibility makes it easier for you to be vigilant. 

And we’re always looking for ways to provide you with more and better information about our regulations. So let’s keep up the dialog . . . let us know when we’re 

confusing you, or when we can do better—because the better our regulations are understood by you, the more successful our critical enforcement efforts will be. 

I know that complying with the regulations is burdensome, but it’s for an important cause. We want to work with you to ease the regulatory burden while tightening our grasp around terrorist financiers. 

Working together, we have accomplished a lot on this front of the war on terror 

in the last 3 years. The United States has designated 383 entities as terrorists or 

supporters of designated terrorists and frozen nearly $142 million in terrorist-related assets. More than $37 million has been frozen in the United States. 

The U.S. has also identified and frozen over $4.5 million in al Qaida-related 

funds. In addition, almost $72 million has been frozen by other governments worldwide. 

Almost 1500 terrorist-related accounts and transactions have been blocked around 

the world, including 151 in the United States. 

Our efforts are making a difference. So please know that we appreciate our working relationship on the war on terror, and that we view you as a partner in other 

critical ways, as well. 

You’re also a partner in the effort to increase financial literacy and protect our 

citizens from identity theft. Both programs are critically important to the citizens 

of America. 

For many Americans, credit unions are successful gateways for people to enter the 

financial mainstream through their relationships with employers, schools, community groups and other affiliations. 

I want to commend you for your terrific support for financial literacy. 


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The Department of the Treasury has awarded the John Sherman Award for Excellence in Financial Education to several credit unions for their innovative financial 

education efforts. For example, in June 2003, we presented a certificate to the Ohio 

Credit Union League’s Latino Financial Literacy Program, which provides financial 

education for Latino immigrants in the Columbus area. We understand the importance of your efforts. 

The National Credit Union Administration also plays an important role on the Financial Literacy and Education Commission along with the Department of Treasury 

and 18 other agencies. This Commission is working to coordinate the Federal effort 

on financial education and will soon be launching a Web site and toll free hotline 

to provide Americans with a central source for Federal financial education information. 

You do so much for your customers, and for your country . . . I’m thrilled to be 

here with you today, and thrilled to have you as a partner in so many efforts. 

I look forward to continued work with the credit union community on all fronts, 

and am pleased to share with you an optimism and enthusiasm for the future of 

the American economy. We have a shared belief that our best days are ahead of us. 

I am pleased to be working toward that future together. 

Thank you for having me here today. 

f 

Chairman THOMAS. Of everything that I have heard here today, 

Mrs. Johnson, the one statement you made I just find dumbfounding, that you cannot find a credit union back home in Iowa 

that you can join. If you were in California, there are ads that are 

run that say, ‘‘Can you join?’’ The response, ‘‘Are you breathing?‘‘ 

I think you meet that qualification. On the panel number 3 we will 

have a spokesperson from Louisiana, who will talk about how terrific it was that their particular credit union had exchange relationships with other credit unions, and so I could indicate that you 

could perhaps join a credit union here in Washington, and I can’t 

believe there isn’t a credit union in Iowa that would offer reciprocal 

opportunities based upon your membership in the credit union 

here. If that is not the case, you and I need to explore how we can 

create for you the opportunity to join a credit union back home. I 

think it is outrageous that you don’t have the ability to avail yourself of the services of the very structures you are charged with 

overseeing. 

The difficulty that I have, either in the President’s statement or 

the Secretary of the Treasury’s statement, or most of the other 

statements about whether or not we have a comfort level with what 

is going on in credit unions, is the fact that most often you have 

to accept statements, for example, Madam Chairman, as you gave 

us: ‘‘I have no doubt,’’ ‘‘we believe,’’ ‘‘acts of faith,’’ are probably not 

comfortable enough, especially as the gentleman from Texas indicated, that there was a lot of activity out there in the corporate 

community. You indicated that you have CPAs who report. They 

had CPAs that reported. They were concerned there were reporting 

requirements that were burdensome and didn’t want additional reporting requirements. We now have an individual serving 25 years 

in jail based upon what he actually did. What I have difficulty in 

is not understanding, as you continue to evolve and change the 

form of the credit union, that there isn’t any more sensitivity on 

what could happen in terms of the downside of that evolution. Let 

me give you an example, and I would like to hear your response. 

In 1998, the definition for community was modified using a local 

concept, geography. You have approved a local geographic-based 


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credit union which has as its boundaries, Los Angeles County. That 

is more than 10 million people. If in fact there is an opportunity 

to try to serve people of modest means, there are ample opportunities in Los Angeles County. There are also ample opportunities to 

locate your credit union offices in ways in which you could absolutely skim those folk who make more than half a million dollars 

a year, if they are so inclined to use a credit union. Repeatedly, 

when Members asked you what do you do in terms of a measuring 

unit to see if people are actually providing services to people of 

modest means, you don’t have the structure or the data capability 

of determining that. Does that concern you at all? 

Ms. JOHNSON. Congressman, there have been some large community charters granted, and I think that has been very beneficial 

to those communities. They are still restricted in their geographical 

boundaries. They have to establish a—there has to be interaction, 

common interests documented. Typically, when you have a single 

political jurisdiction, you find those types of interaction services, a 

commonality among that segment. 

Chairman THOMAS. Would you give me an example of the commonality other than the fact that they live in Los Angeles County? 

In fact, I understand that they don’t even have to live in Los Angeles County to belong. They can worship or work. 

Ms. JOHNSON. There is certainly commonality of public services. There is commonality—— 

Chairman THOMAS. Not necessarily. Somebody could be in Orange County, which is often the case, and work in LA. It is a completely different county structure. 

Ms. JOHNSON. Then the interaction of the working within the 

county, using the facilities of the county, using the—— 

Chairman THOMAS. Just let me say that at this point, comparing that structure to what we started with, ‘‘I am a member of 

a company,’’ ‘‘I am a member of a school district,’’ in terms of what 

was the historical rationale for creating these, and you are down 

to now telling me that those are still substantially sufficient commonalities to allow the concept to continue, I am just saying at 

some point you need to maybe take a step back. In arguing in 

terms of the Community Reinvestment Act—and we are going to 

have a panelist on the third panel and I know he has a 3:00 o’clock 

flight, and I am going to do everything I can to get him up here— 

here is the question. You have tax-exemption. What is the primary 

reason you have tax-exemption? Is it because of the cooperative 

community volunteer structure of the organization, or is it because 

during the ’thirties, when it was clear that people of modest means 

were not being served adequately, given the existing financial 

structures of the day, that this made sense in creating opportunities for people of modest means? Which one is the primary reason 

you think that Congress gave credit unions tax-exemption? 

Ms. JOHNSON. I think by reading the statute. that Congress 

was establishing an alternative provider for affordable financial 

services, and the structure is certainly what it is based on by having a not-for-profit with the members putting in their capital and 

then loaning it back out, everyone, every single member of the 

credit union was benefiting. That is entirely different than a structure of a stock-held institution. 


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Chairman THOMAS. No, no, I understand that. 

Ms. JOHNSON. Having both is great. 

Chairman THOMAS. I understand that, but is that the primary 

reason you think you get the tax-exemption, because of the structure? 

Ms. JOHNSON. Reading the statute, I believe that that has been 

reaffirmed, yes. The structure, and there is also then to serve the 

savings needs and those of modest means, but I would say yes. I 

would say the structure, in reading the statute, the structure is the 

main basis for the tax-exemption. 

Chairman THOMAS. Okay. But I think it is very important, and 

I think you should underscore this, that was included in the ’thirties is included in 1998, serving people of modest means. Earlier, 

I used not-for-profit hospitals as an example. The IRS has allowed 

not-for-profits based upon a changing definition of what their mission is, to no longer have to serve the poor. All they have to do is 

have a structure, and it is the structure alone that allows them 

that competitive advantage. But I think it is important that your 

structure, the people that you are supposed to administer and oversee and police, have this commitment in terms of serving people of 

modest means, difficult to define, as we indicated. But I have a 

hard time understanding why you would resist a question or not 

put up a structure which would allow you to show clear evidence 

that you do serve people of modest means, and that you serve them 

better than other institutions that don’t have that as part of their 

charter. That is why I have some difficulty understanding your testimony on page 12. I assume you were presenting evidence which 

would convince us that you serve people of modest means, and you 

made a comparison with banks, and I would assume that the comparison with banks would show you favorably in serving people of 

modest means if you were going to include it in your information. 

What you have in the last full paragraph on page 12 is that in 

the year 2003 ‘‘credit unions made a higher percentage of single 

family mortgage loans to low and moderate income borrowers . . . 

than banks.’’ You were at 24.2, banks were at 23.2. You got them 

there by a percentage point. ‘‘In addition, credit unions significantly increased home purchase loans to low and moderate income 

borrowers to 28.3% of their loan portfolios at 2003.’’ That is up 

from 23.6 in 2001. But you make the point, ‘‘while bank lending in 

this area stayed relatively constant.’’ Well, ironically, the relatively 

constant rate of the banks was 28.6 percent in 2001, which was 5 

percentage points better than credit unions. The point of constancy 

showed that in 2003 banks loaning to low and moderate income 

borrowers was 28.9, which is half a percentage point greater than 

what the credit unions did in 2003. So, in both instances the banks 

did a better job, according to your own testimony, of loaning money 

to folks of low and moderate means to purchase houses. How does 

that buttress your argument? 

Ms. JOHNSON. Congressman, that is in part why the chart is 

presented above. The interpretation of the HMDA data is being 

done in a very different manner, and I would propose when the 

HMDA data is analyzed in an objective form, you will see that 

credit unions fare very well. If you look at the denial rates for the 

minority groups on the mortgage, you will see that credit unions 


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are doing a very good job. In fact, the denial rates are lower than 

for other financial institutions. I would also say that those rates 

have improved on an annual basis. I believe as GAO had reported 

earlier, that the rates are getting better. 

Chairman THOMAS. Of course they are getting better, but your 

statement, your mission, one of the reasons you get tax-exemption 

is because you are committed to serving people of low and modest 

means, and banks aren’t. They pay taxes and they are beating you 

in a very significant, growing and important area for people of low 

and modest means, and that is providing personal loans on homes. 

Ms. JOHNSON. The reason that this information is included is 

because this is information from a particular group that you will 

probably see elsewhere, and to be truthful in putting it in, I think 

that that is what we need to do, because that is information provided by one particular group that is calculated and manipulated 

in one fashion. 

Chairman THOMAS. All I am saying is that you included that 

data, and I assumed you meant it to have some positive impact on 

us, and I am trying to figure out how it does. That is all. In addition, one of the things that shocked a lot of people was the corporate behavior, how much the chief executives were being paid, 

other remunerations that were available to them, the discrepancy 

between a typical corporation and certain corporations. What I 

heard in terms of your response to Ms. Hart and others was about 

the idea of maybe if we could get some understanding of executive 

compensation. We could show that there is a consistent relationship between the size of the credit union and what the CEOs get 

paid and there aren’t any anomalies, and if there are some anomalies, you might want to focus on those anomalies. That is transparency. 

But to get the transparency you have to be able to collect the 

data, and the argument that the law doesn’t require you to collect 

that data, I would think, would be something you would want to 

talk about with the credit unions so that you don’t wind up with 

a scandal. If your answer is, ‘‘Don’t worry, there won’t be one,’’ I 

would be very concerned about that, especially as the way you have 

changed your credit union structure in which the similar relationship to join it is that you are breathing, and that it can include a 

geographic unit that is larger than 42 States in the United States. 

Those structures create opportunities for people who aren’t as committed to the core concepts that created credit unions in the first 

place, to give you some comfort that people who work in the same 

place, people who are employed in the same place, who deal with 

similar issues. 

I will tell you that I belong to the current Schools Federal Credit 

Union, and I understand the nexus, and I understand people are 

there. It continues to change a little bit, but I understand the basic 

nexus. I don’t understand county of LA. Your explanation as to why 

the county of LA makes sense, I would tell you, probably isn’t 

enough cement for the people who might join this credit union to 

have a very high comfort that they are going to be looking out after 

their own interest, the common interest that we have, the common 

interest that we are all in LA. 


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I have a little concern, because I would think you would want to 

be looking for tools to provide accountability, tools for transparency, tools for verifiability, because if as recently as 1998 you 

restated your mission as helping people of modest means, you 

should feel proud about proving that, and I think you could if you 

had the instruments that could establish that, but you don’t. I 

would think, given the enormous discrepancy that Mr. Hillman 

presented between credit unions, and especially the comment about 

the shift from the structure of credit unions, you would want to 

give people some comfort that there isn’t a certain structure, or you 

yourself would like to know that maybe some of these newer structures are simply not as responsive to the old core common ideas of 

a credit union that protected you in the past. So, I am kind of wondering why every time you gave an answer, it was an answer that 

was very, in my opinion, defensive. 

I came across a court opinion in 2004 which I think illustrates 

the concern that a number of us have and one of the reasons we 

would prefer having a hearing to listen to what you are doing as 

the structure has evolved. The court said the ‘‘NCUA must have 

some gatekeeping responsibility to ensure‘‘—in this instance—‘‘that 

the local requirement be satisfied.’’ It ‘‘cannot act as a rubber 

stamp or cheerleader for any application brought before it.’’ This 

case is troubling because there is no indication in the record that 

the NCUA questioned any of the data Tooele First Credit Union 

(TFCU) provided, or that the NCUA queried into areas that would 

diminish the likelihood of finding a local community. If the NCUA 

had conducted any critical analysis of the information provided, it 

should have recognized areas of concern that required further discussion. 

That to me is a cautionary signal that you should be concerned 

about the integrity that you could show easily and simply by the 

data you collect, both through transparency and through accountability, in terms of rules that are applied to other institutions that 

have a slight different tax structure, but which you should talk 

about emulating so that it doesn’t bite you. But to say ‘‘I believe’’ 

or ‘‘I have no doubt’’ in today’s world with the evolving structure 

of credit unions, I personally believe puts you at great risk. I would 

just caution you that Mr. Hillman and the GAO have provided you 

with some structures. I know you are taking a look at it. 

Cheerleading probably doesn’t serve the clients of the NCUA as 

much as a very careful analysis of where you might get tripped up, 

in which public disclosure might be made, and that the credit 

union movement is damaged far beyond the individuals who conducted themselves in ways that certainly weren’t typical of the way 

credit unions were supposed to conduct themselves. The old original structure virtually guaranteed that it wouldn’t happen. The 

new structure, I think, is going to cause a number of people some 

real concern if there is no ability to prove, not on faith, but on 

structure and information, that the compensation, the accountability and the mission are all being served. 

So, I would think simply from a defensive point of view that you 

would be anxious to find those tools, some of them indicated by the 

GAO and others, so that you could readily provide the data that 

would dismiss any argument, and perhaps in collecting the data, 


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you might find that there are some outliers that you would be very 

concerned about, but you don’t know about them now because you 

don’t collect the data. That would be an early warning system that 

some of the new and novel directions that you are going are perhaps fraught with a little more peril than the old typical structure, 

which I think made a lot of sense, still makes a lot of sense today, 

and serves clearly defined groups. Frankly, peer group review is 

usually one of the best ways to keep people in line, and that is 

based upon the structure. I just have to tell you, I have a very difficult time understanding peer group review when what you have 

in common is that you either worship, work, go to school, or live 

in a county that has a population greater than 42 of the 50 States. 

That is really the point I wanted to make after having listened to 

all of the members in terms of the questions that they had, just as 

a prudent thing you might want to think about doing sooner rather 

than later. Any reaction? 

Mr. MCDERMOTT. Mr. Chairman? 

Chairman THOMAS. I wanted to know if the chairman had any 

reaction to the statement. 

Ms. JOHNSON. Thank you for your comments, Congressman. 

We realize that this is an issue, and we have met with GAO, and 

we do intend to respond. 

Chairman THOMAS. But I think you should look at, for example, 

the 9nineties, which would provide you with some of the compensation that is going on. I know you are not required to do them, but 

perhaps some kind of a cooperative effort to examine exactly what 

tripped up some of those other corporations on accountability, on 

thinking that a CPA structure worked, on relying on folk that you 

can’t tell me by a thorough examination actually did what they 

said they did. I mean I know those things are unseemly, but in today’s world I think just to protect credit unions, the Agency created 

to protect them would want to have an oversight function more 

than a cheerleader. 

Ms. JOHNSON. I would add that many of the credit unions have 

voluntarily adopted many of the requirements in Sarbanes-Oxley, 

not required by statute to do so, but many credit unions have 

moved that direction. We encourage it. We have put out guidance 

on Sarbanes-Oxley, and that transparency is also beneficial. 

Chairman THOMAS. Do you think we are probably worried 

about those who voluntarily adopted Sarbanes-Oxley? 

Ms. JOHNSON. I would say it is—I may have used that word 

a little loosely. We have put out guidance and we have strongly encouraged many of the Sarbanes-Oxley procedures. 

Chairman THOMAS. I understand the cost and the difficulty of 

complying. I think it makes all kinds of sense to figure out at what 

level, given the risk of something going wrong, especially since the 

small ones have that tighter old-fashioned structure, would you 

draw a line, that you would say below this level and this structure, 

there is not that great of a concern, you don’t necessarily have to 

comply; above that, moving in the new direction with all of these 

different opportunities, especially outreach with for-profit structures in alignment with a not-for-profit structure, that this is probably a prudent thing to really think through, given the size of 

multibillion dollar operations and the opportunity in a whole new 


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environment to put you people at risk in a way that you never 

thought you would be at risk. I am reacting to the way you thought 

you were at risk with this hearing, when all I wanted to do was 

to ask you to look inward and do the kinds of things that you need 

to do to protect yourself so that what happened to corporations 

doesn’t happen to you. I agree completely the old structure pretty 

well protected you. You are off into areas now that are vastly different with amounts of money that are vastly different, with people 

who become leaders in the movement, who want to create new 

structures vastly different than what you had 25 years ago even, 

and certainly different than 50 years ago. 

I would very much like to see, and in fact will make sure on a 

follow up that we do it, that you have got some structures, you are 

asking questions. There is never a problem when you ask a question and the answer is a verifiable-certified-backed-up-with-information, no. The fact that you didn’t do it would be of great concern, 

especially given the Federal role you play in your oversight. Okay? 

Thank the panel very much. Anticipate the second panel. 

Mr. BECERRA. Mr. Chairman? 

Chairman THOMAS. Anticipate the second panel. 

Mr. BECERRA. Mr. Chairman. 

Chairman THOMAS. I tell the gentleman we have been here, 

and I accommodated everyone who was here when the Chairman 

began the final statement, and the Chairman said at the beginning 

of the hearing that the Chair would conclude with the questioning. 

The gentleman will have ample opportunity to question a number 

of other people on different panels. 

Mr. BECERRA. Mr. Chairman, I was here before the Chairman 

started his final remarks. He never said that this was his final 

statement. I was here prior to that. I was here prepared to ask my 

5 minutes of questioning. I believe under the rules of this Committee and this Congress, this House, I am entitled to 5 minutes 

to address the panel. So, unless I don’t understand the rules, I am 

not sure why I would not be entitled—— 

Chairman THOMAS. I tell the gentleman that the gentleman 

that spoke just prior to the Chairman was the gentleman from 

Texas who sat next to him, and I have to tell you that I saw the 

gentleman from Texas in his entire profile. 

Mr. BECERRA. Mr. Chairman—— 

Chairman THOMAS. However, the Chair wants to make sure 

that no member, regardless of how brief their appearance in the 

Committee, is shorted in terms of their opportunity to ask questions. Does the gentleman from California, Mr. Becerra, wish to inquire? 

Mr. BECERRA. Under regular order, Mr. Chairman, yes, I 

would. 

Chairman THOMAS. The gentleman is recognized for 5 minutes. 

Mr. BECERRA. I thank the Chairman. I thank the panel for 

being here such a long time. Let me ask a couple of questions of 

Ms. Johnson, because I think the Chairman brought up some good 

points that I believe a number of the credit unions in the industry 

are trying to address, and I think others could be encouraged to do 

more. It seems to me that there has been a good purpose served 

by giving credit unions an opportunity to have options on how to 


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service modest income, low-income communities in this country so 

that they can avail themselves of financial services. It seems, 

though, that most of the studies do show that the credit union industry is still lagging far behind, substantially behind even banks 

and thrifts, in making loans to modest income communities, especially communities of color, and, in some cases, when it’s compared 

to women. I know that a few years back in 2001 or 2000, there was 

a proposal before the administration to try to provide for something 

similar to what CRA does within the financial services industry for 

banks and savings and loans. That proposal, the community action 

plan, which was initially approved by NCUA, was subsequently reconsidered. I know that the reasons having been given were that 

NCUA was preferring to use a carrot versus a stick approach. I 

guess my first question would be: How long do we feed carrots before we think we need to use a stick to make sure that the credit 

unions do move forward and do a much better job of fulfilling the 

charter passed in the thirties that we try to service modest-income 

communities through credit unions? 

Ms. JOHNSON. Well, it has been the belief of NCUA that the 

credit unions are serving members of modest means and those in 

the community because they can only serve their members. In 

1998, Congress had debated at length CRA requirements and 

whether they should be imposed on credit unions, and at that time, 

there was no evidence to show that it was necessary for credit 

unions. 

Mr. BECERRA. Would you say that is still the case? 

Ms. JOHNSON. We have—— 

Mr. BECERRA. With the evidence that is before you now, some 

of the analyses that have been done, would you say it is still the 

case that there is no need to try to have further encouragement for 

credit unions to do a better job of serving low-income or modestincome communities? 

Ms. JOHNSON. Well, actually, Congressman, most credit unions 

that have adopted underserved areas are actually growing three 

times faster than other credit unions. We see the results that they 

are reaching out into the community when they have that opportunity for a community charter or through adoption of an underserved area. Otherwise, if you are dealing with employer groups, 

et cetera, many of those people are restricted through that employee group. There are others in the community that could probably benefit from a credit union that aren’t being—cannot walk 

through the door and join the credit union. 

Mr. BECERRA. I think you sort of point out that, on the whole, 

credit unions are still fairly small compared to banks and savings 

and loans. I think Citibank by itself is bigger than all the credit 

unions in the country combined—— 

Ms. JOHNSON. Actually, the—— 

Mr. BECERRA. In terms of total assets. 

Ms. JOHNSON. Actually, the top three banks—the three biggest 

banks, any one of them is larger than the entire credit union industry combined. 

Mr. BECERRA. To some degree, in response to the exchange you 

had with the Chairman, you can only do what the law permits you 

to do. How you go about enforcing these laws with regard to outVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00083 Fmt 6633 Sfmt 6602 E:\HR\OC\26372.XXX 26372

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reach into low-income communities is dependent on what the law 

permits you to do. The laws which are passed by this Congress, to 

some degree, dictate, they prescribe to you how to go about doing 

this. So, to some degree, I think we have to recognize that we have 

to tailor the law so that credit unions can go out there and encourage the membership in these modest-income communities. But the 

1998 law I think did you give you an opportunity to expand membership to try to get into some of these modest-income communities. We have this year legislation that is working its way 

through the Committees that may come to the floor in the House 

at least that would likely expand the reach of membership for credit unions. While I have always supported the charter of credit 

unions, it seems to me that credit unions would probably serve 

themselves well if they did a better job of demonstrating that they 

were going to go into these modest income communities if the industry is going to try to go out there and have a more expanded 

definition of membership. So, I am wondering if you could just comment on that last question. 

Ms. JOHNSON. The aspects as far as membership that are included in the proposed legislation is very limited. I believe it allows 

credit unions to retain single segs. If they were to become a community charter, they could retain those segs. There are actually 

very minimal changes to the actual membership proposals or to enlarge membership. 

Chairman THOMAS. The gentleman’s time has expired. I once 

again want to thank the panel, and at this time ask the second 

panel—Vice Admiral Cutler Dawson, Harriet May, Jeff L. Plagge, 

David E. Hayes. I would recognize the gentlewoman from Connecticut for purposes of introducing the last member of this second 

panel. 

Mrs. JOHNSON. Thank you, Mr. Chairman. It is my pleasure to 

welcome Mark Macomber to the dais here to testify before the 

Ways and Means Committee. I have known Mark for many, many 

years. He is first Vice Chairman of America’s Community Bankers, 

but he is the President and CEO of Litchfield Bancorp in 

Litchfield, Connecticut, a mutual organization, and has been a 

leader not only in banking circles in Connecticut and now nationally, but also in the communities of the Northwest Corridor of Connecticut, not only dedicated to building a strong economy, but to 

building strong communities, and I thank him for all he’s done 

throughout that region and welcome him here today. 

Chairman THOMAS. The Chair apologizes to the panel, and 

would indicate that all of you have written statements and will 

make them a part of the record, and you can then, as you have noticed, address the Committee in whatever manner you see fit. We 

might as well just go from the Chair’s left to the right, and start 

with Vice Admiral Mr. Dawson. 

STATEMENT OF VICE ADMIRAL CUTLER DAWSON, PRESIDENT 

AND CHIEF EXECUTIVE OFFICER OF NAVY FEDERAL CREDIT 

UNION, ON BEHALF OF THE NATIONAL ASSOCIATION OF 

FEDERAL CREDIT UNIONS 

Vice Admiral DAWSON. Thank you, Mr. Chairman. Chairman 

Thomas, Members of the Committee, I am Vice Admiral Cutler 


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Dawson, United States Navy retired; President and CEO of Navy 

Federal Credit Union. I am here today on behalf of the National 

Association of Federal Credit Unions to address the tax-exempt status of our Nation’s credit unions. We have provided the Committee 

a written statement, as you said, Mr. Chairman; and, however, my 

oral comments will draw primarily on my experience with Navy 

Federal Credit Union. In 2004, I completed a 34-year career in the 

Navy and was chosen to take the helm at Navy Federal. During 

that time, I have seen what the—during my time in the Service, 

I have seen what the credit union has done for sailors and marines. 

It is truly their credit union. Navy Federal began operations over 

70 years ago with a group of Navy Department employees and 

their surplus dollars to make emergency loans to employees. At the 

end of the first year of operation, the credit union included 46 borrowers and total assets of $450. 

We now serve sailors and marines and Navy Department employees and their families around the world through 106 members’ 

service centers, including 21 that are overseas. Our motto is we 

serve where you serve. We have not strayed from our mission of 

serving those members who share a common bond of military or civilian service with the Department of the Navy. Last year, as I was 

leaving active duty, the last—one of the last things I did while on 

active service was I went to Iraq to review the finances of the folks 

that were there that were conducting the operations. 

I spent the day with the Marines in Fallujah, and they spent the 

day briefing me on what they were about to do and what operations they were about, and what they had contemplated in the future. That night while we were having dinner, I happened to mention to them that I was retiring from the Navy, and that I had just 

been selected the day before to be the new President of Navy Federal. All the conversation stopped at that time about what they 

were doing. They wanted to know what I was going to do at Navy 

Federal, ’cause virtually all of them were members of Navy Federal. Some had been members for 25 years. Some had been members for 10; some for less. But to a man and to a Marine and to 

a woman, they wanted to know what I was going to do. 

This same commitment and dedication to their members is duplicated by thousands of credit unions all over America. Navy Federal 

and all credit unions are not-for-profit, as you know, and that 

served defined memberships. We are owned by our members and 

we are governed by unpaid directors who are elected on the basis 

of one vote and one member regardless of deposits. We build the 

necessary operating capital by retaining earnings, earnings that if 

taxed would curtail our ability to do the very best of things that 

we currently do. But how does the Nation benefit from our tax-exempt status? I can only explain it to you in terms of the members 

that we serve, many of whom are sailors and marines. It allows 

Navy Federal to operate in overseas locations where our members 

are serving our Nation. As I mentioned to you earlier, we serve in 

21 different locations across the world. 

We also conduct financial management training through Navy 

and Marine Corps programs. In the first 6 months of this year, we 

conducted over 750 such sessions. We assist our members through 

budgetary counseling and debt management services at no-cost to 


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the member. We guarantee utility deposits and security deposits 

for members in the Navy and Marine Corps. As you know, they 

move quite a lot. We provide members remote access to their accounts via the Internet worldwide, and even to ships at sea. But 

most importantly, we offer financial alternatives to provide lower 

loan rates and higher savings dividends, and I think, in some way, 

we keep the payday lenders at bay. In summary, Mr. Chairman, 

the credit union mission of meeting the credit and savings needs 

of customers, including the sailors and marines that serve our 

country is as important today as it ever has. It is with this in mind 

that I believe that continuing the Federal income tax-exemption for 

all credit unions is merited. I thank you for this hearing today, and 

I look forward to your questions. 

[The prepared statement of Mr. Dawson follows:] 

Statement of Vice Admiral Cutler Dawson, retired, President and Chief Executive Officer of Navy Federal Credit Union, on behalf of the National 

Association of Federal Credit Unions 

Introduction 

Chairman Thomas, Ranking Member Rangel and Members of the Committee, the 

National Association of Federal Credit Unions (NAFCU)—the only national trade 

association that exclusively represents the interests of our nation’s federal credit 

unions—thanks you for the opportunity to testify here today on the tax exempt status of our nation’s credit unions. NAFCU represents over 800 federal credit 

unions—financial cooperatives from across the nation—that collectively hold 67 percent of total federal credit union assets and serve the financial needs of approximately 28 million individual credit union members. 

The universe of tax-exempt entities is very large; as of 2004 there were almost 

1.4 million federal income tax-exempt organizations, not including churches and religious organizations, under § 501(c) of the Internal Revenue Code. Credit unions 

constitute a very small portion of that universe. In fact, our nation’s approximately 

9,200 credit unions account for merely 0.66 % of all federal income tax-exempt organizations. Yet while small in number, credit unions play an important role in directly serving their members, and ultimately in indirectly benefiting the American 

public; studies have shown that the presence of credit unions benefits not only credit 

union members but all Americans who use federally insured depository institutions. 

America’s credit unions have always remained true to their original mission of 

‘‘promoting thrift’’ and providing ‘‘a source of credit for provident or productive purposes.’ Because of their cooperative not-for-profit structure, credit union members 

find that product service offerings remain widely available to them irrespective of 

economic or stock market conditions. Such dependability means credit unions are 

not in a particular market or product offering today but out of that area tomorrow 

simply to bolster income. In providing quality services to primarily the middle and 

lower-middle class, particularly with respect to consumer credit needs, credit unions 

continue to fill a void left by other financial institutions. 

Credit union critics have erroneously claimed that some credit unions today are 

no different than banks and thus should forfeit their federal income tax exempt status. Such claims simply do not stand up to close scrutiny. While credit unions—like 

all financial service providers—have evolved and grown over the years to meet the 

changing financial services needs of their members, the basic structure, philosophy 

and guiding principles of credit unions remain the same today as when the federal 

income tax exemption was granted to credit unions in 1937. Congress reaffirmed 

this fact just seven years ago, when as part of Section 4 of the ‘‘Findings’’ contained 

in the Credit Union Membership Access Act (P.L. 105–219), Congress declared that: 

‘‘Credit unions, unlike many other participants in the financial services market, 

are exempt from Federal and most State taxes because they are member-owned, 

democratically operated, not-for-profit organizations generally managed by volunteer 

boards of directors and because they have the specific mission of meeting the credit 

and savings needs of consumers, especially persons of modest means.’’ 

That statement remains true today, the same as it did seven years ago. 

More recently, and as a part of that legislation, the 2001 Treasury Department 

study comparing credit unions with other depository institutions noted that credit 

unions 


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‘‘are clearly distinguishable from—other depository institutions in their structure 

and operational characteristics. . . . They are member-owned cooperatives, with 

each member having one vote regardless of the amount of a member’s deposits. 

Moreover, they do not issue capital stock, rather they are non-profit entities that 

build capital by retained earnings. Finally, credit unions may serve only an 

identifiable group of customers with a common bond (e.g., the employees of a specific 

firm, the members of a certain organization, or the members of a specific community). (Emphasis added).’’ 

The federal income tax exemption for credit unions was supported by then candidate and now President George W. Bush in 2000, when he stated ‘‘. . . as part 

of my overall commitment to lower taxes and provide more opportunities for working Americans, I support continuing the tax-exempt status of credit unions.’’ During 

the 2004 campaign, President Bush reiterated that position, noting ‘‘I support 

strongly the tax-exempt status of credit unions and will continue to highlight the 

important contributions that credit unions make to our financial system.’’ Treasury 

Secretary John Snow recently told a credit union audience ‘‘We oppose this talk of 

taxation of you and your industry . . . it’s a truism I think in economics, you always 

get less of anything you tax. Well, we don’t want to get less of what you do.’’ Reflecting the bipartisan nature of this issue, 2004 Democratic presidential nominee John 

Kerry wrote to NAFCU that ‘‘I want you to know that I will continue to support 

America’s credit unions and oppose any efforts to change the existing tax-exempt 

status of credit unions.’’ 

Historical Reasons for the Credit Union Tax Exemption 

The 16th Amendment, which established the basis for a federal income tax, was 

ratified in 1913; at that point state-chartered credit unions had already been operating for four years. The federal income tax status of credit unions, however, remained unclear until 1917, when the Secretary of the Treasury asked the Attorney 

General for a legal opinion on the tax liability of state-chartered credit unions operating in Massachusetts. The Attorney General rendered an opinion that credit 

unions were exempt from federal income taxes. 

In 1934, Congress passed the Federal Credit Union Act (FCUA), which created the 

federal credit union charter. The FCUA did not explicitly exempt federal credit 

unions from paying income tax. In 1935, however, the Commissioner of the Internal 

Revenue Service (IRS) ruled federal credit unions were exempt from paying federal 

income taxes. A 1937 amendment to the FCUA explicitly granted a federal income 

tax exemption for federal credit unions (12 U.S.C. § 1768 (2000)). As set forth in the 

2001 Treasury Department study, ‘‘two reasons were given . . . (1) that taxing credit unions on their shares, much as banks are taxed on their capital shares, ‘places 

a disproportionate or excessive burden on credit unions’ because their shares function as deposits and (2) that ‘credit unions are mutual cooperative organizations operated entirely by and for their members . . . ’ ’’ 

While the credit union community has continued to grow and evolve in the changing financial marketplace, the core justifications for which Congress granted federal 

credit unions a tax exemption have not changed. Credit unions still operate as notfor-profit financial cooperatives, according each member an equal vote in credit 

union operations. 

Bankers’ Myths vs. the Credit Union Reality 

Some critics of credit unions would have you believe that credit unions pay no 

taxes at all. Credit unions, however, still pay many taxes and fees, among them payroll and property taxes, but Congress has determined that federal income taxation 

of member-owned shares in a credit union would put a ‘‘disproportionate and excessive’’ burden on credit unions. It is also important to note that share dividends paid 

to credit union members are taxed at the membership level. 

These same critics would have you believe that credit unions are today no different than banks. The defining characteristics of a credit union, no matter what 

the size, however, remains the same today as they did in 1937: credit unions are 

not-for profit cooperatives that serve defined fields of membership, generally have 

volunteer boards of directors and cannot issue capital stock. Credit unions are restricted in where they can invest their members’ deposits and are subject to stringent capital requirements. A credit union’s shareholders are its members (and each 

member has one vote, regardless of the amount on deposit), while a bank has stockholders. 

While credit unions have grown, like all financial institutions over the years, the 

credit union community remains quite small when compared to the size of the banking community. federally insured credit unions had $647 billion in assets as of December 31, 2004, while FDIC-insured institutions held over $10.1 trillion in assets. 


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Last year Federal Deposit Insurance Corporation (FDIC)-insured institutions grew 

by an amount exceeding the total assets of all credit unions combined. 

Navy Federal Credit Union, the world’s largest with just over $22.9 billion in assets, is dwarfed by the nation’s largest bank with over $967 billion in assets. Furthermore, several of the nation’s largest banks have total assets greater than the 

entire credit union industry. We would also note that in December of 1980 the credit 

union share of total financial assets was 1.4 percent. According to Federal Reserve 

Board statistics, 24 years later, as of December 31, 2004, credit unions’ share of financial assets was still only 1.4 percent. Banks, on the other hand, accounted for 

18.7 percent of household assets as of December 31, 2004. 

Finally, while banks continue to attack the credit union federal income tax exemption, the number of banks that pay no corporate federal income tax continues to rise 

through the increased number of banks organized as Subchapter S corporations and 

through the utilization of other tax avoidance measures. According to NAFCU’s 

analysis of FDIC call report data, as of December 31, 2004, nearly 24% of all FDICinsured institutions paid no federal corporate income tax as Subchapter S corporations. These 2,139 FDIC insured institutions not only account for nearly 24% of all 

FDIC-insured institutions; they collectively hold over $322.5 billion in total assets, 

or just under 50% of the total assets of all federally-insured credit unions combined. 

Of these 2,139 FDIC-insured institutions that paid no corporate federal income tax, 

1,077 of them (ranging in size up to $9.5 billion) paid no income tax of any kind. 

Limitations on Credit Union Capital 

Credit unions support sound economic policy and goals. At the same time, credit 

unions must adapt to changing membership needs. Credit unions must also create 

sufficient return on members’ deposits to establish sufficient reserves. Unlike other 

financial organizations, credit unions have no stockholders and no access to the capital markets. Credit union reserves, therefore, serve several needs. 

• They are a source of funds for assuring that credit unions meet the statutory 

requirements for safety and soundness. 

• They allow credit unions to keep pace with modern-day financial practices. 

• They are the only source of capital, which allows credit unions to offer a wide 

array of financial services to their members. 

Furthermore, some critics argue that credit unions serve some who are not of 

modest means. While it is true that the average income of a credit union member 

has grown since the Federal Credit Union Act was enacted in 1934, a 2004 Filene 

Research Institute study entitled ‘‘Who Uses Credit Unions’’ found that the average 

household income of those who hold accounts solely at a credit union was less than 

$43,000, while the average household income for those who solely hold accounts at 

a bank was almost $77,000. 

Additionally, because credit unions can only raise capital from the deposits of 

their members, the cooperative nature of the credit union means that the deposits 

of the entire membership allows the credit union to have the money to make loans 

and provide services to those who may not have significant deposits. 

The Credit Union Income Tax Exemption Benefits Everyone 

Although banks claim there is ‘‘competition’’ from credit unions, banks continue 

to acquire record profits. An article in the January 31, 2005 issue of the American 

Banker newspaper entitled ‘‘Feeling Heat from Deposit Competition,’’ reported that 

‘‘Zions Bancorp [of Salt Lake City, Utah] was one of the many large regional banks 

that while making record profits for the 4th quarter of 2004 and for the calendar 

year, gave in to deposit pricing pressure in the fourth quarter [of 2004].’’ The article 

continued: ‘‘Zions said pressure from other banks and specifically credit unions in 

Utah prompted it to raise rates on money market accounts by 20 basis points late 

in the fourth quarter.’’ 

A September 2004 report and analysis by Robert M. Feinberg, a professor of Economics at American University, entitled ‘‘An Analysis of the Benefits of Credit 

Unions to Bank Loan Customers,’’ found that ‘‘a substantial credit union presence 

in local consumer lending markets has a significant impact on U.S. bank loan customers, saving them at least $1.73 billion per year in interest payments.’’ A January 

2005 study by Robert J. Tokle, a professor of Economics at Idaho State University, 

entitled ‘‘An Estimate of the Influence of Credit Unions on Bank CD and Money 

Market Deposits in the U.S.,’’ estimated that bank customers benefit to the tune of 

$2.0 to $2.5 billion annually just in interest on deposits due to the competitive presence of credit unions. The credit union federal income tax exemption, therefore, does 

not benefit solely credit unions and their members, but each and every American 

who uses a federally insured depository institution. 


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Consumer advocates have also recognized and supported the federal income tax 

exemption for credit unions. In the fall of 2003 the Consumer Federation of America 

(CFA) examined the federal income tax status of credit unions and reaffirmed these 

points in a study entitled ‘‘Credit Unions in a 21st Century Financial Marketplace.’’ 

In the study, CFA concluded, among other things: 

• The benefits that credit unions deliver to the public far exceed their costs, as 

measured by the tax exemption, through lower priced services and higher interest rates; and, 

• The value of tax breaks enjoyed by banks is ‘‘far greater, in absolute and relative terms, than the value of the credit union tax exemption.’’ 

The Loss of the Federal Tax Exemption Would Raise Safety and Soundness 

Concerns, Adversely Impact Member Rates and Fees, as well as Increase Conversions to Banks 

Federally insured credit unions must build their capital reserves through retained 

earnings and all are prohibited from accessing the open capital markets by law. As 

noted by former NCUA Chairman Dennis Dollar in a letter to The Honorable Sheryl 

Allen (a member of the Utah State House of Representatives) regarding potential 

safety and soundness implications from the taxation of credit unions in that state: 

‘‘it is certain that any resulting net worth considerations that might arise (from taxation) could indeed become a significant issue . . . [as a result of] credit unions having their retained earnings negatively impacted [by taxation].’’ 

Any taxes imposed on credit unions would, because of their structure, most likely 

also adversely impact members’ savings rates, borrowing rates and fees—creating 

a tax increase on America’s 87 million credit union members. In addition, credit 

unions’ boards and management would be driven to make decisions in a manner 

similar to banks, with the end result being a decision-making process driven by tax 

considerations or other issues rather than what is in the best interest of members. 

As a result, a very unfortunate consequence could be a shift in orientation imposing 

a broader economic cost, as noted in the Congressional Budget Office’s July 2005 

Background Paper, ‘‘Taxing the Untaxed Business Sector.’’ 

Finally, credit union boards would also have to carefully evaluate alternative business models. Today federally insured credit unions are more heavily regulated than 

any other financial depository institution, with restrictions on capital, who they can 

serve, investments and—in the case of the federal credit unions—a usury ceiling of 

15%. (Federally insured credit union member business lending is also more restricted than that of either banks or thrifts.) Over the past 9 years, 29 credit unions 

have converted to mutual thrifts and 18 of those have taken the following stop of 

becoming stock-held institutions. Most recently, two credit unions in Texas, Omni 

Credit Union with $1.1 billion in assets and Community Credit Union with $1.4 billion in assets converted to mutuals. A likely consequence on taxation would be an 

increase in such conversions. Such conversions could lead to job losses of credit 

union employees. 

Credit Unions Pay Their Own Way 

The deposit insurance of federally insured credit unions is self-funded through a 

cooperative system that has never cost the American taxpayer one dime. It was 

started with money from credit unions, and pursuant to the Deficit Reduction Act 

of 1984, all credit unions with federal insurance deposited in the National Credit 

Union Share Insurance Fund (NCUSIF) an amount equal to 1 percent of their insured shares (12 U.S.C. 1782) to recapitalize the fund (a move that also helped to 

reduce the federal deficit). Credit unions also pay the full administrative costs of 

their federal regulatory agency, the National Credit Union Administration (NCUA). 

Fees levied on credit unions cover the entire cost of NCUA’s expenses for chartering, 

supervising and examining credit unions, and for administrative overhead. With today’s federal budget expenditures approaching $2.48 trillion, credit union members 

can be proud that the taxpayers are not charged for NCUA’s operations—the cost 

of which will be an estimated $148 million in FY 2005. 

Credit Unions Service to their Field of Membership 

Federal credit unions continue to actively reach out to low- and moderate-income 

borrowers. As a result of the low-income designation or adding of underserved areas, 

federal credit unions are striving to provide greater access to low- and moderateincome individuals for much needed financial services. In addition, federal credit 

unions engage in partnerships with consumer organizations and participate in various government programs in their efforts to enhance their services to those in financial need. 


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1 A ‘‘low-income credit union’’ is a credit union in which the majority of its members, or the 

majority of residents in the community the credit union serves, makes less than 80 percent of 

the average for all wage earners as established by the Bureau of Labor Statistics or have an 

annual household income that falls at or below 80 percent of the median household income for 

the nation as established by the Census Bureau. 12 C.F.R. φφ 701.1, 701.34. 

Some federal credit unions are designated specifically as low-income credit 

unions; 1 they predominately serve low-income members, and the number of federal 

credit unions with this designation is increasing (see Chart 1). 


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2 An underserved area is a local community, neighborhood or rural district that is an ‘‘investment area’’ as defined in section 103(16) of the Community Development Banking and Financial 

Institutions Act of 1994 (12 USC § 4703(16)). 12 USC § 1759(c)(2). Examples of areas that qualify 

as investment areas include: an area where at least 20 percent of the population is living in 

poverty; an area where the unemployment rate is at least 1.5 times the national average; or 

an area meeting the criteria for economic distress as established by the Community Development Financial Institutions Fund (CDFI) of the U.S. Department of Treasury. 

Addition of Underserved Areas 

Credit unions continue to add underserved communities to their fields of membership.2 All types of federal credit unions have added underserved areas, with the 

greatest participation coming from multiple-common-bond credit unions, followed by 

single-sponsor credit unions and then community credit unions. The number of 

areas added this year is expected to reach 200 (see Chart 2 previous page), a slightly slower pace than during 2004. 


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Despite the slight decline in the pace of adding underserved areas, the number 

of potential members in underserved areas continues to grow (see Chart 3). As of 

September 2005, the potential number of members in underserved areas added to 

the Fields of Membership (FOM) of FCUs was 21.6 million. By the end of 2005, 

FCUs are projected to add to their FOMs underserved areas with approximately 

29.0 million potential members. This figure is slightly higher than the 2004 figure 

of 27.4 million. 


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Finally, FCUs with underserved areas as part of their FOMs have achieved greater loan growth than the FCU community as a whole (see Chart 4), reflecting the 

extent to which FCUs have taken advantage of the opportunity to serve their members in these underserved areas. 


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Mortgage Lending to Low and Moderate-Income Members 

Based on the most recent Home Mortgage Disclosure Act (HMDA) data, credit 

unions tend to make smaller mortgage loans than other financial institutions and 

have a higher percentage of mortgage loans to low- and moderate-income borrowers. 

Among all mortgage loans approved in 2004 for 1–4 family home purchases, the average loan size by banks was over 50 percent larger than the average loan size by 

credit unions, and the average loan size by thrifts was almost 100 percent larger 

than credit unions. In addition, the percentage of mortgage loans under the conforming limit of $333,700 is higher among credit unions when compared to other 

financial institutions (see Chart 5). Also, the percentage of credit union mortgage 

borrowers with applicant income of $40,000 or less is higher among credit unions 

(see Chart 6). 


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Credit union approval rates also exceed that of banks and thrifts (see Table 1 next 

page). In this regard, the loan approval rate, rather than the proportion of total 

loans granted to low- and moderate-income applicants, is the best indicator of credit 

unions providing service to such applicants, because the loan approval rate does not 

depend on field of membership type, or the geographical area served. 

In 2004, the HMDA data collected, for the first time, included information on the 

interest rate charged on mortgage loans. The information was collected on the interest rate spread between the mortgage loan annual percentage rate (APR) and an 

applicable Treasury security yield. If the difference between the APR and the Treasury yield were less than three percentage points for a first-lien loan and less than 

five percentage points for a subordinated-lien loan, there was no reporting requirement. Credit unions had a significantly smaller percentage of loans mandating reporting (see Table 2) than either banks or thrifts, not only with respect to all mortgage approvals, but also with respect to those of household incomes less than 

$40,000 and those granted to minority applicants. 

Table 1—Mortgage Loan Approval Rate* 

1998 

All Applicants White Applicants Minority Applicants 

Household Income Household Income Household Income 

Less than 

$40,000 

$40,000 or 

More 

Less than 

$40,000 

$40,000 or 

More 

Less than 

$40,000 

$40,000 or 

More 

Credit Unions 85% 93% 88% 94% 72% 85% 

Banks 71% 88% 75% 89% 57% 77% 

Thrifts 69% 89% 72% 90% 60% 82% 

2001 

Credit Unions 84% 94% 87% 95% 70% 86% 


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Table 1—Mortgage Loan Approval Rate*—Continued 

1998 

All Applicants White Applicants Minority Applicants 

Household Income Household Income Household Income 

Less than 

$40,000 

$40,000 or More Less than 

$40,000 

$40,000 or More Less than 

$40,000 

$40,000 or More 

Banks 70% 87% 74% 89% 60% 78% 

Thrifts 77% 89% 80% 90% 67% 82% 

2004 

Credit Unions 81% 92% 84% 93% 66% 84% 

Banks 70% 84% 73% 85% 59% 76% 

Thrifts 71% 82% 74% 84% 59% 77% 

Source: Federal Financial Institutions Examination Council HMDA Data 

*Loans originated plus loans approved but not accepted as a percent of all loan applications. Minority applicants include those who identified themselves as Native American, Asian/Pacific, Black or Hispanic 

In conclusion, today, there are more low-income designated credit unions, and 

more underserved areas are being added every year. When compared to banks and 

thrifts, credit unions approve real estate loans that are smaller in size, approve a 

greater percentage of conforming real estate loans, have a greater percentage of real 

estate borrowers with less than $40,000 income, and grant fewer real estate loans 

charging three percentage points or more above the Treasury benchmark. 

Table 2—2004 Approved 1–4 Family Purchase Loans 

Percentage of Approvals with Rate Spreads**>=3% 

Percentage Reporting 

Above 3 Percent Spread 

All Applicants 

(with race data) 

White Approvals Minority Approvals 

Household Income 

Household Income Household Income 

Less than 

$40,000 

$40,000 or More 

Less than 

$40,000 

$40,000 or More Less than 

$40,000 

$40,000 or More 

Credit Unions 4.0% 2.7% 3.9% 2.7% 5.0% 3.0% 

Banks 10.5% 7.2% 9.5% 6.4% 16.8% 12.5% 

Thrifts 7.8% 5.1% 7.3% 4.7% 11.1% 7.6% 

Source: Federal Financial Institutions Examination Council HMDA Data 

** Approvals equal loans originated plus loans approved but not accepted. Rate spread is the difference between the annual percentage rate (APR) of the loan and the applicable Treasury yield of a comparable period 

of maturity. The rate spread is reported only if it is equal to or greater than 3 percentage points for first-lien 

loans and 5 percentage points for subordinated-lien loans. Minority approvals include those who identified 

themselves as Native American, Asian/Pacific, Black or Hispanic. 

Taxation of Credit Unions Would Harm America’s Consumers 

If credit unions were taxed, there are many possible results, over time, for credit 

union members. Some of the results include: 

• Credit Unions Would Lose their Identity: By necessity, credit unions would 

become more driven to increase profits in order to pay taxes and customer service—one of the hallmarks of the credit union philosophy—would likely suffer. 

• Rates and Fees: Monies paid in taxes would adversely impact saving rates, 

borrowing rates, and fees. 

• Capital: Further restraint on the ability to raise capital, potentially impacting 

safety and soundness. 

• Erosion of the Volunteer Base: As credit unions become ‘‘more like banks,’’ 

the self-help characteristic of credit unions and the community as a whole 

would become less distinct. 

• Conversion to Other Business Models: Given the significant regulatory burden that credit unions already carry, there is a strong likelihood that the rate 

of conversions to mutual thrifts would increase, this could result in a loss of 

jobs for credit union employees. 


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Tax Status of Subchapter S Banks 

Today, the banking trade associations have attacked the credit union tax exemption as a remnant of the past, an unfair advantage that is undeserved despite credit 

unions’ not-for-profit, cooperative structure. NAFCU disagrees with these sentiments. The bank attacks on the credit union tax exemption ring hollow and hypocritical in light of the growing number of Subchapter S banks. Like credit unions, 

Subchapter S banks do not pay corporate income tax. 

Under a provision in the tax code implemented in 1996, banks that qualify as 

Subchapter S corporations are exempt from paying corporate income tax. In 1996, 

Congress included a provision in the Small Business Job Protection Act (P.L. 104– 

188) that allows banks that do not use the reserve method of accounting for bad 

debt to qualify as small business corporations and therefore, qualify as Subchapter 

S corporations. In Subchapter S corporations, the tax at the corporate level is removed, and only the shareholders pay an income tax. Previously, banks were not 

allowed to qualify as Subchapter S corporations because banks already enjoyed a 

substantial tax advantage in the method in which they were allowed to account for 

bad debt. 

Since passage of Small Business Protection Act, the number of Subchapter S 

banks has steadily increased. In 1997, there were 604 Subchapter S banks. Today, 

there are 2,139 Subchapter S banks with total assets of $322,461,619,000. The largest Subchapter S bank is Emigrant Savings Bank, a thrift, with assets of 

$10,267,659,000. 

Critics of the credit union community argue that large credit unions have outgrown the historical justification for the tax exemption, ignoring the fact that it is 

the structure of the credit union is an important justification for the tax exemption. 

Few, if any, critics would argue that all credit unions should be subject to taxation. 

Instead, opponents try to distinguish between large credit unions—which they argue 

should pay taxes—and small institutions with limited assets and basic services. 

Subchapter S corporations, however, enjoy the exemption from corporate level income taxes without any restraints, real or proposed, on their asset size. Currently, 

there are four main requirements to qualify as a Subchapter S bank: 

• The total number of shareholders cannot exceed 100; 

• Second, shareholders must be individuals or other certain trusts; 

• Third, the corporation can issue only one type of stock and; 

• Fourth, the bank may not use the reserve method of accounting for bad debts. 

As the requirements make clear, banks may qualify as Subchapter S corporations, 

and reap the tax benefits, regardless of their asset size, or the services they provide. 

It would be inequitable to impose an income tax on not-for-profit, cooperative credit 

unions based on asset size, while for-profit Subchapter S banks—operating with 

fewer regulatory restrictions—remain untaxed regardless of their size or the sophistication of the services they provide. 

Conclusion 

In summary, the structure, philosophy and guiding principles for credit unions, 

large and small, remains the same today as it was in 1937; i.e., they continue to 

be member-owned, democratically-controlled, not-for-profit cooperative organizations 

managed by volunteer boards of directors with the mission of meeting the credit and 

savings needs of consumers, especially persons of modest means. Thus, we believe 

there is more than ample justification for continuing the federal income tax exemption for all credit unions, regardless of size, charter type, field of membership or 

services offered. 

f 

Chairman THOMAS. Well, thank you, Admiral. Ms. May? 

STATEMENT OF HARRIET MAY, PRESIDENT AND CHIEF EXECUTIVE OFFICER, GREATER EL PASO’S CREDIT UNION, EL 

PASO, TEXAS, ON BEHALF OF THE CREDIT UNION NATIONAL 

ASSOCIATION 

Ms. MAY. Thank you. Good afternoon. 

Chairman THOMAS. Push the button. 

Ms. MAY. Got it. I know I always have to adjust this. Thank you 

for this opportunity, Chairman Thomas, to speak before the ComVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00097 Fmt 6633 Sfmt 6602 E:\HR\OC\26372.XXX 26372

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mittee. Thank you, Committee Members, for being here. I am Harriet May, President and CEO of GECU of El Paso, Texas, and I am 

testifying on behalf of the Credit Union National Association. The 

GECU, formerly known as Government Employees Credit Union, 

has served the families of El Paso County since 1932, when, at that 

time, 11 men pulled $5 a piece to serve their fellow civil service 

employees. Today, we serve the needs of over 247,000 members, 

with assets of over $1 billion. El Paso’s population is 82 percent 

Hispanic, with a median household income of just under $30,000. 

Nearly 25 percent of families live below the poverty level. Just over 

43 percent of our members have household incomes of less than 

$29,000. The majority of our members are low-income, so our dayto-day products and services, not just special products, must be tailored to meet their unique needs. 

So, Mr. Chairman, I confess GECU is one of those big, bad billion 

dollar credit unions that the bankers claim have morphed into 

something they were not intended to be; except, quite honestly, 

they are wrong. They are wrong because GECU is a relatively large 

credit union, by credit union standards, but it is important to understand it operates under the same philosophy, the same function, 

and is organized in the same structural make up as occurred when 

it was set up in 1932 as do other credit unions. It is this fact that 

justifies maintaining the tax-exempt status of credit unions. My 

written testimony addresses the issues laid out by the Committee 

for review, making a strong case that credit unions earn their taxexemption each and every day. Let’s be clear from the start. The 

original reason for the credit union tax-exemption was based on the 

positive nature of credit unions. 

Since 1917, the tax-exemption has been reaffirmed a number of 

times, most recently with strong statements in support from both 

President Bush and Treasury Secretary Snow. Contrary to rhetoric, 

the asset size of credit unions has never been the basis for considering the imposition of Federal income taxation. Additionally, 

whether or not credit unions make business loans has no connection to tax-exemption. Since their earliest days, credit unions have 

provided business loans to their members. In fact, the first Federal 

statute limiting member business loans was enacted in 1998. Recently, both the U.S. Treasury and congressional studies have 

found that credit unions are indeed fulfilling their purpose. Studies 

portray credit unions as robust institutions with a specialized 

structure serving identifiable groups of members. Meanwhile, in 

1998, Congress recognized that there are five characteristics that 

distinguish credit unions: member ownership, net worth created by 

retained earnings, dependence on volunteers, and not-for-profit 

basis of operations; and foremost, service only to its members. 

The findings concluded that credit unions are exempt from taxation because of these characteristics and because they had the 

specified mission of meeting the credit and saving needs of consumers, especially, but not only, persons of modest means. Even 

though taxing credit unions might result in $1.5 billion in annual 

tax revenues, as described in my written statement, consumers at 

credit unions and banks benefit approximately $10.6 billion a year 

in the form of better rates on loans, fees, and savings nearly because credit unions exist. As member-owned institutions, credit 


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unions endeavor to offer products and services that their members 

need and want. As technology results in more and better offerings, 

credit unions must respond to their members’ needs. 

However, none of the core characteristics of credit unions or rationales for the tax-exemption has anything to do with credit union 

size, field of membership restrictions, the range of services offered, 

or the extent to which credit unions might not compete with financial institutions. Instead, they have everything to do with the cooperative structure of credit unions and their mission of providing affordable services to American households. It is clear that credit 

unions play an important role in our economy. Credit unions serve 

people of all walks of life, at all economic levels. Credit unions provide the public with a not-for-profit cooperative alternative to the 

for-profit sector. Consumers benefit by having access to lower cost 

services that might not otherwise be available to them. The tax-exempt status of credit unions is the glue that holds credit unions 

and their not-for-profit approach cooperative financing together. If 

the tax-exemption were removed, if 87 million Americans were 

forced to pay additional taxes solely because of their ownership in 

the credit union, it would lead to the end of a movement as we 

know. Credit unions would become banks, and consumers would 

pay a high price. Thank you, Mr. Chairman. I would be glad to answer any questions. 

[The prepared statement of Ms. May follows:] 

Statement of Harriet May, President and Chief Executive Officer, Greater 

El Paso’s Credit Union, El Paso, Texas, on behalf of the Credit Union National Association 

EXECUTIVE SUMMARY 

INTRODUCTION (Pages 1–4) 

Although GECU is a relatively large credit union (by credit union standards), and 

provides a wide range of services to meet the particular and unique needs of its 

membership, it is important to understand that it operates under the same philosophy, serves the same function and is organized under the same structural makeup as all other credit unions. It is this fact, repeated by credit unions of all types 

and sizes across the nation who remain true to their historic purpose and continue 

to provide the public need, that justifies maintaining the tax-exempt status of credit 

unions. 

This testimony addresses the issues laid out by the Committee for review, including making a strong case that credit unions continue to meet the needs of their 

members, as envisioned when credit unions were created in the last century. The 

testimony also refutes many false and misleading statements of the banking industry in its effort to eliminate credit unions as a choice for America’s consumers. 

HISTORY OF THE TAX-EXEMPT STATUS (Pages 4–12) 

The original reason for the credit union tax exemption was based on the cooperative nature of credit unions. Today, credit unions continue to exist as financial cooperatives, and their not-for-profit, tax-exempt status helps to assure that credit 

unions fulfill their role in the U.S. financial sector. 

In fact, this credit union role, as a basis of the tax exemption, dates at least from 

as early as 1917 in Massachusetts. Since then, the tax exemption has been reaffirmed a number of times, including in 1935, 1936, 1937, 1951 and, most recently, 

in 1998. The 1951 reaffirmation is significant because in that year Congress repealed the tax exemption for mutual savings banks, specifically because these institutions had strayed from their commitment to mutuality. 

However, in 1969, Congress extended the unrelated business income tax (UBIT) 

requirements of the Internal Revenue Code to cover a broad array of otherwise taxexempt organizations. State chartered credit unions potentially became subject to 

UBIT under this action. (Federally chartered credit unions (as federal instrumentalities) were specifically exempt from UBIT.) From the start, this requirement has 

raised some difficult issues that have yet to be addressed satisfactorily by the IRS, 


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particularly since IRS has never offered its own articulation of the purpose of statechartered credit unions’ federal tax exemption (which we believe is to enable these 

credit unions to function as not-for-profit cooperatives offering financial services that 

promote thrift). CUNA continues to work with the Service to clarify this situation. 

Contrary to banker rhetoric, credit unions were established to serve the needs of 

working Americans, allowing them to pool their resources in self-help financial organizations. This view is rooted in the legislative history of the development of credit 

unions. In fact, in 1934, a Senate report noted that there was a pressing need ‘‘to 

eliminate the loss of buying power which now results from the fact that the masses 

of the people are obliged to look to high-rate money lenders in time of credit necessity.’’ Credit unions were formed to serve these ‘‘masses,’’ and are proud to have 87 

million members today. 

Never has the asset size of credit unions (which is often a reflection of the number 

of members a credit union serves) been the basis for considering the imposition of 

federal income taxation. 

Additionally, while credit unions are specifically chartered to serve the needs of 

individual members, since their earliest days credit unions have provided business 

loans to those members. In fact, the first federal statute limiting federal credit 

union business lending was enacted in 1998 with the passage of the Credit Union 

Membership Access Act (CUMAA). 

Finally, credit union earnings are the only pot of money that would be taxed at 

the end of the year. However, these earnings also stand as a cushion to absorb any 

losses a credit union might incur through changing economic conditions. Taxation 

would erode what credit unions could build as this cushion and, depending on economic conditions, could even undermine maintaining the net worth required by statute. This cushion not only protects the credit union itself from future challenges, 

but also protects the National Credit Union Share Insurance Fund. 

SERVING THEIR INTENDED GOALS (Pages 12–20) 

Recent U.S. Treasury and congressional studies have found that credit unions are, 

indeed, fulfilling their purpose. The U.S. Department of the Treasury has conducted 

several detailed studies of credit unions in the last eight years. These objective studies, which were requested by Congress, are exhaustive and present detailed analyses of the credit union system. The studies portray credit unions generally as robust institutions with a specialized structure serving identifiable groups of members. 

Meanwhile, in 1998, the Congress wrote in the CUMAA ‘‘findings’’ that there are 

five characteristics that distinguish credit unions: member ownership, net worth created by retaining earnings, dependence on volunteers, not-for-profit basis of operations, and service only to members. 

The CUMAA congressional findings also concluded that credit unions are exempt 

from taxation because of these characteristics and because credit unions have ‘‘the 

specified 

mission of meeting the credit and savings needs of consumers, especially (but not 

only) (parenthesis added) persons of modest means.’’ 

Credit unions put these characteristics to work every day by serving all of their 

members, including those of modest means. In fact, recent studies have shown that 

households using a bank and not a credit union have higher incomes and wealth 

than do households using only a credit union. Other studies, specifically of data collected under the Home Mortgage Disclosure Act (HMDA), reveal that credit unions 

are taking advantage of greater opportunities to serve low- to moderate-income 

members (something they only attained the ability to do broadly within the last 10 

years) and disproportionately serve LMI borrowers. 

Finally, credit unions of all types remain restricted in who can join—either by 

community, occupation, association or some other ‘‘common bond,’’ despite rhetoric 

to the contrary by America’s bankers. 

USE OF THE TAX BENEFIT (Pages 21–23) 

Credit unions employ the tax benefit by passing it through to their members, primarily in lower rates on loans, lower fees (or none at all) and higher returns on savings. The nation’s 87 million credit union members benefit by $6.3 billion a year as 

a result of paying fewer and lower fees and lower loan rates and earning higher 

rates on deposits compared to banking institutions. This $6.3 billion is not retained 

by just a few large stockholders. Instead it is distributed across all 87 million members based on their usage of the credit union. In fact, relatively more of the benefit 

accrues to lower income members than would be explained by their volume of business at the credit union because credit union pricing tends to be friendlier to lower 

balance accounts than at banks and alternative financial institutions. 


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Additionally, there are also significant financial benefits to consumers that are 

not members of credit unions. Recent studies have shown that bank customers benefit in the aggregate by $4.3 billion a year as a result of lower loan rates and higher 

deposit rates at banks as a result of the existence of credit unions. In total then, 

bank customers and credit union members benefit to the tune of at least $10.6 billion a year merely because credit unions exist. 

CHANGES IN THE INDUSTRY HAVE NOT COMPROMISED JUSTIFICATION 

OF RETAINING THE TAX EXEMPT STATUS (Pages 23–28) 

As member owned institutions, credit unions endeavor to offer products and services that their members need and want. And as technology results in more and better offerings, credit unions must respond to meet their members’ demands, so long 

as they are permissible by law and regulation. In fact, over the years the National 

Credit Union 

Administration, like the bank and thrift regulators, has on occasion amended its 

regulations to permit credit unions more flexibility to serve their members better. 

However, there is no question that while credit unions may offer products and 

services provided by banks and thrifts in response to their members’ needs, credit 

unions operate under serious constraints. As concluded by the Treasury in a recent 

report: 

Federal credit unions generally operate within the same legal framework as other 

federally insured depository institutions. Most differences between credit unions and 

other depository institutions derive from the structure of credit unions. Credit 

unions have fewer powers available to them than do banks and thrifts. 

Further, the relative size of a credit union, or the products and services it offers, 

does not affect its mission. Because of their size and efficiency, large credit unions 

are often more able to provide the benefits of the cooperative to members, such as 

lower loan rates and fees and higher dividend rates. Larger credit unions are also 

more able to offer special programs benefiting low- and moderate-income households. 

However, none of the core characteristics of credit unions or rationales for credit 

unions’ tax exemption has anything to do with credit union size, field of membership 

restrictions, the range of services offered, or the extent to which credit unions might 

not compete with other financial institutions. Instead, they have everything to do 

with the cooperative structure of credit unions and their mission of providing affordable services to American households, especially those of modest means. 

CONCLUSION (Page 29) 

It is clear that credit unions play a powerful role in our economy. Credit unions 

serve people of all walks of life at all economic levels. Credit unions provide the public with a not-for-profit, cooperative alternative to the for-profit sector. Consumers 

benefit by having access to lower cost services that might not otherwise be available 

to them, especially those of modest means. And the facts show that the banking industry, which is engaged in an effort to put credit unions out of business, continues 

to mislead Congress into thinking that their very existence is threatened because 

of credit unions and their tax status. But banks continue to earn record profits. 

Recent oil industry ads in the Washington Post illustrate this fact. The ads point 

out that in fact the banking industry recorded the highest profits of all U.S. industries during the second quarter of 2005—even more than the pharmaceutical industry. While the banking industry continues earning record profits, credit unions provide a nearly 7-to-1 return to consumers on the dollar, benefiting them by over $10 

billion dollars in yearly savings. 

Credit unions are an important part of the financial life of American consumers. 

And the tax-exempt status of credit unions is the glue that holds credit unions and 

their not-for-profit approach to cooperative financing together. If the tax exemption 

were removed—if 87 million Americans were forced to pay taxes solely because of 

their membership in a credit union—it would lead to the end of the movement that 

we know. Credit unions would become banks, and the consumers would pay dearly, 

not only in higher taxes, but in higher fees, less return on their savings and borrowings and the loss of a cooperatively owned, not-for-profit alternative in the financial services marketplace. 

Good morning, Mr. Chairman, Ranking Member Rangel, and members of the 

Committee. On behalf of America’s Credit Unions and their 87 million members, 

thank you for inviting me to testify today on ‘‘A Review of the Credit Union Tax 

Exemption.’’ I am Harriet May, President and CEO of GECU in El Paso, Texas. I 

am testifying on behalf of the Credit Union National Association (CUNA), of which 

I am a member of its Board of Directors. CUNA is the largest of the credit union 


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trade associations, representing over 90 percent of the nation’s approximately 9,000 

state and federally chartered credit unions. 

GECU (formerly know as Government Employees Credit Union) has served the 

families of El Paso (TX) County since 1932, when 11 men pooled $5 each to serve 

fellow postal workers. Over the years, the credit union’s reputation for providing 

caring, proactive service to its members has made it the largest locally owned financial institution in El Paso. Today, we serve the needs of over 247,000 members with 

just over $1 billion in assets. That equates to just over $4,000 per member, a rather 

low number that can be explained by El Paso’s demographic composition. 

El Paso’s population is 82% Hispanic with a median household income of just 

under $30,000. Nearly 25% of the families live below the poverty level. GECU’s 

membership demographics mirror that of the community. The credit union serves 

247,000 members—a third of every El Pasoan. Just over 43% of our members have 

household incomes of $29,000 or below. 

With these demographics, GECU has not developed ‘‘special’’ programs to reach 

the underserved or low income. Rather, we recognize that because the majority of 

our community and the members we serve are low-income, our day-to-day products 

and services must be tailored to meet their unique financial needs. 

We serve our members’ lending needs with non-traditional products and services: 

Consumer Loans 

• Ready Credit line of credit—low-balance line of credit for member emergencies 

and other small-dollar needs. Typical loans range from $200 to $800 with the 

average being about $500. 

• Small dollar loans—GECU continues to make loans to members to meet their 

needs even if the amount is only $200. This type of loan would not be considered extraordinary, but rather ‘‘normal’’ for our membership. It is not atypical 

to provide a loan for a member to purchase dentures or eyeglasses. For the year 

2004, GECU funded 1,329 small-dollar loans for $518,948, an average balance 

of only $390.48. As one member responded in a recent member satisfaction survey, ‘‘Doy gracias porque es el u ́nico banco que nos presta dinero en caso de 

emergencia con bajo intere ́s. Gracias por todo.’’ L. Ramirez. (‘‘I give thanks because you are the only ‘‘bank’’ that loans us money in emergencies with low interest. Thank you for everything.’’) 

• MasterCard First—designed particularly for those needing to rebuild their credit and for individuals desiring to establish credit 

• FamilyAccount MasterCard—GECU piloted this product for MasterCard. The 

card enables the cardholder to allocate spending limits for family members who 

in turn receive their own card and unique account number which they can use 

to make purchases up to their spending limit. Primarily designed for collegebound students in El Paso, the product serves another segment of our population—parents and other older relatives. With the Family Account MasterCard, 

the cardholder is able to provide financial assistance for his or her parents without stripping them of their independence. 

• Through July of this year, GECU has funded nearly $38 million in mortgage 

loans to El Paso families; 83% of all first lien mortgage loans have been made 

to Hispanics; 40% of those loans were to households with income less than 

$38,400. 

• Additionally, through July of this year, GECU has funded nearly $11 million 

in mortgage loans through Fannie Mae special programs, ‘‘Expanded Approval’’ 

and ‘‘My Community’’, both of which provide additional financing opportunities 

for low-income families who would not otherwise be eligible. 

• GECU has been very active in El Paso City Bond Money programs, providing 

members with down payment assistance and lower interest rates for homes purchased in targeted areas of town. The credit union won another $3 million in 

September of this year and as of October 21 there is already $1.3 million in the 

pipeline. The entire allotment would have already been claimed if there weren’t 

a current shortage of dwellings from which to choose in our community. 

• GECU is the predominant provider of vehicle loans in El Paso, having earned 

a reputation for lower interest rates and finding ways to put members in new 

vehicles without putting unnecessary burdens on their monthly obligations. 

Small Business Loans 

• In response to member requests, GECU began offering small business loans to 

our members two years ago. Based out of the One Stop Business Resource Center in El Paso, staff works with small businesses to provide loans for working 

capital, expansion and inventory. We work closely with Accion, the Hispanic 


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and Greater Chambers of Commerce, and other not-for-profit organizations 

dedicated to the success of small business in El Paso. 

Deposit Products 

• GECU offers Free Checking (no monthly service fee; no fee for excessive check 

writing). 

• We also offer ‘‘The No Excuses Savers Club’’. This product enables beginning 

savers to open a 12-month CD with just $50. The product earns the prevailing 

12-month CD rate and allows multiple deposits during the term of the CD (minimum $10). As of July, we have over 5,362 accounts totaling over $6 million 

with an average balance of $1,129—quite an accomplishment for our typical 

member, nearly all of which are of modest means. 

• We offer a Christmas Club Account that enables members to save for the holidays in a 9-month CD that they appreciate because the money is ‘‘off-limits’’ 

until it matures. This helps members develop savings discipline. 

• IRNet Vigo—GECU was the first credit union in Texas to offer this low-cost alternative for wiring of money, designed especially for credit unions, to foreign 

countries. Our members especially appreciate being able to send money to their 

families in Mexico for a fraction of the cost of other wire transfer services. 

Financial Education 

• GECU offers monthly financial education classes in English and Spanish 

through the El Paso Affordable Housing Credit Union Services Organization 

(CUSO). Participants learn the basics about credit and how to apply for a mortgage loan. The CUSO was formed in 2001 by 8 local credit unions to provide 

education to credit-challenged individuals with the goal of eventually preparing 

them for home-ownership. 

• The credit union also hosts quarterly seminars for first-time homebuyers hosted 

by our own mortgage loan officers. These seminars are offered in English and 

Spanish. 

• GECU’s Financial Counseling experts, full-time employees of GECU, educate 

members about developing realistic budgets and strategies for debt-free living. 

• Through year-end 2004, Financial Counselors served 637 members with $2.8 

million in the program. 

• GECU also partners with the YMCA with their Consumer Credit Counseling 

program; YMCA staff works out of one of GECU’s branches to serve families 

with credit counseling needs. 

• GECU works to begin the financial education process early and is active with 

local Partners in Education programs, Junior Achievement and the CTAC (Career Technology Advisory Committee) 

• GECU staff takes the message of financial education to the airwaves as well. 

Two of our senior managers are frequently asked to appear on a local morning 

Spanish-language talk show where they provide educational information about 

financial products and services to listeners. 

Being a locally-owned, locally-managed financial institution benefits the community in many ways. The credit union philosophy of ‘‘people helping people’’ is more 

than a notion, it is our commitment to GECU’s membership and it is evidenced by 

the credit union’s current loan to deposit ratio of over 98%. Nearly every dollar deposited by a GECU member has been loaned out to another GECU member; the 

money stays in El Paso and is put back to work for El Pasoans—their families and 

their businesses. 

Mr. Chairman, as the Committee conducts its important oversight function, I 

wanted to make sure I provided you with the backdrop for my credit union, which, 

although large by credit union standards, operates under the same philosophy, 

serves the same function, and is organized under the same structural make-up as 

all other credit unions. 

In that spirit, Mr. Chairman, I welcome the opportunity to assist the Committee 

in its review of the history and purpose of the credit union tax exemption. The fact 

is that the credit union tax exemption is one of the best investments Congress has 

ever made on behalf of the American consumer. Credit unions of all types and sizes 

remain true to their historic purpose and continue to provide the public need that 

justifies maintaining the tax-exempt status of credit unions. 

My testimony today will address the specific issues you laid out in the Committee 

Advisory notice. In addressing these issues, I will clearly review the history of why 

credit unions are tax exempt, as well as make the case that while the nation has 

undergone many changes in the century or so that credit unions have existed, the 

need for them continues today and credit unions continue to meet that need. I also 


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will refute the many false and misleading statements of the banking industry in its 

effort to eliminate credit unions as a choice for America’s consumers. 

HISTORY OF THE CREDIT UNION TAX-EXEMPT STATUS 

The Cooperative Structure of Credit Unions 

At the outset, it is important to establish that the original reason for the credit 

union tax exemption was based on the cooperative nature of credit unions. Credit 

unions today continue to exist as financial cooperatives, and their not-for-profit, taxexempt status helps to assure that credit unions fulfill their role in the U.S. financial sector. 

The Federal Credit Union Act defines a federal credit union as a cooperative association chartered ‘‘for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes,’’ language that has not 

changed since 1934. Cooperative banking was needed because consumers in the 

1930’s were not typically served by the commercial banking industry but rather by 

loan sharks. Senator Morris Sheppard, the key Senate proponent of credit union legislation in the 1930’s, said in his remarks when introducing the bill that would 

eventually become the Federal Credit Union Act of 1934: 

‘‘A credit union is a cooperative bank—supplying its members with (1) an excellent system for accumulating savings which enables them (2) with their own money 

and under their own management to care for their own short-term credit problems 

at normal interest rates with all the resultant earnings reverting to the members 

as dividends on their savings in the credit union and as surplus.’’ 

These words could just as accurately be said today about the nation’s 9,000 federal and state credit unions. 

The 1934 Senate report on the federal credit union bill stated: ‘‘Credit unions also 

have vast educational values. The fact that credit unions of working men and 

women, managed by fellow workers have come through the depression without failures, when banks have failed so notably, is a tribute to the worth of cooperative 

credit and indicates clearly the great potential value of rapid national credit union 

extension.’’ 

Credit unions continue to operate as democratically controlled mutual institutions, serving their members on a non-profit basis. Credit unions do not have separate groups of customers and stockholders with competing interests—obtaining reasonably priced financial services versus assuring good stock prices and returns. 

Rather than distributing net income among stockholders, most of a credit union’s 

income is returned to members in the form of lower loan rates and fees, or higher 

yields on savings (and credit union dividends paid to members are, of course, taxed). 

Some earnings are retained by the credit union to comply with statutorily mandated 

net worth requirements and as a cushion to anticipate future needs. 

So, in spite of revisionist attempts to rewrite history, since its inception, the credit 

union tax exemption has had nothing to do with the size of a credit union, field of 

membership restrictions, or the types of services a credit union offers. 

Chronology of Credit Unions’ Federal Tax-Exemption 

The first credit union law was passed by Massachusetts in 1909. Federal revenue 

laws in 1913 and 1916 contained exemptions for some mutual and cooperative entities, but did not mention these new state chartered ‘‘credit unions’’ by name. Therefore, in 1917 the U.S. Attorney General ruled that Massachusetts credit unions were 

exempt from federal income tax because: 

[O]n examination of the purpose and object of such associations, it appears that 

they are substantially identical with domestic building and loan associations or cooperative banks ‘organized and operated for mutual purpose and without profit’ [the 

Attorney General quoting from the 1916 statute]. It is to be presumed that the Congress intended that the general terms used in Section 11 should be construed as 

not to lead to injustice, oppression, or an absurd consequence. 

The 1917 Attorney General ruling served as the basis for the exemption of state 

chartered credit unions from federal income taxes until 1951. By 1934 there were 

over 2,000 credit unions operating in the United States, chartered by 35 states and 

the District of Columbia. 

The Federal Credit Union Act of 1934 allowed the states to tax federal credit 

unions only up to the maximum rates levied on similar domestic banking institutions. 

In June 1935, in response to an inquiry from the Farm Credit Administration, 

which regulated federal credit unions at that time, the Internal Revenue Commissioner ruled that federal credit unions would be granted exemption from federal income tax. 


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In 1936 legislation was introduced to prohibit state and local taxation of federal 

credit unions not based on real or tangible property, and to provide credit unions 

an exemption from federal taxation. The tax provision that passed in 1937 remains 

unchanged since that time. Section 122 of the Federal Credit Union Act (12 USC 

Section 1768) reads as follows: 

The Federal credit unions organized hereunder, their property, their franchises, 

capital, reserves, surpluses, and other funds, and their income shall be exempt from 

all taxation now or hereafter imposed by the United States or by any State, Territorial, or local taxing authority; except that any real property and any tangible personal property of such Federal credit unions shall be subject to Federal, State, Territorial, and local taxation to the same extent as other similar property is taxed— 

The arguments in support of the tax exemption were summed up in the 1937 

House Committee Report: 

Experience with Federal credit unions since the passage of the original [1934] act 

indicates that the taxation of these organizations in a manner similar to the taxation of domestic banks places a disproportionate and excessive burden on the credit 

unions. . .As Federal credit unions are mutual or cooperative organizations operated entirely by and for their members, it appears appropriate that local taxation 

should be levied on the members rather than on the organization itself. 

At the same time that Congress provided for the federal credit union tax exemption, it designated federal credit unions as fiscal agents of the United States, required to perform whatever services the Secretary of the Treasury required in connection with the collection of taxes and the lending and repayment of money to the 

U.S. government (Section 121 of the Federal Credit Union Act, 12 USC Section 

1767). When designated, federal credit unions can be depositories of public money, 

and some credit unions today hold federal tax and loan accounts, typically used by 

employers to deposit periodic payroll taxes due to the U.S. Treasury. This provision 

of the Federal Credit Union Act led to the formal designation of federal credit 

unions as instrumentalities of the United States government. This designation as 

a federal instrumentality is significant in determining which section of the Code 

governs federal credit unions’ tax-exemption and in exempting federal credit unions 

from the application of the unrelated business income provisions of the Code. 

Federal credit unions are exempt under Section 501(c)(1) of the Internal Revenue 

Code because they meet the three requirements of that subsection of the Code: They 

are chartered by Congress (through the authority granted to the National Credit 

Union Administration); they are federal instrumentalities; and the law they operate 

under (the Federal Credit Union Act) specifically grants an exemption. National 

banks are also federal instrumentalities, but they are for-profit institutions and 

Congress has not included in the National Bank Act a tax exemption for national 

banks. 

Mutual Thrifts’ Loss of Tax-Exemption 

In 1951, the tax treatment of mutual thrifts and credit unions diverged for a very 

good reason: mutual thrifts had strayed from their commitment to mutuality, 

whereas credit unions have remained true to that commitment. The Attorney General’s 1917 ruling had continued to provide the tax-exemption for state chartered 

credit unions until 1951. In 1951 Congress repealed the income tax exemption of 

mutual savings banks because they competed with taxed institutions and because 

they engaged in widespread proxy voting schemes to control boards. Voting is based 

on the amount a person has on deposit, not on the basis of one-member-one-vote 

as is the case with credit unions. This voting system allows a group to control the 

mutual thrift, and therefore to make business decisions for their own personal pecuniary rewards, not as a not-for-profit organization. The U.S. Treasury stated the following in its 2001 comprehensive report on credit unions: 

In 1951, however, Congress removed the thrift tax exemption because these institutions had evolved into commercial bank competitors, and had lost their mutuality, 

in the sense that the institutions’ borrowers and depositors were not necessarily the 

same individuals. 

Although deciding to eliminate the tax-exemption for other mutual financial institutions in 1951, Congress specifically retained the tax-exemption for state chartered 

credit unions by adding to the list of exempt organizations Section 501(c)(14)(A): 

‘‘Credit unions without capital stock organized and operated for mutual purposes 

and without profit.’’ While this Code provision does not specifically reference state 

chartered credit unions, federal credit unions were exempt from federal income tax 

since 1937 under Section 501(c)(1), so this subsection only applies to state chartered 

credit unions. 

No credit union issues stock, and therefore no credit union has stockholders. Credit unions have members, called shareholders because of the requirement to purchase 


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a share in the credit union as the indicia of membership and ownership. No one 

can borrow directly from the credit union without becoming a member. Credit 

unions can only build up capital (‘‘net worth’’) through earnings retained after covering expenses, including paying members for their savings through dividends. 

(Credit union dividends are treated by the Internal Revenue Service for reporting 

and taxing purposes as identical to interest paid by bank customers on their savings.) 

The Federal Credit Union Act assures that mutuality is maintained because the 

Act mandates the membership requirement and that each member of the federal 

credit union have one vote to elect the credit union’s unpaid board of directors, regardless of the amount of savings at the credit union. The standard federal credit 

union bylaws, issued by the National Credit Union Administration, dictate election 

procedures in conformance to the Act. In short, credit unions’ commitment to mutuality is firmly embedded in the laws governing them. 

When, in 1951, Congress determined that mutual savings banks had become competitors with taxed institutions, the thrifts actually accounted for a greater share of 

household savings deposits than banks did. They were indeed significant competitors with banks. Today, in comparison, credit unions represent only a tiny fraction 

of the combined deposits of credit unions and banking institutions. 

Unrelated Business Income Taxes 

Not all credit unions are exempt from all federal income taxes. In 1969 Congress 

extended the unrelated business income tax (UBIT) requirements of Sections 511– 

514 of the Internal Revenue Code to cover a broad array of otherwise tax-exempt 

organizations. State chartered credit unions potentially became subject to UBIT. 

Federal credit unions are not subject to UBIT because federal instrumentalities are 

specifically exempt from Sections 511–514. It is totally logical that federally chartered credit unions are exempt from UBIT because Congress establishes the powers 

of a federal credit union in the Federal Credit Union Act and has not authorized 

any activity that it believes is unrelated to the purpose of a credit union. Federal 

credit unions are not required by the IRS to file the Form 990 that other tax-exempt 

organizations are required to file. In response to the banking industry’s call for 990 

filings by all credit unions, we wrote to the Ways and Means Committee in July 

2004, explaining why such a filing is not required and not necessary for federal 

credit unions. State chartered credit unions do file 990 forms, either individually or 

as part of a group 990 form filed by their state regulator or trade association, as 

permitted by the Service. 

From the start, the application of UBIT to state-chartered credit unions raised 

some difficult issues that have yet to be addressed satisfactorily by the IRS. 

UBIT applies to a trade or business regularly carried on by a state-chartered credit union, where that trade or business is not substantially related to the purpose 

of the credit union’s tax exemption. We believe that the purpose of state-chartered 

credit unions’ federal tax exemption is to enable them to function as not-for-profit 

cooperatives offering financial services that promote thrift. However, the IRS has 

never offered its own articulation of the purpose of the exemption. Without that 

piece of the puzzle, it is very difficult for credit unions to know what products and 

services are unrelated to their tax—exempt purpose. 

To make matters worse, what little guidance the IRS has issued on this subject 

over the years has been sporadic, isolated, and contradictory. In the 1970s, for instance, the Service issued a small number of private letter rulings indicating that 

various insurance products were not subject to UBIT. In 1995, however, the IRS 

issued another private letter ruling that seems to contradict the earlier ones. Of 

course, even private letter rulings are of limited utility, as they are regarded as applying only to the organization to which the letter is addressed. Credit unions have 

been left wondering what to do. 

We have tried diligently to address the problem with the IRS. In 1997, CUNA and 

other credit union organizations formally wrote to the IRS, challenging the conclusion of the 1995 private letter ruling and requesting guidance applicable to all credit 

unions. 

The IRS has yet to respond to our 1997 request for guidance. Several years ago, 

the Service started to audit dozens of credit unions, questioning if they should be 

filing a Form 990–T, which is required for any tax-exempt organization with more 

than $1,000 of gross income from unrelated business activities. Numerous activities 

were cited by the field staff as being possibly subject to UBIT; the IRS field staff 

turned to the central IRS office for guidance. We have been discussing this issue 

with the Service for some time, and we understand that the IRS hopes to provide 

some guidance to its own staff next year. 


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UBIT is a complicated area, and we think it is unreasonable to expect any credit 

union to be filing 990–T forms until adequate, public guidance is issued. The IRS 

Exempt Organization division recently released a listing of its FY2006 plans, which 

implies that it has possible problems with some state chartered credit unions complying with the UBIT requirements. We are concerned that the IRS may now be 

planning to hold credit unions responsible for taxes that they could not have known 

they owed—and that the IRS has yet to articulate a coherent theory of what is and 

is not subject to UBIT. 

Recent Congressional Reaffirmation of Credit Unions’ Tax-Exempt Status 

In 1998, Congress overwhelmingly approved the Credit Union Membership Access 

Act, which reaffirmed the tax treatment of credit unions. CUMAA stated: 

The Congress finds the following: (4) Credit unions, unlike many other participants in the financial services market, are exempt from Federal and most State 

taxes because they are member-owned, democratically operated, not-for-profit organizations generally managed by volunteer boards of directors and because they have 

the specified mission of meeting the credit and savings needs of consumers, especially persons of modest means. 

Serving Working America 

The Federal Credit Union Act was enacted by Congress during the depths of the 

Great Depression. The law’s preamble said the purpose of the legislation was ‘‘to 

establish a Federal Credit Union System, to establish a further market for securities 

of the United States and to make more available to people of small means credit 

for provident purposes through a national system of cooperative credit, thereby helping to stabilize the credit structure of the United States.’’ 

That fleeting reference to ‘‘people of small means’’ was the only mention of that 

term in the entire statute. (Many state credit union laws do not mention this term 

at all.) Bankers cite these few cryptic words to say that credit unions were chartered 

to serve only people at the low end of the income scale. As the legislative history 

indicates, however, Congress created a national system of credit unions to address the credit and savings needs of working Americans, allowing them to 

pool their resources in self-help financial organizations. 

In 1934 basically there were rich people, served by the banks that survived in the 

1930’s, and everyone else who were at the mercy of loan sharks. As the 1934 Senate 

report on the federal credit union bill stated, there was a pressing need ‘‘to eliminate the loss of buying power which now results from the fact that the masses of 

the people are obliged to look to high-rate money lenders in time of credit necessity.’’ 

Credit unions were formed to serve these ‘‘masses,’’ and are proud to have 87 million members today. The commercial banking industry didn’t seem to decide until 

the 1960’s that it could make a profit off of the everyday financial needs of the typical American consumer. 

When he introduced his credit union bill in 1934, Senator Sheppard cited the success of the 2,200 state chartered credit unions: ‘‘While these credit unions—are managed by the working people and the farmers who compose them, they have come 

through 3 years of extreme depression with practically no failures, establishing the 

finest record ever established by any form of banking in times of similar stress. . . . 

This bill is offered as a substantial contribution to a better banking system for average city workers and farmers. It would greatly stimulate the spread of a form of 

cooperative banking, which has met every test of the depression successfully.’’ 

Senator Sheppard in his introductory remarks cited the success of state chartered 

credit unions composed of: postal workers; railroad workers; city employees; telephone workers; members of the National Grange; and the American Legion. Looking 

at the largest credit unions today, they are based on similar memberships composed 

of: America’s military services; federal, state and local government employees; airline transportation employees; utility company employees; and so forth. The common 

denominator of the credit union member of the 1930’s and the credit union member 

of the 21st century is he or she is part of working America. Morris Sheppard, 

Wright Patman and the other members of Congress who advocated in the 1930’s the 

development of a national credit union system would be very proud to see their 

handiwork today. 

Credit union charters based on community, associations or employment existed 

prior to 1934, and the new Federal Credit Union Act also recognized these various 

types of charters. However, charters based on employee groups were by far the most 

viable because they consisted of people who were employed and were the easiest to 

organize into a critical mass of participation. Therefore, most credit union charters 

issued in the decades following 1934 were for employee groups. Obviously, the U.S. 

economy has changed in 70 years. In the 1930’s, one in five U.S. workers was emVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00107 Fmt 6633 Sfmt 6621 E:\HR\OC\26372.XXX 26372

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ployed on farms; today, that ratio has fallen to one in forty. In the 1930’s, the service sector accounted for only one-third of the work force; today it represents more 

than 80% of all workers, many working for small businesses. It was not until the 

early 1980’s—faced with a serious recession, a changing workplace, and the threat 

to safety and soundness both to individual credit unions and the National Credit 

Union Share Insurance Fund (created in 1970)—that many credit unions began to 

change to multiple employee group charters or community charters. 

The asset size of a credit union, which is typically a reflection of the number of 

members a credit union serves, also has never been and should never be the basis 

for considering the imposition of federal income taxation. Interestingly, Roy 

Bergengren, a founding father of the U.S. credit union movement, testified to the 

Senate Banking Committee in 1933 that in some states some credit unions ‘‘are now 

bigger than the average bank in the State.’’ 

Serving Member Businesses 

Some people are of the mistaken belief that credit unions did not get the authority 

to offer business loans until the passage of the Credit Union Membership Access Act 

in 1998. On the contrary, credit unions have offered what we now think of as business loans from their earliest days. In fact, CUMAA limited for the first time by 

statute how much business lending a federally insured credit union can do. Until 

NCUA issued a member business loan regulation in 1987, the only restriction on 

business lending by a federal credit union was found in its bylaws. 

It was no secret to those involved in passage of the Federal Credit Union Act in 

1934 that business loans were commonly made by certain credit unions, depending 

on their field of membership. Roy Bergengren said to the Senate Banking Committee in 1933 that credit unions promote: ‘‘—the public good by developing thrift 

through the credit unions, solving the short-term credit problems of the worker, the 

small business man, and the farmer, freeing them from the usurious money lenders 

and teaching sound economic lessons at a time when such teaching is very essential’’ (emphasis added). 

In fact, the 1934 law said that federal credit unions’ purpose was ‘‘creating 

a source of credit for provident or productive purposes.’’ This language anticipated that business loans would be made by federal credit unions, since 

state chartered credit unions had been making business loans since first 

chartered in 1909. For instance, here is a Boston advertisement from around 1912: 

The Industrial Credit Union encourages borrowing by its members, when it will 

enable them—(2) To become established in business. Examples: The purchase of 

tools for a mechanic. The giving of sufficient credit to a member to enable him to 

start a business where he must put out money for wages, bonds, running expenses, 

etc. The buying for cash of plant, good-will or stock in trade. 

Roy Bergengren documented in 1923: A loan for a World War I veteran to start 

a junk business; a loan to another veteran to buy a truck to fix machines; a loan 

to a widow to buy stenography equipment; and a loan to a man to buy a variety 

store in his neighborhood with follow-up loans for improvements and goods. In 1924, 

in a meeting seeking to organize financial cooperatives, the keynoter said a basic 

need in obtaining federal legislation is to make loans for ‘‘thrifty or productive use; 

that is, primarily for purposes that will enable borrowers to repay their loans out 

of the increase of that for which money is spent.’’ 

A 1927 study on ‘‘Why Workers Borrow: A Study of Four Thousand Credit Union 

Loans,’’ published by the federal government in its ‘‘Monthly Labor Review,’’ found 

that about 8% of the loans were to ‘‘small business men who needed help to tide 

them over a dull period or to expand when their business seemed to warrant it. 

Many of the shopkeepers also borrowed in order to make cash payments on stock 

when they could buy it more cheaply that way.’’ 

In responding to NCUA’s 1986 proposal to impose restrictions on business lending 

by all federally insured credit, those credit unions making business loans provided 

many examples. (Of course, then as now, only certain credit unions engage in business lending, depending on their fields of membership.) Here are a couple of examples from the mid-1980’s of the types of business loans being made by credit unions 

at that time: 

• Northeast Community Federal Credit Union in San Francisco: Loans to immigrants to open small businesses in the changing ‘‘Tenderloin’’ area of the city. 

• Santa Cruz Community Credit Union in California: Between its founding in 

1977 and in 1985, approximately $12 million of its $20 million in loans were 

made for business purposes (many for less than $25,000). Example: A business 

loan to a small local newspaper for capital expansion. 


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So contrary to any belief that Congress intended that credit unions be precluded 

from making business loans to its members as a condition of being tax-exempt organizations, the record clearly shows that for 25 years prior to the enactment 

of the Federal Credit Union Act in 1934 and for the 70 years after its enactment, certain federal and state chartered credit unions have been an important resource for member business loans. 

Credit Unions Are Unique Among Cooperatives 

Credit unions’ earnings are the pot of money that would be taxed at the end of 

the year. Taxation would erode what credit unions could build as a cushion and, depending on economic conditions, could even undermine maintaining the net worth 

required by statute. This cushion not only protects the credit union itself from future challenges, but also protects the National Credit Union Share Insurance Fund. 

Because the full faith and credit of the United States stands behind the NCUSIF, 

ultimately the American taxpayers pay if serious problems arise in the financial 

market place. This is what happened when the federal government had to spend billions of dollars to clean up the savings and loan industry debacle of the 1980’s. 

Although both the NCUSIF and the Federal Deposit Insurance Corporation 

(which insures bank deposits) are backed by the U.S. government, only the NCUSIF 

requires the institutions it insures to deposit an amount equal to 1% of their federally insured funds with the U.S. Treasury and to replenish the 1% from their retained earnings if financial troubles throughout the system require large NCUSIF 

payouts. As credit unions grow, they are required to contribute more to maintain 

their 1% deposit in the NCUSIF, and the added dollars count toward the federal 

government’s deficit reduction. Therefore, the unique NCUSIF capitalization system 

relies on well-capitalized credit unions that can transfer funds to the NCUSIF in 

case of systemic problems. The FDIC insurance program has no such safety net before it turns to the Congress for appropriated funds. 

Other cooperatives don’t have the full faith and credit of the United States ultimately standing behind their ventures. Fortunately, credit unions by their very nature—volunteer-lead, non-stock cooperatives—are conservatively run because there 

is no personal pecuniary interest in taking risks with other people’s money, a key 

credit union distinction from both stock and mutual banks. It would be counterproductive to tax credit unions, thereby encouraging them to run up expenses and 

otherwise reducing their net income subject to tax. 

Although estimates of taxing credit union indicate that that about $1.5 billion a 

year would be collected by the federal government, these estimates apparently don’t 

take into account fundamental changes that inevitably would be made in credit 

union operations if taxed. For example, there are 150,000 people who volunteer 

their services by serving on credit union boards and committees to further the notfor-profit mission of their credit unions. The Federal Credit Union Act prohibits all 

but one volunteer from being compensated, and for the few federal credit unions 

that provide any ‘‘compensation,’’ it is nominal. Some states allow board compensation, but again any compensation received by board members in those states typically is quite nominal, if provided at all. 

Since any compensation paid by a taxable organization is a deductible expense, 

the question would quickly arise if a credit union were taxed, ‘‘Why not pay people 

who serve on boards of directors, supervisory committees, credit committees, and 

other committees of the credit union?’’ This would lower the taxes due, but also undermine a credit union’s fundamental philosophy, ‘‘People Helping People.’’ And anyone serving in any position for other than nominal compensation is certainly driven 

by different motives than those who are volunteering their services. 

ARE CREDIT UNIONS SERVING THEIR INTENDED GOALS? 

Treasury and Congressional Findings: CUs Fulfill Their Purpose 

The U.S. Department of the Treasury has conducted several detailed studies of 

credit unions in the last eight years. These objective studies, which were requested 

by Congress, are exhaustive and present detailed analyses of the credit union system. The studies portray credit unions generally as robust institutions with a specialized structure serving identifiable groups of members. 

One of the most comprehensive studies, ‘‘Comparing Credit Unions With Other 

Depository Institutions,’’ was issued in 2001. (The link to the study is: http:// 

www.treas.gov/press/releases/reports/report30702.doc.) 

In that study, the Treasury Department was asked to analyze, among other 

issues, the ‘‘potential effects’’ of imposing federal tax laws on credit unions in the 

same manner as they are applied to banks and other financial institutions. 


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As part of its review, the study examined the history of the tax treatment of credit 

unions, including Congress’ rationale for the credit union exemption. The Treasury 

Department concluded (on page 28 of the report): 

Thus, the tax exemption was based primarily on the organizational form of credit 

unions—. 

The study observed that credit unions have grown larger in recent years and have 

expanded the list of products and services they offer their members. Nonetheless, 

drawing on the Credit Union Membership Access Act (CUMAA, P.L. 105–219) and 

a 1997 Treasury report, ‘‘Credit Unions,’’ the study concluded, remain ‘‘clearly distinguishable from’’ banks and thrifts in their organizational and operational characteristics. Such characteristics are: 

• Credit unions are member-owned and each is entitled to one vote in selecting 

the credit union’s board and in other decisions. • Credit unions do not issue capital stock but create net worth by retaining earnings. • While some credit unions have the legal authority to have paid employees or 

other paid directors serve on their boards, credit unions depend on volunteers 

elected by their members to serve as directors. • Credit unions are not-for-profit and all earnings are either retained as net 

worth or returned to the members in the form of lower loan rates, dividends 

or interest on savings, bonus dividends or similar uses. 

• Credit unions may ‘‘only accept as members those individuals identified in a 

credit union’s articulated field of membership.’’ 

The study noted that while other types of institutions may exhibit one or more 

of these characteristics, only credit unions exhibit all five together. 

Section Two of the congressional findings of CUMAA—legislation enacted in 1998 

to overturn the Supreme Court’s ruling on field of membership—lists these same attributes as the distinguishing factors a credit union embodies. 

The CUMAA congressional findings also concluded that credit unions are exempt 

from taxation because of these characteristics and because credit unions have ‘‘the 

specified mission of meeting the credit and savings needs of consumers, especially 

(but not only,) (parenthesis added) persons of modest means’’. 

Congress further found, after probing hearings in the House Financial Services 

Committee and Senate Banking Committee, that the credit union movement in the 

United States began as a ‘‘cooperative effort to serve the productive and provident 

credit needs of individuals of modest means.’’ 

Congress further stated in its findings that ‘‘Credit unions continue to fulfill this 

public purpose. . . .’’ 

Service To All Members, Including Those of Modest Means, Is the Hallmark of Credit 

Unions 

I began this statement by listing some of my own credit union’s services. Credit 

unions all across the country undertake considerable efforts to serve the financial 

needs of individuals of modest means. These programs include pro-consumer check 

cashing and other services that provide alternatives to payday lending; beneficial 

savings plans; financial counseling; financial management workshops; special home 

mortgage and other tailored lending programs; and partnerships with community 

organizations that serve low and moderate income families. 

These initiatives are in addition to the favorable loan and savings programs credit 

unions routinely offer their members. Many credit unions will open a share certificate or savings account for $100 or less and will grant a member a loan for a similar 

low amount—a practice that is virtually unheard of at other financial institutions. 

In addition, a number of credit unions provide technical support, training, equipment, financial or other assistance to credit unions that serve predominantly low 

and moderate income areas. 

Throughout most of their history, credit unions have actually been hamstrung in 

their efforts to serve members of modest means because field of membership rules 

generally restricted eligibility to occupational groups. It is only in the past couple 

of decades that smaller employee groups because eligible for credit union service, 

and even more recently that community charters became relatively accessible for 

credit unions. Then just five years ago, the National Credit Union Administration 

adopted an expedited program known as Access Across America to permit federal 

credit unions to add underserved areas to their fields of membership. Since the beginning of 2001, over 92 million potential members from underserved areas have 

been added to credit union fields of membership. Credit unions acknowledge it will 

take some time to reach out to and serve members in these communities. However, 

in the three years ending December 2003, credit unions that added such underVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00110 Fmt 6633 Sfmt 6621 E:\HR\OC\26372.XXX 26372

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served areas experienced membership growth over three times that of other credit 

unions (17.4% vs. 5.2% over the three year period.) 

The study, ‘‘Who Uses Credit Unions,’’ (Lee, Jinkook, University of Georgia and 

Kelly, Jr., William A., University of Wisconsin-Madison) which was updated in 2004, 

clearly shows that households of modest means, as well as households in other income categories, rely on credit unions to meet their financial needs. The study was 

based on the Survey of Consumer Finance that is sponsored every three years by 

the Federal Reserve Board. 

Among other things, the study reviewed the median net financial wealth of households, which it defined as total financial wealth less credit card and other unsecured 

debt. This included deposit accounts, mutual funds, securities accounts, savings, insurance, cash and other financial assets. 

The study found that households that use banks exclusively have a median net 

financial wealth 2.7 times as much as households that use a credit union exclusively. The median net financial wealth for a credit union household was $7,900. 

The average annual income for households that use credit unions only for their financial needs was $42,662 compared to $76,923 for households using banks only. 

Income could include wages, salaries, interest income, unemployment compensation, 

child support, alimony, welfare assistance and pension income. 

The study’s findings squarely refute the charge that bank customers are less affluent than credit union members. ‘‘Households using a bank and not a credit union 

have higher incomes and wealth than households that use only a credit union,’’ the 

study points out. 

The methodology of the study is significant because unlike other studies, it reviewed consumer financial institution affiliations based on five categories: households that use banks only and are not members of a credit union (56% of the households); households that use both banks and credit unions, but primarily use a bank 

(16%); households that use both banks and credit unions but primarily use a credit 

union (12%); households that use a credit union only (8%); and those that use neither banks nor credit unions (6%). 

The use of this model allowed the study to overcome the deficiencies in other studies on credit union membership that compare credit union members with non-members or compare credit union members with bank customers. 

The study also found: 

At the top income brackets, we see a very high use of banks only, which suggests 

that banks are particularly successful in gaining the entire business of these households. However, households in the top income brackets seldom use a credit union 

only. For example, in the $100,000–$200,000 income category, households are 23 

times more likely to use only a bank than only a credit union and households with 

income over $200,000 are 68 times more likely to use only a bank than only a credit 

union. . . . Further among those that use a bank only, median net financial wealth 

is higher than among households that use a credit union. 

The latest report from the Federal Reserve Board on Home Mortgage Disclosure 

Act (HMDA) data (December 2004) also demonstrates credit unions’ service to those 

of modest means. 

The HMDA data set provides a wealth of information on mortgages by type of 

loan (such as refinancing and conventional loans) and the socioeconomic characteristics of the applicant. The data provides information on loan approvals and denials. 

It also shows the proportion of approved loans that were actually granted. 

The HMDA data over the past three years, ending in 2004, shows: 

• A rising proportion of mortgage loans originated by credit unions are to lowto-moderate income (LMI) borrowers (those whose household income is at 80% 

of median or less). 

• As a result, in 2003 and 2004, a greater proportion of credit union mortgage 

loans were made to LMI borrowers than at other lenders. 

PROPORTIONS OF MORTGAGES ORIGINATED TO LMI 

BORROWERS 

2002 2003 2004 

Credit Unions 24.3% 25.4% 27.6%

All Other Lenders 26.2% 25.4% 26.6%

CU—Others ¥1.9% 0.1% 1.0%


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This is firm evidence that credit unions are taking advantage of greater opportunities to serve LMI members and disproportionately serve LMI borrowers. 

In addition to the core fact that credit unions make a greater portion of their 

loans to LMI borrowers than other lenders do, there are a number of other indicators in the HMDA data that demonstrate greater credit union service to LMI borrowers. While credit unions serve a greater proportion of LMI borrowers than do 

other lenders, they also provide more favorable treatment to LMI borrowers compared to their treatment from other lenders. 

Credit unions understand and appreciate that they have a special purpose in 

helping to meet the financial needs of individuals of modest means. Not only is the 

regulatory environment more conductive to outreach, but also CUMAA facilitates 

credit union expansions to serve the underserved. Key data already indicate credit 

unions provide important service to individuals ignored or shunned by other institutions and there is every indication that future data will reflect the ever growing efforts of credit unions to serve those of modest means. 

In fact, just three days ago, here in Washington a group of credit unions announced a near billion-dollar new mortgage program targeted specifically at our 

lower income members. This program has been under development for the past 

year. Under the program, which we are calling Home Loan Payment Relief (HLPR, 

pronounced ‘‘helper’’) credit unions will make loans to borrowers with incomes at or 

below the local area median at rates that are a full percentage point below market 

for the first three years of the loan. After that, therates will adjust to market on 

anadjustable basis, with yearly limits on the increase of 1% and a lifetime cap of 

5%. 

With the initial rate discount, credit unions are essentially giving up their normal 

net income from these loans. The program will enable thousand of modest means 

credit members to buy their first house, without exposing them to the severe risks 

of such exotic loans as short-term adjustable interest only loans. We expect this program to grow to over $10 billion over the next several years. 

Field of Membership as a Defining Characteristic of Credit Unions 

Since their inception, credit unions have had limitations on whom they could 

serve. Historically, these limitations had nothing to do wit the tax exemption. But 

this is an appropriate occasion to address some issues raised by the banking industry about field of membership. 

A credit union’s field of membership represents the persons, organizations and 

other entities to whom and which a credit union may legally provide its services. 

At the federal level, a credit union’s field of membership may be occupational— 

based on employment by the same or related businesses; associational—based on 

membership in the same association; multiple group—comprised of more than one 

group; or based on one or more communities. Each group within a credit union must 

have a common bond, which is the characteristic that distinguishes the group from 

the general public. There are a number of other statutory and regulatory restrictions that apply, regardless of the type of field of membership a credit union chooses. 

Some would have this Committee believe that field of memberships have become 

so broad that virtually anyone can join any credit union. That is far from the case. 

As a resident of El Paso, I cannot join a credit union with a community charter in 

New York, regardless of how large that community might be. As a credit union 

CEO, I cannot join Navy Federal Credit Union, and my colleague from Navy Federal 

cannot join GECU. 

At the same time, comments from then NCUA Board Chairman Dennis Dollar 

help illustrate why reasonable field of membership expansions and the capability to 

add new groups is so essential to credit unions. 

We have lost more credit unions, and particularly small credit unions, because of 

lack of diversification of field of membership than any other reason. If we are going 

to be effective with risk-management in our credit unions, if we are going to be effective enabling credit unions to diversify their risk to where the closing or 

downsizing of a sponsor does not take away what would otherwise be a strong and 

functioning credit union, we must have diversification in our field of membership 

within the bounds of what the law allows. 

Consistent with the bankers’ record of attack, several issues remain the subject 

of their criticism. One relates to the misconception that CUMAA only permits 

groups of 3,000 or less to be added to an existing credit union. This is inaccurate. 

Groups with 3,000 or more members are eligible to join an existing credit union 

if the NCUA determines in writing in accordance with guidelines and regulations 

that the group would not be financially viable and is unlikely to succeed as a new 

single common bond credit union. (S. Rept. 105–193) 


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Another issue is how NCUA views ‘‘local’’ as the term applies to the area a community credit union may serve. The fact remains that Congress specifically authorized NCUA to prescribe a regulation defining ‘‘well-defined local community’’ for 

credit unions that seek to serve a community. NCUA was given this task because 

it has the relevant expertise developed over decades of implementing field of membership issues. 

Community credit unions must meet all legal requirements, including being welldefined by specific geographic boundaries. Under NCUA’s policies, ‘‘If NCUA does 

not find sufficient evidence of community interaction and common interests—additional documentation will be required’’ in order for NCUA to assess whether the 

community exists and may be rejected if all requirements are not met. 

Additionally, community credit unions must develop a detailed and practical business plan. The plan must ‘‘focus on the accomplishment of the unique financial and 

operational factors of a community charter. Community credit unions will be expected to regularly review and to follow—the business plan’’ which is also subject 

to review by NCUA examiners. 

As NCUA Board Chairman JoAnn Johnson stated, NCUA follows three standards 

when implementing policy: it must be thoroughly consistent with CUMAA; it must 

comply with recognized and historical safety and soundness standards; and it must 

be implemented with a minim amount of paperwork and unnecessary regulatory 

burden. 

In responding to Congress’s directive to prescribe requirements for ‘‘well-defined 

local communities’’ that is exactly what NCUA has done. 

As stated by then NCUA board member Debbie Matz when the changes to the 

agency’s field of membership policy were adopted: 

I am cognizant of the fact that the statute requires that a proposed community 

credit union must comprise ‘‘a local community, neighborhood, or rural district.’’ I 

have given a great deal of thought to the concept of ‘‘local community’’ and what 

that really means in the year 2003. I have concluded that times have changed and 

so has the concept of local community. Years ago this might have been the neighborhood in which one lived and worked—perhaps a few city blocks or a town. In this 

age of advanced communications, accessible public transportation and highway systems and regional shopping malls and business centers, the larger community charters permitted in this regulation are not, in my opinion, inconsistent with the statutory requirements. 

Further, I have concluded that size, in and of itself, should not be a factor in determining the validity of a field of membership. It is a commitment to the credit 

union philosophy of people helping people. This is what credit unions are all about. 

I believe that one of the distinguishing characteristics of credit unions is the wide 

array of affordable financial services they offer: $200 loans to a family to prevent 

their electricity from being turned off; risk-based lending as an alternative to payday loans; branches in very-low-income neighborhoods; and world-class financial literacy programs. Under this rule, the size of a community is no longer the primary 

focus. Our attention would shift to the real issue—how the credit union would serve 

everyone in its field of membership. 

Perhaps most importantly, larger fields of membership will permit more people 

to join a credit union and I think that is a really good thing. This (change) will permit credit unions to make their services available to some of the 56 million people 

who do not have accounts in insured financial institutions. 

Despite rhetoric to the contrary, credit union membership has demonstrable limitations. Nonetheless, as recognized by GAO, the Treasury and others, CUMAA contains a number of provisions that authorize credit union membership growth and 

expansion. NCUA’s obligation as the regulatory agency charged with implementing 

these provisions is to permit credit unions to utilize the full extent of the field of 

membership authority granted to them by Congress, which the agency seeks to do. 

Any less from NCUA would be abrogating the responsibilities bestowed on it by 

Congress. 

None of this has the slightest bearing on the tax exemption issue. 

Credit Union Member Business Lending Meets A Need that is Not Being 

Fulfilled Elsewhere 

Based on data from the Small Business Administration (SBA) and elsewhere, 

credit unions that engage in member business lending often fulfill borrowing needs 

that are not being met by other institutions. Nonetheless, credit union opponents 

often focus their criticisms on member business lending activities. 

Under CUMAA, the Department of the Treasury was requested to review a number of issues relating to credit unions’ member business lending. This included examining the extent to which member business lending helps to meet the financial 


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needs of low and moderate income individuals. The study also considered whether 

credit unions that engage in member business lending have a competitive advantage 

over other financial institutions. 

In January 2001, the Treasury issued its report, which indicated then, as is the 

case now, that member business lending is consistent with the purpose of 

credit unions; it does not represent the competitive concern that banks 

claim it does; and it is an activity for credit unions that is consistent with safety 

and soundness. Under NCUA rules and statutory requirements, a member business loan (MBL) 

is a loan, line of credit, or letter of credit under which the borrower uses the proceeds for commercial, corporate, business investment property or venture, or agricultural purposes. Loans fully secured by 1–4 family residences and loans the total of 

which to an individual are less than $50,000 are excluded. As part of CUMAA, credit unions must limit their MBLs to the lesser of 1.75 times net worth or 12.25 percent of total assets. These limits were first imposed in 1998. 

In its study, the Treasury found that 25 percent of the credit union member busi- ness loans were made to members with household incomes of less than $30,000. Another 20 percent of credit union member business loans were to households with incomes between $30,000 and $50,000. The study also indicated that member business 

lending does not pose a material risk to the National Credit Union Share Insurance 

Fund. 

The Treasury added: 

‘‘Business lending is a niche market for credit unions. Overall, credit unions are 

not a threat to the viability and profitability of other insured depository institutions.’’ 

A major reason for the Treasury’s conclusion is that credit unions share of business loans is less than 1 percent of the market. Only about 1,780 credit unions 

make member business loans, an increase of about 170 credit unions from 1995. 

Also, the average size member business loan at a credit union is around $155,000. 

A 2002 survey conducted by the American Bankers Association showed that only 4% 

of commercial banks viewed credit unions as their primary competitors in business 

lending or other business financial services. 

‘‘Banks still dominate SBA lending,’’ the American Banker newspaper reported on 

October 27, 2005. ‘‘More than a dozen banking companies make more loans on their 

own than all credit unions combined in fiscal 2005. Bank of America Corp., for example, made nearly 12,000 worth $413 million.’’ 

Citing the need for lenders to make more, small business loans, the SBA has encouraged credit unions to participate in its 7(a) lending program. Currently 103 

credit unions make loans through that program; the average loan size is around 

$109,000. 

Treasury Secretary John Snow has also encouraged credit unions to provide member business loans. In February 2004, the Secretary appeared before the CUNA 

Governmental Affairs Conference and commended credit unions: 

Small business is at the foundation of this great economy, and credit unions have 

been there for entrepreneurs when they needed you the most. As of last year, credit 

unions were welcomed into the SBA lending programs, and I hope that has helped 

out both you and America’s entrepreneurs as much as this Administration hoped it 

would. You know as well as I do: small business is where the jobs come from. We 

estimate that between two-thirds and three-quarters of recent net new jobs are coming from that sector. That’s why we want to make small business tax cuts permanent, and that’s why I want to commend the credit union community for financing 

America’s hard-working small-business owners! 

In February of this year, the Secretary reiterated his support: 

You do good work. Loans to small business, home mortgages, financial education 

and fighting the financial war on terror—each one of these efforts is critical to our 

country’s economic health and strength, and I applaud you for doing good while you 

do business. We don’t want less small business lending. 

Yet, that is exactly what banker groups envision for credit unions, making fewer 

member business loans. If that happens, it won’t just be credit unions and their 

members that are harmed, but the small business community and the economy. 

USE OF THE TAX BENEFIT 

There are significant financial benefits to members. The nation’s 87 million credit 

union members benefit by $6.3 billion a year as a result of paying fewer and lower 

fees and lower loan rates and earning higher rates on deposits compared to banking 

institutions. This $6.3 billion is not retained by just a few large stockholders. Instead it is distributed across all 87 million members based on their usage of the 

credit union. In fact, relatively more of the benefit accrues to lower income members 


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1Federal Deposit Insurance Corporation, Quarterly Banking Profile, Fourth Quarter 2004. 2 Comments before the 2003 Chicago Federal Reserve Bank Conference: Whither the Community Bank? 3William F. Bassett and Thomas F. Brady. The Economic Performance of Small Banks, 1985– 

2000. Federal Reserve Bulletin, November 2001. 

than would be explained by their volume of business at the credit union because 

credit union pricing tends to be friendlier to lower balance accounts than at banks 

and alternative financial institutions. For example, in 2004, considering a basic 

checking account, 79% of credit unions had a no fee account compared to only 32% 

of banks. Further, at those credit unions charging a fee, the monthly average was 

less than half the average fee charged by banks, $4.21 compared to $8.56. Finally, 

the average minimum balance required to avoid the fee at a credit union was $486, 

less than a third of the average fee-avoiding minimum at banks of $1,645. Clearly, 

lower income members receive significant benefits from their access to credit union 

service. 

There are also significant financial benefits to consumers that are not members 

of credit unions. Based on the work of Professors Robert Tokle of Idaho State University and Robert Feinberg of American University, and also based on research 

from the Board of Governors of the Federal Reserve, bank customers benefit to the 

tune of at about $4.3 billion a year. This is the result of lower loan rates and higher 

deposit rates at banks as a result of the existence of credit unions. The effect of 

credit union presence on bank fees has not been estimated, but undoubtedly would 

add to the $4.3 billion annual benefit to bank customers. 

Although bank customers benefit because of the existence of credit unions, other 

financial institutions continue to thrive in the presence of credit unions. The FDIC 

recently reported that banks recorded record profits for the fourth year in a row.1

Aggregate bank return on assets (ROA) has exceeded 1% for the past 12 years, averaging 1.23%. And credit unions are only growing marginally faster than banks. In 

the decade ending in 2004, total banking institution assets grew at a compound annual rate of 7.25% compared to 8.4% for credit unions. Credit unions now account 

for 6.2% of the combined assets of all depository institutions. At the growth rates 

of the past decade, it will take until the year 2053 for the credit union share to 

climb to just 10%. 

The health of the banking industry over the past decade has not been confined 

to just large banks. In a 2003 conference, Federal Reserve Gov. Mark Olson said: 

‘‘The year that just ended was one of record profits for the industry as a whole, and 

for community banks in particular—Community banking has a long history of 

strength and success and a bright future. The past year was a good one for community banks. Once again the vitality and adaptability of the community banking franchise were amply demonstrated.’’ 2 Two Federal Reserve economists have recently 

described the strong performance of the nation’s smaller banks. They found that 

‘‘small banks have grown considerably more rapidly than large banks and have 

tended to meet or exceed them in some measures of profitability.’’ 3

In total then, bank customers and credit union members benefit to the tune of 

at least $10.6 billion a year. That is seven times the amount of revenue that would 

result from the taxation of credit unions. The tax exemption is leveraged in this way 

because of the cooperative structure of credit unions. When comparing banks to 

credit unions, the amount that banks pay in dividends to stockholders is more significant than is the tax exemption. Further, credit unions pay very little compensation to directors, with the savings passed on to members. Finally, credit unions’ ratios for expenses and loan losses compare very favorably to similarly sized banks. 

Society benefits in a number of ways from the tax exemption of the nation’s notfor profit credit unions. Both members and nonmembers benefit from the existence 

of credit unions. Part of that benefit stems from having a sector of the financial 

services industry with the provision of service to the less fortunate in our society 

as an integral part of their strategic mission. This benefits the nation’s modest 

means households both directly through credit union services and indirectly by serving as an example to other financial service providers. In addition, the taxpayer is 

provided considerable protection from risk of loss to the National Credit Union 

Share Insurance Fund by virtue of the tax exemption. Credit unions also provide 

an important source of loans to America’s small businesses at a time when credit 

from other sources is becoming less available. 

Removing the tax exemption of credit unions would so change the structure of the 

industry that within a few years, most credit unions would either have become 

banks or would be operating very much like banks. That would result in a significant loss of benefits to the nation’s 87 million credit union members. 


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4 Edward Kane and Robert Hendershott, The Federal Deposit Insurance Fund that Didn’t Put 

a Bite on U.S. Taxpayers Journal of Banking and Finance, 20(September, 1996), pp.1305–1327. 

Credit union members benefit both financially and non-financially by virtue of 

their membership in a credit union. In terms of non-financial benefits, they have 

the opportunity to belong to and participate in a democratically controlled financial 

cooperative. Further, they may volunteer to participate in the governance of their 

financial institution. Crucial to credit unions is the control exerted by the over 

150,000 volunteers who serve on boards and committees. Credit unions are also 

known for offering consumer education and financial counseling services that would 

be threatened under taxation. 

Evidence of the consistently strong level of member focus at credit unions is found 

in the results of the annual American Banker newspaper survey of financial institution customers. Credit union members have for 21 years in a row given credit 

unions higher satisfaction ratings than bank customers give banks. The cooperative 

structure really does make a difference. 

The tax exemption also serves to protect taxpayers from losses to the share insurance fund. There are two important connections between the stability of NCUSIF 

and credit unions’ tax exemption. First, the primary buffer for a deposit insurance 

system is the capital or net worth maintained in insured institutions. Because credit 

unions have no access to capital markets, their only source of capital is the retention of earnings. A tax on net income would thus disincent credit unions from retaining earnings, weakening protection for the NCUSIF. In fact, the cost to the taxpayer of FSLIC’s losses far exceeded the total taxes paid by FSLIC insured institutions prior to FSLIC’s failure. 

Second, as cooperatives, credit unions have a systemic inclination to avoid risky 

activities. Kane and Hendershott have shown that the cooperative structure of credit unions presents credit union decision makers with incentives that are strikingly 

different from those faced by a for-profit financial institution, making it less feasible 

for credit union managers to benefit from high-risk strategies.4 This is an especially 

useful trait for federally insured depository institutions. 

Credit unions have a long history of providing business loans to their members, 

although such loans represent a small portion of the portfolio for most credit unions. 

However, at a time when research published by the Small Business Administration 

finds that consolidation in the banking industry is reducing credit access for small 

business, the credit access provided by credit unions is even more important. 

Society benefits in a number of ways from the existence of cooperative, not-forprofit credit unions. These benefits would gradually disappear were credit unions 

subject to federal income tax. Credit union regulation, which is much more restrictive than that for other financial institutions, includes: limits on who the credit 

union can serve, limits on business lending, lack of access to capital markets, etc. 

The tax exemption is the incentive that encourages credit union CEOs and boards 

to continue to operate as credit unions rather than throwing off the restrictions by 

converting to a bank charter. Such conversions would only limit the range of choices 

available to America’s consumers, especially those of modest means. 

CHANGES IN THE INDUSTRY HAVE NOT COMPROMISED JUSTIFICATION OF RETAINING THE TAX EXEMPT STATUS 

Credit unions have undergone changes similar to other industries over time. With 

new technology, the advent of new products and services, credit union members 

have demanded that their credit unions provide them with access to all the benefits 

of a modern financial service provider. Credit union membership trends have 

changed during this time as well. Historically, credit unions were employer based, 

but with changes in the economy and the closure of many plants, credit unions 

found ways to continue serving their members, most recently by converting to geographically based memberships that the Federal Credit Union Act has made possible since 1934. But one thing has remained constant—the structure of a credit 

union and its intense focus on providing its members a not-for-profit alternative 

with personal service. 

Credit Union Products and Services Remain Comparatively Restricted 

As member owned institutions, credit unions endeavor to offer products and services that their members need and want. And as technology results in more and better offerings, credit unions must respond to meet their members’ demands, so long 

as they permissible by law and regulation. 

Over the years, NCUA, like the bank and thrift regulators, has on occasion 

amended its regulations to permit credit unions more flexibility to serve their members better. For example, in 2001 NCUA included in its rules a list of activities that 


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federal credit unions may engage in that are incidental to their authority to operate 

as a credit union. Such activities encompass electronic financial services and loanrelated products. While some have sought to portray the rule change as too liberal, 

in essence the incidental powers rule codified activities that NCUA had already permitted credit unions to engage in through prior legal opinion letters. 

While NCUA has made incremental changes to the list of permissible activities 

for credit unions, Congress has not considered any comprehensive modernization of 

the Federal Credit Union Act in over 70 years. (CUMAA, passed in 1998, as previously indicated, was a response to efforts to correct a field of membership problem 

and resulted in imposing new, burdensome regulations on credit unions.) By contrast, it is fair to note that the sweeping new authority Congress granted the banking system when it adopted the Gramm-Leach Bliley Act in 1999 does not apply to 

credit unions, with the exception of the privacy provisions. Under that Act, among 

other things, affiliations between banks, securities firms and insurance companies 

are facilitated. In addition, financial holding companies are authorized to engage in 

a range of activities, including any activity that the Federal Reserve Board determines is financial in nature or incidental to financial activities. Banks are permitted 

to own or control a financial subsidiary that engages in activities that banks may 

not engage in directly, and they may underwrite and deal in municipal revenue 

bonds. Further, the Act authorized a number of securities activities for banks including statutory exemptions from broker/dealer requirements and investment advisory requirements. 

Even without Gramm-Leach-Bliley, credit unions lag far behind banks in the 

kinds of activities in which they can engage, notwithstanding the fact that credit 

unions may offer additional services to their membership through credit union service organizations (Credit unions may loan up to 1% of their assets to a CUSO or 

invest up to 1% of assets in such organizations.) The 2001 Treasury study comparing credit unions with banks makes it clear credit unions face more operational 

restrictions than other institutions. 

In general, federal credit unions have more limited powers than national banks 

and federal savings associations. Most notably, federal credit unions face stricter 

limitations on their commercial lending and securities activities. In addition, a 

usury ceiling prevents them from charging more than 18 percent on any loan, and 

the term of many types of loans may not extend beyond 12 years. 

The Treasury notes a number of activities that are not permissible for credit 

unions but are allowed for banks. These include the offering of trust accounts, the 

purchase or sale of derivatives, investments in corporate debt securities and other 

activities. (Unlike banks, credit unions’ investments are very limited and include 

government and agency securities, along with certain insurances of governmentsponsored enterprises. Credit unions with net worth of 9% have authority to invest 

in certain mortgage-related securities.) 

One of the harshest limitations on credit unions is the ceiling on their member 

business lending, which is set at the lesser of 1.75 times net worth or 12.25 percent 

of total assets. National banks have no specific restrictions on commercial lending 

and thrifts may make commercial loans up to 20% of their total assets. 

Credit unions also come under more stringent core net worth (capital) requirements than are placed on banks. As required by statute, credit unions must maintain net worth levels that are actually spelled out in the law. Banks also have core 

capital requirements, but they are set by regulation, which is easier to change than 

statutory requirements. In addition, credit unions sustain core net worth that is a 

full two percentage points higher than the core capital required of banks. 

Indeed, the net worth, lending, and other significant restrictions under which 

credit unions operate are the impetus for the credit union provisions in the Financial Services Regulatory Relief Act, HR 3505, and the Credit Union Regulatory Improvements Act, HR 2317, which are currently pending in the House. 

There is no question that while credit unions may offer products and services provided by banks and thrifts in response to their members’ needs, credit unions operate under serious constraints. As concluded by the Treasury: 

Federal credit unions generally operate within the same legal framework as other 

federally insured depository institutions. Most differences between credit unions and 

other depository institutions derive from the structure of credit unions. Credit 

unions have fewer powers available to them than do banks and thrifts. 

A Credit Union’s Size Does Not Affect Its Mission 

Some have suggested that the nation’s very largest credit unions are in some 

sense no longer true credit unions, that they no longer live up to what Congress 

originally intended credit unions to be. They go on to argue that therefore large 

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tinue to promote thrift and to provide a source of credit for provident or productive 

purposes. How many members a credit union has, or how many loans it provides 

does not affect the core characteristics of a credit union, or the real reasons for credit union’s tax exemption. Further, large credit unions today fully live up to what 

Congress had in mind when it originally created the federal credit union charter 

and later granted the credit union tax exemption. It should also be remembered that 

a ‘‘large’’ credit union would still be modest sized by bank standards, and that the 

nation’s three largest banking institutions each is larger than the entire credit 

union movement. 

None of the core characteristics of credit unions or rationales for credit unions’ 

tax exemption has anything to do with credit union size, field of membership restrictions, the range of services offered, or the extent to which credit unions might not 

compete with other financial institutions. Instead, they have everything to do with 

the cooperative structure of credit unions and their mission of providing affordable 

services to American households, especially those of modest means. 

Credit unions are all about their members. Today credit unions serve 87 million 

members with affordable financial services. Twenty one million of those members 

belong to the one hundred credit unions with assets over $1 billion. There is no relation between the size of an institution and the absence or presence of reasons to 

justify the tax exemption. Large credit unions are democratically controlled, not-forprofit cooperatives in every way that smaller credit unions are. The boards of directors of large credit unions are composed of volunteers just as they are at small credit unions. A large credit union may be more likely to offer a broader array of services, and to be a greater presence in a local community. However, neither factor 

makes it less a cooperative than a smaller credit union. No one suggests that as 

soon as the congregation of a church, synagogue or mosque exceeds a certain size, 

it should no longer be tax exempt. Likewise, it would be ludicrous to say the American Heart Association should lose its tax exemption simply because of its size, 

while a small local charity should not. 

Because of their size and efficiency, large credit unions are often more able to provide the benefits of the cooperative to members, such as lower loan rates and fees 

and higher dividend rates. Larger credit unions are also more able to offer special 

programs benefiting low- and moderate-income households. In a survey conducted 

in 2002, when asked how many of up to 18 services geared to low/mod income 

households they offered, only 6% of credit unions with assets below $20 million offered at least half of the services. Fully 42% of credit unions with assets over $500 

million offered that many of the services. Large credit unions are also more likely 

than small credit unions to participate in outreach activities to attract low/mod income members, and to have added underserved areas to their fields of membership 

under NCUA’s Access Across America program. 

I have already described how my own large credit union fulfills its mission. Here 

are some examples of what other large credit unions do today: 

Navy Federal Credit Union, the nation’s largest with two and a half million members and $25 billion in assets, is the epitome of a not-for-profit financial cooperative 

organized to provide its members with low-cost financial services. It is guided by 

an unpaid, volunteer, member-elected Board or Directors (one member, one vote.) 

Navy Federal serves most military and civilian personnel of the Navy and Marine 

Corps and their families, including almost 400,000 young active duty military personnel of modest means. Members can open a share account with only $5, and the 

account has no monthly fees, minimum balance requirement, and earns dividends. 

The credit union operates 108 field offices around the world, from Keflavik, Iceland 

to Guantanamo Bay, Cuba, to Diego Garcia in the Indian Ocean to Bahrain. Half 

of the overseas offices operate at a loss, but they are maintained in order to serve 

military personnel on overseas deployments. 

San Antonio Federal Credit Union (230,000 members and $1.8 billion in assets) 

is a pioneer in financing manufactured housing for members with limited incomes. 

For many Americans, high quality manufactured housing is a cost effect alternative 

to the escalating costs of traditional site built homes. Manufactured housing must 

meet manufacturing standards that meet or often exceed requirements of some local 

codes. Since entering the manufactured housing finance market in 2002, San Antonio Federal Credit Union has made over 3,000 high quality portfolio loans for this 

affordable housing. The average loan size is about $50,000. The credit union is also 

developing the infrastructure to assist other credit unions around the country to 

serve this market. 

Despite the protestations of community bankers, as described above, credit unions 

are not unfair competitors to banks, and credit unions are not eroding their market 

share. Further, the share of total depository institution assets held by community 

and smaller regional banks (all but the top 100 banking institutions in the U.S.) 


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has indeed plummeted from 53% in 1992 to 27% in 2004. However, over the same 

period, the share of credit unions has remained stable at about 6%. It is the largest 

100 banks (larger regionals, super regionals, and money center banks) that have 

taken the market share, from 41% in 1992 to 67% in 2004. This is shown in the 

accompanying chart. 

If credit unions had such an ‘‘unfair’’ advantage over banks, one can wonder rhetorically why we have not seen a wholesale conversion from bank to credit union 

charters. The reason no commercial bank has converted to a credit union is that 

doing so would expose them to democratic ownership and control, would likely cause 

banker salaries to decline dramatically, and would force the institutions to adhere 

to a much more restrictive regulatory regime. 

Finally, it is disappointing but not surprising that in all their protestations about 

the tax treatment of credit unions the banking organizations fail to mention the 

growing role of Subchapter S banks. Over 2,100 banks have adopted the Sub S form 

of tax treatment since 1997. While Subchapter S status is not the same as a tax 

exemption, it results in significant loss of government revenue. The direct cost to 

the federal government from banking institution Sub S elections is estimated to be 

$790 million in lost revenue in 2004, and the total will only grow as banks continue 

to try to expand Sub S eligibility. In fact, it is estimated that the total cost to the 

Treasury for Sub S election will exceed the estimated cost of the credit union tax 

exemption within a few years. We believe that the Committee may wish to investigate Subchapter S election, as there appears to be absolutely no functional difference between a Sub S and a Sub C corporation to justify different tax treatment. 

Largest 100 Banking Institutions 

(1992 sahre = 41%: 2004 share = 67%) 

Smaller Banking Institutions 

(1992 share = 53%; 2004 share = 27%) 


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CONCLUSION 

Mr. Chairman, it is clear that credit unions play a powerful role in our economy. 

Credit unions serve people of all walks of life at all economic levels. Credit unions 

provide the public with a not-for-profit, cooperative alternative to the for-profit sector. Consumers benefit by having access to lower cost services that might not otherwise be available to them, especially those of modest means. And the facts show 

that the banking industry, which is engaged in an effort to put credit unions out 

of business, continues to mislead Congress into thinking that their very existence 

is threatened because of credit unions and their tax status. But banks continue to 

earn record profits. And if you saw the oil industry ads in the Washington Post last 

week, you would have noticed that in fact the banking industry recorded the highest 

profits of all U.S. industries during the second quarter of 2005—even more than the 

pharmaceutical industry. While the banking industry continues earning record profits, credit unions provide a nearly 7-to-1 return to consumers on the dollar, benefiting them by over $10 billion dollars in yearly savings. 

Credit unions are an important part of the financial life of American consumers. 

And the tax-exempt status of credit unions is the glue that holds credit unions and 

their not-for-profit approach to cooperative financing together. If the tax exemption 

were removed—if 87 million Americans were forced to pay taxes solely because of 

their membership in a credit union—it would lead to the end of the movement that 

we know. Credit unions would become banks, and the consumers would pay dearly, 

not only in higher taxes, but in higher fees and less return on their savings and 

borrowings. 

Thank you again, Mr. Chairman, for the opportunity to address the Committee 

in its effort to review the tax-exempt status of credit unions. 

f 

Chairman THOMAS. Thank you, Ms. May. Mr. Plagge, is that 

correct? 

STATEMENT OF JEFF L. PLAGGE, PRESIDENT AND CHIEF EXECUTIVE OFFICER, FIRST NATIONAL BANK OF WAVERLY, 

WAVERLY, IOWA, ON BEHALF OF THE AMERICAN BANKERS 

ASSOCIATION 

Mr. PLAGGE. That’s correct. Plagge. 

Chairman THOMAS. Okay. 

Mr. PLAGGE. Mr. Chairman, my name is Jeff Plagge, and I am 

President and CEO of First National Bank, a community- and employee-owned bank in Waverly, Iowa. We just celebrated our 141st 

anniversary. I am grateful for the opportunity to testify about the 

credit union tax-exemption, and, on behalf of the American Bankers Association, and thank you for holding this hearing. As we’ve 

heard many times, Federal Credit Unions pay no income tax. In 

1937, Congress exempted Federal Credit Unions from all forms of 

taxation—Federal taxation, and chartered them with the specific 

mission of helping people of small means. Traditional credit unions 

still fulfill this mission by providing basic financial services to a 

well-defined group. Unfortunately, an increasing number of credit 

unions have abandoned this core mission. Instead of helping people 

of small means, sophisticated credit unions are expanding into commercial lending, buying naming rights to sports stadiums, financing luxury hotels, and building elaborate headquarters. My written 

testimony is filled with examples of these and other activities. 

How does a $5.2 million contribution for naming rights to a 

sports arena serve credit union members? If a credit union can add 

the entire State of Washington to its field of membership, what has 

happened to the common bond? If a credit union is making business loans to non-members, what does that have to do with tax-exVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00120 Fmt 6633 Sfmt 6602 E:\HR\OC\26372.XXX 26372

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empt purpose, and who is indirectly being subsidized? In my hometown, the $1.1 billion John Deere Community Credit Union is more 

than five times larger than our $200 million community bank. 

Fueled by its Federal tax-exemption, the John Deere Community 

Credit Union competes virtually for every one of my customers regardless of their income, employment, or need. On the local level— 

and this is what this is about, where all competition plays out— 

the effects can be dramatic to our community bank and others like 

it around the country. 

Credit unions’ tax-exemption gives them a significant price advantage over tax paying banks that offer essentially the same products and services, and it enables credit unions to grow much more 

rapidly. The fact is in more and more communities, credit unions 

are many times larger than the local banks that are competing in 

that market. For example, my bank’s average agricultural and 

business loan size is $52,000. John Deere Community Credit 

Union’s business loan size is more than twice that, and that is still 

a reasonable amount, and there are others in the testimony on 

page seven that talk about some of the more aggressive business 

lending things going on. The Federal Government is subsidizing 

super competitors against nearly 8,000 taxpaying community banks 

in this country that have $500 million or less in assets. There are 

now 263 credit unions with assets of more than $500 million each, 

and more than a hundred credit unions with assets more than a 

billion dollars each. Studies by the Federal Reserve and the GAO 

show banks served more low and moderate income people than 

credit unions. The National Community Reinvestment Coalition 

has also concluded that the average bank is more often the source 

to credit of people of modest means than credit unions. 

The NCRC says most people would be surprised to learn that 

banks are doing a better job of serving low- and moderate-income 

people than credit unions. Credit unions argue that their tax status 

exists because they are not-for-profit and cooperatively owned. But 

being a not-for-profit cooperative does not justify a tax-exemption. 

In fact, most cooperative member-owned and not-for-profit financial 

institutions are now subject to Federal taxation of some kind. Credit unions enjoy the sweetest tax deal of all of them. In contrast, 

mutual insurance companies, mutual savings banks, and mutual 

savings and loan associations lost their tax-exemption years ago. 

Removing their tax-exemption did not diminish their vitality. 

These institutions are healthy, well capitalized, and profitable. 

During the last 5 years, mutual savings banks and mutual savings 

and loans paid $2.9 billion in corporate income tax. Just like my 

bank, they are paying their fair share. This cannot be said today 

for some of the new breed of large and aggressive credit unions. 

These financially sophisticated complex credit unions should be required to stay within their mission or be taxed and regulated like 

the rest of us. The ability of community banks like First National 

to compete depends on it. Thank you, Mr. Chairman. 

[The prepared statement of Mr. Plagge follows:] 


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1Tax expenditures are defined in the law as ‘‘revenue losses attributable to provisions of the 

federal tax laws which allow a special exclusion, exemption, or deduction from gross income or 

which provide a special credit, a preferential rate of tax, or a deferral of liability.’’ 

Statement of Jeff L. Plagge, President and Chief Executive Officer, First 

National Bank of Waverly, Waverly, Iowa, on behalf of the American 

Bankers Association 

Mr. Chairman, my name is Jeff Plagge. I am president and CEO of First National Bank, a $200 million community bank located in Waverly, Iowa. The American 

Bankers Association (ABA) appreciates the opportunity to comment to the Ways and 

Means Committee on the tax exemption of credit unions. Our comments focus on 

the evolution of traditional credit unions serving ‘‘people of small means’’ to full 

service, financially sophisticated institutions that compete head-to-head with taxpaying banks and fail to serve the mission for which they have been exempted from 

all federal taxation. 

ABA on behalf of the more than two million men and women who work in the 

nation’s banks, brings together all categories of banking institutions to best represent the interests of this rapidly changing industry. Its membership—which includes community, regional and money center banks and holding companies, as well 

as savings associations, trust companies and savings banks—makes ABA the largest 

banking trade association in the country. 

This statement addresses three central points: 

I. A new breed of credit union has abandoned its mission to serve those of small 

means. In fact, studies show banks are more often a source of credit to low- and 

moderate-income people than are credit unions. 

II. Being a non-profit cooperative does not, alone, justify a tax exemption. Fairness dictates equal tax and regulatory treatment for similarly situated institutions. 

Yet complex credit unions take advantage of their tax-exempt status to unfairly 

compete with tax-paying banks, offering virtually indistinguishable products and 

services in the same markets. 

III. Congress has repeatedly recognized that there are limits to tax exemptions 

and has acted to eliminate them for entities that stray from their intended public 

policy goals. Credit unions that have abandoned their core mission should be taxed 

or required to convert to bank charters. 

I. Complex Credit Unions Outgrow Justification for Tax Subsidy 

Chairman Thomas, as you stated earlier this year, ‘‘Tax-exemption is an important benefit and the Congress has a responsibility to oversee and assure the American taxpayer that the tax-exempt sector is living up to its legal responsibilities.’’ 

We agree. ABA recommends that Congress examine credit unions’ tax-advantaged 

status, particularly those that have strayed from the original credit union mission. 

While many credit unions remain true to their original mission, today a growing 

number of credit unions have abandoned their roots and inappropriately taken advantage of their tax-exempt status. 

Continuing the special tax treatment for institutions that look and act like taxpaying banks has public policy consequences. The size of the ‘‘tax expenditure’’ as 

the Office of Management and Budget (OMB) calls it, is already big—more than a 

billion dollars per year. And basic economics tells us that it will get bigger as taxfavored firms take business away from taxpaying firms. Simply put, as these credit 

unions get larger, so does the tax expenditure.1

This is not how the credit union movement began. Closely-knit groups of people 

would pool their resources to provide small loans for one another. Credit unions 

were originally created and granted their tax exemption to fill a market void that 

existed in consumer finance in the early 20th Century. Few, if any, banks at that 

time offered consumer loans, and consumers, especially people of modest means, had 

few options to obtain credit. 

By 1934, the United States had approximately 2,500 credit unions, with 38 states 

and the District of Columbia offering credit union charters. Later that year, a federal credit union charter became available. Whether chartered by a state or the federal government, membership was limited to people with close bonds because familiarity was critical to the ‘‘character’’ loans made by credit unions. The commonality 

of interest among members—their common bond—was the essence of credit unions. 

It was the justification for their unique place in our financial system. 

Who Serves Low- & Moderate-Income Consumers? Increasingly, Not Credit 

Unions 

Today, an array of options for credit is available for everyone, dramatically reducing the justification for granting credit unions special treatment. In fact, studies reVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00122 Fmt 6633 Sfmt 6621 E:\HR\OC\26372.XXX 26372

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2 ‘‘Credit Unions: True to Their Mission?’’ NCRC, 2005. 

3 ‘‘CUs, Banks Put Up Dueling Bills in Oregon,’’ American Banker, March 25, 2003. 

4 CUNA National Member Survey, 2002. 

5 ‘‘How to Head Off Coming Under CRA Dominates Debate at CUNA Convention,’’ American 

Banker, October 14, 1994, p. 9. 6 ‘‘Are Credit Unions Dodging Their Responsibilities? One CEO Thinks So.’’ Credit Union 

Journal, December 2, 2002, p. 11. 

veal banks serve more low- and moderate-income people than credit unions do, despite credit unions’ supposed focus on ‘‘people of small means,’’ as required by the 

Federal Credit Union Act. 

The Federal Reserve’s 2001 Survey of Consumer Finances revealed that only 36 

percent of the households that primarily used credit unions had low- and moderateincomes in contrast to 42 percent of the households that primarily used banks. In 

2003, the Government Accountability Office (GAO) released a report that showed 

that 64 percent of households that primarily use a credit union are middle and 

upper income, as compared to 58 percent of households that primarily use banks. 

It also found that banks provided 34 percent of their mortgage loans to low- and 

moderate-income borrowers while credit unions issued just 27 percent of their loans 

to these borrowers in 2001. 

A recent study conducted by the National Community Reinvestment Coalition 

(NCRC) concluded that banks are more often a source of credit to people of modest 

means than credit unions are. ‘‘In the year 2005, after 70 years of federal supervision of credit unions, most people would be surprised to learn that banks are doing 

a better job of serving low- and moderate-income people than credit unions,’’ the 

NCRC study said.2

Think Federal Credit Union exemplified in its 2003 Annual Report how credit 

unions’ focus has changed when it stated: ‘‘Yesterday our challenge was to provide 

financial services to members who could not get services elsewhere. Today our challenge is to provide financial services to members who can get services anywhere.’’ 

Instead of focusing their resources on people of modest means, today a new breed 

of institution that bears little resemblance to a traditional credit union is capitalizing on its tax-exempt status to offer products and services far beyond any meaningful common bond. There are now more than 100 credit unions each with assets greater than $1 billion. There are 263 credit unions with assets of more than 

$500 million each. 

In nearly half the states in this country, a credit union would rank among the 

top ten banks in terms of size. As Gene Portias, president of the Credit Union Association of Oregon, stated: ‘‘In a lot of places, credit unions are the major financial 

institution.’’ 3 Complex, aggressive institutions increasingly dominate the industry, 

yet still try to hide behind the veil of a ‘‘traditional’’ credit union. 

The credit unions’ own surveys suggest that their image of serving moderate- and 

lower-income people is no longer valid. The profile of the average credit union member today—higher than average income, better educated, and more likely to be in 

a professional occupation than his or her non-member counterpart—is not one typically associated with people needing taxpayer-supported financial services. According to a recent demographic survey conducted by the Credit Union National Association (CUNA), the average household income of credit union members is 20 percent 

higher than nonmembers—$55,120 versus $45,790.4

The fact is that bank customers are more likely to be from low- and moderateincome households than are credit union customers—yet credit unions continue to 

enjoy the tax expenditure purportedly because they serve people of modest means. 

As Bruce Shawkey of Credit Union Management magazine stated, ‘‘. . . [C]redit 

unions’ ‘bread and butter’ members are middle-aged white males with mid- toupper-incomes.’’ 

Even credit union executives are disturbed that credit unions have strayed so far 

from their original mandate to serve people of small means. Citing CUNA’s numbers 

on the average household income of members served by credit unions, Armando 

Cavazos, president of Credit Union One in Ferndale, Michigan, said, ‘‘We should almost feel guilty about serving people of affluence.’’ 5

Jim Blaine, CEO of State Employees CU in Raleigh, NC, conceded, ‘‘Maybe we’ve 

gotten so sophisticated we don’t want to get our hands dirty with poor folks any 

more. That’s what we were created to do, and sometimes I think we’re forgetting 

that.’’ 6

And, Ed Gallagly, president/CEO of Central Florida Credit Union, says, ‘‘There’s 

no question that subconsciously—and even consciously—some credit unions are tryVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00123 Fmt 6633 Sfmt 6621 E:\HR\OC\26372.XXX 26372

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7 ‘‘Are Members Really Leaving Credit Unions? CEOs Offer Their Take,’’ Credit Union Times, 

April 14, 2004, p. 42. 8 A Study of the Evolution and Growth of Credit Unions in Virginia: 1997–2002, by Neil Murphy and Dennis O’Toole, November 2003. 9 ‘‘Show of Hands Indicates CU Interest in Biz Lending,’’ Credit Union Journal, September 15, 

2003, p 11. 10 Credit Union Journal, September 1, 2003. 11 Credit Union Times, March 30, 2005, p. 23. 12 ‘‘Texans CU’s Business CUSO Taking Off; Loans Range from Multi-Million to Just Thousands,’’ Credit Union Times, February 2, 2005, pp. 1, 36. 

ing to run-off unprofitable members. I hate to use that term run-off but that’s 

what’s happening.’’ 7

Credit Union Subsidy is Used Inappropriately 

As morphed credit unions stretch their fields of membership across ever-larger geographic areas and venture into new business activities, is the tax benefit being 

passed on fully to credit union members? In more and more cases, the answer is 

no. 

In some cases, it is going to build elaborate corporate headquarters like Golden 

1 Credit Union’s new 200,000 square foot headquarters in Rosemont, California, 

costing more than $30 million and GTE Federal Credit Union’s new 125,000 squarefoot headquarters located on a 12.5 acre campus in Tampa, at a cost of about $22 

million. And Digital Credit Union in Massachusetts paid $5.2 million for the naming rights for an arena in Worcester (MA) in 2004 and University FCU in Texas 

is contributing $13.1 million to the renovation of the University of Texas’s baseball 

stadium in exchange for naming rights. Is this an appropriate use of the credit 

union tax exemption? 

Communities are not being served, either. Credit unions, unlike banks, are not 

required to meet the obligations set forth in the Community Reinvestment Act 

(CRA). In a study of Virginia credit unions, professors Murphy and O’Toole found 

that ‘‘banks and savings institutions in Virginia are putting a greater percentage 

(88 percent) of their deposits back into the community in the form of loans than are 

credit unions (76.3 percent). In other words, tax treatment of credit unions has not 

resulted in a higher proportion of loans going to meet the needs of the communities 

they serve.’’ 8

Business Lending—Extending Tax-Subsidized Services to Commercial Entities 

In addition to serving a wealthier customer base, the new breed of credit unions 

is looking for profitable opportunities in commercial lending, thus further extending 

the tax exemption beyond its original purpose. Business lending by credit unions 

grew by almost 50 percent in 2004. More than 420 credit unions have at least 5 

percent of their total loans in business loans and almost 240 have at least 10 percent of their loan portfolio in business loans. Nearly 250 credit unions are designated guaranteed lenders by the Small Business Administration (SBA), and more 

than 300 credit unions have either purchased or participated in business loans made 

to non-members. Should members’ savings fund business loans to non-members? 

‘‘Successfully banking the small-business owner is one of the keys to increased 

credit union profitability,’’ the Credit Union Executive Society noted. And many 

credit unions are following this course to boost profits. Jean Faenza, EVP for Telesis 

Community CU, describing her credit union’s pursuit of business owners, stated: 

‘‘Remember, every business owner is a consumer who has other accounts . . . small 

business are employers. We’re greedy—we want all of those accounts.’’ 9

Lending by credit unions is big business. For example: 

• Less than one year after commencing operations, CU Business Group, LLC said 

it had processed more than $50 million in business loans—with the averagesized loan worth more than $600,000. Larry Middleman, CU Business Group’s 

President/CEO, noted that the ‘‘[l]oan packages are much larger than we anticipated.’’ 10

• The average business loan outstanding at Florida’s Vystar Credit Union is 

$463,000; at California’s Telesis Community Credit Union, it is $693,100. 

• Coastal Federal Credit Union with $1.5 billion in assets has ventured into complex commercial real estate transactions where the average size loan exceeds 

$4 million.11

• Texans CU has approximately $382 million in business loans on its book and 

funded Prism Hotel’s acquisition and construction financing of the 280-room 

Radisson Memphis Hotel in Tennessee.12


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13 A Study of the Evolution and Growth of Credit Unions in Virginia: 1997–2002, by Neil Murphy and Dennis O’Toole, November 2003. 14 ‘‘Friendly Foes: Once Allies, Credit Unions Now Compete for Customers,’’ by Barbara Marquand, Sacramento Business Journal, May 24, 1999. 

• Spokane Teachers CU financed a $3 million renovation of the Montvale Hotel, 

a luxury hotel in Spokane, Washington. 

These are all loans for which a bank would likely compete. It is inappropriate that 

credit unions leverage their tax subsidy to compete unfairly head-to-head with taxpaying banks and become ‘‘super competitors.’’ It also begs the question of who is 

indirectly subsidized by the credit unions tax exemption: Luxury hotels and commercial real estate developers? Is this what Congress intended? 

Subsidizing a ‘‘Super Competitor’’ That Preys on Community Banks & 

Small Credit Unions 

Although the credit union industry argues that the issue of credit union competition is about big banks against little credit unions, it is really about the billion dollar credit unions ‘‘fueled by their federal tax subsidy’’ against the community banks 

in this country. Competition in financial services occurs on the local level. The fact 

that the banking industry as a whole is much larger than the credit union industry 

has no bearing on head-to-head competition in the local market. 

There are nearly 8,000 community banks in this country with assets of less than 

$500 million each. The credit union tax exemption adversely affects these tax-paying 

banks. It gives credit unions a significant price advantage over tax-paying banks 

that offer the same products and services and enables credit unions to grow much 

more rapidly. 

The fact is that in more and more communities, it is the credit union that is many 

times larger than the local banks. This trend facilitates a market share shift from 

tax-paying institutions to tax-exempt credit unions. For example: 

• In North Carolina, State Employees Credit Union (SECU), which has assets of 

over $12.7 billion and 185 branch locations and 860 ATMs, competes directly 

with almost one hundred community banks, but is 44 times larger than the average-sized community bank. 

• The Credit Union of Texas, with $1.6 billion in assets, is almost seven times 

larger than the 17 community banks it competes with in its market. 

• Visions FCU with $1.6 billion in assets boasts that it was the largest mortgage 

lender in Broome County (NY) for 2003. 

• Some aggressive credit unions are now so large that they dominate the deposit 

market in their areas, competing head-to-head with large and small banks 

alike. For example: 

• With $2.9 billion in assets, Vystar Credit Union in Northeast Florida dominates 

its market area with more deposits in the region than First Alliance, Wachovia 

and Bank of America combined. 

• With $5.6 billion in assets, Boeing Employees’ Credit Union in Washington 

State dominates its market area with more deposits there than Washington 

Mutual and Bank of America combined. 

• With $1.8 billion in assets, ENT Federal Credit Union in Colorado dominates 

its market area with more deposits in the region than Wells Fargo and World 

Savings Bank combined. 

It is obvious that the tax subsidy provides credit unions a very large pricing advantage. For example, professors Murphy and O’Toole found that ‘‘. . . credit unions 

are enabled to offer a 67 basis point advantage in loan pricing and deposit pricing 

over banks as a direct result of the fact that credit unions do not pay state or federal taxes. In a highly competitive industry, the 67 basis point government subsidy 

is substantial.’’ 13

And the competition is not just banks versus credit unions, but also morphed 

credit unions against traditional credit unions. Lorraine Ratoni, CEO of Sacramento 

County Grange Credit Union noted: ‘‘We’re losing members to larger credit unions. 

We’re having a harder and harder time competing.’’ 14 Again, who does Congress intend to subsidize? 

Laura Bruce, writing for Bankrate.com, states, ‘‘To say credit unions don’t compete with one another or with banks just doesn’t ring true anymore. There’s competition. Some of it’s for sheer survival; some of it’s for market share. Not all credit 

unions have jumped into the fray. Some employment or organization-based credit 


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15 ‘‘The Changing Face of Credit Unions’’ By Laura Bruce, Bankrate.com, December 19, 2003. 16http://www.ncua.gov/news/speeches/2005/matz/463,20,Slide 20. 17Public Law No.: 105–219. 18 Credit Unions: Financial Condition Has Improved, but Opportunities Exist to Enhance 

Oversightand Share Insurance Management. General Accounting Office, October 2003 (GAO– 

04–91), p 35. 19 Bankrate.com. 

unions may have a very successful niche and be able to stay small and survive, 

maybe even thrive—but they’re part of a shrinking minority.’’ 15

Policies Fuel Credit Union Consolidation and Unlimited Growth 

While credit unions have grown to serve wealthy customers and offer commercial 

loans, NCUA continues to expand their tax subsidy without restraint. Through pro 

forma approvals of multiple common bonds, rapid approvals of community charters 

beyond any reasonable definition of ‘‘local,’’ and liberal interpretations facilitating 

expansion of business lending and other service offerings, NCUA has fueled the evolution towards larger, more complex credit unions. Today, a single credit union can 

serve thousands of unrelated groups, or huge geographic areas with millions of people. This is not what Congress intended. 

Mergers and acquisitions have also played an important role in the expansion of 

many large credit unions. The result is fewer, but larger, credit unions. Since 2000, 

the credit union industry has consolidated at twice the rate of the banking industry. 

Over the last 4 years, nearly 1,100 small credit unions have disappeared.16

Community charters are the fastest expanding segment of the credit union industry. Federal law permits a credit union to serve anyone in a ‘‘well-defined, local community, neighborhood or rural district.’’ 17 In fact, the number of federal credit 

unions with community charters has more than doubled from 464 in 1999 to 1,051 

as of year-end 2004. 

The use of the term ‘‘community’’ has reached absurd proportions. NCUA and various state regulators have approved community expansions that include some of the 

largest cities in the country, entire Metropolitan Statistical Areas (MSAs), multiple 

counties across state lines and even entire states as part of a credit union’s field 

of membership. The result, according to GAO, is that the average size of a community charter approved by NCUA jumped almost three-fold from a population of 

134,000 people in 1999 to 357,000 in 2003.18 And this growth occurred in spite of 

NCUA’s acknowledgment that when Congress, in 1998 legislation, added the requirement that community credit unions be ‘‘local,’’ it intended to limit the size of 

such credit unions. 

As Scott Waite, Senior Vice President and Chief Financial Officer of the $3 billionplus Patelco Credit Union, said on the credit union’s expansive community charter 

in Northern California: ‘‘[I]f you walk past our front door, you can join.’’ 19

A few of the many other examples that illustrate just how far the definition of 

‘‘local community’’ has gone include: 

• NCUA approved a community charter application for LA Financial CU to serve 

the 10 million plus residents of Los Angeles County—larger than the population 

in 42 states and a geographic area equivalent in size to the states of Rhodes 

Island and Delaware combined. 

• Wescom Credit Union’s field of membership includes the 16 million people living in Los Angeles, Ventura, Orange, Riverside, and San Bernardino Counties. 

• In 1999 and 2000, Meriwest Credit Union added the three million residents of 

Alameda and Santa Clara Counties and expanded its reach into Contra Costa 

and San Mateo Counties with a combined population of 1.7 million, and into 

the City and County of San Francisco—representing another 750,000 people. 

• Boeing Employees CU in Washington State amended its field of membership to 

include the whole state of Washington. 

To evade field of membership limitations, credit unions have been forming charitable foundations. Anyone who makes a donation to the foundation is eligible to join 

the credit union. For example, $2.1 billion GTE FCU advertises on its website: ‘‘You 

can join GTE FCU even if you are not eligible for membership through your employer or a family member. GTE FCU sponsors a non-profit educational financial 

club, CUSavers.’’ 

And some credit unions do not even go through the pretense of having a common 

bond. As Greenwood CU in Rhodes Island states, ‘‘membership . . . is open to all 

responsible people who want to be a member.’’ 


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20 American Banker, April 2, 2004. 21 56 Stat. 798. 22 Comparing Credit Unions with Other Depository Institutions, United States Department of 

the Treasury, January 2001, p.25. 23OMB, February 2005, for the fiscal years 2006 through 2010. 

II. Being a Not-for-Profit Cooperative Does Not Justify the Tax Exemption 

Since morphed credit unions no longer embody the traditional characteristics that 

justify continuing their tax exemption, they have been forced to offer a new justification. According to Dick Ensweiler, Chairman of the Credit Union National Association, ‘‘Credit unions have the tax status that they do because they are not-for-profit, 

cooperatively owned, democratically governed, and generally led by volunteers from 

among the membership.’’ 20

But being a not-for-profit cooperative does not justify being tax exempt. 

In fact, most financial institutions that had traditionally been described as ‘‘cooperative, member-owned and not-for-profit’’ are now subject to federal taxation. Those 

institutions include mutual insurance companies, mutual savings banks, and mutual savings and loan associations. Each of these financial institutions lost their tax 

exemption years ago—mutual insurance companies in 1942, and mutual savings 

banks and mutual S&Ls in 1951. Why? 

In the 1951 decision, Congress determined that: 

• These cooperative and mutual institutions were in ‘‘active competition’’ with 

taxable institutions and continuing their tax exemption would be ‘‘discriminatory;’’ and, • They had evolved into institutions whose ‘‘investing members are becoming simply depositors, while borrowing members find dealing with a savings and loan 

association only technically different from dealing with other mortgage lending 

institutions in which the lending group is distinct from the borrowing group.’’ 21

Thus, Congress determined that mutuality alone was not sufficient to continue 

the tax exemption for these institutions. This conclusion is particularly telling because of the similarities between mutual savings institutions and credit unions, as 

noted by the U.S. Treasury Department: ‘‘Mutual thrifts are the federally insured 

depository institutions most similar in structure to credit unions, because like credit 

unions, mutual thrifts generally do not have corporate stock, are not-for-profit entities, and are owned by their depositors, or members, rather than by shareholders.’’22

In fact, in a letter to the editor appearing in the September 28, 2005 edition of 

the Credit Union Times, Ralph Leas, president and CEO of Golden Bay FCU writes, 

‘‘I have long believed that the original logic of a credit union tax exemption has expired and that credit unions, like other business cooperatives in the United States, 

should pay their fair share.’’ 

The tax preference originally provided to credit unions was a way to subsidize financial services for individuals with low and moderate income. Many traditional 

credit unions still dedicate themselves to this purpose. But the metamorphosis to 

healthy and sophisticated credit unions shows how quickly this goal can be abandoned. 

If the tax exemption is no longer conditioned upon the policy goal of serving lowand moderate-income individuals and offering a limited menu of products and services, the special tax treatment for morphed credit unions cannot be justified 

III. Congress Has Acted to Limit Tax Exemptions 

Financial entities that have retained their tax-exempt status are generally subject 

to limitations that restrict either their size or the breadth of their membership. 

Moreover, their tax-exempt status remains based on narrowly crafted congressional 

directives relating to the service of niche markets or to achieving limited policy 

goals. With the erosion of both the common bond and the easing of limits on credit 

union products and services, credit unions’ are free to stray from their original mission. 

The question of where the line should be drawn to control the taxpayer expenditure needs to be answered. Every expansion of a morphed credit union expands the 

tax expenditure. OMB estimates that the credit union ‘‘tax expenditure’’ will exceed 

$7.5 billion 23 over the next five years, and this figure does not take into account 

additional lost state tax revenue. And most of the tax subsidy goes to the most aggressive credit unions—those that are least likely to embrace traditional credit 

union principles. In fact, the largest 100 credit unions absorb 40 percent of the tax 

expenditure—quite a contrast with the 29 percent of just 6 years ago. 

This is a substantial subsidy and, with inadequate restraints, it will grow rapidly. 

Basic economics tells us what happens when a tax-exempt firm and a taxpaying 


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24 Budget Options, CBO, March 2003, p. 218. 

firm offer the same products: the tax-exempt firm grows at the expense of the taxpaying firm. As business flows to the tax-exempt firms and away from taxpaying 

institutions, the size of the tax expenditure will grow. The public deserves a thorough review to assure that the tax expenditures are being appropriately spent and 

not disadvantaging competing businesses that carry out the same activities on 

which they pay taxes or fueling abandonment of the mission for which the exemption was created. 

As mutual insurance companies and mutual savings banks became similar to, in 

the words of the Congressional Budget Office, ‘‘profit-seeking corporations’’, Congress eliminated their tax exemption.24 In the Revenue Act of 1942, Congress made mutual insurance companies with annual gross receipts in excess of $75,000 subject 

to federal income tax. This change was made to restrict the exemption to smaller 

institutions deserving of the class exemption. Since that time, the threshold for eligibility for this exemption has been changed to annual net written premiums not 

exceeding $350,000. 

Conclusion & Recommendation for Change 

Congress needs to ask: ‘‘At what point do large, diversified credit unions cease to 

be the type of institutions the Congress envisioned to be worthy of a tax exemption?’’ 

Complex credit unions, which have evolved into full-service financial institutions 

serving the general public, are a far cry from the small, traditional credit unions 

that served distinct groups of ‘‘people of small means’’ that Congress sought to assist 

when it provided tax subsidies to credit unions in the 1930’s. 

These credit unions are very different from the many credit unions that have remained true to the spirit of the original credit union charter. Credit unions that are 

indistinguishable from tax-paying banking institutions no longer deserve their tax 

exemption and should be required to pay taxes or to convert to a bank charter. 

One possible tax model currently applies to most cooperatives organized for economic purposes (as opposed to charitable or limited purposes), i.e., Subchapter T of 

the Internal Revenue Code. Members, or ‘‘patrons’’ would be responsible for paying 

taxes on earnings (i.e., interest on deposits) passed through to them (at their individual tax rate). Retained earnings—which do not benefit individual members— 

would be taxed at the general corporate rate. Under this approach, credit unions 

could continue to pass on their financial profits to their members, either through 

higher interest rates on deposits or through lower interest rates on loans. Their taxadvantaged growth, however, would be eliminated. At a minimum, Congress needs 

to curb the ability of credit union regulators to expand the size of the subsidy at 

the taxpayers’ expense. 

Removing the tax exemption for mutual savings institutions and mutual insurance companies did not diminish their vitality. These institutions are healthy, wellcapitalized, and profitable. During the last five years, mutual savings banks and 

mutual savings and loans paid $2.9 billion in corporate income taxes. Just like my 

bank, they pay their fair share. The same cannot be said for today’s new breed of 

credit unions. 

Thank you. 

f 

Chairman THOMAS. Thank you. Mr. Hayes? 

STATEMENT OF DAVID E. HAYES, PRESIDENT AND CHIEF EXECUTIVE OFFICER, SECURITY BANK, DYERSBURG, TENNESSEE, AND CHAIRMAN, INDEPENDENT COMMUNITY BANKERS OF AMERICA 

Mr. HAYES. Mr. Chairman and Members of the Committee, my 

name is David Hayes. I am President of Security Bank in 

Dyersburg, Tennessee, and the Chairman of the Independent Community Bankers of America. I am pleased to appear today on behalf of the ICBA and its nearly 5,000-member community banks 

throughout this great country. My bank has $135 million in assets. 

I have 70 employees, and I live in a community 19,000 people, located in rural west Tennessee. The ICBA believes this hearing will 


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help foster a better understanding of the genuine concerns and 

frustrations community banks often have as they work in their 

local communities, pay their fair share of taxes, and compete head 

on with credit unions. The credit union sector often states that they 

represent only a small portion of the entire financial service industry. However, an important distinction is that most often tax-exempt credit unions compete head on with taxpaying community 

banks of similar size. Research finds that the largest overlap in 

terms of competition in size is in the $10 million to $100 million 

asset size class, which includes about half of all banks and about 

40 percent of all credit unions. In this class, banks and credit 

unions primarily compete with each other and not with the largest 

banks or credit unions. 

Unfortunately, the dramatic tax burden difference between these 

taxpaying banks and tax-exempt credit unions places community 

banks at a severe competitive disadvantage. Congress originally allowed credit unions tax and regulatory advantages in the thirties 

for the purpose of helping serve people of modest means and with 

a common bond. But today, the notion of modest means and common bond is lost. For example, the local credit union in my community promotes that anyone who lives, worships, attends schools, or 

business or other legal entities and their families are eligible customers. Today, credit unions have more than 87 million customers, 

reaching the wealthy and the middle-income classes. In fact, there 

are more than one hundred billion dollar credit unions providing 

sophisticated banking services. Consequently, today, the $680 billion credit union industry is quite similar to any other financial 

service provider except for their special regulatory treatment and 

tax subsidy. Because of their rapid expansion, the credit union tax 

subsidy will cost an estimated $31 billion in lost Federal revenue 

over the next decade, according to the Tax Foundation. 

Credit unions often cite that they deserve tax-exempt status because of their mutual ownership structure. However, mutual structures can be taxed and are, in fact, taxed. In 1951, Congress eliminated the tax-exemption for savings and loan and mutual savings 

banks on the grounds that they were no longer unique from other 

taxpaying financial institutions. Perhaps most troublesome is the 

failure of the credit union industry to provide any unique service 

to individuals of modest means despite their large tax subsidy. A 

growing body of research shows how banks consistently exceed 

credit union performance in lending to women, minorities, and lowand moderate-income borrowers in communities. Ironically, little of 

credit unions’ tax subsidy is passed to their members. The Tax 

Foundation research shows that a huge portion of the credit union 

earnings are retained and used for expansion. Only six of 50 basis 

points may go to credit union borrowers through lower interest 

costs. While more and more research shows credit unions are not 

providing any special services to the people of modest means, the 

credit union industry has embarked on expanding its business 

lending. It is doubtful that Congress in passing the Federal Credit 

Union Act 1934 envisioned credit unions making commercial loans. 

Yet, credit unions continue to advance measures to skirt their legal 

business lending cap. 


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1The Independent Community Bankers of America represents the largest constituency of community banks of all sizes and charter types in the nation, and is dedicated exclusively to representing the interests of the community banking industry. Founded in 1930, ICBA is celebrating its 75th anniversary year. For more information, visit ICBA’s website at www.icba.org. 2Federal Reserve Bank of Kansas City. Financial Industry Perspectives, July 2005. 

3 Ibid. p.6. 

As long as credit unions are tax-exempt, the ICBA will oppose 

expanding credit union powers, such as H.R. 2317. In conclusion, 

the credit union industry is similar to other taxpaying banks serving the same customer base. Notably, the Tax Foundation credit 

union research concluded that today the principal justification for 

tax-exemption would seem to be that it already exists. Over the 

past decade, Security Bank has paid more than $4.2 million in Federal income taxes alone, and we proudly support our local community. During that same period of time, Security Bank has committed over a million dollars to fund scholarships at local community colleges, while tax-exempt credit unions have done very little. 

When asked to contribute for civic needs, the response typically is 

we can’t because we’re not-for-profit. Community banks pay their 

taxes and serve their communities. We urge the Committee to consider policies that would help create greater parity between tax-exempt credit unions and taxpaying community banks. Thank you 

very much. 

[The prepared statement of Mr. Hayes follows:] 

Statement of David E. Hayes, President and Chief Executive Officer, Security Bank, Dyersburg, Tennessee, and Chairman, Independent Community Bankers of America 

Mr. Chairman, Ranking Member Rangel, and members of the committee, my 

name is David Hayes, Chairman of the Independent Community Bankers of America (ICBA) 1 and President and CEO of Security Bank, a $135 million community 

bank in Dyersburg, Tennessee. I am pleased to appear today on behalf of ICBA and 

its nearly 5,000 members nationwide to testify on the ‘‘Review of the Credit Union 

Tax Exemption.’’ 

The ICBA commends Chairman Bill Thomas and the Committee members for undertaking this important hearing and for examining the current tax treatment of 

the credit union sector. We hope that this hearing helps foster a better understanding of the concerns and frustrations community banks often have as they try 

to best serve their local communities and compete head-on with tax-exempt credit 

unions. 

Credit Union Tax Exemption Warrants ReassessmentThe origins of the credit 

union industry’s current tax exemption reach back to the Great Depression, a time 

when basic financial services were extremely limited for low- and moderate-income 

Americans. Congress originally allowed credit unions generous tax and regulatory 

advantages in the 1930s for the purpose of helping serve individuals of modest 

means. Individual credit unions were largely limited to serving individuals sharing 

a common bond—in most cases, the same employer or occupation. While the credit 

union tax subsidy has continued for seven decades, today’s modern financial services 

industry is robust, highly competitive, and offers a plethora of products and services 

readily available to all consumers. 

Over the decades, the tax-exempt credit union industry has changed dramatically 

too. Credit unions have expanded aggressively in size and scope. The tax-exempt 

credit union industry has been growing even faster than commercial banks. According to the Federal Reserve Bank of Kansas City’s research, credit union growth is 

on a steady upward climb with accelerated growth beginning in 2000.2 Between 

1994 and 2004, credit union annual asset and deposit growth exceeded that of commercial banks in the United States. Commercial banks witnessed 7.7% annual asset 

growth and 6.9% annual deposit growth during 1994 to 2004 while credit unions experienced 8.4% annual asset growth and 8.1% deposit growth during that same decade.3

Today, credit unions have a broad customer base of more than 87 million customers, reaching the wealthy and middle-income classes and they offer the full 


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range of financial products and services. In fact, credit unions are even expanding 

a large and growing commercial lending business. 

Consequently, today’s $680 billion credit union industry has become quite similar 

to any other financial service provider, except for their special regulatory treatment 

and tax subsidy. As our Nation struggles with its fiscal policy demands and strives 

to make our tax system more fair and equitable, it is important for lawmakers to 

assess ways to create greater parity between tax-exempt credit unions and competing taxpaying entities. 

Congress Made Other Tax-Exempt Financial Service Providers TaxableCredit 

unions often cite that they deserve tax-exempt status because of their ‘‘mutual’’ ownership structure. However, mutual structures can be taxed—and in fact they are. 

For example, Congress did impose taxes on mutual savings banks and mutual insurance companies. Today, all mutual thrifts pay federal taxes at the same rate as 

other for-profit companies. The savings and loan associations and mutual savings 

banks were not subject to the federal income tax until 1951. By 1951, Congress recognized the services of the thrifts and their customer base evolved so they were not 

much different from other financial service providers. The equitable policy solution 

was to include thrifts in the tax base and Congress eliminated their tax subsidy on 

the grounds they were similar to competing taxpaying corporations. 

Likewise, today’s tax-exempt credit unions have grown to resemble other competing financial service providers which calls into question the ongoing policy justification for the credit union tax subsidy. Credit unions can offer their more than 

80 million customers mortgages, car loans, small business loans, credit cards, individual retirement accounts, brokerage services, and commercial loans. From the 

modest origins of the 1930s, today’s tax-exempt credit union industry has dramatically changed to support the same broad customer base, and to provide the same 

range of services as taxpaying financial institutions. An equitable tax system would 

impose the same tax treatment on the same economic actions and transactions. Yet 

community banks face a greater tax and regulatory burden than tax exempt credit 

unions while they serve the same customer base. 

Not Your Grandfather’s Credit Union 

Today there are one hundred credit unions with $1 billion or more in assets providing sophisticated banking products and services to wealthy and middle-income 

members while benefiting from tax-exempt status. Another noteworthy aspect of today’s tax-exempt credit union industry is that corporate credit unions have been set 

up to provide the same sophisticated wholesale services as taxpaying correspondent 

banks. For example, U.S. Central Credit Union in Lenexa, Kansas holds more than 

$35 billion in assets and is owned by 72 member credit unions and has over $700 

million in annual revenue. Today there are more than 30 corporate credit unions 

with over $110 billion in combined assets providing specialized and sophisticated 

banking services for credit unions. 

No Common Bond 

Today’s credit unions have virtually no limit to their customer base as the ‘‘common bond’’ requirement has become meaningless. Take for example the recent credit 

union charter approval for the Los Angeles Financial Credit Union to serve: ‘‘Anyone who lives, worships, works in, or attends school in Los Angeles County.’’ This 

encompasses a county of more than 10 million people and a geographic area larger 

than the states of Delaware and Rhode Island combined. 

Similarly, the NCUA justified the expansion of the $1.6 billion Bethpage Federal 

Credit Union by saying that the 2.5 million people in its field of membership ‘‘interact by traveling along common roadways, receiving news from common media outlets, and shopping at common trade centers.’’ One community credit union in Utah 

encompasses six counties—an area larger than the state of Maryland. The ICBA believes that these field of membership expansions undermine any concept of the common bond, rendering it meaningless and removing a key policy tenet underlying the 

purpose for any credit union tax-exempt advantage. The 87 million credit union customers are indistinguishable from the customers of community banks and thrifts. 

Tax Exempt Credit Unions Not Serving Special Purpose 

What is the ongoing policy justification for the credit unions’ tax subsidy? Is the 

$680 billion credit union industry serving a unique purpose not met by other financial service providers? A large and growing body of research from the Congressional 

Budget Office, the General Accountability Office, the Woodstock Institute, the Tax 

Foundation and other research groups indicates that there is little or no evidence 

that today’s tax-exempt credit unions are better serving the moderate and low-income individuals their tax-exempt status was intended to foster. 


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4 ‘‘Competitive Advantage: A Study of the Federal Tax Exemption for Credit Unions,’’ by Professor John A. Tatom, Ph.D. Tax Foundation, 2005. www.taxfoundation.org 5 ‘‘Credit Unions: True to Their Mission?’’ National Community Reinvestment Coalition, May 

2005. www.ncrc.org 6General Accounting Office. ‘‘Credit Unions: Financial Condition Has Improved, but Opportunities Exist to Enhance Oversight and Share Insurance Management.’’ October 2003. 7Woodstock Institute. ‘‘Rhetoric and Reality: An Analysis of Mainstream Credit Unions’ 

Record of Serving Low-Income People. February 2002. 8School of Business, Virginia Commonwealth University. A Study on the Comparative Growth 

of Banks and Credit Unions in Virginia: 1985–1995.’’ August 1997. 9 Congressional Research Service. ‘‘Should Credit Unions be Taxed?’’ August 2005. 

A recent Tax Foundation study concluded that the credit union tax subsidy has 

largely failed to deliver financial services to low-income people.4 A 2005 study by 

the National Community Reinvestment Coalition determined that banks actually do 

a better job of fulfilling the credit unions’ mission than the credit unions. This study 

highlighted how banks ‘‘consistently exceed credit unions’ performance in lending to 

women, minorities, and low and moderate-income borrowers and communities.’’ 5 A 

2003 Government Accountability Office Study found that credit unions serve a more 

affluent clientele than banks. This GAO study concluded that ‘‘credit unions overall 

served a lower percentage of households of modest means than banks.’’ 6

Another study by the Woodstock Institute concluded that credit unions serve a 

higher percentage of middle- and upper-income customers than lower-income households.7 Similarly, a study by the Virginia Commonwealth University concluded that 

credit unions tend to serve a higher proportion of wealthier households in their customer base.8

Additionally, a recent Congressional Research Service report added that through 

credit union service organizations, ‘‘credit unions may provide their members with 

panoply of sophisticated financial services and products that rivals the offerings of 

banks and thrifts.’’ The CRS report notes that ‘‘over the past 30 years, most of the 

distinctions between credit unions and other depository institutions have been eliminated or reduced because of deregulation; consequently, the justification for the tax 

exemption for credit unions has been increasingly questioned.’’ 9 Simply stated, more 

and more studies are piling up showing that today’s credit unions are not serving 

any unique purpose. 

Credit Unions Expand into Commercial Lending 

While new research continues to show credit unions are not providing any special 

services to low- and moderate-income individuals, the credit union industry has 

greatly expanded its business and commercial lending. The credit unions recently 

sought and won regulatory approval to increase their small business commercial 

lending through the Small Business Administration (SBA). Ironically, Congress did 

not approve SBA business lending for credit unions, however the credit union regulator NCUA did. Notably, these SBA loans are not subject to the legal 12.25 percentof-assets business-lending cap Congress specifically placed on the credit unions. So 

credit unions can expand their SBA business lending regardless of Congress’ intent. 

Credit unions continue aggressive measures to skirt the legal 12.25 percent business-lending cap, notably with the advancement of the ‘‘Credit Union Regulatory 

Improvement Act’’ (H.R. 2317) in the 109th Congress. This bill would raise the current statutory limit on business lending by tax-exempt credit unions to 20 percent 

of a credit union’s assets from 12.25 percent, double the size of loans that would 

be excluded from the cap from $50,0000 to $100,000 and exclude certain other business loans from any limit. 

As long as credit unions remain exempt from the tax and regulatory requirements 

imposed on community banks, the ICBA strongly opposes the expanded credit union 

powers in H.R. 2317. The bill substantially increases the credit unions’ commercial 

lending powers and makes a number of statutory changes that are inconsistent with 

credit unions’ historic mission and favored tax status. This Ways and Means Committee hearing on tax-exempts provides a solid opportunity to assess such credit 

union activities in light of the ongoing special tax treatment the credit union industry enjoys. 

Commercial Lending Should Be Incidental Service 

The ICBA continues to express concerns about the rapid expansion of credit 

unions into the commercial lending arena, so long as credit unions remain tax-exempt. It is doubtful that Congress, in passing the Federal Credit Union Act of 1934 

for the purpose of helping credit unions serve individuals of modest means, envisioned credit unions making commercial loans. Indeed, H.R. 1151, the Credit Union 

Membership Access Act (‘‘CUMAA’’), which first codified the practice of commercial 


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10 ‘‘Competitive Advantage: A Study of the Federal Tax Exemption for Credit Unions,’’ by Professor John A. Tatom, Ph.D. Tax Foundation, 2005. www.taxfoundation.org 11 ‘‘Competitive Advantage: A Study of the Federal Tax Exemption for Credit Unions,’’ by Professor John A. Tatom, Ph.D. Tax Foundation, 2005. www.taxfoundation.org 

lending, actually imposed a strict limit on credit union business loans. The Senate 

Banking Committee report on this bill stated clearly that Congress intended that 

business lending by credit unions be incidental to, and not the main focus of, the 

services provided to their customers. Yet through SBA lending and expanded lending powers, credit unions are aggressively expanding into business lending. 

Tax-Exempt Credit Unions Compete Directly With Taxpaying Community Banks 

Today, tax-exempt credit unions compete directly against taxpaying community 

banks and continue to expand their financial service power, size, and scope. The top 

federal income tax rate applied to C corporation community bank income and S corporation community bank income allocated to shareholders is 35%. Additionally, income generated by C corporation community banks is subject to double taxation 

when distributed in the form of dividends or capital gains, creating a combined tax 

burden exceeding 57%. 

In sharp contrast, tax-exempt credit unions pay no federal income tax yet compete 

directly with taxpaying community banks. The dramatic tax burden differential between taxpaying commercial banks and tax-exempt credit unions places community 

banks at a severe competitive disadvantage and highlights a specific example of 

where the tax code is extremely unfair. 

The credit union sector often states that they represent only a small portion of 

the entire financial service industry. However, most often tax-exempt credit unions 

compete head on with community banks of similar size. The Tax Foundation’s credit 

union study finds that the ‘‘largest overlap in terms of competition and size is in 

the $10 to $100 million size class, which includes about half of all banks and 30 

to 40 percent of all credit unions. In this class banks and credit unions primarily 

compete with each other and not with the largest banks or credit unions.’’ 10

Growing Tax-Exempt Credit Union Industry Responsible for Significant Tax Loss 

The ICBA would like to call to the Committee’s attention the most recent independent research conducted on the tax cost associated with the credit union industry. Notably, the Tax Foundation’s 2005 credit union study concluded that credit 

unions have used their tax-subsidized status to greatly expand in size and scope. 

Because of their rapid expansion, the Tax Foundation estimated that the credit 

union tax subsidy will cost $31 billion in lost Federal revenue to the U.S. Treasury 

over the next decade.11 This study noted how large, multi-group and geographicbased credit unions have far exceeded their original tax-exempt statutory mission 

and unfairly use their tax-free status to compete with taxpaying community banks. 

Little of the Credit Union Tax Subsidy Passed Through to Customers 

Other important finding of the independent Tax Foundation’s research into the 

tax-exempt credit union industry includes: 

Corroborated by other studies of credit unions and banks, the direct and indirect 

evidence gathered for the Tax Foundation study shows that the equity holders of 

credit unions receive the tax savings as unusual returns. These unusual returns do 

not show up as relatively high dividends, however. Instead, they occur as unusually 

large retained earnings accumulated as net worth in their credit unions. The stakeholders’ extra income reinvested in the credit union provides new capital that allows 

the credit union to grow faster than other institutions. Simply stated, rather than 

return the benefit of the tax subsidy to their members, a huge portion of credit 

union earnings are retained and used for expansion. 

Only 6 Basis Points of 50 Basis Point Advantage Benefits Credit Union Members 

According to the Tax Foundation’s research, of the 50 basis points in subsidy that 

the tax exemption provides, at least 33 basis points accrue to owners in the form 

of larger equity and larger assets. Approximately 6 basis points may accrue to credit 

union borrowers through lower interest rates, and not more than 11 basis points are 

absorbed by higher labor costs. There is little or no effect on deposit rates or other 

costs. There appears to be substantial leakage of the credit union tax advantage into 

new expenditures to grow. For example, the $2.7 billion Digital Credit Union in 

Massachusetts recently spent $5.2 million to purchase the naming rights for an auditorium now called the DCU Center. 


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Little Justification for Credit Union Tax Exemption 

Today credit unions continue to grow faster than banks, have little practical limitations on membership, and make business loans that increasingly have no limits 

on who can borrow, how much or for what purpose. More troublesome is the failure 

of the credit union industry to provide any special or unique service to individuals 

of modest means. 

The Tax Foundation research concludes that today the principal justification for 

the tax exemption would seem to be that it already exists and, therefore, removing 

it could adversely impact thousands of institutions and their customers. Under current law, as it is being enforced, there is no good policy argument based on equity 

or efficiency for maintaining the tax exemption. And these institutions and customers are perceived, incorrectly, to be relatively lower income or associated with 

the economic security and progress of lower income people. 

Tax Reform and Credit Unions 

Policymakers are in the process of examining ways to make our tax code fairer 

and simpler while raising needed revenues. Fiscal neutrality and fairness in the 

Code would require addressing the special tax treatment of credit unions. Taxing 

some financial institutions that offer the same consumer deposits and loans while 

not taxing others, in particular credit unions, distorts the allocation of resources. It 

promotes the employment of deposit and credit resources in the tax-free credit union 

sector at the expense of their competitors, banks, thrift institutions and finance 

companies. Notably, the Tax Foundation study could not find any net benefit to 

members that could not or would not be available in the absence of tax-subsidized 

credit unions. Credit unions are not compelled by regulators to meet a higher standard in the service of low- and moderate-income customers, and there is no evidence 

that they do so voluntarily. 

Conclusion 

Credit unions are among the most rapidly growing financial firms in the country. 

Congress eliminated the tax exemptions for savings and loans and mutual savings 

banks decades ago on the grounds that they were similar to profit-seeking corporations. Since then, large credit unions have come to resemble thrifts and banks. The 

looser field of membership requirements allows credit unions, especially large ones, 

to expand their growth opportunities, reinforcing the competitive advantage obtained from their tax advantages. Today’s $680 billion tax-exempt credit union industry is conspicuously similar to 

other taxpaying financial service providers serving the same customer base. There 

is little or no evidence that credit unions are providing any unique or special benefit 

or service to people of modest means—the original impetus for their special tax 

treatment. Therefore, it is important for policymakers to reassess the tax-exempt 

status of the rapidly expanding credit union industry as part of any review and 

oversight of the tax-exempt sector. This Ways and Means hearing on the tax-exempt 

credit union sector is a welcome first step. 

Community banks pay their taxes and serve their communities. Community 

banks play a vital role in the U.S. economy as a critical source of lending for individuals, small businesses and farms across America. The ICBA applauds the Ways 

and Means Committee for considering policies that would help make the tax code 

more equitable as it is applied to tax-exempt credit unions and taxpaying community banks. 

I sincerely appreciate the opportunity to offer our comments for this important 

hearing and to highlight areas where the tax code is extremely unfair. The ICBA 

looks forward to working with the Committee and we are encouraged by your ongoing efforts to fairly assess the standing of tax-exempt credit union industry. 

f 

Chairman THOMAS. I thank the gentleman. Mr. Macomber? 

STATEMENT OF MARK E. MACOMBER, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, LITCHFIELD BANCORP, LITCHFIELD, 

CONNECTICUT, ON BEHALF OF AMERICA’S COMMUNITY 

BANKERS 

Mr. MACOMBER. Thank you, Chairman Thomas. First, I’d like 

to express my gratitude to Congress Nancy Johnson for her kind 

introduction today. Nancy represents our district, our State, and 


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our Nation extraordinarily well. Chairman Thomas, Ranking Member Rangel, and Members of the Committee. I am Mark Macomber. 

I am President and CEO of the Litchfield Bancorp in Litchfield, 

Connecticut. I am here this afternoon representing America’s Community Bankers, where I serve as first Vice chairman of the board 

of Directors. I want to thank Chairman Thomas for his leadership 

in reviewing the appropriate application of tax-exemptions for cooperative and not-for-profit organizations and in particular for today’s 

hearing, which is addressing the credit union industry. My institution is a $180 million state chartered community bank that is part 

of a two-bank mutual holding company. We are one of 765 mutual 

savings institutions that operate throughout the country alongside 

community banks organized as stock companies. 

Today, my remarks will focus on the unfair competitive advantages that credit unions have compared to community banks like 

mine. We are facing a looming crisis unless tax policy favoring 

multi-billion dollar credit unions is changed. We urge the Committee to create a fair tax system that encourages a diversity of 

community credit providers, offering competitive products and paying taxes to support the public needs of our Nation. The Nation’s 

mutual savings institutions hold over $250 billion in assets and 

paid $800 million in taxes in 2004. Mutual institutions have a long 

and vibrant history and have demonstrated an enduring commitment to our communities. Over 35 percent of mutual institutions 

have been in existence for 100 years or more. My own institution 

was chartered in 1850. Mutual institutions are cooperative. They 

were founded to serve the average American. We are a critical part 

of our local community—its life, its culture, and its economic future. We have survived depressions and recessions, world wars, 

and natural disasters. 

In 1951, we survived taxation. Despite the revocation of our taxexemption, mutual savings institutions continue to experience 

growth and thrive as pillars in the communities we serve. The parallel to the development of mutual savings institutions and credit 

unions is a very close one. In 1951, this Committee determined 

that mutual institutions were mature and provided a broad range 

of banking products and services, and, as a result, should become 

subject to taxation despite their cooperative status. I never had the 

opportunity to meet my predecessors from that time, but I am quite 

sure that they didn’t like losing their tax-exemption. However, the 

Committee’s decision was the right one based on principles, principles of equity, fairness, allowing the market to allocate resources 

and generating revenue to support essential functions of government. In our written submission, Chairman Johnson states that, 

and I quote this, ‘‘in 1951, Congress found the mutual thrifts had 

essentially lost the essence of their mutuality; and, therefore, lost 

their tax-exemption.’’ 

Her submission reflects a total lack of understanding of mutuality then and now. My own bank lives up to the intent and standards of the community service envisioned by its incorporators in 

1850. She is simply wrong on this count. Today, the credit union 

industry is a $646 billion segment in the financial services industry, and is growing rapidly. This growth, driven primarily by multibillion dollar credit unions, is increasingly displacing community 


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banking. This trend will accelerate unless the Committee takes action. Inaction will result in more concentration and less competition driven only by tax incentives and not by economic efficiency. 

The parallels between mutual savings banks 50 years ago, including my own bank, and today’s conglomerate bank-like credit unions 

cannot be ignored. Conglomerate full-service credit unions are competing for the same customers and offering the same products as 

community banks. In fact, credit union service organizations, 

CUSOs, as used by Federal Credit Unions, are in abuse of their 

tax-exempt status. Allowing credit unions to create new companies 

that are outright purchase companies is not only unfair, but completely unjustifiable and further expands their tax-exemption. 

These credit unions offer every conceivable financial service, and 

serving more than most community banks. The range of services 

even includes airplane leasing, and, as the Chairman noted, pet insurance. Individual credit unions have been granted geographic 

markets as large as 11,000 square miles and so-called fields of 

membership of over 10 million people. This last number, again alluded to—referred to by the Chairman, is particularly phenomenal 

because it means that there is one credit union today serving a 

population greater than that of 42 of the 50 States. I say it again 

because it bears repeating. Mr. Chairman and Members of the 

Committee, like mutual savings institutions in 1951, these credit 

unions should be recognized as a mature industry that has a responsibility to contribute to essential federally funded initiatives. 

In 1951, Congress concluded that the continuance of tax-free treatment for mutual institutions would be discriminatory. Clearly, continuing a tax-free treatment for bank-like credit unions would be 

equally discriminatory today. Thank you for the opportunity to testify before your Committee today. I would be happy to answer any 

questions you may have. 

[The prepared statement of Mr. Macomber follows:] 

Statement of Mark E. Macomber, President and Chief Executive Officer, 

Litchfield Bancorp, Litchfield, Connecticut, on behalf of America’s Community Bankers 

Chairman Thomas, Ranking Member Rangel and Members of the Committee, I 

am Mark Macomber, President and CEO of Litchfield Bancorp in Litchfield, Connecticut. Litchfield Bancorp is a $180 million state chartered community bank, part 

of a two bank mutual holding company. I also serve as CEO of the holding company. 

I am here this morning representing America’s Community Bankers (ACB), where 

I serve as First Vice Chairman of ACB’s Board of Directors. I want to thank Chairman Thomas and his staff for their leadership in exploring the outdated tax exemption that bank-like credit unions continue to enjoy at the detriment of community 

banks across the country, and the impact of foregone revenue on strained government finances. 

My testimony is in four parts as follows: 

1) History of Mutual Institutions and their Taxation; 

2) History and Background of Credit Unions; 

3) Taxation & Legislative History of Today’s Credit Unions; 

4) Mission of Credit Unions and How They Have Strayed. 

The History of Mutual Institutions and their Taxation 

Americans have always been entrepreneurs. Almost 200 years ago, when Americans of limited means could not gain access to the commercial banking system, 

neighbors pooled resources to create mutual savings institutions. As customers of 

these institutions, they insisted on quality service for themselves and their communities. As stewards, they delivered it. 


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The contributions of mutual institutions are documented in the history of American banking and the histories of the communities that have benefited from the mutual institutions tradition of service. For nearly two centuries, the nation’s mutual 

institutions have contributed to the quality of life in cities and towns across the 

United States. An industry of independent, strongly capitalized and highly efficient 

institutions with a commitment to community service has flourished. Individuals of 

diverse backgrounds have formed businesses that strive to address the need for 

credit and services in communities. 

As the first financial institutions in our country, mutual institutions in the United 

States were founded by individuals, for themselves and their neighbors. The doors 

of commerce that banking opened for the well-to-do in the early days of the country 

were closed to average citizens. Mutual institutions stepped into this breach to provide high quality consumer and small business banking services to the depositors 

and to the communities they serve. They continue this tradition today, and have become a critical part of their local culture and community. 

Beginning just 40 years after the Declaration of Independence, mutuals were 

founded to provide banking services and credit access for ordinary citizens whom 

the established banking community ignored. Whether state or federally chartered, 

mutual institutions serve the average American regardless of family background, occupation or belief. These early mutual institutions did not pay taxes. 

State chartered mutual savings banks, the earliest forms of mutual savings institutions, date back to 1816. The first legally sanctioned mutual savings bank in the 

world, The Provident Institution for Savings, in Boston, Massachusetts, was patterned after similar institutions in England and Scotland. Its founders dedicated the 

institution to providing a ‘‘means of contributing to the welfare of the working classes.’’ 

This was the forerunner of what became the mutual savings bank—one of the two 

mutual savings institution charters that eventually became a permanent part of the 

U.S. banking system. The other—the building and loan associations—later evolved 

into the present savings and loan associations. Federal savings and loans associations were first chartered in 1933 after the enactment of the Home Owners Loan 

Act. These institutions were chartered with the express purpose of promoting and 

providing homeownership. 

Provident Institution for Savings had as its purpose the encouragement of thrift 

among low- and middle-income persons. One of the reasons for the popularity of the 

new mutual institutions was the ease of use—workers could deposit as little as five 

cents and could withdraw the monies as needed. 

About 765 mutual institutions—including mutual holding companies—hold over 

$250 billion in assets. Mutual institutions have written and hold about $175 billion 

in loans, and in addition they service about $35 billion in mortgage loans that have 

been sold to the secondary mortgage market. Mutual banks have helped millions of 

families live the American dream by writing countless loans for homes, cars, education and small businesses, and to help see families through difficult times. 

Mutual institutions demonstrate an adaptability that allows the development of 

new products. Like their stock-owned competitors, they grow through internal expansion and by combination with other federally insured depository institutions and 

branch networks. This flexibility and adaptability is evidenced by the fact that 263 

mutual savings institutions operating today have been in existence for 100 or more 

years. These venerable institutions, the oldest of which has operated for 185 years, 

constitute 35 percent of all mutual institutions operating today. 

Mutual banks have survived depressions and recessions, world wars, natural disasters and taxation because of a distinctive management strategy that is focused on 

the long-term future of the bank and community. Directors or trustees have a fiduciary responsibility to ensure that their institution meets the highest standards of 

safety and soundness. Mutual managers are free from the short-term focus of financial analysts who expect higher earnings every quarter and are thus able to look 

to the long-term needs of their institutions and communities. 

Mutual institutions are the perfect role model of community banks and the community banking philosophy of putting customers and community first. Mutuals are 

critical participants in the rapidly evolving financial services marketplace. We believe that the orientation toward community service, local decision-making and stable employment in mutual banks are important keys to the continued success of any 

community in which they are located. Mutual institutions have demonstrated an 

adaptability that allows the development of new products as well as growth. While 

mutual institutions have a continuing need to be competitive and profitable, they 

demonstrate a responsiveness to community that goes well beyond profits and 

strives to improve the quality of life of their neighborhoods. Managers of mutual inVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00137 Fmt 6633 Sfmt 6621 E:\HR\OC\26372.XXX 26372

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1 ‘‘Outline of Study by Committee on Ways and Means of Federal Tax Revision,’’ Press Release, Committee on Ways and Means, U.S. House of Representatives, June 5, 1959. 

stitutions believe that their charter is well suited to support non-profit and other 

civic enterprises. 

Until 1951, mutual institutions of all types, including mutual savings and loans 

associations, mutual savings banks, and cooperatives, were tax-exempt. In 1951, the 

tax exemption was repealed and these entities became subject to the regular corporate income tax on a phased-in basis. It was believed that mutual institutions 

were mature enough and were providing a sufficiently broad range of banking products and services that they should not retain preferential tax treatment. 

In 1959 the Ways and Means Committee described the criteria laid down as 

guidelines for considering such changes in taxation: 

1. Equity and fairness; 

2. Progression in the distribution of tax burdens; 

3. Allowing free play of the market in allocating resources; 

4. Providing a climate for economic growth; 

5. Ease of taxpayer compliance and administration of the law.1

Although mutual institutions initially were permitted to defer portions of the new 

tax liabilities by establishing special bad debt reserves to encourage the accumulation of reserves, these deferrals were progressively eliminated in a series of changes, 

principally in 1962 and 1969, and were eliminated entirely in 1986. Despite being 

progressively subjected to full taxation over a period of years, mutual institutions 

have thrived as pillars in the communities they serve. 

Over the past 15 years, the number of mutual institutions has grown as a share 

of all banks. This change has occurred because the cooperative structure and community focus of mutual institutions has insulated them in part from the ‘‘merger 

frenzies’’ that have sometimes gripped markets for publicly traded banks. Today, 

mutual savings institutions are stable, competitive, tax-paying institutions that operate under flexible charters conducive to offering a wide range of essential banking 

services to the communities in which they operate. It is little wonder that in recent 

years the memberships of two dozen credit unions have chosen to convert to a mutual institution charter. 

History and Background of Credit Unions 

Credit Unions can also be state or federally chartered. State credit unions were 

first chartered in the United States in the early twentieth century. Federal credit 

unions are chartered under the authority of the federal credit union act, which was 

enacted in 1934. 

A federal credit union is a tax-exempt, cooperative financial institution owned and 

run by its members. Credit unions enable members to save and borrow money. 

Members pool their funds to make loans to one-another. The volunteer board that 

runs each credit union is elected by the members. In 1900, the credit union concept 

crossed the Atlantic to Levis, Quebec. There, Alphonse Desjardins organized a credit 

union to relieve the working class from usurious interest charged by loan sharks. 

In 1909, Desjardins helped a group of Franco-American Catholics in Manchester, 

New Hampshire organize St. Mary’s Cooperative Credit Association—the first credit 

union in the United States. An ironic footnote—while it remains a credit union 

today, it recently changed its name to St. Mary’s Bank. The Massachusetts Credit 

Union Act became law in that same year. The Massachusetts law has served as a 

basis for subsequent state credit union laws and the Federal Credit Union Act. 

Credit unions became increasingly popular in the 1920’s. People had more money 

to save and could afford durable goods. However, they needed a source of inexpensive credit. Credit unions began growing because commercial banks and savings institutions typically did not provide consumer credit. In 1920, the Massachusetts 

Credit Union Association began promoting the development of credit unions in that 

state. Within a year, Massachusetts chartered 19 new credit unions. By 1925, 26 

states had passed credit union legislation. By 1930, that number grew to 32 states 

with a total of 1,100 credit unions. In 1934, President Roosevelt signed the Federal 

Credit Union Act into law, authorizing the establishment of federally chartered 

credit unions in all states.The purpose of the federal law was ‘‘to make more 

available to people of small means credit for provident purposes through a 

national system of cooperative credit . . .’’ A statutory exemption from taxation 

was not provided until 1937. Two reasons were given for granting the exemption: 

1. Taxing credit unions on their shares, much as banks are taxed on their capital 

shares, ‘‘places a disproportionate and excessive burden on the credit unions’’ because credit union shares function as deposits; 2. ‘‘Credit unions are mutual or coopVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00138 Fmt 6633 Sfmt 6621 E:\HR\OC\26372.XXX 26372

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2S. REP. 82–781 (1951) reprinted in United States Code Congressional and Administrative 

Service at 1993–1994. 

erative organizations operated entirely by and for their members. . . .’’ Competition 

in the 1970s brought major changes in the products and services offered by financial 

institutions. Credit unions did not want to be left out. In 1977, federal legislation 

enabled credit unions to offer expanded services, including share certificates and 

mortgage lending. During the decade the number of credit union members more 

than doubled and assets in credit unions tripled to over $65 billion. Deregulation, 

increased flexibility in merger and field of membership criteria, and expanded member services characterized the 1980s. High interest rates and unemployment in the 

early ’80s brought supervisory changes and insurance losses. With the Share Insurance Fund near bankruptcy, the credit union community called on Congress to approve a plan to recapitalize the Fund. In 1985, federally insured credit unions recapitalized the NCUSIF on their own by depositing one percent of their shares into 

the Share Insurance Fund. Backed by the ‘‘full faith and credit of the United States 

Government,’’ the National Credit Union Share Insurance Fund has three ‘‘fail safe’’ 

features: Federal credit unions must maintain a one percent deposit in the Fund; 

Premiums are levied by the Board if necessary; and when the equity ratio exceeds 

1.3 percent ($1.30 on deposit for every $100 insured), the Board sends a dividend 

to credit unions. Since the recapitalization, the NCUA Board has charged credit 

unions a premium only once. In 1991, the Fund dropped to a 1.23 percent equity 

level and credit unions were asked to pay a premium. Credit union failures declined 

steadily throughout the 90’s and the Share Insurance Fund grew. Taxation and 

Legislative History of Today’s Credit Unions 

The credit union industry is a $646 billion segment of the financial services industry that paid $0 in taxes last year. In fact, the credit union industry has contributed 

no tax dollars to our country over the past 69 years, creating a competitive inequity 

that must be remedied. By comparison, mutual savings institutions hold less than 

40 percent of the assets currently held by credit unions, but paid $800 million in 

taxes, while credit unions pay nothing. 

To gain a better understanding of the need for tax equity among financial service 

providers, it is useful to review the dialogue that took place when the tax exemption 

for savings associations and mutual savings banks was repealed in 1951 and when 

tax deductible reserve provisions for these same entities were reviewed ten years 

later. By doing so, it becomes clear that the parallels between savings associations 

and mutual savings banks 50 years ago and the conglomerate credit unions of today 

cannot be ignored. 

1951 and 2003: Active Competition With Taxpaying Financial Service Providers 

Today’s conglomerate, full-service credit unions are competing for the same customers and are offering the same products as community banks, large commercial 

banks, and even brokerage firms. Like the savings associations and mutual savings 

banks of 1951, these institutions should be recognized as a mature industry that 

has a responsibility to contribute to the nation’s armed forces, educational programs, homeland security, transportation system, and other important federally 

funded initiatives. 

Prior to the Revenue Act of 1951, savings and loan associations and mutual savings banks were exempt from federal income tax under the premise that they were 

cooperative enterprises that played an important role in the national priority of financing residential mortgages, and therefore should be exempt from taxation. 

In 1951, Congress indicated that these institutions had grown in financial 

strength to the extent that they should be expected to bear their fair share of the 

tax burdens of the Nation. The Senate Report for the Revenue Act of 1951 states: 

Mutual savings banks are in active competition with commercial banks and life 

insurance companies for the public savings, and they compete with many types of 

taxable institutions in the security and real estate markets. The continuance of the 

tax-free treatment now accorded mutual savings banks would be discriminatory. So 

long as they are exempt from income tax, mutual savings banks enjoy the advantage of being able to finance their growth out of earnings without incurring the tax 

liabilities paid by ordinary corporations when they undertake to expand through the 

use of their own reserves. [Eliminating the special treatment] would place mutual 

savings banks on parity with their competitors.2

Likewise, today some credit unions have evolved to become significant competitors 

for public banking services. In fact, credit unions are more like banks today than 

savings associations were in 1951. In 1951 federal mutual savings associations could 


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3Tooele Federal Credit Union’s community field of membership consists of Salt Lake County, 

Davis County, Weber County, Morgan County, and Summit County, and Tooele County Utah. 

The geographic areas of these counties are available at http://quickfacts.census.gov/. 4Treasury Department Report of July 1961 on the Taxation of Mutual Savings Banks and 

Savings and Loan Associations at 8. 

not offer checking accounts and they were only authorized to engage in lending activities within their communities, which generally were limited to a 50-mile radius. 

Today, credit unions offer mortgages, credit cards, business checking accounts, 

debit cards, IRAs, student loans, consumer loans, home equity lines of credit, agricultural and commercial loans, money market accounts, brokerage services, mutual 

funds, and insurance products. Furthermore, community chartered credit unions 

have been granted fields of membership stretching over 11,000 square miles.3 In addition, LA Financial has been granted a field of membership encompassing all of Los 

Angeles County and all of its 10.1 million people. LA County has a population larger 

than the population in 42 states. It encompasses 4,084 square miles. 

Because credit unions offer such a broad range of products and because they may 

offer those services to such a large geographic distribution of consumers and businesses, conglomerate credit unions are clearly competing with other taxpaying financial services enterprises. Large credit unions have matured, and special treatment should not continue for that fast growing portion of the credit union industry 

that looks and acts like banks. The words of the 1951 Senate Report ring just as 

true for credit unions today as they did for savings associations and mutual savings 

banks in 1951. 

1961 and 2003: Reserves Represent Corporate Income 

Some credit union advocates argue that taxing credit unions threatens the safety 

and soundness of the entire industry. They maintain that credit unions would not 

be able to survive such a tax because they are only able to raise capital through 

retained earnings. 

Like credit unions, mutual savings banks return income earned from borrowers 

to savers after deducting expenses and required allocations to reserves. Despite the 

revocation of their tax exemption, mutual savings banks continue to experience 

growth. Moreover, just as Congress determined that the safety and soundness argument was not persuasive in the context of expanding the tax on mutual savings 

banks in 1961, the assertion that credit unions cannot withstand any taxation 

should likewise be rejected. 

If the funds going into the corporation’s reserve do represent corporate income, 

there would appear to be no reason, from the viewpoint of tax policy, for not taxing 

them. Moreover, other financial institutions that compete for the savers’ dollars, 

such as commercial banks, do in fact have to depend primarily on surplus built up 

after taxes, rather than on access to the equity capital market, in order to obtain 

the protective capital cushions which all businesses need.4

The rationale for taxing credit unions is solid; the need to tax credit unions is 

pressing; and the motivation for taxing credit unions is central to the success of private enterprise. Credit unions have matured to a $646 billion industry, and rising 

federal and state deficits confirm the need for fairness. Congress should review the 

government-created competitive disparity between credit unions and community 

banks, particularly those that are mutually organized, and should enact legislation 

that represents sound public policy, is fair to all competitors in our banking system, 

and is fair to the American taxpayer. 

Please refer to Appendix I. 

Mission of Credit Unions and How They Have Strayed 

Credit unions are not fulfilling their mandate to serve persons of modest means. 

Congress chartered credit unions in 1934 to serve persons of modest means. In 

return, credit unions were exempted from taxation. However, an October 2003 General Accounting Office (‘‘GAO’’) report indicates ‘‘that credit unions served a slightly 

lower proportion of low- and moderate-income households than banks.’’ Similarly, a 

1991 GAO report found ‘‘no evidence that today’s credit union members are for the 

most part of small means.’’ 

Further, the credit union industry has vehemently opposed efforts to require credit unions to engage in special efforts to serve low-income customers or neighborhoods like banks and savings institutions. In fact, in a March 30, 2005 editorial the 

Credit Union Times, by Mike Welch, stated: ‘‘ACB apparently thinks credits unions’ 

first obligation is to serve communities in which they operate. Wrong. CUs’ number 

one obligation is to serve the changing financial needs of the members who own it. 

Of course, the community will also be served as a by-product.’’ The comment is selfVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00140 Fmt 6633 Sfmt 6621 E:\HR\OC\26372.XXX 26372

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5 12 CFR 712.5. The specific activities listed within each pre-approved category are provided 

as illustrations of activities permissible under the particular category. The NCUA rules state 

that this is not an exclusive list. 

serving and ignores the substantial federal safety net provided to credit unions 

through the National Credit Union Share Insurance Fund, in addition to the substantial tax subsidy under discussion today. This would be like a bank saying that 

serving shareholders is sufficient and serving the bank’s community is a mere afterthought. Credit unions’ not-for-profit status is no excuse for an exemption from community reinvestment responsibilities. Banks and savings institutions have Community Reinvestment Act responsibilities regardless of whether they make a profit. 

Field of Membership Expansion. In 1998, the passage of the Credit Union 

Membership Access Act (‘‘CUMAA’’) formalized the establishment of several types 

of credit union membership. It specifically identified single common-bond credit 

unions, multiple common-bond credit unions, and community credit unions.In so 

doing, CUMAA encouraged many mid-size and large credit unions to dramatically 

grow their memberships and expand into new markets. This is particularly true 

with credit unions that converted to community charters. In some cases, the geographic limits of communities were extended to boundaries that not only defied the 

definition of ‘‘community,’’ but also defied logic. 

Emboldened by CUMAA, the NCUA has not only allowed, but actually encouraged 

credit unions to abandon their historically well-defined groups, such as employees 

of a specific company, and move on to adopt all-encompassing ‘‘community’’ charters. 

On December 10, 2004 a federal judge for the U.S. District Court for the District 

of Utah struck down an NCUA decision granting a charter spanning six counties 

in the state of Utah, which would have covered an area larger than the state of 

Maryland. In the decision the judge expressed concern that the NCUA was acting 

‘‘as a rubber stamp or cheerleader for any application brought before it.’’ The judge 

went ever further to criticize the NCUA for failing to do due diligence. Judge Dale 

A. Kimball said that ‘‘If the NCUA had conducted a critical analysis of the information provided, it should have recognized areas of concern that required further discussion.’’ 

Through such charters, the credit union can serve multiple unrelated membership 

groups under one umbrella, including much of the general public over a wide geographic area. Recent changes to the NCUA’s field of membership rules also provide 

for the creation of an occupational common bond based on a trade, industry or profession. Members can also share a common bond by virtue of providing similar products, providing similar services or sharing the same profession or trade. 

Credit Union Service Organizations (CUSOs). Many credit unions have 

formed subsidiaries known as credit union service organizations (‘‘CUSO’’s) that 

have contributed significantly to the dramatic growth of complex, conglomerate credit unions. CUSOs offer sophisticated products such as trust administration and investment services. CUSOs also provide non-traditional financial services such as 

real estate brokerage, pre-paid legal service plans, and travel agency services. In 

many cases, CUSOs are established to offer services not permitted by a credit 

union’s charter. All Income generated through CUSOs should be taxed. 

List of Permissible CUSO Activities5

Checking and currency services 

• Check cashing 

• Coin and currency services 

• Money orders, savings bonds, travelers checks, and purchase and sale of U.S. 

Mint commemorative coins services 

Clerical, professional, and management services 

• Accounting services 

• Courier services 

• Credit analysis 

• Facsimile transmissions and copying services 

• Internal audits for credit unions 

• Locator services 

• Management and personnel training and support 

• Marketing services 

• Research services 

• Supervisory committee audits 


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Business loan origination 

Consumer mortgage loan origination 

Electronic transaction services 

• Automated teller machine services 

• Credit card and debit card services 

• Data processing 

• Electronic fund transfer services 

• Electronic income tax filing 

• Payment item processing 

• Wire transfer services 

• Cyber financial services 

Financial counseling services 

• Developing and administering IRA, Keogh, deferred compensation, and other 

personnel benefit plans 

• Estate planning 

• Financial planning and counseling 

• Income tax preparation 

• Investment counseling 

• Retirement counseling 

Fixed asset services 

• Management, development, sale, or lease of fixed assets 

• Sale, lease or servicing of computer hardware or software 

Insurance brokerage or agency 

• Agency for sale of insurance 

• Provision of vehicle warranty programs 

• Provision of group purchasing programs 

Leasing 

• Personal property 

• Real estate leasing of excess CUSO property 

Loan support services 

• Debt collection services 

• Loan processing, servicing, and sales 

• Sale of repossessed collateral 

Record retention, security, and disaster recovery services 

• Alarm-monitoring and other security services 

• Disaster recovery services 

• Microfilm, microfiche, optical and electronic imaging, CD–ROM data storage 

and retrieval services 

• Provision of forms and supplies 

• Record retention and supplies 

Securities brokerage services 

Shared credit union branch (service center (operations) 

Student loan origination 

Travel agency services 

Trust and trust-related services 

• Acting as administrator for prepaid legal service plans 

• Acting as trustee, guardian, conservator, estate administrator, or in any other 

fiduciary capacity 

• Trust services 

Real estate brokerage services. 

Please refer to Appendix II. 

Credit Union Member Business Loans 

In September 2003 the NCUA revised its rule to allow federal credit unions to 

circumvent Credit Union Membership Access Act’s statutory assets. CUMAA stated 

that member business loans could be 1.65 times the credit union’s net worth or 

12.25% of its total assets. However, the new rule allows credit unions to exclude 

purchases of participation loans and non-member loans from this statutory cap upon 


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6 Article reprinted from: http://www.cuna.org/newsnow/03/system072203–9.html 

NCUA approval. The Department of Treasury opposed the proposal, but unfortunately the final rule virtually ignored Treasury’s concerns and opposition. 

Large Sophisticated Credit Unions Hide Behind the Small Credit Union 

Image 

Over the years, two distinct credit union industries have emerged. The first adheres to its statutory mission. The other hides behind the small credit union image 

to preserve its federal tax exemption. Even the National Credit Union Administration recognizes that the expansion that it has allowed to occur within the credit 

union industry now makes many credit unions indistinguishable from banks and 

savings associations. At a November 18, 2004 NCUA Board meeting, board member 

Deborah Matz observed that many legislators consider small credit unions to be the 

symbol of all credit unions. As a result, she reasoned, it is important to preserve 

small credit unions so that the entire credit union industry will not be taxed. 

We see no value in subsidizing credit union conglomerates that offer diverse, highend financial products and services to the general public. It is a common 

misperception that credit unions offer only basic banking services to local hospital 

employees, schoolteachers, and government workers. In reality, many credit unions 

have evolved into complex financial institutions that do not have meaningful membership restrictions. 

For example, credit unions offer commercial loans, stocks, mutual funds, margin 

and option accounts, trust services, and other sophisticated products. Furthermore, 

many credit unions do not have a distinct field of membership and offer financial 

products and services to the general public. For instance: 

• LA Financial Credit Union’s field of membership includes all of Los Angeles 

County and its 10.1 million residents. Los Angeles County is home to more than 

25% of California’s population and more people than reside in 42 of this nation’s 

50 states. 

• Suncoast Schools FCU in Tampa, FL caters to persons in 14 counties and has 

assets of over $4 billion. 

• Citizens Equity First CU in Peoria, IL serves over 14 counties and employees 

of over 550 select companies. 

• Rhode Island-based Greenwood Credit Union advertises that membership ‘‘is 

open to all responsible people who want to be members.’’ 

$800 million Greylock Federal Credit Union in Massachusetts recently ran radio 

advertisements telling listeners if they ‘‘have a pulse,’’ they are probably qualified 

to join Greylock Federal Credit Union. 

Specific Abuses by Credit Unions Pet Insurance? 

Yes, pet insurance. Believe it or not, CUNA has an article on their website boasting the fact that two of the largest credit unions in Colorado offer pet insurance to 

their members. 

Fido, Kitty offered insurance through CUs 

COLORADO SPRINGS, Colo. (7/23/03)—El Paso County, Colorado’s two largest 

credit unions have taken the family pet under their field of membership—at least 

indirectly. 

Ent FCU and Air Academy FCU are offering pet insurance coverage for dogs and 

cats through a Colorado CU League subsidiary that also helps credit unions offer 

trust services, dental insurance and other products (The Gazette July 20). 

Depending on the level of coverage and Fido’s size, age, and health, monthly premiums for dogs are $9.95 to $55.90. For Kitty, the rates range from $8.50 to $26.90. 

Compare that to the $2,000 a year one owner of a rambunctious mutt paid in vet 

bills, including $1,800 for surgery to remove a corn cob stuck in the dog’s intestines. 

The coverage includes up to $3,000 per incident for accidents, broken bones, bites, 

and illness. 

Ent began offering the coverage last month when it became available from the 

league and because members said pet care expenses were becoming a financial 

issue. Air Academy began offering pet insurance in May. 

The credit unions share in the revenue produced by the pet insurance program, 

which offers checks and electronic greeting cards imprinted with a pet’s photo, an 

online pet photo album, and discounts at a pet products retail chain.6


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Credit Unions Are Not For Profit? 

• Digital Federal Credit Union is spending $5.2 million for the naming rights to 

the Worcester Centrum Centre. In effect, the credit union’s tax-free status 

means that local taxpayers will subsidize the cost of these naming rights by $2 

million. Digital Federal Credit Union also conducted a major television advertising campaign during Boston Red Sox baseball games. 

• Over the past year, $4.6 billion BECU sent 2.1 million direct mail pieces and 

drew in 20,000 new members. 

• According to a July survey by the National Association of Federal Credit 

Unions, 39% of respondents indicated that they impose a minimum balance on 

share draft accounts while another 35% indicated that they charge monthly 

fees. 

• Commodore Perry Federal Credit Union imposes a $5 check-cashing fee on 

members that maintain only a regular share account at the credit union, but 

no checking account, no loans, no active account. Members will also be charged 

for cashing checks if they withdraw the full amount of their direct deposit on 

the day it is deposited, but have no active accounts. 

• Portland Teachers Credit Union President Cliff Dias earned $1.6 million in salary and bonus in 2003, according to a report the credit union filed with the IRS. 

Unrelated Business Income Tax 

As a general rule, not for profit organizations are subject to the unrelated business income tax (UBIT) on net income from activities that are not substantially related to the organization’s exempt purpose. The Internal Revenue Service (IRS) has 

not issued guidance regarding the application of UBIT to non-traditional credit 

union activities, although credit unions in Alabama, Connecticut, and Colorado have 

reportedly received UBIT-related inquiries from the IRS. 

Credit unions should not be permitted to offer such a wide array of products to 

the general public without being subject to some form of taxation. We urge the 

House Ways and Means Committee to study CUSOs in the context of evaluating 

how credit unions have evolved beyond organizations with limited fields of membership that provide financial services to persons of modest means. We support examining whether the UBIT or an UBIT-like tax should be applied to certain credit 

unions. Sophisticated credit unions should be recognized as complex financial institutions and should no longer be permitted to claim that they are part of a ‘‘mom 

and pop’’ industry that deserves to be exempt from federal income tax. 

Credit unions compete with insurance providers and car dealerships as 

well as community banks 

Redwood Credit Union recently formed RCU Insurance Services, a credit union 

service organization that offers insurance products to both credit union members 

and non-members living in the community. Redwood Credit Union also owns an 

auto center where members can shop for vehicles with on-site financing and auto 

insurance. (http://www.cuna.org/newsnow/products.html) 

City County Credit Union, Margate, Fla., also owns a used car dealership for both 

credit union members and non-members. They also provide on site financing. 

http://www.cuna.org/newsnow/archive/list.php?date=021005 

Please refer to Appendix III. 

Conclusion 

Chairman Thomas, Ranking Member Rangel, and Members of the Committee, we 

thank you for inviting America’s Community Bankers to testify on the ‘‘Review of 

Credit Union Tax Exemption.’’ Over 50 years ago, this same Committee undertook 

an examination of the tax-exemption granted to mutual banks and savings and 

loans. After lengthy deliberation, the Committee concluded that mutual institutions 

were competing directly with banks and to continue the exemption should be discriminatory. The same is true today. We reemphasize that our concern remains with 

the sophisticated credit unions that have grown beyond their common bond and are 

as bank-like as mutual institutions that are taxed. From a competitive perspective, 

these credit unions have become tax-exempt community banks, creating situations 

in which a billion dollar, tax-free credit union can sit opposite a $180 million, nonstock, taxpaying mutual savings bank like mine. ACB commends the Committee 

and its staff for undertaking an examination of the tax-exempt sector, and we look 

forward to working with the Committee on this important issue. 


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Appendix I 

Income tax liability 2003 

$0 Would have 

paid $1.32 billion if 

taxed at the same 

rate as banks and 

savings associations.7

Lost exemption in 

1952. 

$7.5 billion.8 Federal 

mutual savings associations paid over 

$285 million in 2003. 

All federally insured 

mutuals paid $1 billion.9

$30 billion.10

CRA obligations No CRA obligations. Predated the 

CRA. Mutual 

savings associations 

worked to 

maintain and 

foster the 

economic 

strength of 

communities 

they served. 

The CRA requires 

insured depository institutions 

to serve and 

help foster 

growth in each 

of the communities they 

serve, including 

low- to moderate-income 

areas within 

their communities. 

Same as federal 

savings associations. 

Interest on 

consumer 

checking accounts 

Federal credit 

unions may 

pay interest 

on both consumer and 

business 

checking accounts. 

No. Checking 

accounts 

were not permitted. 

Federal savings 

associations 

may not pay interest on business checking 

accounts. Offering interest 

bearing NOW 

accounts to individuals and 

nonprofit organizations is permissible. 

Same as federal 

savings associations. 


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Appendix I—Continued 

Income tax liability 2003 

$0 Would have 

paid $1.32 billion if 

taxed at the same 

rate as banks and 

savings associations.7

Lost exemption in 

1952. 

$7.5 billion.8 Federal 

mutual savings associations paid over 

$285 million in 2003. 

All federally insured 

mutuals paid $1 billion.9

$30 billion.10

Field of membership Federal credit 

unions may 

serve only persons within 

their field of 

membership. 

Over the 

years, membership restrictions have 

been liberalized legislatively and by 

regulation. In 

2003, the 

NCUA greatly 

expanded its 

field of membership rules. 

At a minimum, the 

new rules will 

allow 56 million additional 

people to qualify for credit 

union membership. Separately, some 

states have 

very liberal 

field of membership interpretations..

Mutual savings 

associations 

were authorized to lend 

within their 

communities, 

which generally was defined to comprise a 50- 

mile radius. 

Not applicable. Not applicable. 

Lending limits A federal credit 

union may 

lend to any 

one member 

up to 10% of 

its deposits..

Historically, 

mutual savings associations could 

lend up to a 

percentage of 

assets, generally between 15– 

20% of assets 

to a single 

borrower, depending upon 

loan type. 

Lending limits 

track those for 

national banks. 

Federal savings 

associations 

also have an additional lending 

limit authority 

for residential 

development 

loans. 

The single borrower limit 

generally is 

15% of the 

bank’s capital 

and surplus 

on an unsecured basis. 

An additional 

10% limit is 

available if 

collateralized 

with fully 

marketable 

securities. 


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* This chart is intended to illustrate that credit unions have evolved into full service financial 

service providers that offer the same products and services as community banks. It is not intended to be a comprehensive list. 

Appendix I—Continued 

Income tax liability 2003 

$0 Would have 

paid $1.32 billion if 

taxed at the same 

rate as banks and 

savings associations.7

Lost exemption in 

1952. 

$7.5 billion.8 Federal 

mutual savings associations paid over 

$285 million in 2003. 

All federally insured 

mutuals paid $1 billion.9

$30 billion.10

Business lending authority 

Federal credit 

unions may 

make business 

loans of up to 

12.25% of 

total assets. 

However, a recent rule 

adopted by the 

NCUA allows 

credit unions 

to exclude 

purchases of 

participation 

loans and nonmember loans 

from the statutory cap if 

approved by 

the NCUA. 

No. Federal savings 

associations 

may make commercial loans in 

an aggregate 

amount totaling 

20% of total assets, 10% of 

which must be 

in small business loans. 

National banks 

have general 

commercial 

lending authority. 

Unsecured 

consumer 

loans 

Yes (12-year 

term limit). 

No. Yes. Yes. 

Insurance/securities powers 

Yes. No. Yes. Yes. 

7 Banks and savings associations pay approximately 40% of their income in federal and state taxes each 

year. According to the NCUA’s 2003 Annual Report, Federal credit unions had a net income of $3.3 billion, 

40% of which is $1.32 billion. President Bush’s FY 2005 budget estimates that credit unions’ federal tax exemptions will cost a cumulative total of $7.88 billion between 2005 and 2009. 8SNL Database. 

9 Id. 

10 Id. 

Appendix II—Credit Union Products and Services* 

Loan Products: Mortgate Loans; Commercial Loans; Commercial Property 

Loans; Aircraft Loans; Lines of Credit; Recreational Vehicle Loans (including Boats, 

MOtorcycles, Snowmobiles, and Waverunners); Automobile Loans; Home Equity 

Lines of Credit; Credit Cards; Student Loans. 

Deposit Products: Individual Retirement Accounts; Checking Accounts; Money 

Market Deposit Accounts; christmas Colubs; Certificates of Deposit; Debit Cards. 

Investment Products: Stocks; Margin Accounts; Option Accounts; Trust Services; Unit Investment Trusts; fixed Annuities; Variable Annuities; Retirement and 

Investment Planning; Mutual Funds; Retirement Plans (401 (k), 403(b), SEP, etc.); 

529 Educational Savings Plans; Tas Free Municipal Bonds; Corporate Bonds; U.S. 

Government Bonds. 

Insurance Products: Automobile Insurance; Term Life Insurance; Whole Life 

Insurance; Accidental Death and Dismemberment Insurance; Homeowners Insurance; Disability Income Insurance; Long Term Care Insurance; Renter’s Insurance; 

Dental Insurance; Risk Management Insurance Needs Analysis; Credit Life Insurance. 


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Services: Sweep Services; Online Banking; Wire Transfers; Safe Deposit Boxes; 

Savings Bonds; Cashier’s Checks; Money Orders; Gift Checks; Extended Warranty 

Policies on New or Used Vehicles; Cash Back Real Estate Programs Members earn 

cash rebates when buying or selling real estate. Members are assigned a real estate 

agent. After settlement, a cash rebate is directly deposited into the member’s account; Automobile Listing Services A computerized listing service that gives members access to listings of new auto prices, including the MSRP and the dealer’s invoice costs. The guide also provides information on options and their prices; Discount Vehicle Buying Services Advisors search for new and used vehicles on a member’s behalf. 

Appendix III 

Credit Unions: Fact vs. Fiction 

Myth Fact 

Myth: Credit unions 

deserve to be exempted from taxation because they are cooperatives. 

Fact: Credit unions are not the only cooperatively owned financial 

institutions. Like credit unions, mutually organized savings and 

loan associations and mutual savings banks return to savers income earned from borrowers after deducting expenses and required allocations to reserves. Mutuals pay corporate income tax 

on retained earnings (undistributed net income). 

Myth: Credit unions 

are not-for-profit. 

Fact: Credit unions are very profitable. They retain earnings and 

they are using those earnings to grow at a rapid pace. In 2002, 

federally insured ‘‘not-for-profit’’ credit unions had a net income 

of over $5.6 billion.11 Further, these credit unions held over $37 

billion in undivided earnings. Federally insured mutually organized savings institutions had a net income of approximately 

$1.6 billion and paid approximately $868 million in income 

taxes.12

Myth: Credit unions 

serve persons of modest means. 

Fact: An October 2003 report by the General Accounting Office 

found that banks serve a higher proportion of low- and moderateincome households than credit unions. Credit unions are exempt 

from the Community Reinvestment Act and are not required to 

engage in special efforts to serve low-income consumers or neighborhoods. 

Myth: Credit unions 

have limited fields of 

membership. 

Fact: Credit unions no longer have the membership limitations 

that were originally justified their income tax exemption. Today, 

credit unions cater to the general public and serve the same customers as community banks. Credit unions that historically 

served well-defined groups, such as employees of a specific company, have moved to adopt ‘‘community’’ charters that allow 

them to serve the general public over a wide geographic area. 

Other ‘‘common bond’’ credit unions have been permitted to include over 1,000 unrelated membership groups within their field 

of membership. 

Myth: Credit unions 

are a ‘‘Mom and Pop’’ 

industry. 

Fact: Credit unions are a $623 billion industry. Approximately 100 

credit unions have assets of $1 billion or more. 

Myth: Community 

banks hypocritically 

seek additional Subchapter S benefits 

Fact: The shareholders of Subchapter S banks pay taxes on their 

earnings regardless of whether those earnings are distributed. 

While a credit union with $1 million in retained earnings pays $0 

in taxes, a Subchapter S bank with the same retained earnings 

pays close to $400,000 in taxes. 

11 NCUA 2002 Annual Report. Federally insured credit unions include federal and state charters that have share insurance. Federally chartered credit unions alone earned nearly $3.1 billion in 2002. 12SNL Database. Federally insured mutuals institutions include all federally chartered institutions as well 

as those state chartered institutions that have federal deposit insurance. 

f 


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Chairman THOMAS. Thank you, Mr. Macomber. The gentlewoman from Connecticut. Does Mrs. Johnson wish to inquire? 

Mrs. JOHNSON. Thank you, Mr. Chairman. There clearly is a 

difference between the very big credit unions and the smaller credit 

unions. Are there greater constraints on you membership area, Mr. 

Macomber, than on a credit union’s membership area? Or membership isn’t the right word—but your service area? 

Mr. MACOMBER. Well, legally, we get to go across State boundaries. We certainly have to do some work. But we are not really 

restricted geographically as far as the State of Connecticut. There 

was at one time a law in place that had a 50-mile radius restriction 

on banks like mine. However, as a practical matter, again, we are 

$180 million bank, and exactly like credit unions, we generate all 

of our capital, all of it from retained earnings. As a bank our size, 

we really don’t have access to capital markets for any consequential growth in capital, so we are also limited to where our capital 

comes from from retention earnings. 

Mrs. JOHNSON. What is the regulatory burden of a small bank 

versus a small credit union? 

Mr. MACOMBER. Well, we are not subject to CRA. And, as I 

think was mentioned earlier, there are a couple of recent—actually 

one as recent as 2003 that indicated that credit unions were not 

serving the lower-income and moderate-income individuals as well 

as smaller banks are doing, community banks are doing. I would 

like to quote actually something that was in the Credit Union 

Times. Their editor, Mike Wells stated that—and this is in response to a letter over my signature that was printed in his publication, ‘‘ACB apparently thinks credit unions’ first obligation is to 

serve communities in which they operate. Wrong. CUs’ number one 

obligation is to serve the changing financial needs of the members 

who own it. Of course, the community will also be served as a byproduct.’’ That is not exactly, you know, a ringing endorsement of 

what the Community Reinvestment Act is all about, and I think 

the performance of credit unions outside of what they are chartered 

to have done in 1934 supports that this statement is exactly how 

a lot of credit unions feel. 

Mrs. JOHNSON. Is it more costly for a small bank to make a 

loan than it is for credit union to make a loan? 

Mr. MACOMBER. That is hard to gauge. You know, I will say 

that the overhead in credit unions, looking at their statistics, tends 

to run higher. I don’t think that is a function of what it costs to 

make a loan. 

Mrs. JOHNSON. In this issue of size, is there any precedent in 

any other section, area of banking, to regulate differently according 

to size? 

Mr. MACOMBER. Again, in the CRA area, banks now under the 

FTIC, the OTS, actually started this, and the FTIC has adopted 

similar rules. Banks of a billion dollars or less have a less detailed 

examination from a CRA perspective than banks of over a billion 

dollars. 

Mrs. JOHNSON. Thank you. Thank you, Mr. Chairman. 

Chairman THOMAS. Does the gentleman from New York wish 

to inquire? 

Mr. MCDERMOTT. No. 


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Chairman THOMAS. Does the gentleman from Kentucky wish to 

inquire? 

Mr. LEWIS OF KENTUCKY. No. Not at this time. 

Chairman THOMAS. Does the gentleman from Michigan wish to 

inquire? 

Mr. LEVIN. Thank you. Let me ask those from the community 

banks, are there any restrictions on credit unions that don’t exist 

for you? Any of you want to answer that? 

Mr. PLAGGE. I think probably the one right now, and it would 

be part of this CREAL legislation, there is some restrictions that 

they have as it pertains to the percent of business loans they can 

have as part of their assets. Right now that I believe is 12 and a 

half percent. They’re seeking to get that to 20 percent. But one of 

the things that is discouraging to community banks in that percentage is they don’t count loans currently below $50,000, and I 

think the legislation calls for not counting business loans below 

$100,000. As my testimony identified, almost all of our business 

loans as a percentage last year, 2004, 62 percent of our business 

loans—business and agricultural loans—were under $100,000. 

Now, what that legislation says is apparently they aren’t even important enough to count. That’s indeed a big part of our portfolio. 

Mr. MACOMBER. Also Federal savings banks do have restrictions on commercial lending. They’re restricted to 10 percent—excuse me 20 percent total; 10 percent, which has to be small business loans. So, there are restrictions on that part of the banking 

industry. 

Mr. LEVIN. How about other restrictions that apply? How about 

interest rates? Any difference? 

Mr. PLAGGE. We see it up and down the ladder. I can find credit unions where we have lower fees, lower rates. I can probably— 

they can probably find credit unions that have the reverse of that. 

Mr. LEVIN. How about restrictions, though. Any legal restrictions? 

Mr. PLAGGE. Restrictions on interest rates? 

Mr. LEVIN. Yeah. 

Mr. PLAGGE. You mean just state usury laws and so forth? The 

same. I would assume that would apply to credit unions in our 

State. 

Mr. HAYES. That would be my guess is I mean—you know, the 

state law controls the interest rates on the—— 

Mr. LEVIN. How about for Federal Credit Unions? Isn’t there a 

difference? 

Mr. MACOMBER. Well, I think the Chairman mentioned that 

there’s an 18 percent usury rate for Federal Credit Unions, which 

would probably match most States or perhaps be higher than some. 

Mr. LEVIN. What is the largest credit union within 10, 15 miles 

of—or say 10 miles of each of your banks? 

Mr. PLAGGE. I am in Waverly, Iowa. We have a branch of John 

Deere Community Credit Union, which is a billion one. They are 

in 33 I think now of the 99 counties in Iowa. So, they are by far— 

I think they are the seventh largest financial institution in the 

state. So, they are, by far, the largest in the State at this point. 


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Mr. HAYES. There is a small credit union in the community in 

which I live, and then 40 miles away, we have branches of one of 

the larger credit unions in the—— 

Mr. LEVIN. Forty miles away? 

Mr. HAYES. Forty miles. Yes, we have facilities there. 

Mr. MACOMBER. We are basically in the same situation. We 

have a small local credit union. But certainly within 35 or 40 miles, 

we have a billion dollar credit union as well. 

Mr. LEVIN. Thirty-five or 40 miles? Okay. Thank you. 

Chairman THOMAS. The gentleman from Texas, Mr. Brady, 

wish to inquire? 

Mr. BRADY. Briefly, Mr. Chairman. I would ask the panel, back 

on the issue of small business access to capital, how does the taxexemptions for credit unions impact for good or for worse access to 

capital of small business start ups and expansions? Who—what institution now, what type of institution now best serves those needs 

in our communities? I would—why don’t reverse it from the earlier 

panel. Start with Mr. Macomber and head in that direction. 

Mr. MACOMBER. Well, certainly, banks have the SBACU—in 

Connecticut, we have the CDAs. So, we have a number of government programs that are very helpful as far as start-up capital. We 

also provide start-up capital for folks that we’ve known, very much 

like credit unions. The different between a small bank like ours 

that has been in the same community for 155 years and that of a 

credit union that has been there for 50 years is pretty slim as far 

as knowing our customers and being able to help where it is appropriate. Start-up capital for new businesses is a very difficult thing 

to come by, as you know. Again, knowing our customers makes it 

easier for us than it might be for someone from outside the State. 

Mr. BRADY. Thank you. 

Mr. HAYES. The same for our institution and our community. I 

mean, you know, we are with our customers working in civic 

projects. We are working with them on school boards. We understand their needs. You know they understand that we are there to 

help them achieve their dreams. So, you know, I think we are a 

good source of that capital, being a community bank, because if our 

community doesn’t grow, then our institution doesn’t grow and we 

can’t continue to add new staff. So, that is an important part we 

play. And, you know, I am looking at my loans for my board report 

next week. I would tell you that the majority of the loans that 

we’ve made in the last 30 days would be under $10,000. 

Mr. BRADY. Thank you. 

Mr. PLAGGE. As my figures show, I mean we make a lot of 

small business loans. We have the same basically structure that 

credit unions in our market would have. We have access to SBA 

loans and so forth. It is really not the issue of small business lending I guess that we say should be restricted with credit unions. It 

is the types of business lending that you are starting to see nationwide through the credit union industry—some of the examples I 

gave in my written testimony—and the amount of that that is actually occurring to non-members. So, geographically, even though 

they may not have a credit union branch in their market, there is 

business lending going on, leaping across markets and the credit 

union industry. So, it doesn’t have to be—that competition doesn’t 


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have to come from the local branch in your market. So, I think 

what we look at is what is happening with the business loan exemption, and indirectly when you start seeing luxury hotels and 

those kinds of things being financed, who’s being subsidized in the 

process? So, it is not so much the—being against credit unions and 

business lending. It is what you are starting to see and the lack 

of regulation or the lack of monitoring behind it from the standpoint of NCUA, saying is this what we intended that tax subsidy 

for. 

Mr. BRADY. Thank you. 

Ms. MAY. I guess. Short arms. I guess in my community, it is 

a little different. We are a low-income community, largely Hispanic. 

We were not doing member business loans. We had for many years 

prior to let’s say 195 or so. But then we set back and said this 

wasn’t something we wanted to concentrate on. In the late ’nineties, I started receiving a great amount of pressure from my State 

Senator and my State Representatives that there is lack of capital 

available in my city. We have an abundance of out of the local market banks that have moved into El Paso, and we see capital leaving 

in the form of deposits going elsewhere. We had—a brother of our 

Congressman had to go to a different State to get his small business loan made. So, we did reach out and start making small business loans. Now, our small business loans are averaging right 

around $120,000, $145,000. But they are largely to minorities, and, 

as I said, in a low-income community. 

Mr. BRADY. All right. Thank you. 

Vice Admiral DAWSON. Sir, we have also only recently begun 

business lending. Our average loan for a business loan is about 

$25,000. We see members such as spouses that start daycare centers; members who have transitioned to a second career and need 

to buy a fleet of two or three trucks. That is where we are concentrating right now. 

Mr. BRADY. Great. Mr. Chairman, thank you very much. 

Chairman THOMAS. I thank the gentleman. Does the gentleman 

from Washington wish to inquire? 

Mr. MCDERMOTT. Admiral and Ms. Ma, you represent the credit unions; is that correct? Can you give me your opinion about what 

evil brought about this oversight hearing? What is it that we are 

searching out? Why do you think you are being summoned before 

the U.S. Congress? 

Ms. MAY. I believe we have heard some of that in our recent testimony here. We, as an industry, have grown to 6 percent of the 

financial assets of the Nation. 

Mr. MCDERMOTT. Six percent? 

Ms. MAY. Yes, sir. That it is if you exclude the Merrill Lynch’s 

and so forth. I mean the insurance companies have gone into offering checking accounts. So, we have grown to 6 percent, and as contrasted with the mutual savings industry, which grew to 50 percent 

in the early ’50—of the deposits. This is—our 6 percent seems to 

be perceived as a threat. I believe that the issue here is that we 

do not have to serve stockholders. We serve our members, and our 

members only. All our net income is returned to the members in 

the form of lower rates on loans, higher rates on deposits, and contributions to retained earnings, which provides safety and soundVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00152 Fmt 6633 Sfmt 6602 E:\HR\OC\26372.XXX 26372

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ness. It seems to be a concern that our structure works in that 

manner. But I think as a result, we have, as quoted by Ms. Johnson from I believe it was Zion National Bank made the issue that 

if it weren’t for credit unions, just think what their record profits 

could be. 

Mr. MCDERMOTT. Admiral? 

Vice Admiral DAWSON. Sir, at Navy Federal, we consider our 

tax-exemption to be a privilege. I am very happy to come here 

today and to explain how we use that privilege to the best use of 

the Nation and to our members. 

Mr. MCDERMOTT. Is there anything about your credit union 

that would me it—now, I am talking about your own personal credit union, not your National status—that would—that you are worried about? Is there some kind of creeping problem there? 

Vice Admiral DAWSON. No, sir. The Chairman’s remarks at the 

beginning about transparency, accountability, and verifiability that 

is something that we work on very hard every day at our credit 

union, as I think all credit unions do, and I think we should. We 

owe that to our members and we owe that to you. 

Mr. MCDERMOTT. But my understanding of the value here is we are talking about $600 billion in credit unions as opposed to 

about $4 trillion in the—and all the credit unions put together 

don’t even come up to Citicorp. So, what is this threat? I mean how 

could you be a threat? Is it the idea would catch on, that people 

would form their own banks? Is that—it is kind of like a socialist 

germ that is infecting the body politic or what are we—— 

Ms. MAY. I do have an application to convert to a credit union 

if any of my peers would like it here at the table. 

[Laughter.] 

Mr. MCDERMOTT. Well, let me ask a technical question. If you 

have money—you have made some money, and you retain it; you 

don’t give it out in dividends to your members. You use it as a capital to be used for your operation of your credit unions; is that correct? 

Vice Admiral DAWSON. Yes, sir. That is correct. 

Mr. MCDERMOTT. So, if you had to pay that, you could no 

longer keep it. You would have to pay taxes to the Federal Government. Where would you get that capital that you would use? You 

would have to go—— 

Vice Admiral DAWSON. There is no other source under current—— 

Mr. MCDERMOTT. But can’t you get it from the Federal Reserve 

or some place? Maybe you should open it up so that you can go to 

the Federal Reserve? How would you function if you lose your capital? 

Ms. MAY. We couldn’t—we can only build capital from retained 

earnings. If—we pay out dividends on our member shares, which 

is the same as interest on deposit accounts. But we have to retain 

earnings into capital, which is held at a higher standard for credit 

unions than it is for our banking brethren. We have mandated capital standards under the 1151, which was passed in 1998. Without 

that capital, at the level we maintain it, and net income we have 

to contribute to it every year, we would not be considered as safe 

and sound as—— 


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Mr. MCDERMOTT. You mean the law that was passed by the 

Republicans in 1998; is that correct? 

Ms. MAY. Yes. This must be a fight between the Banking Committee and the Ways and Means Committee. I guess that is why 

you are here today. Thank you, Mr. Chairman. 

Chairman THOMAS. The gentleman is welcome. Does the gentleman from Colorado, Mr. Beauprez, wish to inquire? 

Mr. BEAUPREZ. Thank you, Mr. Chairman. I think I will start 

with you, Mr. Macomber. Am I pronouncing it correctly? 

Mr. MACOMBER. That is about as close as anyone ever gets. 

That is great. Thank you. 

Mr. BEAUPREZ. Nobody tries my name ever at all. You have 

made a case that I think actually is going to invite a response from 

the Admiral and from Ms. May. But you made a case that credit 

unions aren’t unlike the mutuals of the ’fifties. All credit unions? 

Mr. MACOMBER. Credit unions aren’t like mutuals of 2005, either. I think the answer to that might be to go back—Mr. Brady 

had asked a question of Chairman Johnson about could she really 

quantify or make a real distinction between credit unions and 

small community banks. She seemed unable to come up with an 

answer to that, and frankly I am unable to come up with an answer to that as well. 

Mr. BEAUPREZ. Well, I wanted to clarify that that is what you 

said, because I want to come back to the Admiral and Ms. May because my guess is that you have a different perception, and invite 

you to maybe rebut that at least. 

Mr. MACOMBER. If I could add just one quick question. 

Mr. BEAUPREZ. Very quickly because my time is—— 

Mr. MACOMBER. But I am with a mutual savings bank, and 

our only real source of capital is also retained earnings. We are 

fully taxed. 

Mr. BEAUPREZ. Oh, I heard that. I understand that. 

Ms. MAY. Any real differences between credit unions and mutual 

savings banks? 

Mr. BEAUPREZ. Yes, and let me tell where I am going. In my 

earlier questions, I said I am here to reduce tax burdens on people. 

I am not looking to raise taxes, and I am very serious about that. 

But I am also very serious that the credit union industry needs to 

help us somehow—I think it is a line that the Chairman was following—in defending what the Admiral just used I think exactly 

the right word, the privilege, of tax-exempt status. I think that is— 

I think with all due respect to my colleague from Washington, I 

think that is what this is about is making sure that we can do that. 

Ms. MAY. Well, and I certainly acknowledge that it is a privilege 

to have a tax-exempt status, and I value that highly. You know, 

when I walk out of my office at any time of the day, and I look 

at the members that we serve, or when I answer my phone—— 

Mr. BEAUPREZ. Well, I want to be very specific because I have 

got limited time. 

Ms. MAY. Okay. 

Mr. BEAUPREZ. I want to go right to the heart of his question. 

If we just say because in El Paso, there are poor folks, I understand and accept that. 


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Ms. MAY. Yeah. In El Paso, I am able to reach out and do things 

with my members that if I was paying and concerned about paying 

interest or dividends to stockholders I would not be able to do. 

Mr. BEAUPREZ. Okay. I accept that. Admiral? 

Vice Admiral DAWSON. Sir, I have no rebuttal. I just—I know 

what we are as a credit union. We are owned by our members. Our 

borrowers are our—and lenders are the same people. We are governed by a volunteer board. 

Mr. BEAUPREZ. Okay. All right. I accept that. I am going to 

leave you with but a singular, very personal experience, and tell 

you that, like we politicians suffer with one bad apple spoiling the 

barrel and we all get painted, I would submit to you that there is— 

that is a little bit of the challenge your industry faces. I would submit to you that it is probably incumbent upon your industry again 

to help us make sure that your privilege is protected. I would like 

to be able to do that. Here is my very personal experience. I had 

a daughter who was obsessed a particular little car. She found it 

in the used car—the want ads. It was about an hour and half 

away. My wife and she went down to the used car lot, looked at 

it, negotiated, got a price, and the salesman when they were closing the deal said you need a loan. Well, frankly, she didn’t, but her 

curiosity was up, and she said what do you got. He says, well, the 

credit union right across the street will take care of you. 

Oh, but I am not a member. That is not a problem. There is your 

problem, Ms. May and Admiral Dawson. That is your problem in 

that, you know, we had nothing to do with that area, that region, 

that field of membership, and when you see those kind of circumstances I understand why people like this have concern, and 

when I wrote down the words equity and fairness, that is our job. 

On this side of the desk now, I have a different job. It is very much 

one of trying to provide equity and fairness to all of the taxpayers 

and those that don’t. I submit to you again the challenge for your 

industry, of which I am a fan and I want to remain a fan, and I 

want to be as supportive as I can possibly be, is to help us help 

you demonstrate that we are still continuing to be fair and equitable to everybody that is operating on the playingfield. Thank you, 

Mr. Chairman. I yield back. 

Chairman THOMAS. I thank the gentleman. The gentleman 

from Louisiana? The gentlewoman from Pennsylvania? 

Ms. HART. Thank you, Mr. Chairman. I asked a question earlier 

of the Association President Chairman I guess, Chairwoman, regarding the transparency issue for credit unions, and just request 

an answer from you since I really didn’t get one from her, Admiral 

and Ms. May. Is there some objection to providing more transparency in the credit union business? Is there something that I am 

missing that would present a problem for that industry if they filed 

the same form, the form 990, with the IRS? 

Vice Admiral DAWSON. I can speak for Navy Federal, and I will 

say that none whatsoever. We want to be transparent. We think 

that we are. We submit a 5300 report once a quarter to NCUA. 

That report is available to anyone that wants to see it, not only our 

members, but anyone in the Nation that wants to see it. We have 

a—I have an internal audit Committee or audit division that looks 

very closely at my credit union. We have Price Waterhouse as an 


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outside auditor. In fact, as I speak today, they are on board doing 

their quarterly audit. I have a supervisory Committee made up of 

volunteers that can look at anything within my credit union. 

Transparency is a good thing. 

Ms. HART. Okay. Ms. May? 

Ms. MAY. As the gentleman from IRS mentioned several times, 

state-chartered credit unions do file a 990. I am a state-chartered 

credit union. So, we do file in the State of Texas, and it is filed as 

a group 990, and then I subsequently file a 990–T. 

Ms. HART. Is there information that is disclosed in there that 

you believe is sensitive that in some way might harm the credit 

union members? 

Ms. MAY. You know, complying with the law and the rules set 

forth is certainly something that is very important to us. I, like the 

Admiral, go out of our way to make sure our members—everything 

possible can be disclosed to our members. I also have the same 

audit Committee structure, do the same certified CPA audits. They 

are fully unqualified with—we sign off on the various statements 

that we have to make to get a CPA audit. There are, in fact—my 

institution, my staff, and my self go out of our way to over comply 

with any rule or any reporting requirements. So. 

Ms. HART. I didn’t get—what is the size of your credit union? 

Ms. MAY. One point one billion. 

Ms. HART. Okay. Thank you. I would like to ask the bankers a 

similar question. Do you think it is necessary that they would comply with the same transparency? 

Mr. HAYES. Yes, ma’am. 

Ms. HART. Tell me why, Mr. Hayes? 

Mr. HAYES. Well, you know, I have examiners coming in my 

bank on Monday. I have had the 30-page questionnaire, and we 

have completed all that, and I am sure that the credit unions go 

through that as well. But it is imperative—it is sort of like the report card that your children sometimes don’t want to bring home. 

You know, when you ask them how are they doing? Fine. But until 

you get the piece of paper that says well, you made a ‘‘C.’’ I think 

transparency is that report card, and I think it is absolutely not 

a problem for me, and I don’t think it should be a problem for anybody, especially if there is a tax advantage that is there. 

Ms. HART. I think that is the major point is that people have 

a suspicion because there isn’t a level of transparency, and it may 

be completely unfounded. 

Mr. HAYES. Right. I think they are all very—— 

Ms. HART. But we can’t be sure. 

Mr. HAYES. We are all honorable people. But, you know, I think 

it is just transparency needs to be there, and I think that is important. I applaud these folks that are doing it. But the regulator 

needs to say, the regulator tells us what we are going to do nine 

times out of 10. 

Ms. HART. Right. Mr. Macomber? 

Mr. MACOMBER. I don’t really have a different—anything to 

add to what—— 

Ms. HART. Okay. 

Mr. MACOMBER. —Dave said, except that the FDIC, which examines our bank and is our primary Federal regulator, does have 


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some curiosity about salaries and things in the bank, which doesn’t 

appear to be true for the NCUA. 

Ms. HART. Okay. 

Mr. PLAGGE. The only comment I would make: It really struck 

me in the first panel of just how an entity that is there for the public good has literally no reporting to do, period—I mean as it relates to CRA, as it relates to those kind of things that would prove 

the marketplace that they serve there seems to be no push from 

the regulator, who is supposed to be doing that, as OCC does with 

our bank, to actually accomplish that. That is probably the biggest 

frustration. If everybody followed the best practices that we just 

hear to the right, that is probably not—you know, it is probably a 

lot less conversation. 

Ms. HART. That may be the case. Ms. May, do you want to respond? 

Ms. MAY. I just want to say a CPA audit is a requirement. 

Ms. HART. Yes. 

Ms. MAY. There is no way around that. The audit by the examiners, by the regulator occurs every year, and, yes, they do ask my 

salary and the salary of my management staff. There is no hiding 

of any facts in that sense. We do also report HMDA information. 

The only report that we don’t make is the CRA report. We do everything else that has been alluded to. Quite honestly, I assume 

the mutual savings were reporting 990 during the S&L crisis. 

Ms. HART. Thank you. I am out of time. Thank you, Mr. Chairman. 

Chairman THOMAS. I thank the gentlewoman. Does the gentleman from Tennessee, Mr. Tanner, wish to inquire? 

Mr. TANNER. Thank you very much, Mr. Chairman. And, Mr. 

Hayes, thank you for being here. He is from the great eighth district of Tennessee, and we appreciate your coming to Washington 

today. 

Mr. HAYES. Thank you, sir. 

Mr. TANNER. Most of the questions that I had have been asked. 

Are there any meaningful restrictions on credit union membership? 

In other words, is there—if Mr. Beauprez’s daughter can join a 

credit union across the street with no connection to that area or 

anything, what are the meaningful restrictions on credit union 

membership and who sets them? 

Vice Admiral DAWSON. Unfortunately, his—I don’t think his 

daughter could join my credit union. I would like her to, but she 

would have to join the Navy or the Marine Corps first. We are always looking for a few good folks. So, yes, I have restrictions on 

my field of membership, which is the Department of the Navy active duty military sailors and marines and civilians that work for 

the Department of the Navy. I have restrictions. 

Mr. TANNER. Could I just add something here? But the membership, and let me preface my remark by saying I spent 22 years 

in the Navy. I was once a member of the Navy Federal Credit 

Union, and have a great deal of respect for everything the credit 

union does. But the credit union membership rules are not just 

members of the military, but their spouses, their mothers, their fathers, their grandparents, and then it can go out from there. By the 

six—if you remember the movie, ‘‘Six Degrees of Separation,’’ you 


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could take on just about anybody in the country. There are 2.5 million members in the Navy Federal Credit Union. That is not a criticism of the credit union. But I think it shows you how the membership can be just expanded. This is the first time I have ever taken 

issue with an admiral in a public forum. 

Vice Admiral DAWSON. No issue there. Did you keep your membership? 

Mr. MACOMBER. I did not get my membership. 

Vice Admiral DAWSON. But unfortunately, if you had applied 

again, you couldn’t become a member; is that is the restriction that 

I have so. 

Mr. TANNER. Do you set that or does the—are you a Federal 

credit union—who sets the membership guidelines? Is it left up to 

individual credit unions or is it—— 

Vice Admiral DAWSON. No. No, sir. You apply for your field of 

membership with our regulator, NCUA, and they determine what 

your field of membership can be. 

Mr. TANNER. Well, I was just wondering what the field of membership is for your daughter. 

Mr. BEAUPREZ. I don’t know what the field of membership was 

Mr. Tanner, but the question that we asked was, how do we become a member. Oh, all you got to do is walk in and sign the form. 

If you wanted to be a member, in other words, my wife was told, 

you are a member. That is all you needed. 

Mr. TANNER. Is that because we all have a body temperature 

of approximately 98.6? I assume we do at least unless somebody up 

here is dead. 

Chairman THOMAS. Will the gentleman yield? Apparently, that 

is variable as well. 

[Laughter.] 

Mr. TANNER. Thank you, Mr. Chairman. 

Chairman THOMAS. Does the gentleman from California wish to 

inquire? 

Mr. BECERRA. Yes, Mr. Chairman. Thank you. Let me see if I 

can ask a question that Ms. May posed or she made a comment 

that I am hoping folks from the banking industry might respond 

to. She indicated that she had an application for credit union status with her. Can you give us your explanation of why more banks 

or mutuals have not converted to credit unions if the credit unions 

have it so good? 

Mr. PLAGGE. First National Bank in Waverly is a 141-year-old 

small business. It is a small banking institution. It’s part of the 

American fabric of small business. There are non-profits. There are 

for-profits. There are publics. There are privates. I guess the question in itself, if the world was made up if not-for-profits, non-taxpaying, tax-exempt entities, it doesn’t work. Again, our argument 

isn’t against the industry itself, the credit union industry itself. It 

is those that—that it made a comment here several times before— 

that seem to have no limits on what they can do. It seems to frame 

around NCUA that has no borders on what they will approve for 

a community charter for a common bond for business and products 

and services. You are seeing exceptions here with the large credit 

unions that are staying to task, that are staying to a membership 

field common bond, which is terrific. But that is not what we are 


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seeing on a nationwide basis as it relates to business lending and 

so forth. So, I am not apologizing for our status as a community 

bank in Waverly, Iowa, 141 years old, owned by our community 

and employees. So, that is not an option we would chose to take. 

Mr. BECERRA. I think that is a great response, and before I 

move to anyone else, let me do that—is it Plagge or Plague? 

Mr. PLAGGE. Plagge. 

Mr. BECERRA. Plagge. Mr. Plagge I think makes a good argument here that you can have any number. His concern is not with 

any credit union. It is those that seem to be going beyond the scope 

of what the charter was meant to provide to any credit union. To 

those of you who operate credit unions, two questions: Is there ever 

a point where you get too big? Second, should you be allowed to get 

bigger when you still—or at least some or the credit unions in the 

industry still don’t seem to be providing service to a lot of the modest-income families that you would think that credit unions would 

be best at serving? 

Ms. MAY. Congressman, when 1151 was passed in 1998, that 

made available to credit unions the opportunity to expand beyond 

their traditional fields to add low-income areas. In adding low-income areas, we have seen I believe Ms. Johnson reported three 

times the growth among those credit unions than we have in the 

credit unions that did not add low-income areas. As a credit union 

grows and reaches out and serves more people of modest means, 

I think that is a success factor, and that is an opportunity to bring 

more services to people who otherwise are unbanked. 

Mr. BECERRA. So, Ms. May, if I could ask you there: At what 

point will you be able to come back to us and say you at least 

match the banks when it comes to providing loans, mortgages, or 

otherwise to folks in modest income communities to the level that 

banks do? 

Ms. MAY. Are you speaking of GECU or are you speaking of 

credit unions as a movement? 

Mr. BECERRA. As a whole. 

Ms. MAY. As a whole. 

Mr. BECERRA. Because obviously, as I think Mr. Plagge pointed 

out, there are some exceptions or perhaps they are the rule, but 

they are concerned more with the outliers. 

Ms. MAY. Well, we are already seeing in the HMDA data an improvement year by year. 

Mr. BECERRA. But I am asking at what point do you think the 

industry, the credit union industry, will at least as an industry 

come to the point of matching the banking—the for-profit industry—when it comes to making loans to modest-income families in 

this country? 

Ms. MAY. Well, I would suspect we are already there or above 

it. 

Mr. BECERRA. Okay. I am not sure if the data are out there, 

but I am not sure if that is the case. I would hope that that would 

be the case because that would certainly move forward in lending 

you a lot more support. I think I stopped is it Mr. Hayes? 

Mr. HAYES. Yes, sir. You know, like Mr. Plagge, I mean we— 

you know, we have been around for 75 years, and we have been 

there because we have served our customers, all levels of cusVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00159 Fmt 6633 Sfmt 6602 E:\HR\OC\26372.XXX 26372

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tomers, from low to moderate to those who have resources. As I 

have traveled throughout the country representing the ICBA and 

the 5,000 member banks—we represent 6 percent of the total banking assets, and we are—you know, we pay taxes. I think it gets to 

be an issue to us is just, you know, it looks like it is not fair. And, 

you know, you shouldn’t even be asking the question if the charter 

was to serve the low and moderate, and, yet, you are having to ask 

the question when are they going to be there, I mean if that was 

the charter, that was what was put forth. I think it is ironic that 

we are even asking the question. 

Mr. BECERRA. Thank you very much. 

Chairman THOMAS. The gentleman’s time—— 

Mr. BECERRA. My time has expired. 

Chairman THOMAS. The gentleman’s time has expired. Does the 

gentleman from North Dakota wish to inquire? 

Mr. POMEROY. I did, Mr. Chairman. I thank you for this hearing. I think it has been a very interesting discussion. I am not 

quite sure where all of this is going, but if we are just in a kind 

of expansive, fact-gathering position of the Ways and Means Committee, I have found this to be a quite an interesting discussion. 

I might suggest, Mr. Chairman, that a hearing similar on pensions 

would be extremely timely. It is just an enormous amount of concern in this area, and a lot of misinformation in this area, too. 

Even having the discussion about it, absent any particular legislation might be something that would be a good pursuit for this Committee. But as to the issue before us—— 

Chairman THOMAS. Would the gentleman yield? 

Mr. POMEROY. Yes, I will. 

Chairman THOMAS. I think I have a thick enough skin for that. 

[Laughter.] 

Mr. POMEROY. I reckon you do. 

[Laughter.] 

Mr. POMEROY. I would just have a couple of questions. It is a 

bit off the topic, but I have been concerned about, and as long as 

we have the Navy here, Admiral, I have been concerned about the 

location of these payday lending outfits and these subprime outfits 

and even the—I used to be an insurance commissioner—the marketing of scurrilous insurance products to the men and women in 

our military. I think that for the favored tax status of credit 

unions, we do have a right to expect a measure extra, and investment back in the members. So, I am interested in what you can 

tell us about Navy Credit Union’s effort to really help your membership steer its way through and around that subprime industry. 

Vice Admiral DAWSON. We do a variety of things. We make 

our—we make services available to the bases where we serve, to 

provide education on finances for young sailors and marines. I have 

a very large budgetary counseling division at Navy Federal that 

people can call in to get counseling, and they work with a lot of 

people that—or a number of people that have gotten in trouble 

with payday lenders. I think of payday lending for—as a spiral of 

doom for sailors and marines. It is something they just can’t recover from. We all must bring forth alternatives to that. We have 

worked with the Navy-Marine Corps Relief Society. We have talked 

to them about how we can bridge the gap between when people arVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00160 Fmt 6633 Sfmt 6602 E:\HR\OC\26372.XXX 26372

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rive at their doors who are destitute, many of them because they 

have just gone on the shoals from payday lending. 

Mr. POMEROY. I appreciate that response, and I—in the event 

there are Federal legislative issues that you think we actually 

ought to pursue, relative to market abuse in this area, the Committee would I am sure appreciate having it called to your attention. Generally, it is a regulatory issue dealt with at a state level, 

but it does concern me a lot. I mean those who would prey upon 

men and women in our Services, and it is despicable conduct. More 

generally, on this—look I have got friends on both sides of this 

issue, and I have spent a lot of years with my friends in the North 

Dakota banker community talking about the words you used, Mr. 

Macomber, an impending crisis. There is no doubt they feel like 

they can’t compete against these non-taxed entities, and they are 

deeply anguished about it, sincerely so. For me trying to evaluate 

how all this sorts out, I tend to think market share is the ultimate 

demonstration of whether or not we have got something here that 

indeed has given somebody a clear and non-competitive advantage 

in the marketplace. Now, I would like the bankers on the panel to 

tell me how you—to me it looks like the market share is staying 

relatively stable and that profits are healthy in the banking sector, 

and that diminishes my concern that we are heading toward an impending crisis in banking. I don’t say that to be argumentative. I 

would just like your response, sir. 

Mr. PLAGGE. Well, I think it is a great question, because I just 

refer back to something David just said. You know, the community 

banking sector represents 6 percent of the financial sector. Interestingly enough, that is the same percent as the credit union. The 

credit union industry tries to do I think a great job, and it has been 

very successful at it—doing—making this the discussion about Citi 

Group or Citicorp against small credit unions, when, in fact, the 

real battle lines are on the local level against large credit unions 

and community banks. One tax study in Virginia said that there 

is a 67 basis point difference—benefit to the credit union either on 

the loan side or the borrowing—or the deposit side. If that indeed 

is the case, and whether it is that amount or a little less, whatever. 

Just take the tax rates and look at it as a whole. If we are all community-based, and we all know our customers, we are all offering 

essentially the same products and services, 67 basis points is a 

huge difference. Because it is an exemption that goes into that 

marketplace, I mean competition isn’t competition. It is not level 

playingfield competition. The tax-exemption gives enough benefit in 

rates and terms that it can move the market in that direction, 

which is what we are seeing happen in community bank marketplaces. 

Mr. POMEROY. Well, I mean that is just a question. I mean I 

know the argument. It has been well advanced and often today. 

Mr. PLAGGE. Right. 

Mr. POMEROY. But what is happening in market share relative 

to community banks? 

Chairman THOMAS. The gentleman’s time has expired. Any of 

these questions that are asked in which time runs out, if any panel 

member of any panel wishes to supply in writing additional information to explore this area, because I do think share of overall pie 


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versus concentration within a share of the pie is something that I 

think needs to be talked about completely. Does the gentleman 

from Indiana, Mr. Chocola, wish to inquire? 

Mr. CHOCOLA. Thank you, Mr. Chairman. Thank you all for 

being here today. At the risk of stating the obvious, I think we all, 

obviously, understand that credit unions’ tax-exempt status is 

based on their unique organizational structure and their goal of operating for mutual purposes, serving under-served areas and populations. So, I guess the purpose of being here today is to answer: 

Do you do that? Maybe to help us answer that, we can look at the 

state I come from, which is Indiana. The Federal Reserve has estimated that a minimum profitable loan is about $2,400. There was 

a survey done this year in Indiana that indicated that 41 credit 

unions were randomly surveyed, and it found out that the average 

minimum loan for these credit unions was $281. 

It also found out that no-cost checking in these credit unions was offered on an average of a $17 balance in the checking account. 

Also, 26 percent of their members had checking balances under 

$100; and 55 percent of the savings account balances in these credit unions were under $250. So, I guess for the credit union representatives, I would ask, is this unique to Indiana? Or is this a 

similar experience that you see in your state and industry-wide? In 

the interest of full disclosure to the community bankers, I was part 

of a group that started a series of community banks in Indiana. Is 

this the kind of business that you solicit and want? Do you see this 

as potentially profitable? So, I would ask the community bank representatives, first, is this unique to Indiana, or is this what you see 

industry-wide? 

Vice Admiral DAWSON. I think we see it across the credit union 

industry. At Navy Federal, in 2005, we have a quarter of our loans 

average $1,600. Also, as you mentioned, checking, we not only have 

free checking, we pay interest in checking. And 20 percent of our 

checking accounts have $100 balance or less at the end of the 

month. So, they not only get free checking for that, they get interest on that, as well. I don’t think we are unique in the credit union 

industry. 

Mr. CHOCOLA. Ms. May? 

Ms. MAY. While I don’t have the exact numbers with me, he is 

absolutely right. Indiana is not unique. Our 247,000 members, the 

average balance overall is $4,000 in their deposit accounts in total. 

In a financial cooperative, you have those who have, and those who 

don’t have. So, it takes a few very large depositing members to 

make available the moneys that we can lend out to those who don’t 

have. We make $200 loans on a regular daily basis. We make loans 

for eyeglasses, for dentures—whatever it takes to improve our 

members’ lives. 

Mr. CHOCOLA. Are those profitable loans? 

Ms. MAY. No. Our tax-exemption allows us to make those loans. 

There are a number of loans that we make that are not profitable. 

We participate actively in a bond program in our city, and there 

is no profit in those loans, either; but we are able to put a good 

number of people, first-time homebuyers, into homes. Twenty-six 

percent of the mortgage loans we made last year were for first-time 

home buyers. We put out over $3 million just in bond money, which 


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is low-interest downpayment assistance money. The tax-exemption 

does allow us to do business the way we are able to do business, 

to help our members—our members, your constituents. 

Mr. PLAGGE. Our bank offers the same things: free checking, 

free ATM, free money markets, free Internet banking, all those 

kinds of things. We do small loans. We do a variety of direct loans, 

credit cards, home equity lines, all those kinds of things the same 

way. We are not unusual in the community banking industry. As 

an industry, though, there are lots of statistics out there that the 

credit union industry actually has a higher-wealth membership 

than our customer base is in the community banking world. There 

are plenty of studies to show that as well again, and I think it is 

actually part of my testimony. 

Mr. MACOMBER. There is no one here that is running a private 

bank. We are taking customers regardless of their background. 

Again, the statistics that came out, there was a survey I mentioned 

earlier that goes back to 2003 that indicates that small community 

banks do a better job of serving low- and moderate-income individuals than credit unions do. So, I think you can focus in on certain 

statistics, but I think that is pretty much where we are. I think everything we have heard today from the industry, from the credit 

union industry itself, supports that position. 

Mr. HAYES. We are community bankers. That is our community. I mean, that is who our customers are. When you have $8-, $10- 

an-hour jobs that you worked hard to bring into your community, 

I mean, you are going to take care of those people. Having been in 

a community bank, I believe you understand that those customers 

that we all probably have are similar. There is just one difference. 

Mr. CHOCOLA. Well, thank you. I yield back, Mr. Chairman. 

Chairman THOMAS. Thank the gentleman. Does the gentlewoman from Ohio wish to inquire? 

Ms. TUBBS JONES. Thank you, Mr. Chairman. I always am in 

amazement, having sat as a judge for about 10 years, when I bring 

people into my chambers for pre-trial discussion. I say, ‘‘Plaintiff, 

tell me what is going on,’’ and I say, ‘‘Defendant, tell me what is 

going on.’’ I realize I have to wade through all of it to understand, 

myself. I am always amazed at why one or the other of the financial institutions in this community seem to think they are better 

than the other, or they are at a disadvantage, or whatever. But I 

understand the next thing on the loom is when Wal-Mart gets to 

become an industrial bank. 

Mr. HAYES. Yes, ma’am. 

Ms. TUBBS JONES. All of you are going to be at my desk, telling me, ‘‘Don’t let it happen,’’ right? 

Mr. HAYES. You don’t want to get me started on that. 

Ms. TUBBS JONES. Don’t get you started, huh? 

Mr. HAYES. How long do you have? 

Ms. TUBBS JONES. All right, I’ll just ring a bell in the room 

here. 

[Laughter.] 

Ms. TUBBS JONES. I really think, Mr. Chairman—and I would 

suggest this—that there might be a forum in which we might be 

better able to have a discussion like this—because members are restricted to 5 minutes—if there are truly issues that anybody needs 


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to address to make themselves stronger in the job that they do. 

Clearly, our goal is that our constituents are served, no matter 

what institution it is that is in our community. We all really want 

to try and be supportive. Maybe there is a forum in which we could 

literally sit down, maybe with all the credit unions talking about 

what it is we see, or they need to do, or with all the community 

banks, with all the other ones. Then maybe try and bring them all 

in the same room—without boxing gloves—and have a discussion 

about finances in America. I thought I would ask another question, 

Mr. Chairman, but I know, like all of my colleagues, we are probably at the end of questions. I just put that on the table as a possibility that we might engage in down in the future. Also, it makes 

it not seem as if there is an environment operating here to support 

or not support any institution. I yield back the balance of my time, 

Mr. Chairman. 

Chairman THOMAS. Thank the gentlewoman. The problem in 

part is that it depends on how you ask the question, as to what 

you get in answer. If are a common bond union and you belong to 

a corporation and everybody is employed, then you don’t have extremely low-income, as people would define low-income. But you 

also oftentimes don’t have very high income. So, on average, you 

may be higher than someone else, or in fact you may not be. When 

you talk about including under-served areas, that doesn’t mean 

that you are necessarily serving people who are low-income in the 

under-served area; unless, of course, you can produce the data that 

shows that. Part of the discussion has been that, unfortunately, in 

the Chair’s opinion, the agency that is created to oversee the structure seems to not understand that the ability to produce data is a 

very positive thing which can make a point and which provides an 

early warning system if in fact certain things are going in particular directions. It seems to be that the people are more comfortable simply saying ‘‘I believe, and therefore it is.’’ Now, in some 

instances, you can get an answer that shows you how comfortable 

people are when they say ‘‘I believe.’’ Vice Admiral Dawson, you 

folks, what is your structure? Common bond, multiple bond? 

Vice Admiral DAWSON. Common bond. 

Chairman THOMAS. You are a common bond. Now, we have 

gone a little out of the color marks of Navy. It is navy family, even 

if they are civilians; but it is on bases, so you are looking at Navy. 

You are enormous in size. 

Vice Admiral DAWSON. Navy and Marine Corps, yes, sir. 

Chairman THOMAS. Navy and Marine Corps together. You have 

got to include those. But you are enormous in size. But you have 

a common thread which I think is fairly clear, but you extend it 

to families. 

Vice Admiral DAWSON. Yes, sir. 

Chairman THOMAS. How far out does the family tree go? Obviously, husband or wife. 

Vice Admiral DAWSON. Husband or wife. 

Chairman THOMAS. Obviously, children. 

Vice Admiral DAWSON. Children, mothers. 

Chairman THOMAS. Mothers. 

Vice Admiral DAWSON. Yes. My mother is a member. 

Chairman THOMAS. Well, therefore, fathers, I assume. 


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Vice Admiral DAWSON. Fathers, yes. 

Chairman THOMAS. Okay. Is that it? 

Vice Admiral DAWSON. Yes, sir. 

Chairman THOMAS. Ms. May, you folks have decided to take it 

one more jump; is that correct? 

Ms. MAY. That is correct. We were originally Federal Civil Service workers and their family members. 

Chairman THOMAS. But that was a common bond. 

Ms. MAY. That was a common bond. 

Chairman THOMAS. But you are not a common bond any more? 

Ms. MAY. We are now a community, the El Paso County. 

Chairman THOMAS. Right. But you are also under the state 

structure, right? 

Ms. MAY. I am also under state structure. 

Chairman THOMAS. Yes. You are state, and he is Federal. 

Ms. MAY. That is correct. 

Chairman THOMAS. Yes. But you don’t just stop at mother, father, sons, and daughters. You include—— 

Ms. MAY. Pretty much everybody in El Paso County is related, 

so that pretty well handles my community. 

[Laughter.] 

Chairman THOMAS. Is that why you decided to go to first cousins? 

[Laughter.] 

Ms. MAY. Well, you know, first cousin really was—that is pretty 

far out there. 

Chairman THOMAS. But you cover first cousins. 

Ms. MAY. We cover first cousins. 

Chairman THOMAS. If someone comes in and says, ‘‘I am a first 

cousin——’’ 

Ms. MAY. But typically, they qualify because they live in El Paso 

County. We only have offices in El Paso County. 

Chairman THOMAS. You clearly serve under-served areas. 

Ms. MAY. Absolutely. 

Chairman THOMAS. Do you believe that if you are now going to 

respond to an under-served area, and you put an ATM in there, 

that that really meets the financial services of an under-served 

area? 

Ms. MAY. I can only respond for GECU. 

Chairman THOMAS. That is why I am asking you. 

Ms. MAY. We have placed offices—12,000-square-foot building— 

in, I’d say, the southeast side of El Paso, which is primarily Hispanic. In fact, every sign we have in that office, every brochure we 

have in that office, is in the Spanish language. This is what I 

would consider an under-served area, and it is a very successful 

branch. We are very proud of what we do in that branch. 

Chairman THOMAS. Don’t you find, though, that if you are really going to try to service an under-served area, one, you probably 

have to have a facility, because they are not as knowledgeable 

about the way things work; you have to have people who speak 

their language; and the counseling has to be far more supportive 

than it would be in an non-under-served area? 

Ms. MAY. In my city, that is true. 

Chairman THOMAS. Yes. 


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Ms. MAY. As I say, we are Hispanic. It is face-to-face, mano-amano. We speak the language, we share the common culture, quite 

honestly. 

Chairman THOMAS. But you are saying that probably an ATM 

would not—— 

Ms. MAY. Not in my city. 

Chairman THOMAS. —satisfy? 

Ms. MAY. No, sir. 

Chairman THOMAS. That is why I find it interesting that there 

has been an attempt to move ATMs as satisfactory in under-served 

areas. That seems to me to be looking at outreach far more similar 

to these fellows over here, who are driven by the profit motive, by 

which we temper that with taxes, because all they want to do is 

just make money. The credit unions don’t want to just make 

money; they want to serve an area. But it seems to me, as I said, 

ATMs, period. Admiral, have you ever discussed going beyond the 

common bond in terms of structure; multiple bond or community? 

Vice Admiral DAWSON. No, sir, not at our credit union. 

Chairman THOMAS. I mean, if you push this community thing 

anywhere a ship sails, you guys have got a pretty interesting territory. 

[Laughter.] 

Vice Admiral DAWSON. Girlfriends are not permitted to join. 

Chairman THOMAS. Okay. Ports of call, I mean, you know. 

Vice Admiral DAWSON. Girlfriends are not permitted to join. 

[Laughter.] 

Chairman THOMAS. Now, I am going to ask you, and I am going 

to ask Ms. May, and I know it is difficult because you are here representing organizations, and not yourselves, and you may not want 

to answer this question. If you choose not to, I understand. Ms. 

May, you saw a need in the community, and so the community concept and outreach with the state structure made sense to you. 

Ms. MAY. Yes, sir. 

Chairman THOMAS. Do you have any minor discomfort about 

the concept that a geographic or community structure would include Los Angeles County, with all of the rich and the poor and the 

millions of people? 

Ms. MAY. I guess my simple response to that would be, a credit 

union is a financial cooperative. In order to have a cooperative, you 

have to have those who have, and those who have not. Those who 

have make deposits, so that those who don’t have can borrow moneys. 

Chairman THOMAS. That wasn’t my question, but I understand 

the difficulty you would have in answering a question like that. 

Based upon the way you answered it, I really thank you very 

much. 

[Laughter.] 

Chairman THOMAS. Vice Admiral, do you get any qualm at all 

about an area which is supposed to be local that has a population 

greater than 42 states? 

Vice Admiral DAWSON. Sir, I have just been aboard 11 months. 

I would have to look at what that is all about. I am not familiar 

with that. 


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Chairman THOMAS. You see, I think you are comfortable and 

people are comfortable with you because, in essence, it is Navy 

family, or people who are close to Navy family. 

Vice Admiral DAWSON. Right. 

Chairman THOMAS. So, you feel comfortable with that; notwithstanding the fact that you are millions, and have got billions. But 

there is a comfort level based upon that nexus. I am just trying to 

get my arms around the nexus of LA County. That is part of my 

problem. But I appreciate your narrow answer—which could have 

been different, and wasn’t. So, I appreciate it very much. Does the 

gentleman from New York wish to inquire? 

Mr. RANGEL. I just wanted to thank Ms. May. I have heard that 

just her presence here and her presentation has made you a very 

pleasant Chair here and changed the whole atmosphere—— 

[Laughter.] 

Chairman THOMAS. Oh, not at all. 

Mr. RANGEL. Well, I just heard that, so let me say—— 

Chairman THOMAS. It was actually the fact that you were gone. 

[Laughter.] 

Mr. RANGEL. Okay. Ms. May, I just want you to know that I 

may be calling you from time to time—— 

[Laughter.] 

Mr. RANGEL. You know, just to just be here and sit here and 

be your pleasant self. 

[Laughter.] 

Mr. RANGEL. Let me thank all of you for making it possible 

that we understand the problem better. Thank you. 

Chairman THOMAS. Thank you. Let me say, if you understood 

the discussion on the first panel, that the fear that we are simply 

out as a cash cow to find money where people aren’t paying taxes 

should not be thought of as the particular thrust. Our concern is 

with how a changing structure, not justified or documented is fulfilling its responsibilities. Obviously, Ms. May, in the basis of how 

you grew up and what you did and where it is, that is the kind 

of thing that is documented. Then the question is, ‘‘Okay, so why?‘‘ 

That is a second decision. But given the structure movement with 

definition and obviously displayed by small bankers who I think 

partly have some envy of the loans made to these massive buildings and major companies, which is something they would be desirous of—does that really focus on a mission statement? But to the 

extent that the mission statement is seen totally as the organization or the structure of the organization doesn’t focus on the social 

assistance aspect to it, I do believe we have a problem because the 

lines are getting blurred. That is where we have to spend more 

time focusing on that line to get it clear; rather than what I think 

is a blurring which generates a degree of criticism, which in part 

has led to this hearing, but which also is simply something systematically this Committee needs to do under the oversight structure. 

We let people do what they do without paying taxes. Periodically, 

we have to stop by and say, ‘‘How are things going? Because I have 

got people who are paying taxes, and they want to know why you 

don’t pay taxes.’’ That is what this hearing is all about. Thank you 

very much. If we will have the third panel, I want to thank the 

third panel for their patience. But apparently, I don’t have to, beVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00167 Fmt 6633 Sfmt 6602 E:\HR\OC\26372.XXX 26372

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cause the first name on the third panel is someone who is very familiar with the way this place works. It is a pleasure to have before this Committee a former member, a former colleague, a former 

Representative from New Hampshire, Norm D’Amours. We have 

Gordon V.—is it Karels? 

Dr. KARELS. Karels. 

Chairman THOMAS. Karels, thank you, Karels, who is the Associate Dean, College of Business Administration, at the University 

of Nebraska; John Taylor, who is the President and Chief Executive Officer of the National Community Reinvestment Coalition; 

and Constance Kennelly—‘‘Kennelly’’? It is pronounced ‘‘Kennelly’’? 

I thought it was ‘‘Kennelly,’’ but they put it ‘‘Kennelly,’’ because we 

had a former member of the Committee who we had as ‘‘Kennelly.’’ 

Of Tulane-Loyola Credit Union in New Orleans, Louisiana. All of 

you have submitted written testimony. It will be made a part of the 

record. During the time that you have, you can address the Committee as you see fit. If you will allow me, I will start with our 

former colleague, Mr. D’Amours. 

STATEMENT OF HON. NORMAN E. D’AMOURS, A FORMER REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW 

HAMPSHIRE; FORMER CHAIRMAN, NATIONAL CREDIT UNION 

ADMINISTRATION 

Mr. D’AMOURS. Thank you, Mr. Chairman and Ranking Member Rangel, Members of this Committee. I am here today, at the 

request of this Committee, to offer my perspective on the performance of credit unions in serving low-income Americans, as they 

were dedicated to do by their founders, their history, their traditions and, very importantly, by the U.S. Congress in the 1934 Credit Union Act and the 1998 Credit Union Membership Access Act. 

In my opinion, the majority of credit unions are holding true to 

their mission of focusing on low-income members and potential 

members. However, this majority controls a relatively small minority of the total assets of the credit union system, and this majority 

has little or no voice in setting the direction and priorities of the 

overall direction of the credit union system. The founders of the 

credit union movement insisted that unpaid volunteers would control a not-for-profit system, run on sound business principles by 

people who were not out for personal enrichment, and who would 

focus on low-income Americans. 

The reality today is that a small minority of large credit unions 

have created a tightly-controlled and intimidating structure, controlled not by volunteers, but by professionals who pursue growth 

for its own sake, and who profit quite handsomely from that 

growth. Those in control are uncomfortable with, and even at times 

in denial of, the traditional credit union obligation to focus on lowincome people. They fear there is just not enough profit in that. 

When I was Chairman of the NCUA, I attempted to refocus the 

system on low-income credit unions and low-income people who belong to those credit unions and to other credit unions. That effort 

was resisted by the major credit union trade groups and by some 

larger credit unions. Also, as Chairman of NCUA, I tried to effectively measure the performance of credit unions in serving low-inVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00168 Fmt 6633 Sfmt 6602 E:\HR\OC\26372.XXX 26372

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come people. Those efforts were defeated by the NCUA board because of strong opposition by trade groups and some credit unions. 

There have been several objective studies over the past six years 

providing substantial evidence that credit unions as a whole are 

not serving low-income people adequately. These studies, by Dr. 

John Caskey of Swarthmore College in Pennsylvania, by the Woodstock Institute of Chicago, by the GAO, by the National Community Reinvestment Coalition, conclude that in many cases banks 

serve more low-income Americans than do credit unions, and credit 

unions aren’t sufficiently focused on low-income people. You can ignore these studies if you choose to, but they are there. There is also 

strong evidence that, while touting their performance in serving 

low-income people, some credit unions and their trade groups 

fiercely resist any meaningful effort to effectively measure that performance, just as they did when I was Chairman of NCUA. 

Mr. Chairman and Members of the Committee, I am not here to 

suggest that credit unions should lose their tax-exemption. However, as both a taxpayer and a strong supporter of credit union 

ideals, I do think credit unions should be held accountable for their 

tax advantages that they are provided. This tax advantage is based 

on the traditional focus of credit unions on people of small means. 

Congress needs to mandate and oversee measurable standards requiring credit unions to focus on serving low-income Americans. 

This effort is going to have to come from this Committee and from 

this Congress. It will surely not come from the current credit union 

structure, and it will not come from the NCUA. A good first step 

might be an effective survey of credit union performance in serving 

people of small means. That action might begin the process of injecting needed transparency into a closed system. The Woodstock 

Institute study, by the way, in 2003, did suggest other steps that 

perhaps this Committee could look at. 

Lacking strong congressional direction, I believe it is a virtual 

certainty that the credit union system will continue to veer further 

and further off course, and this to the great detriment of low-income Americans and to America itself. Mr. Chairman, there are 

hundreds and hundreds of small credit unions out there greatly in 

need of assistance. They aren’t getting that assistance; meaning 

their low-income members aren’t getting the help and assistance 

that they need. I hope this Committee will, after this hearing, follow up and see to it that the steps we have discussed, and that I 

have mentioned in my written testimony, and that the Woodstock 

Institute outlined, will be considered. I thank you for your attention. I will be glad to answer questions, when the moment arises. 

[The prepared statement of Mr. D’Amours follows:] 

Statement of Hon. Norman E. D’Amours, a former Representative in Congress from the State of New Hampshire, and former Chairman, National 

Credit Union Administration 

Mr. Chairman and members of the Committee, I am here today at the request 

of the Committee to comment on the performance of credit unions in serving low 

income people who belong to a credit union or are within its field of membership. 

I have had the opportunity to observe credit unions from various perspectives for 

about thirty years. I served on the U.S. Congressional Financial Services Committee 

(then called the Banking Committee) from 1975 to 1985. After leaving Congress in 

1985 I was hired by the Credit Union National Association (CUNA) as a legislative 

lobbyist and acted in that capacity until 1993. In that year, I was confirmed by the 


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U.S. Senate to the Board of the National Credit Union Administration (NCUA) 

which regulates and/or insures almost all of America’s credit unions. I was immediately appointed chairman of that Board and served in that position until I left the 

NCUA in December of 2000. 

I have been informed that the purpose of today’s meeting is to address the concerns of some Committee members that credit unions may have strayed from their 

traditional mission of serving people of small means, meaning low-income people, 

as that mission is imposed upon them in the preamble of the 1934 Credit Union 

Act and re-imposed in the 1998 Credit Union Membership Access Act. 

Credit unions were introduced into the United States in the early part of the last 

century through the efforts of wealthy department store owner Edward Filene, Massachusetts banking commissioner Pierre Jay, Massachusetts attorney Roy 

Bergengren, Monseigneur Pierre Hevey from my hometown of Manchester, New 

Hampshire and other leaders who were united by their desire to bring fairly priced 

financial services to lower income people. 

These early credit union movement leaders strictly insisted that credit unions 

should not be based upon a profit motive. They were adamant in their belief that 

unpaid volunteer directors of credit unions would govern the operations of financially sound institutions with no thought of personal financial benefit and based on 

sound business principles. They intended credit unions to work together as cooperatives to help instill habits and values of thrift and prudent borrowing to people who 

were not financially sophisticated and who did not have access to the mainstream 

financial institutions of that day. These were the Americans targeted by financial 

predators. Their efforts helped countless Americans find their way to financial solvency and independence. 

The underlying realities that led to the formation of credit unions are very much 

in existence in today’s America. Credit unions are still very much needed to carry 

out their traditional functions. It is not only the low-income members of credit 

unions who are helped by traditional credit unions. The American free enterprise 

financial system benefits when more and more Americans are empowered to join the 

financial mainstream by breaking the shackles placed on them by predatory lenders. 

By admitting them to membership in credit unions, low-income people immediately 

acquire an ownership stake in their institution. They benefit from higher returns 

on their savings and lower interest rates on their loans because of the credit unions 

unpaid directors, its not for profit structure and, of course, its exemption from taxes. 

I am told that there are a few credit unions that still give periodic or end of year 

dividend bonuses and interest rate rebates to their members when the credit union 

has had a good year. This practice is not remotely as common today as it once was 

for reasons I will touch on later. 

Mr. Chairman and members of this committee, I am convinced that the credit 

union philosophy espoused by the movements founders is a beautiful thing. It is consistent with America’s promise of self-empowerment. It is consistent with the American dream of the accumulation of assets and wealth that gives our citizens the 

sense of pride, accomplishment and independence that in turn makes our country 

stronger. 

I come to you speaking as someone who is deeply committed to the traditional 

focus of credit unions on low income Americans. It is from that perspective that I 

can assure this committee that its concerns about credit unions having strayed from 

their mission are not misplaced. They are very well grounded in reality. In fact, 

there are many people both within and outside of the credit union community who 

share that concern. 

During the seven years that I was at NCUA, I made several efforts to position 

that agency to pay more attention to small credit unions and low-income credit 

unions. Such credit unions are more apt to be made up of low-income members. 

Those efforts were surprisingly difficult to advance because of strong resistance from 

credit union trade groups and some credit unions. 

In 1997, I attempted to persuade the NCUA Board to approve a requirement that 

community based credit unions should include in their business plans a short statement of the general efforts they would make to serve and reach out to low income 

members of the community they were chartered to serve. This modest and reasonable effort was also strongly resisted by the major credit union trade groups. In October of 2000, after several permutations, it finally passed as the Community Action 

Plan (CAP). I left the NCUA at the end of 2000. The NCUA Board repealed CAP 

in December of 2001 just weeks before it was to take effect. 

In 1999, Dr. John Caskey, of Swarthmore College in Pennsylvania, conducted a 

study of full service credit unions. Dr. Caskey concluded that many and perhaps 

most of those credit unions were not making efforts to reach out to low income 

Americans. Dr. Caskey also concluded that while some credit unions were making 


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1 Credit Unions and Asset Accumulation by Lower Income Households. Filene Research Institute. July, 1999, P41 

stellar efforts to serve people of modest means, many others were ‘‘free riding’’ on 

their backs.1 That is, they were benefiting politically from the efforts of those staying true to the traditional credit union philosophy while avoiding the responsibility 

to do so. 

In 1999, I sought to measure the performance of credit unions in serving low income persons by having the NCUA approve a survey to evaluate how credit unions 

were reaching out to underserved members or potential members. The NCUA Board 

did approve that survey but over my strong objections they voted to make it a voluntary one. The survey was never sent out to credit unions because the Office of 

Management and Budget (OMB) weighed in to agree with my stated contention that 

a voluntary survey amounted to a self-selecting sample and would produce no useful 

data. 

In 2002, the Chicago-based Woodstock Institute conducted a study of credit unions 

that concluded credit unions were not living up to their traditional values and responsibilities toward low income people. 

In November of 2003, the U.S. Government Accountability Office (GAO) issued a 

report on credit unions that made three rather startling points. First, they found 

that banks were outperforming credit unions in serving low-income people. Second, 

they found the differences between banks and credit unions were attenuating. 

Third, they suggested that criteria should be developed by NCUA to measure credit 

union performance in serving low income Americans. 

Earlier this year the National Community Reinvestment Coalition (NCRC) released a very detailed study demonstrating that bankers, because of their Community Reinvestment Act obligations, were outperforming credit unions in serving lowincome households and individuals. 

Thus, it seems clear that there is considerable evidence that today’s credit union 

system is not dedicating its substantial assets and skills to serving low-income people, which is its traditional, philosophical mission and statutory purpose. It also 

seems clear that the leaders of the credit union system today do not want credit 

union performance in this regard to be measured in any meaningful way. Their reaction to the 2003 GAO report was that it was ‘‘outrageous’’ and they implied that 

GAO was biased. 

My personal answer to the question of whether credit unions have strayed from 

their traditional mission would be that the majority of credit unions have not. However, the reality is that the majority of credit unions control only a relatively small 

percentage of credit union assets and do not play a significant role in determining 

the direction of the credit union system as a whole. 

According to the 2003 GAO study, credit unions with over one billion dollars in 

assets account for 28 percent of all credit union assets but for less than 1 percent 

of credit unions. Credit unions holding over $100 million in assets account for 75 

percent of total credit union assets but only 11 percent of all credit unions. 

In my opinion, it is this fundamental imbalance between the majority of credit 

unions and the majority of credit union assets that is root cause of the growing disconnect between traditional credit union philosophy and the systemic credit union 

resistance to serving low income people. It also helps explain the very harmful and 

systemic drift towards growth for its own sake and the increasing competition between credit unions within what was once a once more cooperative structure. 

The structure within which credit unions are operating is very tightly controlled, 

from the top down, by profit motivated professionals who seem to be pushing credit 

unions to grow just for the sake of growing. That is not a natural way for credit 

unions to grow and can result in a deterioration of services provided to members, 

especially those of low income. A credit union’s surplus will not be returned to the 

benefit of its members if, only for the sake of growing, those surpluses are dedicated, for instance, to pushing new loan products (that may, perversely, discourage 

the thrift credit unions were by tradition and statute directed to promote); if they 

are dedicated to contracting with outside vendors for products that increase income 

from fee charges; if they are dedicated to acquiring smaller credit unions; if they 

are dedicated to paying top salaries and bonuses to management, and so on. 

While there are many legitimate and natural reasons for credit unions to grow, 

growth for its own sake is driven in large part by the understandable inclination 

of professionals who control credit unions to overly focus on higher and higher salaries and bonuses as opposed to serving low income members and potential members. 

This focus on growth, income and profit seems to apply both to the professionals 

who manage such credit unions and those who run the trade groups they belong 


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to. That linkage results in a powerful control bloc that is pushing a systemic growth 

for growth’s sake in a nearly irresistible manner. 

In my opinion, the antidote to this forced growth is the introduction of systems 

and policies that will cooperatively direct more of the credit union systems’ assets 

toward serving all credit union members and potential members including, with special emphasis, low income people. 

Another complication in dealing with this problem is the fact that there is no one 

size fits all solution. Some of the largest credit unions do keep to the traditional 

philosophy and values of the original credit union movement. They make special efforts to reach out to low income people and to support small credit unions. Some 

of the managers of these large credit unions have expressed deep concern about the 

direction of the credit union movement. Unfortunately, the existing structure of the 

credit union system is so intimidating that most knowledgeable credit union people 

are afraid to speak out publicly. 

I remain hopeful that it is still practically possible today to redirect the concentration of credit union assets from the current growth frenzy into areas or programs 

that could be of great benefit to low-income Americans. Surely, that is an effort 

work making. 

Whatever actions might be taken to refocus the current credit union system on 

its traditional core values, I am absolutely certain of one reality that I hope I can 

adequately convey to this committee and to the Congress. That reality is that any 

effective effort to get credit unions as a whole to do a better job serving lower income households will not come from within the credit union power structure as it 

exists today. If this Congress doesn’t demand it, it won’t happen. 

One place to begin might be to find ways to make credit union structures and operations more transparent. A survey such as I tried to send out in 1999 and as the 

GAO suggested in 2003 might be helpful. Thus far, the current structure’s leadership has successfully resisted transparency. Beyond resisting objective measurements, they even succeeded in exempting their activities from the very reasonable 

disclosures made by other not for profit 501(c) groups as required by IRS form 990. 

I am not here to advocate taxing credit unions. This committee and this Congress 

in its wisdom can certainly devise methods and criteria that will provide the American taxpayer with some assurance that the great benefit and advantage the tax exemption gives credit unions is not being abused. Hopefully, as a first step, a much 

greater degree of transparency will help root out, through exposure, some of the excessive profit motives that have been creeping into and seriously harming the system. At the least, it might give us a clearer picture of who the ‘‘free riders’’ are. 

Mr. Chairman and members of the committee, I thank you for your attention and 

I will be pleased to address any questions you may have. 

f 

Chairman THOMAS. Thank you very much. Dr. Karels? 

STATEMENT OF GORDON V. KARELS, PH.D., ASSOCIATE DEAN, 

COLLEGE OF BUSINESS ADMINISTRATION, UNIVERSITY OF 

NEBRASKA-LINCOLN 

Dr. KARELS. Thank you, Chairman Thomas, Ranking Minority 

Member Rangel, and distinguished Committee Members. I want to 

express my appreciation for the invitation to testify before your 

Committee today. I just want to reiterate the main points of my 

submitted testimony: First, the rationale for credit unions’ Federal 

income tax-exemption is not entirely transparent to me, and may 

no longer hold; Second, the credit union common bond requirement 

has evolved markedly since the granting of the tax-exemption, and 

no longer constrains credit union opportunities and incentives as it 

had in the past; Finally, the ultimate beneficiaries of the credit 

union tax-exemption are very difficult to determine. To me, the rationale for exempting credit unions from federal income tax is probably best understood by examining the reasons Congress eliminated the same exemption for mutual savings and loans and mutual savings banks in the Revenue Act 1951. According to the U.S. 


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Treasury 2001 study, the reason for the loss of the tax-exemption 

was the evolution of these associations as commercial bank competitors. Mutual thrifts operated in a manner similar to banks, and 

the exemption gave them a competitive advantage over taxable 

commercial banks and life insurance companies. 

That same study also indicated that the original exemption in 

1937 was based upon their mutual nature; being operated by and 

for their members. That was also consistent with the original 1917 

administrative exemption for state credit unions that were said to 

closely resemble the cooperative banks and similar institutions 

Congress had earlier exempted. Credit unions evidently had preserved their mutuality in a fashion such that members were not 

just customers in other depository institutions. Clearly, credit 

unions competed with commercial banks, thrifts, and savings banks 

in the personal lending market. They also offered share accounts 

that served as deposits. But their uniqueness among depository institutions is quite apparent; and to me, that is the affinity among 

their members with a common bond. The common bond requirements subject credit unions managers to restrictions not found in 

other depository institutions. Loan opportunities are limited in the 

field of memberships, so that managers are constrained in their 

ability to grow the institution, and they may not rapidly change the 

riskiness of their loan portfolio. 

In the case of credit unions with occupational common bonds, 

long the most dominant type, it also produces company sponsors 

who have an interest in monitoring the operations of the credit 

union and help promote safety and soundness. It is widely accepted 

that the mutual organizational form produces organizations that 

are not as risky as stock-based companies. This has been demonstrated at both banks and insurance companies. Some research 

that we did in looking at the adoption of federal deposit insurance 

by credit unions in the seventies found no evidence that the adoption of deposit insurance led to increased risk-taking in the credit 

industry. I think this was somewhat of a surprise in the academic 

community. We find that the common bond requirement helped to 

limit the risk-taking behavior of managers. In addition, loan size 

limitations help to constrain loan losses. While these limitations 

were relaxed and new types of loan and share accounts were allowed after 1977, they influenced the overall composition of the balance sheets for some time. 

It is widely accepted that the NCUA’s support for multiple employee groups grew out of concern about concentration risk. The recession of the ’eighties caused many industrial firms to close or relocate, and associated credit unions to fail. We did some research 

there, and found that the addition of select employee credit union 

groups allowed credit unions to dissipate some of this concentration 

risk; but at the same time, it reduced the informational advantage 

they had with the close common bond. In many ways, it seems that 

credit unions have evolved in a fashion similar to that of savings 

and loans 50 years earlier. Credit unions now have many powers 

that allow them to compete directly with other depository institutions in many lines of business. Furthermore, the common bond 

has become diluted. The tax-exemption gives credit unions a comVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00173 Fmt 6633 Sfmt 6602 E:\HR\OC\26372.XXX 26372

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petitive advantage over depository institutions, and this advantage 

can manifest itself in various ways. 

One might expect that credit unions would, because of their notfor-profit status, have a lower overall profitability than banks. As 

mutual organizations, the managerial priorities would seemingly 

favor competitive loans and deposit rates over profit levels. The 

emphasis on member services would also tend to drive up operating 

expenses and reduce profitability. Ultimately, the tax-exemption 

provides an avenue for credit unions to have a competitive advantage in loan and deposit rates that are still providing expanded levels of service and reasonable capital accumulation financed out of 

profits. Historically, we don’t find that they necessarily have lower 

overall profitability. There is also mixed evidence as to whether 

they actually have lower net interest margins than other mutual 

organizations. In addition, there is mixed evidence as to whether 

credit unions are less efficient than other mutual types of organizations. In summary, all of these changes, I believe, parallel the developments that led to the taxing of mutual thrifts and savings 

banks. Deposit insurance has removed the issue of excessive burden of share accounts. It is not clear that credit union members 

have been the direct beneficiaries of the tax-exemption. At the 

same time, there is only limited evidence of expense preference behavior. Overall, it does not appear that a repeal of the exemption 

would be particularly detrimental to members, but would more 

likely affect the ability of credit unions to grow at the rates they 

have had in the past. Thank you. 

[The prepared statement of Dr. Karels follows:] 

Statement of Gordon V. Karels, Ph.D., Associate Dean, College of Business 

Administration, University of Nebraska-Lincoln, Lincoln, Nebraska 

The views presented in this statement represent those of the author alone. The 

author is Associate Dean and Professor of Finance in the College of Business Administration at the University of Nebraska-Lincoln and holds the Nebraska Bankers 

Association College Professor of Banking Professorship. The Professorship was created in 1992 with a gift from the Nebraska Bankers Association to the University 

of Nebraska Foundation. College Professorship appointments are recommended to 

the University Chancellor by the Dean of the College upon review by a College Faculty Chaired Professorship Committee. The Nebraska Bankers Association sponsors 

endowed professorships at two of the University of Nebraska campuses. It does not 

participate in the selection of professorship recipients. 

This statement addresses only the issue of the federal income tax exemption for 

credit unions and has three central points: 

I. The rationale for credit unions’ federal income tax exemption is not entirely 

transparent and may no longer hold. 

II. The credit union common bond requirement has evolved markedly since the 

granting of the tax exemption and no longer constrains credit union opportunities 

and incentives as it had in the past. 

III. The ultimate beneficiaries of the credit union federal income tax exemption 

are difficult to determine. 

I. Historical Development of the Tax Exemption 

There appears to be no disagreement as to the origins of mutual savings and credit associations or their purpose. Financial cooperatives such as mutual insurance 

companies and building associations emerged in the latter part of the 17th and early 

18th century. The first credit associations were founded in Germany by business 

persons in need of financial services that were not provided by the existing commercial banking sector. These early organizations led to the development of three types 

of mutual depository institutions in the U.S.—credit unions, savings and loan associations and mutual savings banks—that have both complemented and competed 

with commercial banks. 


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U.S. Treasury (1997) outlines five characteristics that distinguish credit unions 

from other depository institutions. 

1. Credit Unions are member-owned and member-directed cooperatives with each 

member having one vote. Technically credit union member deposits are the capital 

base of the organization. However these accounts also serve the traditional banking 

roles of checking and savings deposits so that over time, retained earnings serve the 

regulatory capital function. 

2. Credit Unions rely on unpaid volunteers directors elected by and from their 

members. 

3. Credit Unions are not for profit and return surplus earnings to members in various forms including higher returns on deposits (shares), lower costs of borrowing, 

greater financial services and retained earning for growth and regulatory capital 

needs. 

4. Credit Unions have a public purpose. The Federal Credit Union Act of 1934 

declares that credit unions are established for ‘‘promoting thrift among [their] members and creating a source of credit for provident or productive purposes.’’ 

5. Credit Unions have limitations on membership based on some affinity among 

members (‘‘common bond’’). 

All U.S. credit unions were originally state-chartered with federal chartering originating in 1934. State-chartered credit unions were not initially exempt from state 

or federal income taxes. An administrative ruling exempted state-chartered credit 

unions from federal income taxes in 1917. Federally-chartered credit unions were 

exempted from both state and federal income taxes in 1937. 

The rationale for exempting credit unions from federal income taxes is probably 

best understood by examining the reasons Congress eliminated the same exemption 

for mutual saving and loan associations and mutual savings banks in the Revenue 

Act of 1951. U.S. Treasury (2001) cites the Senate Report of that Act as indicating 

the reason for the loss in the tax exemption was the evolution of these associations 

as commercial bank competitors. Mutual thrifts operated in a manner similar to 

banks and the exemption gave them a competitive advantage over taxable commercial banks and life insurance companies. 

The 2001 Treasury study also suggest the original legislative exemption provided 

to federal credit unions in 1937 was based upon their mutual nature i.e., being operated by and for their members. In addition, taxing credit unions on their shares 

would be excessive because share accounts also function as deposits. This was consistent with the 1917 administrative exemption for state credit unions where they 

were said to closely resemble the cooperative banks and similar institutions that 

Congress had earlier exempted. 

Credit unions evidently had preserved their mutuality in a fashion such that 

members were not just customers as in other depository institutions (including mutual thrifts). Clearly, credit unions competed with commercial banks, thrifts and 

savings banks in the personal lending markets. They also offered share accounts 

that served the deposit function. Their uniqueness among depository institutions 

was quite apparent: an affinity among members (‘‘common bond’’). This affinity appears to be the significant characteristic that explains the maintenance of the tax 

exemption. 

II. The Role of the Common Bond 

Credit union membership was historically limited to individuals sharing a common bond of occupation, association or geographical area. The common bond requirement subjects credit union managers to restrictions not found in other depository 

institutions. Loan opportunities are limited to the field of membership so managers 

are constrained in their ability to grow the institution or rapidly change the riskiness of the loan portfolio. In the case of credit unions with occupational common 

bonds—long the most dominant type—it also produces company sponsors who have 

an interest in monitoring the operations of the credit union and help promote safety 

and soundness. 

It is widely held that cooperative and mutually organized firms are less risky 

than their stock-owned counterparts. For example, empirical evidence offered by 

Esty (1997) finds that stock-owned thrifts had both riskier portfolios and higher failure rates than mutuals. Lee, Mayers, and Smith (1997) find that risk in the asset 

portfolios of stock-owned property-liability insurers increased markedly relative to 

their mutually owned counterparts following enactment of state guaranty fund laws. 

This is not to say, however, that the mutual form of ownership guarantees limited 

risk-taking behavior. The large number of failures of mutual savings and loan associations in the 1980’s speaks to this point. Indeed, a study by Esty (1993) of 1,737 


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mutual thrifts operating in 1982, found that over 28% failed (or had tangible net 

worth ratios less than 2%) by 1988. 

Federal deposit insurance for credit unions was not instituted until 1971 and was 

not required of many state-chartered credit unions until the mid 1970’s. A study by 

Karels and McClatchy (1999) found no evidence that the adoption of deposit insurance led to increased risk-taking in the credit union industry. They suggest that the 

common bond requirement helped to limit the risk-taking behavior of managers as 

deposit insurance was implemented by credit unions. In addition, loan size limitations and maturity limitations (5 years on unsecured loans and 10 years on secured 

ones) also helped to constraint loan losses. While these limitations were relaxed and 

new types of loans and share accounts were allowed after 1977, they influenced 

overall composition of balance sheet for some time after. 

Beginning in 1982, the National Credit Union Administration (NCUA) reinterpreted the common bond requirement in a way to allow certain types of credit 

unions to add multiple groups referred to as ‘‘Select Employee Groups’’ or SEGSs. 

A successful court challenge to this interpretation eventually led to the passage of 

the Credit Union Membership Access Act of 1998, which explicitly allows for the addition of multiple groups to credit unions’ fields-of-membership. By the time of the 

passage of that Act, over 4,000 state and federal credit unions had added SEGs to 

their memberships. By 1999, multiple common bond credit unions accounted for 

over 70 percent of total federal credit union assets. 

It is widely accepted that the NCUA’s support of multiple employee groups grew 

out concern about concentration risk. The recession of the 1980’s caused thousand 

of industrial firms to close or relocate. Credit unions associated with such firms had 

limited memberships and subsequently experienced solvency problems. NCUA reported some 500 federal credit union liquidations or failures in 1981 alone. Frame, 

Karels and McClatchey (2002) examined the degree to which SEGs affected credit 

union risk. We found that a greater number of SEGs is associated with higher loanto-share ratios, higher loan delinquency ratios and lower capital ratios. These results indicate that expanded membership does increase investment opportunities 

and hence reduces concentration risk but the informational advantage arising form 

the common bonds becomes diluted. 

Since the passage of the Credit Union Membership Access Act, membership at 

credit unions with multiple bonds has actually declined. This is due in part to the 

rapid increase in community-charted credit unions. The terminology for the community field of membership allows for the greatest growth potential in the credit union 

industry and a significant number of federally-chartered credit unions are converting to community charters. Community and multiple common bond credit 

unions now account for over 80 percent of all assets in federally-chartered credit 

unions. 

Of the 50 largest federal credit unions in 2003, only seven had a single 

associational or occupational bond. Six of the largest 50 were community chartered 

and the remaining 37 were multiple bond credit unions. While credit unions are still 

predominantly in the consumer lending area, business and real estate and business 

loans now account for nearly 30 percent of their loan portfolios (and the larger credit 

unions have relatively higher percentages of real estate and business loans compared to smaller credit unions). Twenty years ago, real estate and business lending 

accounted for only about 5 percent of credit union loans. 

In many ways is seems that credit unions have evolved in a fashion similar to 

that of the saving and loan associations some 50 years earlier. Credit unions now 

have powers that allow them to compete directly with other depository institutions 

in many lines of business. Furthermore, the common bond has become diluted. The 

tax exemption gives credit union a competitive advantage over other depository institutions and this advantage can manifest itself in various ways. III. Who Benefits 

from the Tax Exemption? 

Credit union’s tax exemption would be expected to manifest itself in one or more 

of the following ways: 

1. Higher deposit rates for members. 

2. Lower loan rates for members. 

3. Expanded services and products for members. 

4. Higher capital ratios fund future growth or enhance safety and soundness. 

5. Consumption perks for employees. 

One might expect that credit unions would, because of their not-for-profit status, 

have lower overall profitability than banks. As mutual organizations, the managerial priority would seemingly favor competitive deposit and loan rates over profit 

levels. The emphasis on member services would also tend to drive up operating expenses and hence reduce profitability. Ultimately, the tax exemption provides an avVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00176 Fmt 6633 Sfmt 6621 E:\HR\OC\26372.XXX 26372

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enue for credit unions to have a competitive advantage in loan and deposit rates 

while still providing expanded service levels and reasonable capital accumulation 

levels that are financed out of profits. 

Historically we do not observe credit unions having lower overall profitability than 

banks and thrifts. This may reflect the underlying risk of the loan portfolio position 

rather than managerial motives. Hinson and Juras (2002) examined this issue by 

comparing the spread between loan and deposit returns for credit unions and mutual savings and loans. Mutual thrifts were chosen as the comparison organization 

to control for the impact of ownership form on the profit motive of managers. They 

found that credit unions do not, on average, have lower net interest margins than 

mutual thrifts after adjusting for differences in the composition the loan portfolio 

and assets. They interpret this finding as evidence that credit unions are not passing along a significant portion of their tax exemption to members and may instead 

be using it to cover higher operating expenses. 

Using the exemption to provide for managerial perks or to subsidize operating inefficiencies would misallocate the exemption benefits away from credit union members. Frame, Karels and McClatchey (2003) examine this question by estimating 

and comparing the cost functions of credit unions and mutual thrifts. We found 

mixed evidence in this regard. Credit unions with a residential common bond do 

have higher cost than mutual thrifts of similar size but single common bond occupational and associational credit unions are more cost efficient. There were no significant cost differences between multiple common bond credit unions and mutual 

thrifts 

The profitability of credit unions has played an important role in accumulating 

regulatory capital. Both banks and credit unions have increased their capital by 

roughly the same proportion in the last 20 years. Credit unions did this in the first 

half of the period where profitability was relatively higher than banks and banks 

have done it in the second half of the period where they have been relatively more 

profitable than credit unions. In addition, growth in credit unions through common 

bond expansion or conversion to community charters has been more extensive in the 

last half of this period and this was accompanied by very limited increases in capital 

adequacy. Banks and credit unions appear to have converged to similar capital positions that are much stronger than in the past with asset portfolios and product lines 

that are much more similar. 

Conclusion 

Credit unions have matured and evolved greatly since the passage of the 1951 

Revenue Act. Credit Unions are now modern depository institutions that offer a 

broad array of products to, in many instances, a very diverse customer base. Customer shares accounts have the added feature of deposit insurance which limits potential customer losses to near zero. Expanded lending powers allow credit unions 

to compete for residential mortgages longer-term, unsecured personal loans and 

business loans. Traditional, single-common bond associational and occupational 

credit unions now account for less than 50 percent of federally-chartered credit 

unions and for less than 20 percent of credit union assets. Credit union capital adequacy is very similar to that of commercial banks. 

All of these changes parallel the developments that led to the taxing of mutual 

thrifts and savings banks. Deposit insurance has largely removed the issue of the 

excessive burden of share accounts cited in the 1937 exemption. It is not clear that 

credit union members have been the direct beneficiaries of the tax exemption. At 

the same time there is only limited evidence of expense preference behavior on the 

part of credit unions. Overall it does not appear that a repeal of the exemption 

would not be particularly detrimental to members but would more likely affect the 

ability of credit unions to grow at the rates they have in the past. 

The ‘‘public purpose’’ characteristic is often cited as justification for the favorable 

tax and regulatory environment of credit unions. Extending financial services to individuals of small or modest means was embedded in the original common bond concept for credit unions. Credit unions have been very effective in providing services 

to its members but it is also apparent that banks, thrifts and other financial institutions also serve people of very modest means. If fact, one could argue that CRA reporting requirements provide better documentation of this public purpose for banks 

than credit unions. 

There is obvious concern that the removal of the tax exemption will ultimately 

hurt individuals of modest means the most. While the evidence does not seem to 

point to that, perhaps other tax policies that provide direct benefits to these individuals instead of potential indirect benefits through a financial intermediary should 

be considered. Alternatively, providing for a class of loans to individuals of modest 


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means that has an interest income exemption for all financial institutions (such as 

municipal bonds) might result in competition that more directly benefits individuals. 

References 

Esty, B.C., 1993. Organizational form, leverage, and incentives: a study of risk taking in the 

S&L industry. Working Paper, Harvard Business School. 

Esty, B.C., 1997. Organizational form and risk taking in the savings and loan industry. Journal of Financial Economics, 44, 25–55. 

Frame, W.S., Karels, G.V., McClatchey, C., 2003. Do credit unions use their tax advantage 

to benefit members? Evidence from a cost function. Review of Financial Economics, 12, 23–48. 

Frame, W.S., Karels, G.V., McClatchey, C., 2002. The effect of the common bond and membership expansion on credit union risk. The Financial Review, 37, 613–636. 

Hinson, Y.L., Juras, P.E., 2002. Performance evaluation of credit unions: reaping the benefits 

of tax status. Journal of Managerial Issues, 14, 145–161. 

Karels G.V., McClatchey, C.,1999. Deposit insurance and risk-taking behavior in the Credit 

Union Industry. The Journal of Banking and Finance, 23, 105–134. 

Lee, S.J., Mayers, D., Smith Jr., C.W., 1997. Guaranty funds and risk-taking: evidence from 

the insurance industry. Journal of Financial Economics, 44, 2–24. 

U.S. Treasury, 1997. Credit Unions. Government Printing Office, Washington, D.C. 

U.S. Treasury, 2001. Comparing Credit Union With Other Depository Institutions. Government Printing Office, Washington, D.C. 

f 

Chairman THOMAS. Thank you very much, Dr. Karels. Mr. Taylor. 

STATEMENT OF JOHN TAYLOR, PRESIDENT AND CHIEF EXECUTIVE OFFICER, NATIONAL COMMUNITY REINVESTMENT 

COALITION 

Mr. TAYLOR. Good afternoon, Chairman Thomas and Ranking 

Member Rangel. The National Community Reinvestment Coalition 

is honored to be here today and to speak for our 600 community 

organizations across the country that comprise our membership. 

We are essentially a trade association of economic justice organizations working to increase access to credit and capital for minority 

and working-class families. The fundamental purpose and basis of 

establishing credit unions is the same as for the Community Reinvestment Act. The establishment of credit unions and the passage 

of CRA were motivated by concerns that lending institutions were 

not serving low- and moderate-income borrowers. When banks do 

not meet their CRA obligations, they face ramifications, including 

failing their CRA exams and possible denials of mergers and 

branching applications. When credit unions do not serve low- and 

moderate-income borrowers and communities, the penalties are 

non-existent. Unfortunately, NCRC’s research indicates that large 

credit unions are not adhering to the mandate of the Federal Credit Union Act 1934 to ‘‘make credit available to people of small 

means.’’ 

Recently, NCRC conducted a comprehensive study, entitled 

‘‘Credit Unions: True to Their Mission,’’ which I believe we have 

supplied to the Committee. This study compared the performance 

of banks and credit unions serving minority communities and 

women and low-income borrowers in home loans. Despite credit 

unions’ origins as institutions devoted to people of modest means, 

NCRC’s study finds that banks make a higher portion of their 

home loans, with fewer loan denials, than credit unions, to traditionally under-served populations. The NCRC’s study adds powerful evidence to the numerous studies over the years that have detailed credit unions’ lackluster service to people of modest means. 

I am not including all credit unions because, obviously, some of 


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them do an extremely good job. But I am talking about the majority of these credit unions, the large credit unions that constitute— 

I think we have a chart somewhere; it is not up—but that constitute the—could someone run over and put that chart up on the 

percentage of ownership? 

[The information follows:] 

——— 

If you look in terms of the percentage of assets that are controlled by a small number of credit unions, that is the group we 

are really focusing on and their lack of commitment toward underserved populations. A Federal Reserve survey revealed recently— 

and there was an earlier question from the panel about what income was being served—that 36 percent of the households that use 

credit unions had low and moderate incomes; in contrast to 42 percent of the households that primarily use banks. The GAO released 

a report finding that banks provided 34 percent of their mortgage 

loans to low- and moderate-income borrowers; while credit unions 

issued just 27 percent of the loans to borrowers in 2001. The 

NCRC’s study finds over a three-year period, from 2001 to 2003, 

when all types of home lending are considered, banks out-perform 

credit unions in 36 states; or 72 percent of the states. When just 


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home purchase lending is analyzed by itself, credit union performance drops off even more. Banks out-perform credit unions in 40 

of the 50 states; or 80 percent of the time. 

In home purchase lending, the difference in bank and credit 

union performance was usually substantial. For example, in 2003, 

banks made 14.1 percent of their loans to minority neighborhoods; 

whereas credit unions issued just 7.9 percent. In 2003, banks made 

21 percent of their home purchase loans to women; credit unions 

issued 18.7 percent of their loans to women across the country. In 

2003, banks made 9 percent of their home purchase loans to Hispanics; credit unions, 4.8 percent to Hispanics across the country. 

In your home State of California, Mr. Chairman, banks made 18.3 

percent of their home purchase loans to Hispanics; while credit 

unions issued 12.4 percent to borrowers in 2003. In your home 

State of New York, Ranking Member Rangel, banks made 16.6 percent of their home purchase loans in minority neighborhoods; while 

credit unions issued just 5.1 percent in these tracts during 2003. 

Finally, banks made 5.6 percent of their home purchase loans to 

African-Americans; whereas credit unions issued just 2.8 percent of 

their purchase loans to African-Americans in 2003. In preparing for 

this testimony, NCRC conducted analysis of the most recent data, 

the 2004 HMDA data, Home Mortgage Disclosure Act data. This 

analysis shows once again that credit unions trail banks in making 

loans to minorities, to women, and to low- and moderate-income 

borrowers and communities. The chart in our testimony shows that 

banks exceeded credit union performance on all nine CRA and fair 

lending indicators. In addition, the largest credit unions—Navy 

Federal Credit Union, who you just heard from, and Golden 1 in 

California—also performed poorly. Navy Federal lags all credit 

unions on five of the nine indicators of performance, and Navy Federal lags all banks and thrifts on eight of the nine indicators of performance. 

I think the question posed by the gentleman from North Dakota 

is a very accurate one, about the presence of so much predatory 

lending business butting up to and surrounding military bases. It 

begs the question: if the Navy Federal Credit Union is doing such 

a great job and serving people in the Service, why are they surrounded by predatory lending, payday lenders, and other kinds of 

sharks that are literally across the street from the bases where the 

men and women of Service, as the President of the Navy Credit 

Union pointed out, are being taken advantage of? Let me close by 

saying large credit unions and their trade associations should not 

be comfortable in arguing to Members of Congress that, while credit unions lag banks, credit unions are getting better. Their tax benefits and other privileges dictate that they should be better. More 

importantly, you are right, Mr. Chairman. Why would Congress be 

satisfied with credit unions lagging banks, considering the valuable 

benefits bestowed on these institutions by the American taxpayer? 

In my home State of Massachusetts, we actually have CRA for 

credit unions. If you look at our study and you look at the performance of state-run, state-mandated credit unions compared to banks, 

guess what? With the presence of CRA, they perform just the same 

as banks in terms of serving low-income, minorities, and women. 

The NCRC recognizes that a significant segment of the credit union 


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industry remains devoted to serving people of modest means. But 

don’t be misled that Ms. May constitutes anything near what the 

majority of the credit unions are made up of—the majority of number of credit unions, certainly; but in terms of who controls the assets, it is a very, very different picture. By the way, I have got to 

say, just as an aside, I really love all this conversation from the 

majority, talking about the need to increase access to credit and 

capital for under-served people, for poor people and people of modest means. I hope that carries over in a lot of other ways. Because 

I think you are absolutely right on in that perspective, because it 

continues to be a problem. Predatory lending is growing in this 

country. 

Taking the time to really look at institutions that get public benefit, whether it is from depositors’ insurance; applied guarantees 

like the GSC’s, the ‘‘too big to fail’’; or whether it is credit unions 

having tax-exemption—which by the way, for the record, we continue to support the tax-exemption for these credit unions; but we 

think the most wise avenue for the credit unions, for CUMAA and 

the large credit unions to take, and the wisdom that they could 

show the rest of the industry, would be to endorse the CRA-like applications so there is a level playingfield between those community 

banks and other banks, and that they have to serve under-served 

populations, which is what they have not been doing. Thank you, 

Mr. Chairman, for your indulgence. 

[The prepared statement of Mr. Taylor follows:] 

Statement of John Taylor, President and Chief Executive Officer, National 

Community Reinvestment Coalition 

Introduction 

Good Afternoon, Chairman Thomas and Ranking Minority Member Rangel. NCRC 

is honored to be here today as the voice for over 600 community organizations from 

across the country that comprises the National Community Reinvestment Coalition. 

NCRC is the nation’s economic justice trade association dedicated to increasing access to credit and capital for minority and working class families. Our member organizations represent communities from your congressional districts. These organizations include the California Reinvestment Coalition, the Greenlining Institute, Inner 

City Press/Community on the Move, and Rural Opportunities, Inc. We appreciate 

you convening today’s hearing on an issue that our members have been addressing 

for the last several years. 

When NCRC first started analyzing credit union performance, we were hoping 

that we would find that the credit union industry, by and large, was adhering to 

mandate of the Federal Credit Union Act of 1934 to ‘‘make credit more available 

to people of small means.’’ Our research indicates that a very important segment 

of the industry, community development credit unions, is devoted to serving the 

working poor and modest income customers. As a disclaimer, some of the leading 

community development credit unions in the country are NCRC members, including 

the Bethex Federal Credit Union in New York City, the Enterprise Corporation of 

the Delta based in the Gulf region afflicted by Hurricane Katrina, and the North 

Side Community Federal Credit Union in Chicago. In addition to the community development credit unions, we do not doubt that a number of traditional credit unions 

have also stayed true to the 1934 law. However, we have found repeatedly that 

large credit unions have strayed from their mission and the letter and spirit of the 

Federal Credit Union Act. 

The fundamental purpose and basis of establishing credit unions is the same as 

for the Community Reinvestment Act (CRA). The establishment of credit unions and 

the passage of CRA were motivated by concerns that lending institutions were not 

serving low- and moderate-income borrowers. Congress therefore passed legislation 

creating credit unions as lending institutions focused on low- and moderate-income 

communities and borrowers, and then Congress imposed upon banks a continuing 

and affirmative obligation to serve low- and moderate-income borrowers. When 

banks do not meet their CRA obligations, they face ramifications including failing 


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their CRA exams and/or denials of merger and branching applications. When credit 

unions do not serve low- and moderate-income borrowers and communities, the penalties appear to be non-existent. 

NCRC’s Study Agrees with a Substantial Body of Research—Large Credit 

Unions Need to Do a Better Job In reaching Minorities, Women, and 

Low-Income Borrowers 

Recently, the National Community Reinvestment Coalition (NCRC) conducted a 

comprehensive study, entitled ‘‘Credit Unions: True to their Mission.’’ This study 

compared the performance of banks and credit unions in serving minorities, women, 

and low- and moderate-income borrowers with home loans. Despite credit unions’ 

origins as institutions devoted to people of modest means, NCRC’s study finds that 

banks make a higher portion of their home loans with fewer loan denials than credit 

unions to traditionally underserved populations. NCRC’s study is the first that we 

know of that has compared credit union and bank performance in home lending over 

three years across the country as a whole and in each state. A copy of the report 

can be found on our website at http://www.ncrc.org/policy/states/credit—union—report.php. 

In 1934, the Federal Credit Union Act (FCUA) established the federal supervision 

of credit unions as alternatives to banks. The necessity for such an alternative arose 

because the financial needs of low- and moderate-income people were not being met 

by traditional lenders Spurred by the 1934 legislation, credit unions increased their 

presence around the country as lending institutions controlled and owned by people 

of modest means. Based on the assumption that credit unions are serving the needs 

of low- and moderate-income members, credit unions are afforded certain benefits, 

such as federal tax exemptions, to help them fulfill their mission. 

In the year 2005, after 70 years of federal supervision of credit unions, most people would be surprised to learn that banks are doing a better job of serving lowand moderate-income people than credit unions. This comes in the wake of the 1998 

Credit Union Membership Access Act, which provided for significant expansions of 

credit union membership. While this law empowered credit unions by reversing Supreme Court restrictions on credit union membership, it has not resulted in credit 

unions markedly improving their performance in lending to traditionally underserved communities. 

NCRC’s study adds powerful evidence to the numerous studies over the years that 

have detailed credit unions’ lackluster service to people of modest means. The Federal Reserve’s 2001 Survey of Consumer Finances revealed that only 36 percent of 

the households that primarily used credit unions had low- and moderate-incomes in 

contrast to 42 percent of the households that primarily used banks. In 2003, the 

Government Accountability Office (GAO) released a report finding that banks provided 34 percent of their mortgage loans to low- and moderate-income borrowers 

while credit unions issued just 27 percent of their loans to these borrowers in 2001. 

NCRC’s previous analyses of Home Mortgage Disclosure Act (HMDA) data also 

showed that credit unions trailed banks in the percent of their loans to low- and 

moderate-income borrowers in 1999 and 2000. 

In the first study of its kind, NCRC’s three year analysis concludes that banks 

consistently exceed credit unions’ performance in lending to women, minorities, and 

low- and moderate-income borrowers and communities. NCRC scrutinized lenders’ 

performance on 14 fair lending measures including the percent of loans to different 

groups of borrowers and the differences in denial rates to minorities versus whites 

and low- and moderate-income borrowers versus middle- and upper-income borrowers. Banks are compared to credit unions because federal Community Reinvestment Act (CRA) requirements to serve low- and moderate-income communities apply 

to banks but not credit unions. 

When considering performance in home purchase lending by itself, or when considering home purchase, refinance and home improvement lending combined, credit 

unions consistently lagged banks in service to minorities, low- and moderate-income 

(LMI) borrowers, women, and LMI and minority neighborhoods. Over a three year 

period from 2001 through 2003, when all three loan types are taken together, banks 

outperformed credit unions in 36 states or 72 percent of the states. When home purchase lending is analyzed by itself, credit unions’ performance drops off even more— 

banks outperform credit unions in 40 states or 80 percent of the time. 

In home purchase lending, the difference in bank and credit union performance 

was usually substantial, even in 2003 when credit unions were performing better 

than they were in previous years. For example, in 2003, banks made 14.1% of their 

loans to minority census tracts whereas credit unions issued just 7.9%. Likewise, 

banks made 20.8 percent of their loans in minority and/or low- and moderate-income 


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(LMI) tracts whereas credit unions issued just 15.3 percent of their home purchase 

loans in these tracts across the United States in 2003. 

Other examples of large differences in performance include: 

In 2003, banks made 21.8% of their home purchase loans to women; credit unions 

issued 18.7% of their loans to women across the country. 

In 2003, banks made 9% of their home purchase loans to Hispanics; credit unions, 

4.8% to Hispanics across the country. 

In Florida, banks made 17.1 percent of their home purchase loans to Hispanics; 

credit unions issued 9.9 percent of their loans to Hispanics during 2003. Banks 

made 25.4 percent of their home purchase loans to women; credit unions offered 

19.4 percent of their loans to women in Florida during 2003. 

In Texas, banks made 25.1% of their home purchase loans to LMI borrowers; credit unions issued 20.2% of their loans to LMI borrowers in 2003. Banks made 11.8% 

of their purchase loans to LMI minorities while credit unions issued 6.2% of their 

loans to these borrowers in Texas during 2003. 

In California, banks made 18.3% of their home purchase loans to Hispanics while 

credit unions issued 12.4% to these borrowers during 2003. Likewise, banks made 

35.1% of their purchase loans to residents of minority census tracts; credit unions 

made just 25.6% of their loans to these census tracts. 

In New York, banks made 16.6% of their home purchase loans in minority census 

tracts while credit unions issued just 5.1% in these tracts during 2003. Banks made 

23.5% of their purchase loans to women while credit unions made just 18.7% of their 

loans to women in 2003 in New York. Finally, banks made 5.6% of their home purchase loans to African-Americans whereas credit unions issued just 2.8 percent of 

their purchase loans to African-Americans during 2003. This disparity is even larger 

than the national difference (banks made 5.4% and credit unions made 4.4% of their 

loans to African-Americans during 2003). 

Home purchase lending represents the means by which most Americans build 

wealth; home purchase lending is perhaps the most difficult type of home lending 

since more families buying homes for the first time will be less wealthy or have 

fewer assets than families refinancing their mortgage loans. It is distressing that 

mainstream credit unions lag banks by an even greater extent in home purchase 

lending than other types of home lending since home purchase lending represents 

the gateway towards the American Dream of homeownership, wealth building, and 

providing for one’s family. 

The results in NCRC’s analysis are driven by large credit unions as they make 

the most loans in the credit union industry. For the year 2003, the top 25 credit 

unions (in terms of highest number of loans) had a median asset size of $2.3 billion 

and a median membership base of 250,094. The top 25 credit unions made 220,867 

loans overall and issued 28 percent of the single family loans (home purchase, refinance, and home improvement) made by credit unions across the country in 2003. 

The median loan amount was 5,637 loans for top 25 credit unions. 

Here are some loan totals and membership sizes of large credit unions: 

Navy Federal—68,567 loans and 2.5 million members 

Golden 1 Credit Union—18,774 loans and 625,559 members 

Boeing Employees Credit Union—9,673 loans and 401,783 members 

In preparing for this testimony, NCRC conducted analysis with the new 2004 

HMDA data for single family lending (home purchase, refinance, and home improvement lending combined). This analysis shows once again that credit unions trail 

banks in making home loans to minorities, women, and low- and moderate-income 

borrowers and communities. The chart below shows that banks exceeded credit 

union performance on all nine CRA and fair lending indicators. In addition, the 

chart reveals that the largest credit unions, Navy Federal and Golden 1, also perform poorly. Navy Federal lags all credit unions on 5 of the nine indicators of performance and Navy Federal lags all banks and thrifts on eight of the nine indicators 

of performance. Golden One performs better than Navy Federal but still lags banks 

on 6 of the 9 indicators. 


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NCRC’s study acknowledges that credit union performance improved over each 

year of the analysis. However, banks were still exceeding credit union fair lending 

performance in the great majority of states by 2003. This is indeed not good performance for institutions that were originally devoted to serving the credit needs of 

poor people. Large credit unions and their trade association should not be comfortable in arguing to members of Congress that while credit unions lag banks, credit unions are getting better. Their tax benefits and other privileges dictate that they 


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should be better. More importantly, why would Congress be satisfied with credit 

unions lagging banks considering the very valuable benefits bestowed on these institutions by the American taxpayer. The mission established in the Federal Credit 

Union Act of 1934 requires credit unions to lead banks in lending to minorities, 

women, and low- and moderate-income borrowers, not lag behind banks. Moreover, 

the diverse and large membership bases of these large credit unions should provide 

plenty of opportunities to serve women, working class Americans, and people of 

color. 

When considering lending on a national level, we find that bank fair lending performance exceeds credit union performance by even greater margins than when considering performance state by state. This finding is the result of banks consistently 

out-performing credit unions in the largest states while credit unions held the advantage in states that were predominantly rural and less heavily populated. 

Just one state in our country, Massachusetts, has applied CRA to credit unions 

over a long period of time. Our study featured a perfect control experiment in that 

it compared the performance of state-charted credit unions in Massachusetts against 

federally-charted credit unions not subject to CRA. When considering home purchase, home improvement and refinance lending together, state-chartered credit 

unions outperform their federally-chartered counterparts in Massachusetts 69 percent of the time. While banks outperform all credit unions in Massachusetts 71 percent of the time in single family lending, banks and state-chartered credit unions 

perform almost the same—the bank advantage is reduced to only 55 percent. 

NCRC recognizes that a significant segment of the credit union industry remains 

devoted to serving people of modest means. Community development credit unions 

(CDCUs), for example, are specifically dedicated towards communities left out of the 

financial mainstream. About 300 CDCU’s have more than 860,000 members and assets of $3.1 billion. But the credit union industry is now large, totaling over 9,000 

credit unions with assets of $629 billion. While a number of credit unions toil daily 

to reach poor people, it is clear that the industry as a whole has some catching up 

to do and also has the resources to do a much better job. 

NCRC’s findings strengthen the argument that credit unions overall are not meeting their intent of serving low- and moderate-income people. Based on our analysis 

of the impact of Massachusetts’ Community Reinvestment Act (CRA) law and our 

findings that CRA regulated banks consistently outperform credit unions on fair 

lending measures, NCRC concludes that federal CRA must be expanded to large, 

mainstream credit unions. Research has long documented CRA’s effectiveness in its 

application to banks. Likewise, CRA can be effectively applied to credit unions as 

is evidenced by the Massachusetts experience. Since the Federal Credit Union Act 

of 1934 and CRA have the same fundamental purpose—ensuring that low- and moderate-income borrowers and communities are served—doesn’t make sense that CRA 

be applied to large, mainstream credit unions that need a legal and regulatory push 

to better serve people of ‘‘small means.’’ 

Credit Union Industry’s Regulatory Relief Proposal Goes in the Wrong Direction 

Finally, we are also concerned by the credit union’s attempt to seek regulatory 

relief that demonstrates the industry’s interest to abandon its public obligation to 

underserved areas and those with modest means. The credit union’s regulatory relief proposals include efforts to expand their fields of membership, expand commercial lending, and to serve underserved communities with ATMs instead of full service branches. In June of 2004, CUNA testified before the Senate Banking Committee 

on Regulatory Relief, requesting that Credit Unions be allowed to serve underserved 

communities with ATMs. We have seen this request reappear this year as a regulatory relief proposal for consideration by the Senate. This request would repeal existing law and undermine the intent of both House Report 105–472 and Senate Report 105–193 language that explicitly stated that the term ‘‘facility’’ does not include 

an ATM. 

House Report, 105–472, August 1998 

‘‘Any person or organization within an underserved local community, neighborhood, or rural district may be added to multiple common bond credit unions which 

establishes and maintains an office or facility in the underserved areas. The term ‘facility’ in the Act is meant to be defined in the same way that the National Credit 

Union Administration (‘NCUA’ or ‘Board’) has defined ‘service facility,’ that is, an 

automatic teller machine or similar device would not qualify.’’ 

Senate Report, 105–193, August 1998 

‘‘An additional exception exists for persons or organizations within a local community, neighborhood or rural district that is underserved by other depository instituVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00185 Fmt 6633 Sfmt 6621 E:\HR\OC\26372.XXX 26372

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tions. These persons or organizations may join an existing credit union provided that 

the credit union establishes a service facility in that area. The term ‘facility’ is meant 

as it is defined by the NCUA. An automatic teller machine or similar device does 

not qualify as a service facility.’’ 

Throughout HR 1151, the Federal Credit Union Act of 1998, Congress made clear 

and reaffirmed in its findings the public purpose of credit unions, ‘‘SEC. 2. (1) The 

American credit union movement began as a cooperative effort to serve the productive and provident credit needs of individuals of modest means.’’ The request by 

credit unions to serve underserved communities only with ATMs is inconsistent and 

in conflict with the public purpose of credit unions to serve the credit needs of those 

individuals of modest means. 

While our goal is not to limit the growth of credit unions, it is to ensure that credit unions maintain their focus on underserved areas. Instead, we see their proposal 

on Community Credit Union Membership as an attempt by the credit union industry to distort and inappropriately expand their fields of membership to areas which 

credit unions view as desirable and profitable, rather than to underserved areas, despite the original and reaffirmed mission to serve people of modest means. 

This proposal would undermine Congress’s enactment of the Credit Union Membership Access Act (CUMAA) HR 1151, and therefore, its affirmation that credit 

unions have a mandate to serve the underserved. Through CUMAA, Congress permitted a limited exception for multiple-bond credit unions to expand their fields of 

membership by adding underserved areas. Currently, adding underserved areas is 

one of the only means by which multiple bond credit unions can actively expand 

their fields of membership. In providing an exception for underserved areas, Congress reaffirmed the original mission of credit unions to serve those with modest 

means. 

The credit union industry is also requesting to shift the focus of business lending 

from those persons of modest means to commercial lending that does not serve persons of modest means. Throughout Senate Report 105–193, the intent was clear, 

‘‘Title II reaffirms that insured credit unions have a continuing obligation to meet 

the financial services needs of persons of modest means, including low- and moderate-income individuals’’. We believe that credit unions should improve upon its 

home purchase lending to persons of modest means and not on expanding its business lending to serve large commercial firms. 

In general we are troubled by the attempts of the credit union industry to seek 

relief from public law and guidance that is fundamental to its public purpose and 

obligation. We are also concerned by this request because it demonstrates the credit 

union industry’s interest to abandon its public obligation to undeserved areas and 

those with modest means. NCRC and our 600 member organizations have worked 

diligently to insure that the banking industry serve and provide branches to underserved communities through the CRA where they are held accountable. Should the 

credit unions be successful in obtaining their regulatory relief proposals they would 

enjoy expanded fields of membership and expanded commercial lending without any 

check and balances to insure that they are serving persons of modest means. 

The next step in the evolution of credit unions in this country is applying CRA 

to mainstream credit unions, thereby requiring these credit unions to abide to an 

affirmative and continual obligation of meeting the credit needs of low- and moderate-income communities. 

f 

Chairman THOMAS. Thank you. Ms. Kennelly, before we ask for 

your testimony, I just want to indicate that every Member indeed, 

those who aren’t here and the Members of Congress, offer our sincere condolences. You folks were right in the heart of what was an 

extremely difficult, tragic, natural disaster—perhaps exacerbated 

by some man-made assistance, but the devastation was there nevertheless. Our colleague, the gentleman from Louisiana, Mr. Jefferson, and my colleague, the gentleman from Louisiana, Mr. 

McCrery, have been focused on trying to make sure that, at a minimum, life is restored back to some semblance of normal as soon 

as possible. I am anxious to hear where you were, where you are, 

and what has been going on, from someone who obviously is at the 

forefront in listening to, hearing, and probably trying to meet peoVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00186 Fmt 6633 Sfmt 6602 E:\HR\OC\26372.XXX 26372

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ple’s needs who had no understanding of what their needs were 

going to be just a couple of months ago. 

STATEMENT OF CONSTANCE KENNELLY, CHIEF EXECUTIVE 

OFFICER, TULANE-LOYOLA FEDERAL CREDIT UNION, NEW 

ORLEANS, LOUISIANA 

Ms. KENNELLY. Exactly. Thank you very much. I must admit, 

I did evacuate. I did not stay. Chairman Thomas, Ranking Member 

Rangel, distinguished Members of the Committee on Ways and 

Means, I do want to express my profound gratitude for the opportunity to testify before you today, and to share with you my personal story and those of others regarding the ways in which credit 

unions assisted them and their families and untold thousands of 

other people in the aftermath of Hurricanes Katrina and Rita, in 

ways that I believe are unique. I also want to express my appreciation to my fellow Louisianians, Congressman Jefferson, who represents a significant number of my members, and Congressman 

McCrery, for their continuing efforts in the Committee to help our 

devastated state recover. I am, and have been since 1998, the Chief 

Executive Officer of the Tulane-Loyola Federal Credit Union, and 

I am also a member. Our membership includes the faculty, staff, 

and students from Tulane University, Tulane Hospital, and Loyola 

University, which I think spreads the gamut of income across the 

board. 

We are small, with slightly less than $15 million in assets and 

5,000 members. In addition, our credit union is unique, in that it 

has been designated as a low-income credit union, which will allow 

the credit union to receive grants to serve low-income members of 

the community, including those devastated by the hurricane. As 

you might imagine, Hurricane Katrina’s impact on our membership 

and on the membership of credit unions throughout the greater 

New Orleans area has been catastrophic. More than 4,800 of our 

members were evacuated, and many were—and some still remain—temporarily located throughout the United States; some in 

remote areas, but with fairly heavy concentrations in Baton Rouge, 

Houston, Dallas, and Atlanta. To date, only about 30 percent have 

actually returned to the New Orleans area. It has been reported 

that the universities plan to reopen for the spring semester in January of 2006; however, it still remains unclear how many of our 

members will be able to return home by that time. 

Of our 14 staff members, five lived in the areas of total devastation now well known to most of the Nation: the Lower Ninth Ward 

of New Orleans, New Orleans East, and Saint Bernard Parish. 

They may not be able to return. During the storm’s aftermath, I 

had my personal cell phone number listed on the National Credit 

Union Administration’s website, as well as on our own website, for 

member contact. The calls were answered from 7:00 a.m. until 

11:30 p.m., and most of the information requested was related to 

being able to access their funds. I was able to direct them to the 

service center link on our website, or to provide them with the information directly if they did not have access to a PC. During the 

first few days, I responded personally to over 700 e-mails from 

members. For weeks, there were overlapping, non-stop phone calls. 

With rare exception, Members were able to access their funds conVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00187 Fmt 6633 Sfmt 6602 E:\HR\OC\26372.XXX 26372

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veniently from credit union service centers or outlets within the cooperative credit union network of people helping people. In only 

two instances were members located outside of a convenient radius—that is, greater than 25 miles from the nearest branch—and 

for those, funds were wired to them at no cost. 

In so many instances, Louisianians were not just separated from 

their homes; they were also separated from family and from the 

means by which to live. Many were left not only homeless, but 

penniless as well. With phone lines and other means of communication compromised, ATM service was sporadic throughout the affected area. Even credit and debit card use was limited in many 

areas. Moreover, most people who evacuated—including myself— 

never envisioned the level of destruction wrought by Katrina, and 

were thinking that they would only be away from home for a couple of days; not weeks or even, as we have seen, months. Thankfully, credit union members have access to something unique in the 

financial services industry, and it is a cooperative, shared branching network. Because of this network, our members were able to 

walk into credit unions all over the country—in Texas, in California, in Georgia, and elsewhere in Louisiana—and access their 

funds, obtain emergency loans, initiate lines of credit, increase 

their credit card limits, and receive other critical financial services, 

with no questions asked, as though they were at their own home 

credit union. To my knowledge, there is no similar shared access 

system in the banking sector. Moreover, while we had certainly 

planned for emergencies, an event of this magnitude is unprecedented; and yet the shared branching network far exceeded the expectations, and ensured our members the financial access they 

needed. 

We heard from members who had been separated from their family. There was one, a sister, who had been separated. Funds were 

transferred from their joint account. We were able to intervene and 

allow the apartment owners to actually waive the $175 fees. We 

had another instance with an incoming Tulane student who had 

joined the credit union literally 1 hour before they were told to 

evacuate with their family. They called. We had not processed the 

check, but we immediately made that $1,000 available to them. To 

sum it up again, I do want to thank you for your indulgence. I see 

that I have gone over by 27 seconds right now. I want to add that 

not only do we as credit unions not pay taxes; we don’t pay our volunteers. We are run by credit unions. Although we are considered 

not-for-profit, we have to make a profit, because we have to maintain a level of capital above that of other financial institutions. So, 

we are not-for-profit; we meet capital expectations; and we do not 

pay our directors. Thank you very much, Chairman. 

[The prepared statement of Ms. Kennelly follows:] 

Statement of Constance Kennelly, Chief Executive Officer, Tulane-Loyola 

Federal Credit Union, New Orleans, Louisiana 

Chairman Thomas, Ranking Member Rangel, distinguished members of the Committee on Ways and Means, I want to express my profound gratitude for the opportunity to testify before you today and to share my personal story and those of others 

regarding the ways in which credit unions assisted them and their families and untold thousands of other people in the aftermath of Hurricanes Katrina and Rita in 

ways that I believe are unique. I also want to express my appreciation to my fellow 

Louisianans, Congressman Jefferson, who represents a significant number of my 


jcorcoran on PROD1PC62 with HEARING
185 

members, and Congressman McCrery for their continuing efforts in the Committee 

to help our devastated state recover. 

I am, and have been since 1998, the chief executive officer of the Tulane-Loyola 

Federal Credit Union; I am also a member. Our membership includes faculty, staff 

and students from Tulane University, Tulane Hospital and Loyola University. The 

Tulane-Loyola Federal Credit Union is small with slightly less than 5,000 members 

and $15 million on deposit. In addition, our credit union is unique in that it has 

been designated as a low-income credit union which allows the credit union to receive grants to serve low-income members of the community, including those devastated by the hurricane. 

As you might imagine, Hurricane Katrina’s impact on our membership and on the 

membership of credit unions throughout the greater New Orleans area has been catastrophic. More than 4,800 of our members were evacuated, and many were (and 

some remain) temporarily located throughout the United States—some in remote 

areas but with fairly heavy concentrations in Baton Rouge, Houston, Dallas and Atlanta. To date, only about 30 percent have returned to the New Orleans area. It 

has been reported that the universities plan to re-open for the spring semester in 

January 2006; however, it remains unclear how many of our members will be able 

to return by that time. 

Of our fourteen staff members, five lived in the areas of total devastation now 

well known to most of the nation—the Lower Ninth Ward of New Orleans, New Orleans East, and St. Bernard Parish. They may not be able to return. 

During the storm’s aftermath, I had my personal cell phone number listed on the 

National Credit Union Administration’s website, as well as on our own website, for 

member contact. The calls were answered from 7 a.m. until 11:30 p.m. Most of the 

information requested was related to being able to access funds, and I was able to 

direct them to the Credit Union Service Center link on our website or provide them 

with the information directly. 

During the first few days, I responded personally to over 700 emails from members. And for weeks there were overlapping, non-stop phone calls. With rare exception, members were able to access their funds conveniently from Service Centers or 

Outlets within the cooperative Credit Union network of people helping people. In 

only two instances were members located outside of a convenient radius, that is, 

greater than 25 miles from the nearest service center or branch, and for those, funds 

were wired to them at no charge. 

In so many instances, Louisianans were not just separated from their homes; they 

were also separated from family and from the means to live. Many were left not 

only homeless, but penniless as well. With phone lines and other means of communication compromised, ATM service was sporadic throughout the affected area; even 

credit and debit card use was limited in many areas. Moreover, most people who 

evacuated never envisioned the level of destruction wrought by Hurricane Katrina 

and the subsequent deluge. Quite reasonably, given common experience, most of 

those who evacuated were prepared to be away from home, away from their livelihoods, for a few days. When they left, they had no idea—no reason to expect—they 

would need to be prepared to be gone for weeks or, as we have seen, months. 

Thankfully, credit union members have access to something unique in the financial services industry—a cooperative shared branching network. Because of this network, our members were able to walk in to credit unions all over the country—in 

Texas, in California, in Georgia and elsewhere in Louisiana—and access their funds, 

obtain emergency loans, initiate lines-of-credit, increase credit card limits, and receive other critical financial services with no questions asked as though they were 

at their home credit union. To my knowledge, there is no similar shared access system in the banking sector. Moreover, while we had certainly planned for emergency 

situations, an event of this magnitude is unprecedented, and yet the shared branching network far exceeded expectations and ensured our members the financial access they needed in the days and weeks after their lives were turned upside down 

by Hurricane Katrina. 

We heard from a member who had been separated from her sister and grandmother during the evacuations from the Superdome. The sister had transferred 

funds from the joint account by telephone teller unbeknownst to the member who 

wrote a check for rent in Houston. Ultimately, we assisted the member by having 

the apartment complex reverse the NSF charges imposed on her. 

Another of our members called to re-order checks in order to be able to rent an 

apartment for his family. In the interim period, we wired funds for him at no 

charge. For other members, we expedited loans for displaced members, waived fees 

for stop payments and wires, and deferred loan payments until the end of November. 


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An incoming Tulane student, who had joined the credit union just an hour before 

being evacuated on the Saturday before Katrina, contacted us for a withdrawal. 

Knowing the circumstances, we credited his $1,000 deposit immediately even though 

the check had not been processed. 

A credit union in the Lake Charles area promptly accommodated several of our 

members by providing withdrawals, even though they were not, at that time, a part 

of our shared branch network, and we, in turn, wired covering funds to them. During the first weeks after Katrina, one Service Center even agreed to accept and post 

payments from auto insurance companies totaling our members’ automobiles, sight 

unseen. 

These are just a few examples of the manner in which credit unions care for the 

needs of their members. I represent just one of many credit unions whose members 

were adversely affected by the recent hurricanes, and yet I sit before you today certain that my colleagues at those credit unions and their members could recount 

hundreds of similar acts of kindness and compassion too seldom found in the financial services sector. For us, and for our members, caring, and not profit, is the rule. 

From a member’s perspective, a credit union represents caring and thoughtful 

service, even during the most difficult of times. Members may be unaware of the 

size of their credit union, but they care deeply about the personal service, convenience and responsiveness. While Hurricane Katrina and its aftermath were extraordinary circumstances, thanks to the member-oriented approach of credit unions 

throughout the country, we were able to provide a lifeline to our members and fulfill 

our stated mission of taking care of our membership one member at a time. 

Thank you again for the opportunity to testify. 

f 

Chairman THOMAS. Thank you, Ms. Kennelly. Does the gentleman from Louisiana, Mr. McCrery, wish to inquire? 

Mr. MCCRERY. Mr. Chairman, I don’t have any questions. I appreciate the testimony of the panel. We have had some thoughtprovoking testimony, I think, today from all three of our panels. I 

commend the Chairman for undertaking this responsibility of the 

Committee to review the tax-exempt status of institutions that 

have that grant from the Federal Government. Certainly, we ought 

to continue this with other institutions, as well. But I do think today’s testimony has been enlightening in many respects, and gives 

us a good bit to look at and examine as we move forward with 

these hearings. So, I thank the Chairman for holding the hearing, 

and thank the panel for their testimony. 

Chairman THOMAS. Thank the gentleman. Does the gentleman 

from Michigan wish to inquire? 

Mr. LEVIN. I just want to join with you and Mr. McCrery and 

others. It has been an interesting hearing, and this last panel 

added some provocative thoughts. Thank you. 

Chairman THOMAS. The gentleman from Texas, Mr. Brady? 

Mr. BRADY. Mr. Chairman, one, I think this has been an excellent hearing. My only point would be I think regulation has a cost, 

and sometimes an unintended consequence. If we were a banking 

Committee, I would be taking a good, hard look at the whole regulatory structure on all our lenders in the community, to see and 

make sure, as I think that we have, I think, overburdened them 

in areas that they ought not be. I think we ought to provide a lot 

more flexibility than we do today. But with that, again, thank you 

for holding this hearing. 

Chairman THOMAS. Thank the gentleman. The gentleman from 

Louisiana. 

Mr. JEFFERSON. I thank you, Mr. Chairman. I don’t have any 

questions, either. I do want to thank Ms. Kennelly for having come 


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and for the testimony she offered, as well as the other witnesses, 

but particularly her; and for the work that she did to help relieve 

the suffering and to provide some point of contact for people who 

were displaced all over the country as a result of the horrific events 

of Hurricane Katrina, and Rita after that. I think what is really 

important here is that there may be some differences of opinion 

about the tax-exempt status, or about the lending practices, or 

whatever; but I think the importance of a hearing like this is that 

these things get aired, and that from each side there can be, we 

hope, some basis on which the private sector can find a way to 

come together itself and resolve some of these issues without the 

need for there to be any intervention by this Committee or by any 

Committee of Congress. Sometimes, just by having these matters 

explored as they are and having others hear the concerns, one here 

in front of the other, helps to bring resolution to the problem and 

helps to prod some of us to make changes where we hadn’t really 

thought about the need to do that. So, I am hopeful that out of this 

will come some voluntary action on the part of those who may feel 

themselves on the edge of some concerns of others, and find a way 

to work things out before the Congress has to make any decision 

about stepping in on that. So, I want to thank the Chairman for 

bringing the parties together and for holding this hearing. I think 

it has been very beneficial. 

Chairman THOMAS. Thank the gentleman. The gentlewoman 

from Pennsylvania. 

Ms. HART. No questions. 

Chairman THOMAS. The gentleman from California. 

Mr. BECERRA. Thank you, Mr. Chairman. I, too, would like to 

thank the panel for its testimony. I have one question for Ms. Kennelly; but I would like, before I do ask the question, to say that I 

hope that what we get from this is an opportunity to have a further 

discussion, as I think Mr. Taylor was trying to say, about what the 

responsibilities of the credit unions should be. To me, most of the 

evidence I see points to the fact that credit unions have done something very good for many Americans. If it reduces the cost of obtaining credit and opportunities to expand a business or to purchase your first home, I think that is great. I think we have to continue there. But I think, Mr. Taylor, you point out in your testimony very well that, as the credit unions grow, it seems they are 

growing in areas that don’t fulfill the mission that was first set 

forth for them back in the 19thirties; and that was to serve modestincome families principally. While I think many of them do a very 

good job, sometimes as you grow, sometimes you forget, or you lose 

sight of your mission. I hope that they can focus as much as possible, because I think most of us in Congress would like to continue 

to support not just the credit unions and the industry, but their 

tax-exempt status. Ms. Kennelly, a quick question for you. Mr. Taylor did propose that we consider adding CRA-type requirements or 

regulation over the credit industry’s larger players, its larger credit 

unions. I am wondering if you can comment on that suggestion by 

Mr. Taylor? 

Ms. KENNELLY. Well, I don’t know what the threshold would 

be. I really don’t have much of a comment. I think most credit 


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unions generally fulfill those requirements without being required 

to do so. I don’t recall what the threshold was. Do you? 

Mr. TAYLOR. Yes. Well, it is different for different institutions 

but—May I? 

Mr. BECERRA. Please. 

Mr. TAYLOR. In fact—and this gets to Mr. Brady’s point—the 

regulators really did streamline the process. This Congress dealt a 

lot with the regulatory burden associated with financial institutions; very recently reduced the reporting requirements as it relates to CRA. For small institutions less than—what is it, Josh, 100 

million, 250 million? For 250 million, it is really—— 

UNIDENTIFIED SPEAKER. It started off, I think, at 50. 

Mr. TAYLOR. Yes, it has grown very easily. It is a very streamlined exam, so I don’t think the idea of having CRA-like requirements is going to add a terrible burden. For all these institutions 

that say, ‘‘We’re doing it, we’re doing it,’’ they shouldn’t have to 

worry about complying with it. But I didn’t want to answer for you. 

Ms. KENNELLY. Well, I answered. Originally, when all of that came up, I thought it was $50 million. We are very small. 

Mr. TAYLOR. Yes. 

Ms. KENNELLY. So, it is not a burning issue for me. But I do 

feel—believe—that most of the credit unions are complying, without the regulation being there. If it is $100 million, you will probably see some that will want to stay at 99.9. 

Mr. BECERRA. I think Congressman D’Amours pointed out that 

in the past there was an attempt by the industry to try to have 

something similar to CRA applied, but that proposal—which had at 

first been adopted, I believe, under your chairmanship—was subsequently reconsidered. It seems like perhaps now we are finding 

that the fruits of that reconsideration may be coming back to haunt 

some of the credit union industry a bit. But I don’t know if you 

have any comment on that. 

Mr. D’AMOURS. Yes, Congressman, if you would permit me. 

That was my proposal. I advanced that—well, way back in ’97, I 

believe, for the first time. You heard Chairman Johnson and other 

people refer to, when Congresswoman Hart and other people were 

asking about transparency and reporting, the 5300 report that they 

filed quarterly. All I was asking for in that attempt was that they 

add into their business plans something that would state what efforts they might make to reach out to low-income people. They 

called that ‘‘CRA.’’ They fiercely resisted it. After 3 years or so of 

persisting, I finally got it passed. It was not an industry effort; it 

was an agency effort, because I was the chairman of the agency. 

It was repealed a month or two before it went into effect, after I 

left the agency. The truth is, they don’t want to be looked at, and 

I wonder why. 

Mr. BECERRA. I thank everyone for their comments. As we 

move forward, those of us who are very supportive of credit unions 

hope that this is something that can be examined further, now that 

we are collecting more and more data. Perhaps one of the things 

we should do is try to collect even more data, to give us a better 

sense of really where the industry is heading; and therefore we 

have something to compare apples and apples with. So, I thank you 

for your testimony. Mr. Chairman, I thank you for the time. 


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Chairman THOMAS. Thank you. As we conclude, I want to make 

some statements and ask some questions, because I think we have 

been dodging around some of the core structures that we have to 

face sometime. If other Committees, or if agencies that are seen 

more as enablers than regulators, aren’t willing to face up to it, 

then I am willing to make some statements and I am willing to 

allow people to respond to the statements that I make. I believe— 

in large part, based on historical analysis—that the term ‘‘modest 

means’’ was used for a couple of reasons. ‘‘Low-income’’ is easily 

measured. It is a term that is often used inside government. ‘‘Modest means’’ is in the eye of the beholder. But clearly, in the thirties, 

when you talked about ‘‘modest means,’’ it was a typical, middleclass structure in those days. I honestly believe Congress did not 

intend to include ‘‘modest means’’ in the credit union structure to 

require that not-for-profit structure reach out to low-income and racial minorities as a primary focal point in establishing a mutual 

credit structure.When you talk about common bond, they were all 

kind of the same. When you use a company with its employees, 

they aren’t exactly low-income. It was because the banking structure at that time did not make loans, normally, to those kinds of 

people. 

When you look at the history that we have now gone through— 

and we are looking at it today—for someone to respond, who is supposed to be a regulatory agency over credit unions, ‘‘We don’t know 

what ’modest means’ really means,’’ then it is time to get serious 

about a definition. I believe today ‘‘modest means’’ would be substituted with ‘‘low-income and racial and ethnic minority.’’ I know 

there is resistance if that is the definition that is used, but I cannot 

believe we sat through an entire hearing in which people just 

shrugged their shoulders and couldn’t figure out what ‘‘modest 

means’’ means. It means a whole lot different today than it did in 

the thirties. Now, I asked the question several times: What is the 

primary reason for granting tax preference? The structure, which 

is certainly admirable, in terms of a cooperative, self-help, bootstrap kind of a concept, is not the sole reason for the exemption. 

It made sense at the time, because of the environment the country 

was in, for individuals trying to get a loan. 

Today, as we have seen, there are banks who pay taxes, who 

have no common bond, who offer lower rates to low-income and minority individuals. Why? Because, ironically, the structure that was 

to provide assistance back in the ’thirties is a limitation today. Because of the structure, you are limited; and so the people who belong may not necessarily be low-income or minorities. So, the credit 

unions believe they have shifted to a degree by creating the opportunity for a number of common bond folk to come together, in a 

multiple bond; or in fact, to go out and deal with a community. I 

just found it almost amazing that when you talk about underserved areas, it was always geographic; it wasn’t people. There was 

no evidence that was required to show that if you achieved moving 

out into this other area which was defined as under-served, that 

you had to show you were in fact serving the under-served. 

So, one of the real concerns I have is not understanding why the 

credit union industry does not want transparency and accountability. In terms of seeing whether or not we are getting our monVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00193 Fmt 6633 Sfmt 6602 E:\HR\OC\26372.XXX 26372

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ey’s worth, I, personally, as the Chairman of this Committee, as 

long as I am the Chairman of the Committee, when we are dealing 

with somebody who gets a tax-preferred status—as admirable as a 

volunteer, cooperative structure is—I am going to interpret the taxpreferred structure as meaning servicing those who are unable, either through the structure that is present or geography, to get 

their basic financial needs met. Today, that means low-income, minorities, racial, women, and so on; and not some ‘‘modest means’’ 

that can’t be defined. 

I also am quite concerned that an agency that is supposed to be 

a regulator appears to be, to a very great extent, an enabler which 

is making excuses for not being able to measure up to deliver a 

product which gets a tax preference. People keep talking about how 

tax preference isn’t worth much. In fact, banks are better off than 

the rest. Well, then I can’t figure out why you are fighting so much, 

worried so much, and causing so much concern about examining 

the question of tax preference. If it is no big deal, why are you 

here? So, what I really think this industry and Congress and everybody else needs to do is look at how the full panoply of financial 

services are providing the kinds of needs that Americans of all economic levels, ethnicities, or gender, need, and determine whether 

or not the taxpayers’ dollars—which I think are supposed to be 

available to help service—are really being met. 

The only way you can know that those needs are being met is 

to gather data to determine if the decisions you make are effective 

or not. I do not fully understand the defensiveness on the part of 

a number of people, who have been provided with new structures 

presumably to reach out and provide those services to certain 

groups of people, who seem to say that, ‘‘That isn’t our job. That 

isn’t why we are here.’’ That probably concerns me as much as anything, in terms of the comments that have been made during this 

hearing. No, I don’t think you should remove the tax-exempt status; but I won’t put a period there. I would say where it makes 

sense, in terms of the historical and current use of a cooperative 

structure—which, interestingly enough, enabled at one time in the 

thirties, inhibits today to carry out your various activities. That is 

why I think measurements such as the community—— 

[Discussion in hearing room.] 

Chairman THOMAS. Don’t worry about them. They are perfectly 

willing to be rude because they have other needs they want serviced. You can do it outside the room, if you so desire. 

[Pause.] 

Chairman THOMAS. It seems to me that a measurement that is 

applied to taxable entities of financial services should be a reasonable yardstick to be applied to the tax-free area. It has to be explained to me why you shouldn’t adopt it. Providing information on 

remuneration totally of officers and other people who are paid, to 

allow for transparency, shouldn’t be fought. You should do it to 

show how reasonable and equitable the payment structure is, 

which reflects the membership structure, and how it appears favorably to other institutions who deal with money—unless, of course, 

that is not the case. Arguing that you have CPAs who collect data, 

which is exactly the same argument the corporations made, does 

not pass the oversight test. Prior to our peeling off the ugly cover 


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we found that the relationship between the then-existing CPA 

structures, who not only audited but advised the financial structure 

where to put their money, and who then went back and looked at 

the structure and said it was okay. 

To resist voluntarily submitting yourself to something that is an 

FDIC Sarbanes-Oxley similar accounting system, instead of explaining what you do have, is again something I think you need to 

be concerned about. Because as we have seen the concentration of 

money is in a select group of credit unions—I think you are beginning to see a potential of a mitosis, in terms of a broad-based, historical structure which renders a valuable service at a particular 

level and style of service, that may not be compatible with today’s 

modern structure, with what they want to do and how they want 

to do it. To artificially gloss over those differences because you 

want to retain some kind of structure for its historical integrity, 

rather than trying to deal with the issue that is currently growing 

inside your structure, is something I think everybody should be 

concerned about. One of the purposes of this hearing, as far as I 

was concerned, was to get all of the different kinds of credit unions 

not only to talk to us, but to talk to each other; so that you can 

begin to understand that a single, common bond, small community 

credit union isn’t the same as a credit union that has as its endeavor the entire County of Los Angeles, with no other bond than that 

you live, work, go to school, or worship there—and that that collection can pull together amounts of money that rival relatively major 

financial institutions, to finance office buildings, hotels, and other 

activities. 

Then, finally, of all of the not-for-profit structures, this is the 

one, ironically, that has hung onto that commitment to people, tied 

to people of modest means. Maybe some of you fail to realize that 

that definition, which was never firmed up, has changed, and 

‘‘modest means’’ means low-income, racial minorities, and women. 

The easiest way to show that is to use the CRA as a standard. I 

would just tell you, if you look at Massachusetts, which is an absolute case study of a requirement that some use and some don’t, all 

the fog disappears. There is a bright line of who is servicing those, 

and who is not. Mandated; imposed—I don’t care. It is taxpayers’ 

money going to you for the purpose of carrying out a particular 

function. Frankly, I think a good and worthy one is to define the 

people of modest means along the lines of the CRA. Now, that is 

a very strong opinion on my part, as I said, based upon the changes 

that I have seen occurring and the reading that I have made. I will 

give anybody a little bit of time here to have a response back, if 

what I have said outrages you, or misses the point, or does not assist us in moving forward at the end of this hearing to try to get 

a handle on where we are and where we need to go. 

Mr. D’AMOURS. Mr. Chairman, may I say something? 

Chairman THOMAS. Certainly. 

Mr. D’AMOURS. I think you are quite right in noting that it is 

amazing that we can’t get a definition of what ‘‘modest means’’ 

amounts to. But the truth is that that is not happenstance; they 

want it that way. To hear somebody in this room say that everybody in this room is a person of modest means is to fundamentally 

misunderstand what credit unions are all about. When the credit 


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union system was created—it goes back to Canada—people of modest means were people who didn’t have access to banks. I will bet 

everybody in this room has access to a bank or some kind of financial institution. In that day, they didn’t. All they had was loan 

sharks and other predatory lenders. People, if they had jobs, it was 

small factory jobs that weren’t paying very much. The truth is, 

when I was Chairman, and I stressed that they should focus on 

low-income people, in several cases—as that Woodstock Institute, 

by the way, study found—in several cases, they shot back that 

credit unions were never really intended to serve anything but the 

middle class. So, it is to their advantage to deny that ‘‘modest 

means’’ means ‘‘low-income.’’ It did mean ‘‘low-income’’ at the beginning, Mr. Chairman. I take slight issue with you on that, if I may. 

It did mean low-income people from the very beginning. The people 

of modest means, it was built into the credit union statute, were 

in fact low-income people. But I just want to say, Mr. Chairman, 

thank you—— 

Chairman THOMAS. If the gentleman would yield briefly, the 

reason I said it didn’t was because those people were invisible back 

in those days. 

Mr. D’AMOURS. Precisely. Precisely. 

Chairman THOMAS. They really weren’t low-income. They were 

modest means, and they thought they were low-income, but nobody 

looked at all the other folk out there who really were. 

Mr. D’AMOURS. But I do want to say, Mr. Chairman, having hit 

my head up against a brick wall for 7 years as Chairman of NCUA, 

thank you very much for what you are doing. I hope that this isn’t 

just going to be another rallying point for credit union trades to go 

out and raise a lot of money to fight the tax bogeyman, and it will 

result in something positive coming from the U.S. Congress. As I 

said earlier, if it doesn’t come from Congress, it is not going to happen. 

Chairman THOMAS. Thank you very much. 

Mr. TAYLOR. Mr. Chairman, if I may? 

Chairman THOMAS. Mr. Taylor? 

Mr. TAYLOR. I, too, want to thank you, Mr. Chairman and the 

other Members of the Committee. I think this is a very important 

discussion, at least from where I sit, in trying to influence financial 

institutions to not overlook the needs of traditionally under-served 

people, or low- and moderate-income people. I do think it is a problem when the NCUA Chairperson sits in front of you and says, ‘‘I 

consider myself someone of modest means,’’ because I think there 

is a disconnect as to—I mean, I don’t know what they pay these 

days to the Chairman of NCUA, and maybe it is modest means; but 

the medium income for a household in this country is about 

$42,000, and I would put ‘‘modest’’ somewhere below that. 

Chairman THOMAS. Right. 

Mr. TAYLOR. Now, I know you have been cutting government 

budgets and cutting salaries and cutting things, so maybe you have 

done a lot more than I perceived. But I have got to tell you, I think 

the problem is bigger than simply: why doesn’t the industry sort 

of get it, and subject itself to some transparency, some sunshine? 

Because while we are having this conversation, the credit union association, CUMAA, through its Renaissance Commission, in June of 


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2001, issued a report that was sent to its members with a recommendation that it remove the words ‘‘people of modest means’’ 

from the credit union mission statement. In that, they went on to 

say, ‘‘That is a clear victory. We won it. We have done it. You 

know, we don’t need that statement any more.’’ Even in the testimony today, Mr. Chairman, if you look at the CUMAA testimony 

on page 9, there are two paragraphs that refer to those important 

words, ‘‘people of modest means,’’ as cryptic words; a fleeting reference. In other words, trying to downplay what we all think—and 

I think we do—is an important part of the mission of what credit 

unions are about: to serve people of modest means. They are working to try to eliminate that from the mission statement. So, it is 

actually a bigger problem than simply—you know, they are trying 

to move away from that; make no mistake about it. I think this 

Tulane Credit Union, the El Paso, I think they do great work. I 

think they are, obviously, very nice people. But it is not representative of the majority of assets, of where this industry is going. I 

think this is an incredibly important hearing, and I really thank 

you again for having it. 

Chairman THOMAS. Well, let me conclude with this statement. 

Because if in fact I advocated that we would remove the tax-exemption status, you would get something similar to what occurred here 

when this was just an oversight hearing, and you would see a 

whole lot more. I have no intention of doing that. I will tell you, 

though, Mr. Taylor, that transparency, accountability, verifiability, 

are extremely valuable tools. Because it then means somebody else 

determines whether or not somebody should continue to receive a 

tax-free status. I think what you will find is some people meet the 

test easily; others with difficulty, and need to change; and others, 

as you indicated, who wanted to drop that phrase altogether, have 

no interest in meeting it, and do not want transparency, accountability, or verifiability, because then they would be exposed. Right 

now, they are all behind the structure of the small, common bond, 

wonderful—I belong to one—credit union. All I tried to do with this 

particular hearing was to get people to realize that who comes up 

to the mike to talk about what is going on isn’t necessarily representative of an industry that is rapidly changing and needs 

transparency, accountability, and verifiability. Thank you all very 

much. The hearing is adjourned. 

[Whereupon, at 4:10 p.m., the hearing was adjourned.] 

[Questions submitted from Chairman Thomas to Ms. JoAnn 

Johnson, and her responses follow:] 

Question: Please describe what data the NCUA collects regarding Credit 

Union Service Organizations (CUSOs), including their ownership and activities. How many CUSOs are there? How many are wholly owned by a single credit union? How much revenue do CUSOs generate annually? 

Answer: It should be noted, as an initial matter, that NCUA does not directly regulate CUSOs. Instead, in conformance with the Federal Credit Union Act and our 

regulatory framework, the focus of the agency is on the credit union and its relationship with CUSOs. While we require that a CUSO’s books and records be fully accessible to us, issues such as unauthorized CUSO activity or other threat to a credit 

union’s safety and soundness are addressed at the credit union level. In such cases, 

we would require either divestiture or other remedial action to be taken by the credit union, as opposed to a direct regulatory intervention at the CUSO level. 

On a quarterly basis, NCUA requires federally insured credit unions to submit 

the following data via Schedule D—Credit Union Service Organization (CUSO) Information—of the 5300 Call Report: 


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• Full/legal name of CUSO 

• Value of investment in CUSO 

• Amount loaned to CUSO 

• Wholly owned (yes or no) 

• Predominant service 

• Accounting method used by the credit union to reflect the value of the CUSO 

on the credit union’s financial statements 

• Aggregate Cash Outlay in CUSO 

For the third quarter of 2005, there was an aggregate of $735,219,785 reported 

in investments in CUSOs and $396,499,868 in loans in CUSOs. These figures reflect 

a mere .17% of all credit union assets, comprised of .11% from investments and .06% 

from loans. As reported on the third quarter 2005 call reports, there were 551 wholly owned CUSOs. Overall, 2,017 credit unions reported a loan or an investment in 

a CUSO. This figure includes the 551 wholly owned CUSOs. 

The total number of CUSOs is approximately 750. This figure is an approximation 

because NCUA collects CUSO data by legal name which in order to be aggregated 

by number requires data analysis to remove any inconsistencies in the reporting of 

multi-owner CUSOs. The primary CUSO trade group, NACUSO, and credit union 

consulting firm Callahan and Associates jointly publish a CUSO directory that reflects the aggregated list of names. Their figure from the June 2005 Directory of 

Credit Union Service Organizations is 758 CUSOs. 

NCUA believes the risk to credit unions is not in the dollar amount of investments or loans but in potential service disruptions or other reputation issues. For 

example, a CUSO providing Electronic Data Processing (EDP) services may represent an insignificant investment on an individual credit union’s balance sheet, but 

the risk of disruption of service needs to be mitigated and contingencies developed. 

For EDP CUSOs, NCUA includes them in the annual review of data processing vendors and a sample is selected for on-site review by an NCUA Information Systems 

Officer. 

NCUA’s data collection does not capture CUSO revenue data. 

Question: What information is needed in order for a credit union to obtain approval by the NCUA to engage in a business relationship with a 

CUSO? By law, credit unions are restricted in some of the services they can 

provide, however, CUSOs allow credit unions to offer such services. Is the 

NCUA concerned about the increased use of CUSOs, and how does the 

NCUA oversee these relationships? 

Answer: NCUA’s CUSO rule, 12 C.F.R. Part 712, sets out the requirements governing FCU investment or lending to CUSOs. NCUA expects every Federal credit 

union (FCU) to comply with these requirements, but does not require advance notice 

of, and does not issue specific approval for, a particular FCU’s determination to engage in a business relationship with a CUSO. NCUA oversees the relationship and 

enforces compliance with its rule through the examination process. Additionally, 

CUSO activity is monitored from information gathered in the quarterly call report 

program. 

Section 712.5 identifies broad categories of permissible types of activities for 

CUSOs. All such categories reflect the statutory requirement for CUSOs that they 

may engage only in providing services that are associated with the routine operation 

of credit unions. The Board has authority to prescribe rules for the administration 

of the FCU Act. 12 U.S.C. 1766(a). The loan authority for CUSOs in the FCU Act 

specifically reads: ‘‘[a] credit union organization means any organization as determined by the Board, which is established primarily to serve the needs of its member 

credit unions, and whose business relates to the daily operations of the credit unions 

they serve.’’ 12 U.S.C. 1757(5)(D) (emphasis added). Similarly, the investment authority for CUSOs in the FCU Act defines CUSOs as: ‘‘any other organization, providing services which are associated with the routine operations of credit unions 

. . . with the approval of the Board.’’ 12 U.S.C. 1757(7)(I). 

By contrast, an FCU has several specifically enumerated express powers, as well 

as the authority to exercise ‘‘such incidental powers as shall be necessary or requisite to enable it to carry on effectively the business for which it is incorporated.’’ 

12 U.S.C. 1757(17). There is some direct overlap between a FCUs authorized services and that which may be provided by a CUSO. For example, while an FCU can 

always do its own data processing, one or more credit unions may be able to achieve 

economies of scale or other efficiencies from securing necessary services through a 

CUSO. Similarly, one or more FCUs may secure advantages in terms of available 

expertise by conducting their mortgage or member business loan origination through 

a CUSO. Other services, for example, consumer loan origination, are not an authorized activity for CUSOs. Similarly, section 712.5 includes some activities that are 


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not authorized for FCUs. The attached Appendix outlines each of the areas listed 

in section 712.5 and outlines whether the activity is one that is permissible for an 

FCU. 

In general, NCUA is pleased with the range and extent of CUSO activity. The 

flexibility reflected in the CUSO rule allows credit unions to take advantage of 

pooled resources to obtain expertise for complex programs, such as a sophisticated 

consumer mortgage loan origination or business lending program. For more traditional services, use of a CUSO allows an FCU to take advantage of economies of 

scale in obtaining services, resulting in improved services at a lower cost for members. 

Question: According to NCUA regulations, the NCUA may limit any CUSO 

activities at any time, based on safety and soundness reasons. How many 

times has the NCUA done so? 

Answer: NCUA has found CUSOs engaging in inappropriate activities. These 

cases are dealt with by requiring corrective action to be implemented via the credit 

union that has investments or loans to the CUSO. Unless the corrective action is 

implemented, NCUA typically requires that the credit union divest itself of its investment or loan to the CUSO. Prior to September 2005, when NCUA implemented 

a new problem resolution tracking system, the agency did not capture data in a format that can be queried for this type of information. The resolution of CUSO related 

problems is documented in individual examination reports and it would be labor intensive to generate the number of instances corrective action or divestiture was required. 

Two additional factors have a bearing on risk mitigation, from a safety and soundness standpoint, as between an FCU and its relationship with a CUSO. First, the 

extent of permissible investment by an FCU in a CUSO is limited to one percent, 

in the aggregate, of the FCU’s shares plus undivided earnings. An FCU may lend 

an additional one percent to CUSOs. In the unlikely event that an FCU’s financial 

stake in a CUSO were to become a total loss, the impact on the FCU’s overall capital position would not be significant. Second, as more clearly spelled out in the 

CUSO rule, an FCU is required to assure that the corporate veil between itself and 

its CUSO is intact. In accordance with general principles of corporate law, the corporate veil insulates a shareholder from liability for the debts of the corporation. 

Question: NCUA regulations also state that a CUSO may offer services beyond the list of preapproved activities and services only with the approval 

of the NCUA. How many such applications have been received by the 

NCUA, and how many of these applications have been approved, and how 

many have been denied? 

Answer: The provisions in the CUSO rule relating to the ability to petition NCUA 

to request approval for a service not specifically listed in the rule have been included in subsection 7 since March, 1998. 12 C.F.R. 712.7 As the NCUA Board clarified in 2001, the examples under the broad categories listed in the rule are for illustrative purposes only and are not intended to be exhaustive. Since the adoption of 

the rule, we have reviewed numerous requests for interpretation as to whether a 

specific service, such as the referral to other lenders of loan applicants that have 

been turned down by the credit union and the subsequent servicing of those loans, 

is considered permissible under the rule. In accordance with the FCU Act, NCUA 

is guided in its evaluation of any such request by the consideration of whether the 

proposed service relates to or is associated with the routine, daily operation of credit 

unions. 

As prescribed in the rule itself, a request for an addition to the broad categories 

listed in section five should be accompanied by a complete analysis and explanation 

of how the proposal conforms to the overall purpose and requirements of the rule, 

i.e., that the service relates to or is associated with the routine, daily operation of 

credit unions. If NCUA determines to act on the request, we would first publish notice in the Federal Register, treating the request as a petition to amend the rule, 

and invite public comment, which would be reviewed and evaluated before any 

amendment is made. Since 1998, we have received a small number of requests to 

amend the rule by expanding the approved listing of categories, none of which have 

been approved. The Board did amend the rule in 2003 to add the category of business loan origination as an approved category, but this determination, which became effective after notice and the solicitation of public comment in the Federal 

Register, was made by the Board on its own initiative. 

Question: The NCUA chartering manual recognizes four types of affinity on which 

a community charter can be based: residence, education, worship, or employment in 

the relevant community. For how long has the NCUA recognized these forms of affinity as satisfying the requirements of the Federal Credit Union Act that an individual be ‘‘within a well-defined local community, neighborhood or rural district’’? 


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Answer: The NCUA Chartering Manual currently recognizes four types of affinity 

on which a community charter can be based: residence, education, worship, or employment. 63 Fed. Reg. 72011, 72037 (Dec. 30, 1998). NCUA has recognized these 

forms of affinity as satisfying the requirements of the Federal Credit Union Act 

since various dates as reflected in Federal Register issuances. The history is as follows: 

In 1989, NCUA issued a proposed rule and a final rule, Interpretive Ruling and 

Policy Statement (IRPS) 89–1, on its Chartering and Field of Membership Policy. 

In both rules, NCUA wrote: ‘‘Congress has required that a credit union charter that 

will be based on a tie to a specific geographic location be limited to a ‘well-defined 

neighborhood, community, or rural district.’ NCUA recognizes two types of affinity 

on which a community common bond can be based: residence and employment.’’ 

IRPS 89–1, 54 Fed. Reg. 31165, 31170 (Jul. 27, 1989); 56 Fed. Reg. 12221, 12225 

(Mar. 24, 1989). 

In 1993, NCUA proposed changes to IRPS 89–1, but proposed continuing that 

there be: ‘‘two types of affinity on which a community common bond can be based: 

residence and employment.’’ IRPS 93–1, Jul. 28, 1993. After receiving and reviewing 

public comments on this proposal, NCUA issued a final rule in 1994 adding the affinity based on worship. In IRPS 94–1, NCUA ‘‘recognize[d] three types of affinity 

on which a community common bond can be based—persons who live in, persons 

who worship in, and persons who work in the community.’’ IRPS 94–1, 59 Fed. Reg. 

29066, 29077 (June 3, 1994). 

In 1995, NCUA proposed changes to IRPS 94–1. 60 Fed. Reg. 51396 (Oct. 4. 1995). 

In 1996, NCUA, after receiving and reviewing public comments, issued a final rule 

adding an affinity based on education, stating: 

One commenter requests that students should be part of the community common 

bond so that persons who attend any educational institution located in a community 

would be eligible to join a credit union whose field of membership includes that community. The Board agrees. The Board believes that a student is working for the purpose of the community common bond and therefore a person going to school within 

the community boundaries is deemed to be working in the community for field of 

membership purposes. IRPS 96–1, 61 Fed. Reg. 11721, 11725 (Mar. 22, 1996). 

In 1998, after the passage of the Credit Union Membership Access Act (CUMAA), 

NCUA issued proposed and final rules to implement CUMAA, retaining the four 

previously approved affinities. The preamble to the proposed rule stated that: 

‘‘NCUA continues to recognize four types of affinity on which a community common 

bond can be based—persons who live, work, worship, or attend school in the community.’’ 62 Fed. Reg. 49164, 49167, 49187 (Sept. 14, 1998). After receiving and reviewing public comments, NCUA issued a final rule in 1998. IRPS 99–1 stated that 

‘‘NCUA recognizes four types of affinity on which a community charter can be 

based—persons who live in, worship in, attend school in, or work in the community.’’ 

IRPS 99–1, 63 Fed. Reg. 72011, 72037 (Dec. 30, 1998). 

Question: Is there any requirement that a credit union verify that a potential member prove that he works, attends school, worships, or resides 

in the relevant community? 

Answer: Section 5 of a federal credit union’s charter defines those persons eligible 

for membership in a community credit union. Article II, Sections I and II of a federal credit union’s bylaws provide that membership applications will be signed and 

accepted, and approved or denied from those eligible persons. Credit unions must 

comply with their bylaws, and NCUA has an expectation that credit unions will only 

serve individuals who qualify for membership. 

It is standard practice for credit unions to maintain completed signature or membership cards for their members. A sample signature card form is provided to credit 

unions in Section 707, appendix B of NCUA’s Rules and Regulations. The sample 

form includes a statement by the member certifying he or she is within the credit 

union’s field of membership. In the Supervisory Committee Guide for federal credit 

unions, Supervisory Committees are tasked with ensuring adequate internal controls exist over share accounts. The testing of new member signature cards for proper member qualification and approval is one element of signature card control 

itemized in the Internal Control Checklist for share accounts. NCUA examiners consider such testing during their normal review of Supervisory Committee activity, 

and also during their own review of share accounts. Chapter 14 of NCUA’s examiner 

guide sets forth the examination objective to determine share account programs 

meet all legal requirements. 

[Question submitted from Mr. Johnson to Ms. JoAnn Johnson, 

and her response follows:] 


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Question: A majority of the House delegation from Texas, including myself, sent letters to the NCUA detailing our concern with what appeared to 

be unnecessary regulatory obstacles thrown in front of two Texas-based 

credit unions in their attempts to convert to for-profit, taxable banks. After 

having to go back and forth through the courts, the credit unions were finally allowed to convert to banks. What I’d like to know is what steps, if 

any, the NCUA is taking to ensure credit unions which choose to convert 

to tax-paying, for-profit banks are able to do so? 

Answer: NCUA fully supports the legal ability of credit union members to change 

the charter of their financial institution under the Federal Credit Union Act and 

NCUA regulations and acknowledges that NCUA’s regulatory role is limited to oversight of the methods and procedures of the vote. In carrying out its responsibility, 

NCUA believes complete and accurate disclosures for members are crucial to a fair 

and legal vote and members are entitled to know the effects a conversion to a mutual savings bank will have on their ownership and control of their financial institution. 

[Submissions for the record follow:] 

Statement of Walter C. Ayers, Virginia Bankers Association, 

Glen Allen, Virginia 

Should the Wright Patman Congressional Federal Credit Union and the United 

States Senate Credit be using their tax-exempt status to compete in the private sector, providing services to non-government entities? Well, they are, as are many 

other government based credit unions that have chosen to morph away from their 

roots. Therefore, we believe that it is most appropriate that the Ways and Means 

Committee is conducting hearings to examine the role of the tax-exempt sector in 

our economy, including the wisdom of continuing the tax exemption of credit unions 

that have morphed into bank-like institutions 

Credit unions have already captured 25% of the deposit base in the Commonwealth of Virginia, and are growing deposits at almost twice the rate of banks. 

While it is a process that seems to be happening below the public policy radar 

screen, deposits are being transferred from taxpaying institutions over to tax-exempt institutions at a rapid pace. 

With respect to morphed credit unions, there are two significant developments in 

Virginia. First, are all of the aggressive growth credit unions that were government 

and military based when created, that have left their original mission, in some cases 

changed their names to conceal their former purpose, and now use multiple and 

community common bonds to serve the general public. The second development is 

the evolution of the same thing for specific industry based credit unions. Many of 

these credit unions now bear no resemblance to the purpose for which they were 

originally created. 

Ironically, the abandonment of original mission, and the use of the tax-exemption 

to compete in the private sector, starts right inside the United States House of Representatives with the Wright Patman Congressional Federal Credit Union, a $435 

million asset credit union that most would assume exist to serve members of the 

U.S. House of Representatives and staff. In fact, Congressional Federal has adopted 

a multiple common bond approach and morphed away from its original purpose. It 

is now using its tax-exempt status to market its services to Virginia based private 

sector employee groups that have absolutely nothing to do with the House of Representatives or with government. Indeed, Congressional Federal, as is typical of 

those listed below, states on its web site ‘‘we have a wide variety of groups in our 

membership including law firms, health organizations, software companies, and 

many others.’’ Was it the intent of the U.S. House of Representatives, when it authorized the creation of its credit union that its tax-exempt status be used to serve 

law firms, software companies, etc.? One would surely hope not. 

Based on information published on their web sites, I list below additional examples of credit unions headquartered in Virginia that have capitalized on their taxexempt status to make the same strategic shift away from original purpose as has 

Congressional Federal. 

• The United States Senate Credit Union is now a $338 million asset institution 

that now uses a multiple common bond to serves numerous private sector employee groups that obliviously have nothing to do with the U.S. Senate. 

• The State Department Credit Union, an $814 million asset credit union, has 

stepped well beyond its roots, and now serves disparate private sector groups 

outside the Department. 


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• Northwest FCU, a $1.402 billon credit, apparently began as a credit union to 

serve employees of the CIA. Today, it serves some 300 non-government groups 

in high income northern Virginia. All that is required by this credit union for 

an employee group to become a part of its common bond is for a company to 

send in a letter on company letterhead. 

• Langley Federal is a $1,099 billion credit union that has morphed from a credit 

union serving Langley Air Base to a general purpose depository institution that 

now uses a multiple common bond to serve whomever it chooses to enroll, largely by adding private sector employee groups. 

• ABNB is a $324 million credit union. It was formerly the Amphibious Navel 

Base Credit Union, but has now morphed into an institution that uses a community common bond to serve the general population across eight Virginia 

counties and cities. 

• Chartway FCU is a $1,033 billion asset credit union that was originally the 

Navy Air Credit Union. Over the years, it left its military anchor and morphed 

into a multiple common bond credit union serving over 600 different employer 

groups. Now, they simply advertise that they serve anyone that lives where 

they have branches across five states. 

• Commonwealth One, formerly the Army Air Force Annex #1 Credit Union, is 

now a $225 million credit union serving over 100 wide ranging groups, mostly 

private sector, that have nothing to do with the origins of this credit union. 

Plus, this credit union now claims a community common bond involving four 

counties and cities. 

• 1st Advantage FCU started as the Fort Eustis Credit Union. Today it has 

morphed into a $425 million asset general purpose institution that advertises 

that it serves anyone who lives on the Virginia Peninsula. 

• Pentagon Federal is a $7,974 billon credit union established to serve the military. It now uses a multiple common bond to serve private sector employee 

groups. 

• The University of Virginia Credit Union, a $314 million credit union, no longer 

makes any pretense of existing to serve University of Virginia employees. It 

now has a community common bond and serves the general public across eight 

counties and cities. 

• The Virginia Credit Union, with $1.240 billon in assets, no longer limits itself 

to serving government employees. It now has a multiple common bond and has 

already enrolled over 225 employer groups, most of which have nothing to do 

with government, and like so many other credit unions, this credit union is tapping into higher income groups—insurance companies, doctor groups, law firms, 

etc. 

1. Apple FCU had its origins as a government based credit union for teachers. 

Today, it is a $773 million asset credit union that serves a large number of 

disparate, non-teacher groups in Northern Virginia that range from the Bar 

Association to software companies. 

• Member One FCU, a $318 million asset credit union, is the former N&W Railroad credit union. This credit union left its original mission and now serves several hundred major employer groups, PLUS geographic areas involving 14 Virginia counties and cities. 

• DuPont Community is a $507 million asset credit union that has abandoned its 

mission of serving DuPont employees and now has a community common bond 

to serve the public across a 11 county and city region. 

• Newport News Shipbuilding Employees’ Credit Union, an $883 million institution, is no longer for shipbuilders. While its sponsoring company is primarily 

a defense contractor, this credit union now has a community common bond, and 

serves the general public across a 16 county and city geographic area. 

To give you an idea of the magnitude of what is happening, 15 credit unions now 

control 83% of total credit union deposits in Virginia. Five of the ten largest depository institutions headquartered in Virginia are now tax-exempt credit unions. Stated simply, there is a new breed of aggressive growth credit unions that offer virtually everything a bank can offer, and they have been given an open field to serve 

the public. The one thing that has not changed is they get to keep their tax exemption. The tax exemption has become a reward to this new breed of credit unions for 

abandoning original mission. It is a reward for adding doctors, lawyers, accounts, 

IT firms, etc., to the list of groups served. In effect, it is a reward for legal redlining, 

that is, carving high income groups into a multiple common bond while ignoring the 

underserved. It is a reward for obtaining a community common bond and serving 

the general population. In short, the tax exemption has become a reward for aggressive growth credit unions for no longer serving ‘‘people of small means’’, which was 


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the original intent of credit unions. Little wonder that the GAO concluded that 

banks do a better job than credit unions of serving the underserved. 

Does anyone believe the above illustrated developments were intended when the 

tax exemption was granted credit unions in 1937? I don’t believe so. Is it not time 

to tax this new breed of aggressive growth credit unions that have morphed into 

bank-like institutions? Surely it is. 

f 

Navy Federal Credit Union 

Vienna, Virginia 22180 

November 10, 2005 

The Honorable William M. Thomas 

Chairman 

Committee on Ways and Means 

U.S. House of Representatives 

2208 Rayburn House Office Building 

Washington, DC 20515 

Dear Mr. Chairman: 

On Thursday, November 3, 2005, in his testimony before the House of Representatives Committee on Ways and Means regarding the ‘‘Review of Credit Union Tax 

Exemption,’’ John Taylor, President and CEO of the National Community Reinvestment Coalition (NCRC), attacked Navy Federal’s record of lending to minorities, 

low-income borrowers, and women. NCRC often appears to slant its research findings to support its predetermined conclusions. In the past, we have brought errors 

in NCRC’s data analysis to its attention and offered to meet with Mr. Taylor to discuss inaccuracies in its analyses and issues related to how best to serve low income, 

minority and disadvantaged borrowers. NCRC has not responded to our inquiries 

and invitations. 

Navy Federal has an outstanding record of serving women, minority, and low- to 

moderate-income members of the credit union. A principal example of our commitment to serving all of our members, regardless of race or gender, is our history of 

mortgage loan approvals. Our percentage of loan denials of women and minority applicants is consistently well below the average of other mortgage lenders nationwide 

as evidenced by the following table: 

Year 

National 

Black 

Denial 

Navy 

Federal’s 

Black 

Denial 

National 

Hispanic 

Denial 

Navy 

Federal’s 

Hispanic 

Denial 

National 

Women 

Denial 

Navy 

Federal’s 

Women 

Denial 

2004 30.50% 17.05% 23.61% 11.32% 23.47% 12.15%

2003 27.85% 15.65% 21.56% 10.06% 19.15% 9.22%

2002 24.70% 7.58% 19.16% 6.00% 16.45% 3.47%

Additionally, Navy Federal has taken several specific steps to assist low- to moderate-income and minority members in obtaining financing for their mortgage loans: 

• Counseling—Employees provide detailed counseling and education to members 

to make certain they understand the homebuying and mortgage loan process. 

In addition to face-to-face and telephone counseling, we also conduct Homebuyers Seminars in areas where we have concentrations of members. These 

seminars are directed to first-time homebuyers. 

• Low Cost Loans—Navy Federal does not charge any ‘‘junk fees’’ on our mortgage loans, and we always strive to provide the lowest rate possible to our 

members. We also have loan programs that do not require private mortgage insurance for loans with low down payments. These considerations allow more 

members to qualify for our loans by reducing their monthly payments and outof-pocket costs. 

• Minority Loan Review Committee—A group of minority employees review all 

loans to minorities that are denied. This insures that there are no hidden biases 

in Navy Federal’s underwriting decisions. 

• 100% financing—To assist first-time homebuyers, Navy Federal offers a program with no down payment required. 

• HELPER loan—Navy Federal is getting ready to introduce this CUNA mortgage program that offers a 3/1 ARM loan, at 1% below market, to borrowers 

with low incomes. 


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I respectfully request that this letter be included in the record of the testimony 

presented to the House Committee on Ways and Means, Thursday, November 3, 

2005. 

Navy Federal has a proven record of fair lending, and I am confident that the 

needs of our entire membership are being well-served. 

Sincerely, 

Cutler Dawson 

f 

President/CEO 

National Association of Federal Credit Unions 

Arlington, Virginia 22201 

November 17, 2005 

The Honorable William M. Thomas 

Chairman 

Committee on Ways and Means 

United States House of Representatives 

Washington, DC 20515 

Dear Chairman Thomas: 

I am writing on behalf of the National Association of Federal Credit Unions 

(NAFCU), the only national trade association that exclusively represents the interests of our nation’s federal credit unions, to submit information for the record of the 

hearing on the ‘‘Review of the Credit Union Tax Exemption’’ that was held November 3, 2005. 

Two issues were raised at the hearing on which we would like to comment on further—credit union transparency and credit union service to those of modest means. 

There appeared to be some confusion during the hearing regarding the transparency of credit union financial reporting. NAFCU wants to stress to that there 

is full and complete transparency with respect to credit union finances. All federally 

insured credit unions must file with the National Credit Union Administration 

(NCUA) a form 5300 Call Report on a quarterly basis. The call report—a public document—includes comprehensive credit union financial data. (A copy of the call report of Navy Federal Credit Union, downloaded from NCUA’s Web site, is attached.) 

A number of independent rating firms use this public data to rate individual credit 

unions (e.g., IDC Financial). We would also note that over 87 percent of federally 

insured credit unions’ annual audits are performed by external auditors or by statelicensed persons. 

As you will note from the attached 5300 Call Report, it includes detailed information about real estate loans (Schedule A), member business loans (Schedule B), investments (Schedule C), credit union service organizations (Schedule D), borrowings 

(Schedule E), savings (Schedule F), off-balance sheet commitments (Schedule G), information systems and technology, and other miscellaneous information (e.g., new 

programs or service offerings). We would also note that in some areas the credit 

union call report contains more information than that provided by other financial 

depository institutions. For example, details on loan maturity and interest rates 

charged are not collected on the public reports submitted by other depository institutions. 

In addition to the 5300 Call Report, federal credit unions must, under the Federal 

Credit Union Act, adopt bylaws. Credit unions may adopt the 1999 bylaws as set 

forth by the NCUA, a previous edition of the NCUA bylaws, or a combination thereof, and the credit union may also request from NCUA approval for bylaws amendments. 

Subsection 6(c) of Article VII of the 1999 bylaws promulgated by NCUA states: 

‘‘. . . the financial officer will: ‘‘Within 20 days after the close of each month, ensure that a financial statement showing the condition of this credit union as of the 

end of the month, including a summary of delinquent loans, is prepared and submitted to the board and post a copy of such statement in a conspicuous place in the 

office of the credit union where it will remain until replaced by the financial statement for the next succeeding month.’’ 

As an example, a copy of Navy Federal Credit Union’s statement of financial condition as of October 31, 2005, downloaded from Navy Federal Credit Union’s 

website, is also attached. 

We would also like to address the issue of service to people of modest means and 

minority populations. While not the subject of the hearing, we find it ironic that the 

banking trade associations (ABA, ACB, ICBA) would appear before the committee 

to criticize credit union service to those of modest means when the financial instituVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00204 Fmt 6633 Sfmt 6621 E:\HR\OC\26372.XXX 26372

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tions represented by their witnesses granted a total of 13 mortgage loans to minority households in 2004, according to the most recent HMDA data. 

I have attached a copy of a chapter from NAFCU’s 2005 Report to the Board of 

Governors of the Federal Reserve that addresses in further detail how credit unions 

are serving the underserved. As detailed in the attached, there are more low-income-designated credit unions and underserved areas being added by credit unions 

each year. In addition, when compared to banks and thrifts, credit unions approve 

real estate loans that are smaller in size, approve a greater percentage of conforming real estate loans and have a greater percentage of real estate borrowers 

with less than $40,000 in income. 

Finally, our analysis shows that when credit unions grant mortgage loans to 

households with under $40,000 in income, or to minority households, a significantly 

fewer number of credit unions are charging 3 percentage points or more above the 

Treasury benchmark, a new area of HMDA data reporting in 2004. This again demonstrates the benefits that credit unions provide their members over and above that 

provided by other financial depository institutions. 

We thank you for this opportunity to add these comments to the record of this 

hearing. NAFCU looks forward to working with you on this and other matters as 

they arise. Should you wish to discuss these matters, please feel free to contact Brad 

Thaler, NAFCU’s Director of Legislative Affairs, at (703) 522–4770, ext. 204, or me 

at (703) 522–4770, ext. 215. 

Sincerely, 

Fred R. Becker, Jr. 

f 

President and CEO 

California Credit Union Leagues 

Rancho Cucamonga, California 91730 

November 15, 2005 

The Honorable William M. Thomas 

Chairman, Committee on Ways & Means 

U.S. House of Representatives 

Washington, D.C. 20515 

Dear Chairman Thomas: 

On behalf of the California and Nevada Credit Union Leagues, I appreciate the 

opportunity to submit a letter for the record regarding the Committee’s Hearing on 

Review of the Credit Union Tax Exemption held on November 3, 2005. Together, 

the California and Nevada Credit Union Leagues represent the largest state trade 

association for credit unions in the United States, serving 500 member credit unions 

in California and Nevada with 9 million members. 

This letter will address several false and misleading claims made by credit union 

critics during the hearing, as well as describe how credit unions remain true to the 

mission for which they were created. 

Credit Unions Are Serving Those of Modest Means 

Despite misleading claims to the contrary made during the hearing, credit unions 

are proactively serving their current members of modest means, and making impressive strides in attracting potential members in this group to join credit unions. 

A Filene Research Institute publication titled ‘‘Who Uses Credit Unions’’ (updated 

2004; originally published in 1999), which uses Federal Reserve data, showed that 

the average net income, financial assets and net worth of people using only (or predominately) credit unions are all below those of people using only (or predominately) 

banks. The average household income for those using only banks was $76,923, while 

the average household income for those using only credit unions was $42,664. The 

median net financial worth of those households using banks only was $21,500, while 

the median net financial worth of those households using credit unions only was 

$7,900. The Filene Research Institute also reports that the average credit union 

member typically has modest loan and deposit balances: 

Auto loan balance, $11,900; Business loan, $142,500. 

Signature loan balance, $2,200; Savings account, $2,000. 

First Mortgage loan, $99,700; Checking account, $2,200. 

Home Mortgage Disclosure Act (HMDA) data consistently shows that low-income 

borrowers are substantially more likely to be approved for a mortgage at a credit 

union than at any other type of lender. In 2003, credit unions nationwide approved 

72.2 percent of home mortgage loans to low-income borrowers (up from 69 percent 


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1 2004–2005 Credit Union Fees Survey, CUNA. Big Banks, Bigger Fees2001, U.S. Public Interest Research Group. New Jersey Department of Banking and Insurance, various surveys. The 

Money Talks Personal Finance Advice website at www. Moneytalks.org. 2 Blindfolded Into Debt: A Comparison of Credit Card Costs and Conditions at Banks and 

Credit Union, Woodstock Institute. July 2005. 

in 2000). By contrast, non-credit union lenders nationwide approved only 47.8 percent of such loans (up from 46 percent in 2000). In 2003, credit unions denied 15.6 

percent of mortgage loans to low-income borrowers. Non-credit union lenders denied 

27.7 percent of loans to low-income borrowers. Viewed another way, the approval 

rate for mortgages is 151% higher at credit unions than at other lenders. These approval rates hold true for credit unions in every state. 

A significant way credit unions provide value to those of modest means is through 

the pricing of their services. Numerous studies and reports show that credit unions 

charge fewer and lower fees than do banks for the same kinds of services.1 In particular, minimum balances to avoid fees are typically much lower at credit unions 

than at banks. Lower rates on loans, especially on used cars and small loans, are 

another way credit unions serve those of modest means. 

A Woodstock Institute report comparing the terms and conditions of the nation’s 

10 largest banks and 10 largest credit unions found that the credit unions performed better in terms of interest rates, late fees, over-the-limit penalties, grace periods, and disclosure in terms.2 In explaining why the huge difference in fee structures between the two types of financial institutions, the report cited two factors: 

1) credit unions’ nonprofit cooperative structure, which leads to a different cost 

structure than banks; and 2) the credit union mission. ‘‘Their mission,’’ the report 

noted, ‘‘is one reason why credit union-issued credit cards might have different 

terms than cards issued by other financial institutions.’’ As the Woodstock report 

illustrates, credit unions continue to adhere to their original mission to provide 

working people with access to affordable financial services. 

For decades, most credit unions could generally only offer membership to people 

who were part of an occupational group. This had the effect of limiting credit union 

access to members of modest means. However, the passage of the Credit Union 

Membership Access Act in 1998 gave occupational-based credit unions a streamlined 

way to add geographic areas to their memberships that are ‘‘underserved’’ (not 

based on occupational bonds). This provision gave credit unions a greater opportunity to serve persons from all walks of life—including the lowest income levels. 

In other words, more people—especially those in low or moderate income areas— 

have only recently become eligible for credit union membership. Since 1999, more 

than 650 federal credit unions have added 1,406 underserved areas to their fields 

of membership. In the three years ending December 2003, credit unions that added 

these underserved areas experienced membership growth over three times that of 

other credit unions (17.4 percent vs. 5.2 percent over the three year period). 

While credit unions remain committed to serving those of modest means, we must 

point out that credit unions could not remain viable if they served only those of low 

or moderate income. As financial cooperatives, credit unions provide services and 

benefits for its members in proportion to what its members contribute to it. In other 

words, to have a viable cooperative you must have those who ‘‘have’’ and those who 

‘‘have not.’’ A credit union cannot provide loans to its members unless other members have made deposits from which to loan. We believe credit unions should provide all members the same opportunity to improve their financial well-being. 

Big is Not Bad 

We would like to address a misunderstanding introduced during the hearing that 

larger or more complex credit unions have strayed from their original mission and 

are therefore undeserving of their tax-exempt status. There is no legal or historical 

basis for this view. The tax exemption Congress granted in 1937, and upheld in 

1951 and 1998, was not related at all to the size of the institution benefiting from 

it. It was based primarily on the cooperative structure of credit unions (i.e., member-owned, democratically operated, not-for-profit organizations generally managed 

by volunteer boards of directors). 

Do other tax-exempt organizations risk losing their tax exemption when they get 

‘‘too big?’’ For example, should the Red Cross be subject to taxation because they’ve 

grown larger than small, local organizations that also provide relief or charitable 

services? Larger credit unions are still democratically controlled, not-for-profit institutions in every way that smaller credit unions are. A larger credit union may be 

more likely to offer a broader array of services, and have larger presence in a local 

market, but this does not make it less a cooperative organization than a smaller 

credit union. 


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3Source: FDIC, NCUA, U.S. Census Bureau 

It’s also important to note that the credit union tax exemption was not granted 

and reaffirmed by Congress on the premise that credit unions must offer only limited services to their members. Congress has never suggested that credit unions 

forgo pursuing technological improvements to their systems, or ignore consumer demand for more convenient services, in exchange for tax exemption. The argument 

that larger credit unions should be taxed simply because they offer similar services 

to many banks ignores the fact that the tax exemption was granted and upheld 

based on the organizational form of credit unions and not on a credit union’s size 

or sophistication, or the degree of competition it may provide to other financial institutions. To view it from another angle: it doesn’t appear that banks are subject to 

taxation because of the array of products and services they may offer, they are taxed 

because of their structure—that is, they are non-democratically-controlled, profitmaximizing organizations. 

The economies of scale of larger credit unions make it possible for them to offer 

more affordable and responsive services to members of modest means. The presence 

and cooperation of larger credit unions enables smaller credit unions to access infrastructure such as shared ATM networks (e.g., CO–OP Network), the corporate credit 

union system, group lending programs, and shared branching. (Shared branching allows credit union members to conduct transactions on their accounts at any credit 

union that belongs to the shared branching network. We would like to clarify that 

shared branching does not, however, involve shared membership. Members are permitted to obtain loans and other services only at credit unions to which they belong.) The size and efficiency of larger credit unions allows them to provide all of 

their members—including those of modest means—with lower loan rate and fees 

and higher dividend rates. 

Larger credit unions are also more able to offer special programs benefiting lowand moderate-income households. In CUNA’s ‘‘Serving Members of Modest Means’’ 

Survey Report, published in 2003, when asked how many of up to 18 services geared 

to low-moderate income households were offered, only six percent of credit unions 

with assets below $20 million offered at least half of the services. Fully 42 percent 

of credit unions with assets over $500 million offered most of the services. The survey also showed that larger credit unions are also more likely than smaller credit 

unions to participate in outreach activities to attract low/moderate income members, 

and to have added underserved areas to their fields of membership. 

Credit Unions are Not Mutual Savings Banks 

During the hearing, some witnesses attempted to suggest that credit unions are 

no different from mutual savings banks and, since mutual savings banks pay federal 

taxes, credit unions should be taxed, too. Although many savings banks and S&Ls 

are mutually owned, there are key differences in structure and operation that continue to make credit unions unique. 

Mutual savings banks lost their tax exemption in 1951 not because they had become ‘‘too big’’ or too similar to other financial services providers, but because they 

had lost their ‘‘mutuality,’’ in the sense that the institutions’ depositors did not exercise democratic control of the enterprise. Specifically, Congress found: 

• Mutual savings banks had evolved into commercial bank competitors. Unlike 

1951, however, there is no evidence that today’s credit unions are a competitive 

threat to banks or thrifts. In fact, the FDIC reports that banks have enjoyed 

record profits each of the last four years. The real competition in the banking 

industry has been taking place between small and large banks. Since 1993, 

small community banks have lost nearly half of their depository market share 

to the largest 100 U.S. banking institutions, while credit unions have maintained the same depository market share.3

• Mutual savings banks had engaged in widespread proxy voting schemes. Federal 

credit unions are prohibited from using proxy votes under the Federal Credit 

Union Act (12 USC 1760), while mutual savings banks continue to use proxy 

voting. Thus, in a mutual savings bank, the board, which directs all policies and 

operations of the institution, can be elected through control of the proxies. The 

OTS clearly states the practical application of this practice in their Regulatory 

Handbook (Section 110, Capital and Stock Ownership): 

• ‘‘In practice, members delegate voting rights and the operation of federal mutual saving associations through the granting of proxies typically given to the 

board of directors—or a committee appointed by a majority of the board.’’ 

• Mutual savings banks were not democratically controlled (voting was based on 

the size of each member’s deposit). Even today, under OTS rules, mutual savVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00207 Fmt 6633 Sfmt 6621 E:\HR\OC\26372.XXX 26372

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4Protecting the Rights and Interests of Credit Union Members, American Association of Credit Union Leagues, August 2005. 

ings banks can—and often do—apportion voting privileges based on one vote for 

each $100 in an account, up to 1000 votes. In 1998, OTS changed its regulations 

to permit mutual savings banks to amend their bylaws to allow from one to 

1000 votes per member. In direct contrast to this practice, each credit union 

member has always had one vote, regardless of the amount they have in the 

credit union. 

So, while some mutual savings banks may tout that they are ‘‘community and employee owned,’’ it’s unlikely that their depositors enjoy the equal ownership and voting rights afforded to all credit union members. In fact, what the OTS and the 

courts have said about ownership ‘‘rights’’ of federally chartered mutual thrift depositors clearly support this. An illustrative case is Ordower v. Office of Thrift Supervision, where mutual bank depositors challenged the OTS’s approval of a conversion from a mutual savings bank to stock form.4 The court stated: 

‘‘Nominally the customers own the mutual, but it is ownership in name only.’’ 

The OTS’ Regulatory Handbook also states: 

‘‘The ability to exercise control over a mutual savings association by its members 

is not coextensive with the rights of stockholders of ordinary corporations.’’ (Section 

110, Capital and Stock Ownership) 

Other key differences between credit unions and mutual savings banks include: 

• Not for Profit: Credit unions are not-for-profit financial cooperatives, while mutual savings banks operate for the mutual profit of their owners. Indeed, given 

the limited rights of depositors of mutual savings banks as described above, the 

only thing ‘‘mutual’’ about mutual savings banks appears to be the way they 

operate for the mutual profit of their owners. 

• Volunteer service: Most credit union boards of directors serve voluntarily and 

are unpaid. Board members are elected by and from the credit union’s membership. Mutual savings banks have paid directors. 

• Limited market: Credit unions are restricted by statute to a limited field of 

membership composed of specific groups or those in a geographical area. Mutual 

savings banks have no such restrictions. 

• Limited powers: Credit unions are the most heavily regulated of all financial institutions. They must operate within limitations on business lending, loan interest rates, loan maturities, investments, and a host of other restrictions that 

don’t apply to mutual savings banks, and are not allowed access to capital markets. 

CRA is Not Appropriate for Credit Unions 

Banks are subject to the Community Reinvestment Act (CRA) for one simple reason: prior to the passage of CRA, banks accepted the deposits of low-income customers but many banks routinely ‘‘redlined’’ poor areas as too high-risk for lending. 

In response, Congress passed CRA in 1977 to require financial institutions to make 

credit available to those who deposited funds in a given financial institution. Congress exempted credit unions because credit unions—by law and in practice—can 

only lend to their members (i.e., those who belong to a given credit union). 

CRA is not appropriate for credit unions for some of the following reasons: 

• Credit union data results are inherently skewed under CRA because of legal restrictions that banks or thrifts do not face: 

• Banks and thrifts have no limits on who they can serve. 

• Credit unions’ outreach area is restricted by their field of membership. 

• Even ‘‘community’’ credit unions can only serve members. 

• CUs are legally barred from providing ‘‘lifeline services’’ to households that are 

in need and are eligible for membership, but have not formally become members. 

• The result: vulnerable households face yet another barrier to accessing basic 

transaction services. 

• Credit unions are technically restricted from serving the very households 

CRA was intended to reach even though those households qualify for membership. 

• Credit unions and consumers are denied the opportunity to build trust and 

a longer-term financial relationship over a series of transactions. 

• CRA emphasizes lending, especially mortgage and business loans. 


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• Credit unions specialize in flexible savings products and consumer loans, 

which are much more fundamental products and services for households of 

modest means. • CRA doesn’t measure consumer lending, the core business of most credit 

unions. • Credit unions face a legislated cap on member business loans of 1.75 times 

their net worth up to a maximum of 12.25% of assets for ‘‘well-capitalized’’ 

credit unions. • Regulatory restrictions on credit union investments render credit unions ineligible to earn substantial CRA credits under the ‘‘investment test.’’ 

• Credit unions cannot legally make investments in community development 

corporations (CDCs) or community development loan funds (CDLFs) that 

banks can and do use for CRA credit; credit unions are also prohibited from 

participation in tax-credited affordable housing bonds, the New Markets Tax 

Credit Program, and CDFI Fund grants of taxpayer money for community development projects. • Thus, credit unions cannot invest in affordable housing projects, community 

development centers, etcetera whereas banks and thrifts can. 

In closing, the California and Nevada Credit Union Leagues would like to thank 

the Committee for the opportunity to provide additional information for the record 

regarding the unique nature of credit unions. Credit unions have by no means abandoned the statutory mandate Congress gave them in 1934 to remain modest-means 

focused and cooperative in nature. The federal tax exemption—its privilege and its 

responsibilities—motivates the decision process for all credit unions, whether they 

are decisions regarding members, products and services, or field of membership. We 

believe the evidence clearly shows that credit unions—both large and small—remain 

true to their original mission of providing all members with the means to build a 

better way of life. 

Sincerely, 

David L. Chatfield 

f 

President/CEO 

Statement of Financial Services Roundtable 

The Financial Services Roundtable believes it is necessary to examine the tax exemption of federal credit unions. There is a class of credit unions that appear to 

have less focus on serving individuals of modest means and a field of membership 

that stretches the definition of a ‘‘common bond.’’ This, coupled with the ability of 

these taxpayer subsidized credit unions to offer services similar to that of tax-paying 

financial institutions, as a matter of competitive fairness, brings into question 

whether it is appropriate for these credit unions to be tax exempt. The Roundtable 

believes the Committee must examine this tax exemption, which is in part based 

on: 1) these credit unions serving individuals of modest means, and; 2) a ‘‘common 

bond’’ that defines a credit union’s membership. 

The Financial Services Roundtable represents 100 of the largest integrated financial services companies providing banking, insurance, and investment products and 

services to the American consumer. Member companies participate through the 

Chief Executive Officer and other senior executives nominated by the CEO. 

Roundtable member companies provide fuel for America’s economic engine, ac- counting directly for $40.7 trillion in managed assets, $960 billion in revenue, and 

2.3 million jobs 

Serving Individuals of Modest Means? 

Part of the basis for the tax-exempt status of credit unions is their service to individuals of modest means. The Credit Union Membership Access Act of 1998 states, 

it is in part ‘‘because they have the specified mission of meeting the credit and savings needs of consumers, especially persons of modest means.’’ 

A key question that must be examined is if credit unions are serving individuals 

of modest means. Based on data available credit unions serve those of modest 

means, but also serve a significant portion of individuals with substantial means. 

Based on a recent demographic survey by the Credit Union National Association the 

average household income of a credit union member is $55,120, which is significantly higher than the median household income in the United States of $44,389. 

The Government Accountability Office in a 2003 report stated ‘‘[o]ur assessment 

of available data—the Federal Reserve’s 2001 SCF, 2001 HMDA data, and other 


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studies—provided some indication that credit unions served a slightly lower proportion of households with low and moderate incomes than banks.’’ More specifically 

the report indicates that only 36% of households that primarily or only use credit 

unions are of low and moderate income, compared to 42% that primarily or only use 

banks. 

The information available suggests that credit unions are not doing as well as 

other financial institutions in serving individuals of modest means. 

A Broad Common Bond 

Credit unions also receive a tax exemption due to the nature of their membership 

or specifically the common bond that is shared between members. The Credit Union 

Membership Access Act states, with respect to this common bond that ‘‘a meaningful 

affinity and bond among members, manifested by a commonality of routine interaction, shared and related work experiences, interests, or activities, or the maintenance of an otherwise well-understood sense of cohesion or identity is essential to 

the fulfillment of the public mission of credit unions.’’ Today, in practice, what constitutes a common bond stretches this definition allowing for the formation of large 

credit unions that compete for the same customers as tax-paying financial institution in local markets. 

Today credit unions that share a common occupational bond are permitted to add 

other occupational groups to their membership based on what has been said to be 

pro-forma approval of the NCUA. Although even more troubling is the approval by 

the NCUA of charters for credit unions with a large community as a common bond, 

which has fueled the conversion of existing credit unions to community credit 

unions. In 2004, there were 84 conversions to community credit unions with some 

having the ability to serve millions of members. 

These community credit unions are typically chartered to serve people ‘‘who live, 

work and worship or attend schools in, and businesses and other legal entities located in’’ a particular area. Given the population of some of these areas there is a 

large potential membership pool. Some examples of credit unions converting to community charters in 2004 include: 

• The LA Financial Credit Union, which will be able to serve all of Los Angeles 

County, California and has a potential membership of 9.6 million people. 

• The Dessert Schools Credit Union, which will be able to serve all of Maricopa 

County, Arizona and has a potential membership of 3.1 million people. 

• The Dallas Teleco Credit Union, which will be able to serve all of Dallas County, Texas and has a potential membership of 2.2 million people. 

• The U.S. Credit Union, which be able to serve the counties of Anoka, Carver, 

Dakota, Hennepin, Ramsey, Scott and Washington Counties, Minnesota and has 

the potential membership of 2.6 million members. 

These four conversions account for over 5% of the population of the United States. 

From the end of 1999 through 2004, there have been 589 credit unions established 

or converted to community charters. 

This ability to serve millions of people in a community, not only stretches the definition of a common bond, but creates local markets where a tax-subsidized credit 

union can compete community-wide with tax-paying financial institutions for the 

same customer. 

Issue of Fairness 

Today credit unions offer a full range of services and products, including commercial lending services. In essence, credit unions are indistinguishable from banks. On 

a local level as credit unions are able to serve whole communities it creates a competitive disadvantage for tax-paying financial institutions. 

The tax-payer subsidized credit unions have a price advantage over the tax-paying 

institutions in competing for the same customer base. A study on credit unions in 

Virginia, by Professors Neil Murphy and Dennis O’Toole attributes a ‘‘67 basis point 

advantage in loan pricing and deposit pricing’’ to credit unions’ tax-exemption. 

If a credit union does not have to focus on individuals of modest means and is 

permitted to serve large communities, why should it be entitled to a tax exemption? 

As credit unions are permitted to serve large communities, it has the potential to 

create two banking systems in a local market, one that is tax payer subsidized and 

another that pays taxes. Fairness dictates that they similarly situated institutions 

be treated equally. 

Conclusion 

As the Committee examines the tax exempt status of credit union, the Roundtable 

believes it is important to pay particular attention to large credit unions that are 


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unlimited in their ability to compete in a market for the same customers as financial institutions. 

The Roundtable believes it is necessary to evaluate whether these credit unions 

are actually serving their intend purpose of providing services to individuals of modest means, or have greater interest in serving all members of a community through 

a broad common bond. It is an issue of competitive fairness as tax-payer subsidized 

credit unions are indistinguishable from banks and compete for the same customers. 

It is important to ask if the American tax-payer should continue to subsidize theses 

credit unions. 

f 

Statement of the Honorable Phil English, a Representative in Congress 

from the State of Pennsylvania 

I commend Chairman Thomas and Oversight Subcommittee Chairman Ramstad 

for holding today’s hearing to review the tax-exemption for credit unions. The oversight responsibility of the Ways and Means Committee is one of its most important 

roles and examining the vast corners of the tax-exempt sector falls squarely within 

that responsibility. A thorough assessment of the standards for tax-exemption for 

credit unions, as well as other tax-exempt entities, helps our Committee fulfill its 

responsibility to American taxpayers. 

Through this process, I look forward to examining the benefits the nation receives 

in exchange for the credit union tax exemption. The credit unions in my home state 

of Pennsylvania alone, serve 3.5 million customers. In my district in the northwestern part of the state, many working class families rely on credit unions for lowcost financial services. 

As we examine the structure of these not-profit credit unions, I welcome examples 

of the benefits credit unions consumers receive, including in the form of favorable 

interest rates and fees. I also look forward to receiving information regarding the 

demographics of credit unions’ clientele. 

After a comprehensive examination of their structure and benefits, I believe the 

Committee will find credit unions’ tax-exemption is justified because they continue 

to fulfill the important public policy goal of providing working Americans with an 

affordable alternative to their for-profit counterparts. 

f 

A.M. Community Credit Union 

Kenosha, Wisconsin 53144 

November 1, 2005 

Congressman Thomas, My name is Don Gillespie and I am fortunate to serve as 

the President/CEO of A M Community Credit Union (see endnote 1). While I must 

admit to being somewhat concerned that your committee is undertaking the review 

mentioned above, I also must admit that a periodic review of tax exempt organizations is an application of sound government practice. Further, I am confident that 

you, and your committee, will better appreciate the value of the credit union system 

and its tax exempt status through the hearing process. I hope to contribute to the 

committee’s review by providing some personal views of the issue in a concise 

bulleted format. 

The background information provided by the committee indicates that the tax status of credit unions was reaffirmed by the Congress in 1998 when the correctly 

prioritized their reasons; 

• Credit unions remain member owned cooperatives, that individual ownership 

stake illustrates more than a symbolic structure, it ensures that credit unions 

remain more responsive to their member needs. 

• Credit unions are indeed democratically controlled, one member—one vote, is a 

principle we embrace that enfranchises even the lowest economic sector of an 

individual credit union. 

• Credit unions remain not-for profit entities retaining earnings sufficient to fulfill fiduciary safety and soundness standards and returning all other earning to 

their members through extended services or improved pricing on loan, deposit, 

or transaction accounts. 

• Credit unions boards are populated exclusively with volunteer directors (with 

exception to the credit union CEO who may serve as a director). Those volunteers establish the mission and vision of their unique entities, they hire and 


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guide executive management, and they represent the members that elected 

them to office with sincerity and diligence. 

• Credit union missions were sighted by the congress in reaffirming the tax exempt status of such organizations, I offer as support for the contention that the 

mission sighted by the congress is substantially similar to the mission of our 

credit union (see end note 2). 

Further, the specific mention of ‘‘consumers’’ denoted by the descriptive ‘‘modest 

means’’, as highlighted in the 1998 record, might give committee members cause to 

review in more depth the financial performance of America’s credit unions. To that 

end I offer the following (see endnote3). CUNA through a review of FFIEC–HMDA 

data illustrates that between 1998 and 2003 credit unions approved 68.5% of mortgage applications submitted by low income borrowers, while all other lenders approved a mere 45.3% of low income applications—low income mortgage seekers are 

‡ again more likely to be approved at a credit union than a non-credit union. 

Our detractors will attempt to make much of the congressional reference to consumer service and the development of some business services in some credit unions. 

Listen closely to the information provided; you will learn that relatively few credit 

unions offer business services and that business lending represents a small proportion of the credit union balance sheet. NCUA and FDIC data were used by CUNA 

to show that credit union share of business lending remains below 1% of the market 

(see endnote 4). 

Admittedly credit union business lending activity has increased, yet it represents 

less than 1.00% share of the business loan market, I suggest that business lending 

activity is being driven more by a demographic change in the American consumer 

than the business evolution of credit unions. I believe that it is well accepted that 

through economic and demographic changes in the nation and the world more and 

more consumers are self employed. 

The U.S. Bureau of Labor and Statistics http://www.bls.gov/news.release/pdf/ 

empsit.pdf reports that the number of self employed Americans increased 72,000 

during the month of September 2005 alone, that growth translates into an 

annualized rate of 8.40%. Of course as the downsized or outsourced middle manager 

begins her/his entrepreneurial journey they seek the financial institution closest to 

them, their credit union. 

Chairman Thomas, the tax exempt status of credit unions has been and remains 

in the best interest of American consumers (see endnote 5). 

• Any new tax on credit unions is simply a new tax on 87 million credit union 

members. 

• Those outside interests that are calling for credit union taxation have the demise of credit unions not the best interest of Americans at heart. 

The congress in 1998 sighted first and primary the reasons for credit union tax 

exempt status as the member owned nature, democratically controlled structure and 

volunteer board led reality of the credit union system. Those realities exist today 

in each credit union in our nation. Regardless of the field of membership or number 

of members, the asset size or business activity: a Credit Union is A Credit Union— 

we are owned by, governed by and strive to serve our members. With each member 

having the same voice, and earning the same high degree of respect—no matter 

their individual circumstance. 

Please diligently review the status, purpose and operation of credit unions. Consider the source of the testimony before the committee. Weight the antagonists and 

protagonists testimony and you must conclude that the institution of credit unions 

in America is indeed fulfilling the congressional mandate and is certainly deserving 

of their tax exempt status. 

Sincerely 

Donald J. Gillespie 

Endnotes 

1. A M Community Credit Union, 6715 Green Bay Road, Kenosha, WI 53142, 262–697–3700. 

2. Mission Statement: 

To be a member driven cooperative providing a line of financial and financially related products to satisfy the needs of the people who live or work in Kenosha and Racine Counties: 

• Maintaining the Highest Quality of Member Services • Offering Competitive Consumer Financial Products • Encouraging Full Member Participation in our Cooperative 

5. Tax Credit Unions? It Doesn’t Add Up 

Estimated annual increase in federal income tax revenue arising from credit union taxation (a direct tax on 87 million credit union member-owners): +$1.5 billion 


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Estimated annual decline in credit union member benefits arising from change in tax status 

and subsequent operational changes*: ¥$6.3 billion 

Estimated annual decline in bank customer benefits arising from greatly reduced influence 

of credit union competition**: ¥$4.3 billion 

Net annual economic impact of credit union taxation: ¥$9.1 billion 

* Hampel, Bill and Schenk, Mike, CUNA Research & Policy Analysis. ‘‘The Benefits of Credit 

Union Membership’’. http://www.cuna.org/member/download/whpaper_mmbrshp.pdf 

** Feinberg, Robert, M. American University. ‘‘An Analysis of the Benefits of Credit Unions 

to Bank Loan Customers’’. September 2004. http://www.cuna.org/member/download/ 

ba_benefits.pdf. Tokle, Robert J., Idaho State University. An Estimate of the Influence of Credit 

Unions on Bank CD and Money Market Deposits in the U.S.’’ http://www.cuna.org/member/ 

download/ba_influence.pdf 

f 


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West Haven, Utah 84401 

October 28, 2005 

Thank you for this great privilege to submit a written statement concerning the 

credit union tax exemption. As a citizen of this great country, it is truly an honor 

to submit this statement. What a great country! Where else in this entire world 

would I be able to have this opportunity? 

I am the father of 11 children. My wife, Shelley, and I are expecting our 12th 

child around Valentine’s Day next year. Our oldest child is 22 years old. She and 

her husband recently made us the proud grandparents of our first grandchild, a girl. 

I joined a credit union when I first graduated from college in April 1981. My first job out of college paid an annual salary of $16,200. I thought I was rich! My credit 

union provided me with savings plans that helped me save enough money ($5,000) 

for a down payment on a new starter home (total price $50,000), which we finished 

building the week before we were married in February 1982. 

Our credit union has continued to provide us with savings plans that meet our 

modest needs. Our financial goals for our children have been to help them save and 

prepare for college, church missions, and marriage. Our credit union offers a unique 

savings plan which allows us to automatically transfer a minimum of $10 per child 

per month from our paycheck into each child’s savings account. This ‘‘dedicated savings’’ account has no minimum balance requirements but pays certificate of deposit 

rates! Our oldest daughter will be graduating from college this year. Her ‘‘dedicated 

savings’’ account helped finance her education and also provided money for her wedding. Our oldest son recently returned from a church mission to California. His 

younger brother is currently serving a church mission in Brazil. While both boys 

were serving missions at the same time, we were paying $800 a month to cover 

their mission costs. Their ‘‘dedicated savings’’ accounts allowed us to financially support them while they were serving their missions. These accounts also helped finance the missionary in Brazil while he attended college before his mission. The 

missionary that served in California will be starting college in January and he will 

benefit greatly from his ‘‘dedicated savings’’ account. He has also accumulated 

enough money in his account in case wedding bells ring in the near future. 

We are people of modest means. We are a one-income family, living on an average 

salary. People often ask me in amazement how we can afford to have such a large 

family. I always tell them that (1) we are blessed because we contribute to our 

church and (2) our credit union provides us the savings tools that we can’t find anywhere else. 

I don’t know where I would be financially without my credit union. We have since 

used our credit union for a mortgage loan to build a modest home with 5 bedrooms. 

We later turned to our credit union for a refinance and a lower interest rate on that 

mortgage loan. With the help of our credit union, we hope to be completely debtfree many years before we retire. My credit union means everything to me. They 

have helped me raise 11 (soon to be 12) children to be outstanding, respectful, lawabiding, contributing citizens of this country. I feel that the United States has received something in exchange for the benefit of my credit union’s tax exemption. 

That tax exemption has directly benefited me, my wife, and our children as credit 

union members. 

Sincerely, 

f 

Lane Gittins 

Utah Bankers Association 

Salt Lake City, Utah 84111 

November 2, 2005 

The Honorable Bill Thomas 

Chairman 

Committee on Ways and Means 

U.S. House of Representatives 

Dear Chairman Thomas, 

On behalf of the Utah Bankers Association we commend you for your courage to 

address the evolving public policy benefits of the tax exemption granted to some cooperatively owned financial institutions, those designated as credit unions. 

The Utah State Legislature has been on the forefront of this policy debate due 

primarily to the actions of our state regulator to effectively eliminate the common 

bond membership limitations on state chartered credit unions over twenty years 

ago. This resulted in wide-spread tax subsidized competition to the point that the 


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Commissioner’s actions were challenged and overturned in state court. This led to 

several legislative debates and even a special task force which concluded its study 

late last year. 

As a result, the Utah State Legislature adopted a resolution endorsing a recently 

adopted statute that established certain large credit unions as ‘‘nonexempt’’ and 

urging Congress to consider the same approach. The resolution also identified several other inequities resulting from the federal tax treatment of federally chartered 

credit unions including an impingement of state’s rights to collect the same state 

and local taxes from federal credit unions that are assessed to state chartered credit 

unions. 

Attached is a research paper we submitted to our state level legislative task force. 

The research clearly shows that there were two primary reasons for the tax exemption: 1. to facilitate the extension of credit to the poor; and 2. to give credit unions 

the same tax treatment as other cooperatives at that time. I believe you will find, 

as did the Utah State Legislature that at least as it relates to the larger more complex and diversified credit unions, neither of these two justifications applies in today’s marketplace. First, even as recently as two years ago, the GAO determined 

that banks were at least as effective if not more so than credit unions at meeting 

the needs of the poor. Secondly, other cooperative businesses are now taxed. 

I am also attaching a copy of House Joint Resolution 1 adopted earlier this year 

by the Utah State House of Representatives and the Utah State Senate. Please feel 

free to contact me with questions. 

Sincerely, 

Howard M. Headlee 

f 

President 

Statement of Thomas Heller, Orlando, Florida 

I am writing to ask you to oppose any efforts to eliminate the federal tax exemption for credit unions. A new tax on credit unions is an additional tax on 87 million 

working Americans. 

I have been involved with credit unions since 1989. I had been out of work for 

three months and had accumulated credit card debt. Once I was working again, I 

needed a consolidation loan to pay off my credit card. Only my credit union was 

willing to give me the loan and not charge a high interest rate. Studies have shown that consumers save $6.3 billion a year by using a credit 

union instead of a bank. I save hundreds of dollars a year myself just in ATM fees 

that I do not have to pay. I also use the internet for most of my online ‘‘banking’’. 

When I first moved to Florida, I opened a bank account with SunTrust. They 

charged me nearly seven dollars a month, just to bank online! 

My credit union charges me nothing for online access to my money and they do 

not charge me three dollars every time I want to withdraw my money. 

Banks are in the business of making money for stock holders. Credit unions are 

formed by people from similar backgrounds or employers so that they have a better 

way of saving money and getting loans at low rates when nobody else will loan them 

money. 

f 

Kent, Washington 98032 

November 1, 2005 

Dear Committee, 

As a credit union professional in the business since 1979, I see firsthand why the 

House Committee on Ways and Means Chairman Bill Thomas wants to review the 

credit union industry tax-exemption. Several times over the years I called on my 

peers to operate in a fiscally responsible manner that respects our tax-exemption. 

Allow me to give a few examples of how our industry dishonors the tax-exemption: 

• ‘‘Volunteers’’ receiving $5,000 annual conference/education allowance to go to 

Hawaii, Caribbean cruises, Germany, etc. 

• CEOs enjoying membership to exclusive country clubs and driving $70,000 luxury cars paid for by the credit union. 

• Industry average fee of $22 for non-sufficient funds (NSF) when the cost associated to an NSF is estimated at $2. Strange way for not-for-profits to operate 

on behalf of member-owners. 


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• Industry charging loan interest rates in excess of the congressionally mandated 

15% APR when the Fed Funds rate at 1%. NCUA, giving in to industry lobbyists, allowed a waiver so that credit unions could charge up to 18% APR even 

though interest rates were at 45-year lows. 

• Credit unions building extravagant offices/ branches that the tax-paying banking sector cannot justify. 

Credit unions serve a vital role in the country’s financial services industry and 

should be allowed to remain tax-exempt. At the same time, congress should make 

credit unions more accountable for operating in a manner warranting a federal tax 

exemption. Again, allow me to provide a few quick examples. 

• Similar to the interest rate cap, congress should mandate maximum fees 

charged for basic financial services such as NSF, Courtesy Pay, Returned Check 

services. I propose a maximum NSF/Courtesy Pay fee of three times the federal 

minimum wage. 

• Place a maximum on the capital levels for credit unions. Credit unions with 

14%, 16%, 23% are not returning the earnings back to the member-owners. 

From the 1930’s to the 1980’s credit unions successfully operated with less than 

8% capital. Today, the industry average is 40% higher and at the same time 

fees charged to members increased more than 500%. 

• Require credit unions to make available a minimum package of basic financial 

services without a service fee and tightly regulate user fees. 

Credit unions are currently asking the House Financial Services Committee to approve H.R. 2317, the Credit Union Regulatory Improvement Act. I encourage Congress to consider some pro-member amendments to H.R. 2317 that will refocus our 

industry on our member-owners and keep us deserving of the tax-exemption. 

I welcome the opportunity to discuss in further detail any or all aspects of this 

submittal. 

Respectfully, 

Dale Kerslake 

f 

President/CEO 

Credit Union National Association 

Washington, DC 20004 

November 17, 2005 

The Honorable William M. Thomas 

Chairman, Committee on Ways and Means 

U.S. House of Representatives 

Washington, DC 20515 

Dear Chairman Thomas: 

On behalf of the Credit Union National Association, our affiliated state associations and leagues, and America’s 87 million credit union members, I appreciate the 

opportunity to submit this letter as a means of clarifying several issues raised in 

your Committee’s November 3, 2005 hearing to review the federal tax-exempt status 

of credit unions. Please incorporate this letter into the hearing record. 

In this letter, I will also address several incorrect and misleading statements 

about credit unions and our mission made by witnesses from the commercial banking industry. We appreciate your review of this letter and please do not hesitate to 

contact me or my staff if you have further questions or need clarification on any 

of the issues raised during the hearing. 

I. TRANSPARENCY 

Assertion: Credit unions are not providing adequate financial information 

to their members. 

CUNA response: Credit unions are required by law to conduct an annual audit, 

and credit unions with $500 million or more in assets must have an audit conducted 

by an independent, state-licensed auditing firm using generally accepted auditing 

standards, similar to the requirement applicable to banks (12 USC § 1782(a)(6)). A 

federal credit union is required to publicly post its financial statements monthly at 

its office, and the financial report on the condition of the credit union is presented 

at the annual membership meeting. This is more disclosure than required by closely 

held community banks. 


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Similar to banks, credit unions are required to file a call report (Form 5300) quarterly with their regulators, which provides detailed information about the financial 

condition and activities of the credit union and includes aggregate information about 

employee compensation and benefits. The call reports for all federally insured credit 

unions are publicly available on the National Credit Union Administration’s 

website. 

Assertion: The fact that all credit unions do not file Form 990 with the Internal Revenue Service raises concerns. 

CUNA response: As highly regulated depository institutions, credit unions are 

quite different from other non-profit, tax-exempt organizations in the United States. 

As discussed above, credit unions are subject to detailed financial reporting and 

oversight by examiners trained to make sure that credit unions are accurately reporting their financial condition and use of their funds. We question why any credit 

union should be subject to IRS Form 990 reporting. 

In fact, at the November 3 hearing, we understood the IRS witness to question 

whether the Form 990 provides information addressing the questions raised by 

members of the committee. At one time, the IRS relied upon a group 990 form from 

NCUA on behalf of federal credit unions, and decided years ago that that form was 

unnecessary. And, as authorized by the Service, 22 states today provide a group 990 

on behalf of state chartered credit unions in their state. 

The 990 form does contain one line (line 78a) referencing the 990–T filing responsibility. As explained in our testimony on page 8, credit unions have been trying for 

a number of years to obtain guidance from the IRS on the possible application of 

the Unrelated Business Income Tax (UBIT) provisions to state chartered credit 

unions. UBIT is a complicated area, and as depository institutions, credit unions 

have some unique issues that need to be addressed. CUNA thinks it is unreasonable 

to expect any credit union to be filing Form 990–T forms until adequate, public 

guidance is issued. 

Assertion: Because of possible concerns raised about some charitable organizations misappropriating funds to pay exorbitant salaries, credit 

unions should make public the compensation they pay their senior officials. 

CUNA response: We think there is an understandable sensitivity of many credit 

union CEOs about having their salary publicly disclosed. More importantly, we do 

not consider there to be a parallel between charitable organizations which publicly 

solicit funds for a stated goal of carrying out charitable activities and credit unions 

which receive funds from their members for the stated goal of providing them a good 

return on their deposits and a good rate on their loans. 

Volunteer, unpaid credit union boards of directors set the salary and benefits of 

their CEOs. They do so in a competitive environment, and draw upon surveys, such 

as those done by CUNA, to determine appropriate compensation packages. 

Assertion: Credit unions are not subject to sufficient internal control requirements. 

CUNA response: There is no basis for any statement that credit unions lack adequate internal controls, and an effective system of internal controls is a very high 

priority for each credit union, credit union regulators, the National Credit Union 

Share Insurance Fund, and private companies that provide credit unions with fidelity bond and other insurance coverage. 

A review of the NCUA Examiner Guide shows that continual review and monitoring of internal controls at credit unions is expected by the credit union itself and 

by its examiner. Obviously, the specific internal control system in place will vary 

based on the size of the credit union, but the long history of the success of the credit 

union movement and the soundness of the National Credit Union Share Insurance 

Fund demonstrate that internal controls are not a problem in the credit union movement. 

II. SERVING PEOPLE OF MODEST MEANS 

Assertion: Credit unions underperform banks in lending to low and moderate-income and minority borrowers, and banks deny fewer loan applications from underserved populations than credit unions do. 

CUNA response: The reality is that credit unions for the past two years have 

granted a greater proportion of their loans to low- and moderate-income (LMI) borrowers than other lenders have, in reviewing Home Mortgage Disclosure Act 

(HMDA) data. In 2004, credit unions made a greater proportion of combined loans 

to LMI borrowers (27.6%) than did all other lenders (26.6%). The credit union adVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00217 Fmt 6633 Sfmt 6621 E:\HR\OC\26372.XXX 26372

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vantage was even greater, 29% to 25.9%, in purchase loans, an even more important 

type of lending to help people, including first timers, to buy homes. 

We recognize the percent differentials are not dramatic, but there is a good reason 

why we expect to see greater increases in the near future. Until quite recently, credit unions labored under rules that primarily limited membership to occupational 

groups large enough to support a credit union’s operations. In the 1980s, credit 

unions were permitted to add smaller employee groups, but significant growth of 

community based credit unions and permission to expand into underserved areas 

are a much more recent events. Thus, until very recently, unless one worked for a 

relatively large employer, one was unlikely to be eligible to join a credit union. 

Under these rules, credit unions developed into powerful sources of financial services for working Americans. It’s no wonder that credit union membership became 

concentrated in middle and upper middle-income groups. 

With the passage of the Credit Union Membership Access Act of 1998 (PL 105– 

219), adding additional select employee groups, taking on a community charter, or 

adding underserved areas to the field of membership became more feasible. However, this could not have been expected to lead to an immediate change in the income distribution of credit union members. It takes time for credit unions to reach 

out to new markets. It also takes time for potential members to learn of and take 

advantage of what credit unions have to offer. 

Bankers and some community groups are misinterpreting the HMDA data if they 

conclude that banks deny fewer loan applications from underserved populations 

than credit unions do. Since credit unions actually deny far fewer mortgage loan applications across the board than other lenders, from both lower income and other 

applicants, the denial disparity ratio is a misleading measure of performance of 

lending to LMI borrowers. In 2004, 74.1% of applications from LMI applicants were 

approved by credit unions compared to only 51.1% at other lenders. CUNA will provide the committee with a detailed analysis of HMDA data upon request. 

We note with interest that on October 31, 2005—in the same week that the banking industry testified to the committee about credit unions’ ‘‘inadequacies’’ in serving 

low-income people—the banking industry sued NCUA to stop federal community 

credit unions from adding underserved areas to their charters. As we stated at that 

time, this shows that the banking industry’s only real agenda is to squelch competition from more consumer-friendly institutions. 

Assertion: Credit unions should not engage in business lending because it detracts 

from lending they can do to lower-income consumers. 

CUNA response: On the contrary, the type of business lending by credit unions 

is very likely to create jobs for people of modest means. A credit union business loan 

averages about $150,000. As the U.S. Treasury Department 2001 study on business 

lending by credit unions reported, credit union member business loans are disproportionately made to businesses owned by households with modest incomes. 

Treasury reported that 25.3% of member business loans were made to members 

with household incomes of less than $30,000 and another 20% were to household 

incomes between $30,000 and $50,000. 

A credit union business loan can very well be that key ‘‘helping hand’’ for a person 

of modest means to reach the American dream. 

Assertion: Credit unions do not want any measurement standards imposed to 

evaluate their service to people of modest means. 

CUNA response: When a federal credit union applies for a community charter, 

or adds a low-income area to its field of membership, it must submit a business plan 

showing how it plans to serve all segments of the community. The credit union’s 

subsequent implementation of this plan is subject to review by NCUA examiners. 

Credit unions welcome this kind of oversight. 

Credit unions’ objections to past proposals for data collection on service to lowand moderate-income people hve been based on flaws in those specific proposals, not 

from any categorical rejection of some form of tailored, appropriate, and not unduly 

burdensome form of measurement. Application of bank-type Community Reinvestment Act (CRA) standards on credit unions is inappropriate for several reasons: 

• Credit unions do not have the history of ‘‘redlining’’ that the banking industry 

does, and CRA’s approach was designed largely to deal with that history. 

• CRA was intended in part to address the tendency of large banks to receive deposits from one community and lend them elsewhere, even in other countries, 

whereas credit unions are overwhelmingly local in nature, with few opportunities to engage in this abuse. 

• CRA’s measurements take into account only lending activities and investments, 

completely ignoring the provision of low-cost depository service to promote thrift 


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among the underserved, which has always been a fundamental purpose of credit 

unions. 

• CRA was designed for financial institutions that can serve any customer who 

comes in the door, whereas the vast majority of credit unions remain occupationally based, and thus have less opportunity to serve low-income people. 

The Community Action Plan (CAP) eventually by NCUA several years ago included many of the same flaws as CRA, and was rejected by the NCUA Board. The 

comments made by various members of the Ways and Means Committee during the 

hearing earlier this month will certainly encourage further discussion on this subject within the credit union movement about a system of measurement that takes 

into account the unique structure, history, mission, and regulatory restrictions on 

credit unions. 

III. COMPETITION 

Assertion: Credit unions are like mutual savings banks, which pay federal 

income taxes, so credit unions should be taxed too. 

CUNA response: Untaxed credit unions are not like taxed mutual banks. If they 

were alike, the simple solution for the mutual bank would be to convert to a credit 

union to eliminate taxation. So Congress should ask the mutual bank why it does 

not just convert to a credit union if both institutions are similar, rather than ask 

a credit union to try to explain why it’s not like a mutual bank. 

The honest answer is that credit unions and mutual banks differ, and differ significantly. The differences are not in the powers and services offered to consumers, 

because consumers everywhere expect a modern array of financial services. As our 

testimony explains in detail, the differences are fundamentally in structure. A mutual bank would have to limit its market, curtail its investments, stop permitting 

weighted voting, stop paying its directors, stop having proxy voting, and so forth. 

Credit unions are driven by service to their members. While mutual banks do not 

have the divided loyalties that banks with stockholders demonstrate, mutually organized banks clearly do not have the same mission as credit unions do. 

Assertion: Many credit unions have broadened their fields of membership in recent years and grown quite large, and therefore should be taxed. 

CUNA response: Larger or more complex credit unions have not strayed from 

their mission of providing financial services on a cooperative basis. Navy Federal 

Credit Union, the largest credit union in the United States, and GECU, a community credit union serving El Paso, Texas, testified about the diversity of programs 

they offer to meet the financial needs of members at all levels of the income spectrum. At they pointed out, for a financial cooperative for operate safely and soundly, 

it must have members who can save in order to have members who can borrow. In 

fact, economies of scale make it more likely for a larger credit union to offer more 

affordable and consumer-friendly services to members of modest means. 

As CUNA’s testimony discusses at length, the credit union tax-exemption was not 

granted because of small size, limited fields of membership, or limited services to 

the membership. Credit unions grow large because of the nature of their field of 

membership and their success in serving the people eligible for membership. A large 

credit union as measured by its aggregate assets does not mean that it is serving 

richer people, but more people. The largest credit unions in the country today have 

grown based on service to millions of workers from the military services, the airlines 

industry, federal, state and local governments and utility companies, among other 

consumers. 

Assertion: Mutual thrift institutions and mutual insurance companies are 

taxed and have thrived, and there is no reason to believe that credit 

unions, if taxed, would not fare as well. 

CUNA response: Taxing credit unions would erode credit unions’ ability to build 

and maintain their net worth through retained earnings. Over time and under certain economic conditions, this erosion could present safety and soundness problems. 

Moreover, taxation would lead many credit unions to seriously consider whether 

they should convert, via a mutual bank conversion, to a stock bank. The reality is 

that many mutual thrift institutions have converted to stock banks over time. In 

fact, credit unions are getting sales pitches about the merits of conversion to mutual 

banks from law firms who have built a book of business on conversions and have 

found their potential client base notably shrinking. 

The erosion of credit unions’ ability to maintain solid net worth should be of particular concern to the Congress because of the unique federal share insurance program Congress created in 1984. Mutual insurance companies are not covered by a 

federal insurance program, and deposits in mutual thrift institutions are insured by 


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the FDIC. Both the FDIC and the National Credit Union Share Insurance Fund are 

backed by the full faith and credit of the United States government. 

Unlike the FDIC program, however, the NCUSIF by law requires credit unions 

to deposit an amount equal to 1% of their federally insured funds with the U.S. 

Treasury and to replenish the 1% from their retained earnings if financial troubles 

throughout the credit union system requires large NCUSIF payouts. As a credit 

union grows, it is required to add more funds to maintain the 1% level. The FDIC 

insurance program has no such continual support structure from the banking industry. Taxation of credit unions would require reconsideration of whether the unique 

NCUSIF’s funding mechanism, which is beneficial to the American taxpayer, should 

continue. 

Unlike mutual thrifts and mutual insurance companies, credit unions are run by 

volunteer boards, a fundamental characteristic of credit unions. This volunteerism 

helps ensure that management decisions are made for the benefit of members, not 

for the benefit of the decision-makers’ own pockets. Taxation would undoubtedly 

also erode volunteerism since paying board and committee members would become 

a deductible expense. 

Again, thank you for the opportunity to submit additional information for the November 3, 2005 hearing record. I will be happy to respond to any further questions 

you may have. 

Sincerely, 

Daniel A. Mica 

f 

President & CEO 

Statement of Minnesota Bankers Association, Edina, Minnesota 

Introduction 

Chairman Thomas, Ranking Member Rangel and members of the Committee, all 

of us at the Minnesota Bankers Association (MBA) appreciate that the Ways and 

Means Committee is holding a hearing on whether credit unions should continue to 

enjoy their current tax advantages. We are pleased to have the opportunity to provide our comments on this very important subject. 

The MBA represents more than 460 Minnesota banks, ranging in size from small community banks with $10 million in assets up to large regional banks. Of our 460 

member banks, the median size is roughly $58 million in assets. Given the fact that 

we have such a strong community banking tradition, the credit union issue is especially important to bankers in Minnesota. 

The Minnesota banks do an excellent job of serving their consumer, business and 

agricultural customers. Our bankers are extremely active in their communities. 

They give their time and resources to help make their communities stronger. And 

of course our banks and bankers pay their fair share of local, state and federal taxes 

to support our government programs. 

We believe that it is absolutely crucial that Congress consider whether today’s 

credit unions should continue to enjoy their tax advantages. Our bankers support 

reviewing whether there is still a solid public policy justification for the credit union 

industry’s tax exempt status, given the significant changes that have occurred in 

that industry. It is important to question whether the credit union tax exemption 

really benefits the American public and whether it is consistent with our overall tax 

policy. 

This issue is challenging because there are some credit unions that remain true 

to the original credit union concept. These true credit unions serve a fairly tightknit group and work to meet the needs of low- and moderate-income persons. On 

the other hand, many high-visibility credit unions have dramatically changed. These 

‘‘morphed’’ credit unions bear little resemblance to the original credit union concept. 

We would argue that these morphed credit unions should therefore lose their tax 

advantages. 

The MBA is affiliated with both the American Bankers Association and America’s 

Community Bankers. Both these national groups have submitted testimony on this 

issue. We support that testimony, and we will not repeat all the arguments included 

in their statements. Our statement will primarily address two major points, focusing 

on the Minnesota marketplace. 

I. Many complex credit unions operate in a manner that is not consistent with 

the original credit union concept, meaning they should lose their tax exemption 

II. Organizationally, mutual savings banks are very similar to credit unions, but 

mutual savings banks pay taxes 


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1 CUNA Membership Survey, 2002. 

2 Credit Unions: Financial Condition Has Improved, but Opportunities Exist to Enhance Oversight and Share Insurance Management. General Accounting Office, October, 2003 (GAO–04– 

91), p. 20 3GAO–04–91, p. 23. 

I. Many Complex Credit Unions Operate in a Manner That Is Not Consistent With the Original Credit Union Concept, Meaning They Should 

Lose Their Tax Exemption 

Morphed Credit Unions No Longer Focus on People of Small Means 

Traditionally, credit unions have served people of small means. Credit unions 

were formed so that all working-class people would have access to credit. That focus 

on low- and moderate-income persons has long been held out as the public policy 

reason that justifies the credit union industry’s tax advantages. 

However, some credit unions have lost their focus. Studies show that banks do 

a better job of serving low- and moderate-income persons than credit unions do. The 

Credit Union National Association conducted a national member survey in 2002. 

The survey showed that the average credit union member has higher income, is better educated and is more likely to be in a professional occupation than an average 

non-member. Specifically, that study showed that the average household income of 

credit union members is 20 percent higher than that of non-members, $55,120 

versus $45,790.1

The Government Accounting Office (GAO) also reached the same conclusion in a 

recent study. The GAO stated that credit unions have had a historical emphasis on 

serving people of modest means. However, after reviewing currently available data, 

the GAO found that banks more effectively serve low- and moderate-income persons 

than credit unions do. The GAO report stated that 36 percent of households that 

only or primarily used credit unions had low or moderate incomes, while 42 percent 

of households that only or primarily used banks had low or moderate incomes.2

Similarly, credit unions made a higher percentage of HMDA-reportable loans to 

middle- and high-income borrowers and a lower percentage of these loans to lowand moderate-income borrowers than banks did.3

Consistent with those national statistics, we see specific examples where Minnesota credit unions specifically target wealthy people. 

• Think Federal Credit Union is headquartered in Rochester, MN. That credit 

union’s 2003 Annual Report states, ‘‘Yesterday our challenge was to provide financial services to members who could not get services elsewhere. Today our 

challenge is to provide financial services to members who can get services anywhere.’’ This $1.1 billion credit union has clearly lost its focus. Should it continue to receive tax advantages so that it can compete directly against tax paying financial services providers for the same customers? 

• Topline Federal Credit Union is headquartered in Maple Grove, MN, a fastgrowing suburb of Minneapolis. This credit union actively markets its ‘‘Big Toy 

Loans’’ so that its wealthy members can buy expensive luxury items like motor 

homes, powerboats and sailboats. www.toplinecu.com/services/loans.htm. 

• South Metro Federal Credit Union, headquartered in Prior Lake, MN, also actively markets to the wealthy, touting its wealth management and trust services to current and prospective members at www.southmet.com/invest.htm. This 

credit union is also unveiling its new Travel Club, featuring Alaska and Rhine 

River Cruises. 

These are great marketing plans, but they show how far some credit unions have 

gone from the original credit union mission. We argue that continuing to give taxadvantaged financial services to wealthy people is bad public policy. We do not give 

food stamps or subsidized housing to wealthy people. Why should wealthy people 

receive tax-advantaged financial services? 

While we see lots of credit union marketing and outreach to the wealthy, we do 

not see a lot of marketing of basic financial services to low- and moderate-income 

persons. It would be interesting to study the credit union industry’s branching patterns to see how many of the aggressive growth, morphed credit unions establish 

branches in low-income areas. 

Morphed Credit Unions Convert From Common Bond To Huge Community Charters 

Another of the original defining characteristics of traditional credit unions was 

that credit unions served people with a tight common bond. When all the members 

of the credit union worked at the same plant or attended the same church, the common bond ensured accountability. Increasingly, the most aggressive credit unions 


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4GAO–04–91, p. 35. 

have changed from a common bond to a large community charter. Nationally, the 

number of community-chartered credit unions more than doubled from 464 in 1999 

to 1,051 as of year-end 2004. This trend is significant because community based, 

mega-credit unions bear little resemblance to the original credit union concept. 

Federal law requires that any credit union that adopts a community charter must 

serve a ‘‘well-defined, local community.’’ Even with the legal requirement that community credit unions must serve a ‘‘local’’ community, the National Credit Union 

Administration (NCUA) continues to approve community charters that are larger 

and larger. A recent Government Accounting Office report indicated that the average size of a community credit union charter approved by the NCUA increased from 

a population of 134,000 in 1999 to 357,000 in 2003.4

Many of Minnesota’s most aggressive credit unions have changed from a common 

bond to a large community charter. 

• The newly renamed SouthPoint Federal Credit Union in Sleepy Eye, MN was 

originally chartered to serve the parishioners of St. Mary’s Catholic Church. It 

is now a fast-growing community credit union whose membership is open to 

people who live, work, worship or attend school in Brown, Redwood, or Renville 

Counties. See www.cuathome.coop/ASP/home.asp • Central Minnesota Federal Credit Union, headquartered in Melrose, MN, has 

a large geographic territory that is nearly 75 miles wide and 100 miles long. 

It covers all or part of eight counties. The NCUA allowed this credit union to 

have a non-contiguous field of membership. In addition to its regular territory, 

this credit union added the affluent lakes area north of Willmar, MN. See 

www.centralmnfcu.org/ • Mid Minnesota Federal Credit Union is headquartered in Brainerd, MN. Its geographic territory is also more than 100 miles long and 90 miles wide and includes all of six counties and part of a seventh county. The Brainerd lakes area, 

some of our state’s most expensive recreational real estate, is included in this 

credit union’s territory. See www.mmfcu.org/asp/services/service—1—5.asp • U.S. Federal Credit Union originally served military officers, but it now has one 

of Minnesota’s biggest community charters from a population standpoint. Membership is now open to anyone who lives, works, volunteers, worships, or attends school in Anoka, Carver, Dakota, Hennepin, Ramsey, Scott, and Washington Counties. See www.usfed.org/home/?pageLabel=home. The 2000 census 

showed 2.6 million people living in this area. There are over 100 cities and 49 

school districts in these counties. 

The vast majority of the morphed credit unions are choosing a community charter. 

These credit unions compete directly against banks and other financial institutions 

for the same customers. The members of these huge credit unions do not have the 

strong affinity that the members of the traditional credit unions have. These credit 

unions use their tax advantage to gain new members, fueling further growth and 

expansion. The cooperative structure remains, but as a morphed credit union grows, 

its members look less like owners and more like depositors of the institution. The 

Mid Minnesota Federal Credit Union’s website is a perfect example of how the lines 

become blurred for these morphed credit unions. The website states that ‘‘a simple 

$5 deposit will make you a member/owner’’ of the credit union. See www.mmfcu.org/ 

asp/services/service—1—5.asp 

When you compare these morphed credit unions to banks, you see that they offer 

nearly identical financial products and services to the same potential customers. 

They have lost the main characteristics of the original credit unions, which are the 

very characteristics that justified their tax exemptions. These organizations can best 

be described as tax-exempt banks. 

Morphed Credit Unions Are Making Big Business Loans 

Credit unions were originally formed to serve people of small means, but many 

morphed credit unions are dramatically increasing their business loan portfolios. 

While some of these loans are relatively small loans to sole proprietors, credit 

unions also make large, complex commercial loans to corporations. The credit union 

industry’s business lending has significantly increased over the past couple years. 

It jumped almost 50 percent in 2004. Minnesota credit unions are getting into this 

market, making business loans to their members and to non-members. 

We can think of no public policy reason to allow credit unions to serve corporate 

customers. There is simply no justification for allowing corporations to receive taxadvantaged financial services. Many of the morphed credit unions are making a 

major commitment to commercial lending. This fundamental shift in their marVerDate Aug 31 2005 07:09 Apr 13, 2006 Jkt 026372 PO 00000 Frm 00222 Fmt 6633 Sfmt 6621 E:\HR\OC\26372.XXX 26372

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keting focus shows how far they have strayed from the original credit union concept. 

The credit unions have introduced legislation, the Credit Union Regulatory Improvement Act (CURIA), which would allow morphed credit unions to stray even further 

from their original purpose by increasing their commercial lending limits. We 

strongly oppose that expansion. 

II. Organizationally, Mutual Savings Banks Are Very Similar To Credit 

Unions, But Mutual Savings Banks Pay Taxes 

Some credit union advocates have said that their cooperative structure justifies 

their tax advantages. That argument is simply wrong. Credit unions and mutual 

savings banks have a very similar cooperative structure, but mutual savings banks 

pay federal income taxes. Subchapter T of the tax code could easily be applied to 

credit unions, just like it is applied to other mutually-owned organizations. 

The tax treatment of mutual savings banks is instructive. Before 1951 mutuallyowned companies, like mutual savings banks and mutual insurance companies, 

were tax exempt. However, Congress repealed the tax exemption because the mutual companies had matured and were providing a broad range of products that 

competed directly against tax-paying entities. In 1959 the House Ways and Means 

Committee listed some considerations it would use when reviewing the tax treatment of an industry. Those considerations include equity and fairness and allowing 

free play of the market. 

Applying that criteria and reasoning to the morphed credit unions, one would conclude that it is time to tax these credit unions. The morphed credit unions have seen 

incredible growth, due in large part to their tax advantages, and they are stable and 

mature. These credit unions compete directly against tax-paying banks and thrifts, 

so fairness and equity would dictate that similar institutions have similar tax treatment. If the banks and the morphed credit unions were taxed similarly, the free 

market, not the credit unions’ tax treatment, would dictate winners and losers. 

Like all our member banks, Minnesota’s mutual savings banks compete directly 

against credit unions. Because their organizations are so similar to credit unions, 

the executives who manage our mutual savings banks are keenly aware of the significant tax advantages enjoyed by their credit union competitors. 

One member of our association, Brainerd Federal Savings & Loan, has roughly 

$60 million in assets. This mutual thrift competes directly against four credit 

unions, including Mid Minnesota Federal Credit Union, which has roughly $162 million in assets. Using that credit union’s publicly available data, the mutual thrift 

executive roughly calculated the amount of federal income taxes the credit union 

would have paid under Subchapter T. For 2004 the credit union would have paid 

approximately $490,000 in federal income taxes. Paying taxes should not have been 

a major problem for this particular credit union, which has been very profitable. It 

has also grown more than 330 percent in the last 10 years. 

Summary 

Again we want to thank the Committee for reviewing this important issue and 

for giving the MBA an opportunity to provide our thoughts. While some credit 

unions remain true to the original credit union mission, other credit unions have 

morphed into something that is significantly different. These credit unions have 

changed their business focus and are operating in a manner that is not consistent 

with the characteristics that justify the credit union tax exemption. Therefore, fairness and sound tax policy dictate that Congress should repeal their tax exemption. 

Respectfully submitted, 

Joseph J. Witt 

f 

President/CEO 

Wisconsin Federation of Cooperatives 

Madison, Wisconsin 53703 

November 2, 2005 

The Honorable Bill Thomas, Chair 

House Committee on Ways and Means 

United States House of Representatives 

2208 Rayburn House Office Building 

Washington, D.C. 20515 

Dear Chairman Thomas, 


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On behalf of the 6.4 million citizens of Minnesota and Wisconsin that own a cooperative, I would like to thank you for taking the time to review the differences between credit unions and other financial institutions. 

I am confident that a thorough examination of credit unions’ cooperative governance structure, their commitment to their communities and their not-for-profit nature will lead the Committee to conclude that further taxation of credit unions and 

their member/owners is not merited. Like other cooperatives, credit unions are 

owned and governed by those that use their services, and any change in tax status 

amounts to nothing more than a tax increase on 87 million Americans. 

In conclusion, I would point out that Congress first granted credit unions a federal tax exemption in 1937—not because of credit unions’ limited fields of membership, asset size, or types of services offered—but because they are organized and operated for mutual purposes without profit, and because they serve those who are 

not served by banks. Those reasons still hold true today. 

Thank you for your consideration of these comments. 

Sincerely, 

William L. Oemichen 

f 

President and CEO 

Port Orchard, Washington 98367 

November 5, 2005 

Committee on Ways and Means 

U.S. House of Representatives 

To begin taxing a cooperative can have a major impact on numerous associations 

in the United States, many of them agricultural in nature. Members of the cooperatives pay taxes on their individual gains. There are only a handful of credit unions 

in the top 100 cooperatives. 

The banking industry recognizes this advantage and many of them are converting 

to Limited Liability Corporations or S-corporations that have the same legal attributes as a C-corporation, however, the corporation does not pay income taxes on 

earnings, rather, the shareholder pays income tax on dividends on their personal 

income tax return. 

If the Ways and Means Committee contemplates removing the credit unions’ tax 

exemption, the same should apply to Limited Liability Corporations or S-corporations. 

Respectfully submitted, 

f 

Harold Slach 

North Carolina Bankers Association 

Raleigh, North Carolina 27619 

November 2, 2005 

The Honorable Bill Thomas, Chairman 

Committee on Ways & Means 

U.S. House of Representatives 

1102 Longworth House Office Building 

Washington, DC 20515 

Dear Chairman Thomas: 

The North Carolina Bankers Association (NCBA) is pleased to submit this comment in connection with the House Ways and Means Committee’s hearing entitled, 

‘‘Review of Credit Union Tax Exemption.’’ The NCBA is a trade association representing all 147 banks, savings institutions, and trust companies headquartered or 

doing business in North Carolina. 

The competitive pressure exerted by credit unions on the banking industry in 

North Carolina is substantial. While North Carolina banks and savings institutions 

welcome fair competition, the tax advantaged status enjoyed by credit unions has 

increasingly resulted in competitive inequalities. The problem can be traced to a 

new breed of credit unions which has emerged. These large, bank-like credit unions 

have abandoned their mandate of serving persons of modest means who share a 

‘‘common bond.’’ Instead, they now compete directly with banks for business and 

consumer customers and use their tax exempt status to fuel their rapid expansion. 


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The NCBA is extremely concerned about this development and would like to thank 

the Committee for examining this issue. 

Here are a few examples of North Carolina-based credit unions which illustrate 

the competitive inequalities. The State Employees’ Credit Union (SECU) is a statechartered credit union with an immense field of membership. It has 1.25 million 

members, assets of over $12.7 billion, 185 branch locations, and 860 ATMs. It competes directly with almost one hundred community banks, but is 44 times larger 

than the average-sized community bank. Although the banking industry is larger 

than the credit union industry as a whole, that distinction becomes meaningless 

when evaluating local, head-to-head competition. Banks struggle to compete with 

SECU on deposit and loan interest rates because banks must factor into their pricing the costs associated with the payment of taxes and compliance with consumer 

protection and community reinvestment regulations that are not applicable to the 

credit union industry. 

Another example of the aggressive, new-breed credit unions is Allegacy Federal 

Credit Union. It was founded in 1967 in Winston-Salem, North Carolina, to serve 

the employees of R.J. Reynolds Tobacco Company. Today, Allegacy has $1.09 billion 

in assets, over 98,000 members, and its field of membership now includes employees 

of over 350 businesses (along with their family members and members of their 

households), 23 associations, and two communities. Allegacy’s Web site boasts, 

‘‘Among [its] current sponsor companies are the two largest medical organizations 

in the southeast, three nationally prominent law firms, a number of large, well-respected advertising agencies in both New York City and North Carolina, as well as 

many technology businesses.’’ 

Consider Truliant Federal Credit Union, which is also based in Winston-Salem, 

North Carolina. Chartered in 1952, Truliant now has $1.03 billion in assets, over 

178,000 members, and a field of membership that includes over 800 businesses, 24 

counties in North Carolina, and communities in South Carolina and Virginia. It is 

hard to imagine how the common bond requirement of the Federal Credit Union Act 

is truly met when membership is open to anyone in nearly a quarter of the counties 

in the state. 

Other credit unions are taking notice of these techniques. Charlotte Metro Credit Union, which has $126 million in assets and over 32,000 members, proclaims on its 

Web site, ‘‘If you live, work, worship or study in Mecklenburg, Iredell, or Union 

County you are eligible to join Charlotte Metro Credit Union.’’ The City of Charlotte 

and the surrounding metropolitan region is the most populous in the state. Charlotte is also the headquarters for a number of state and national banks. The notion 

that Charlotte Metro Credit Union serves a clearly defined and underserved ‘‘community’’ is absurd. 

Perhaps one of the most troubling examples is Coastal Federal Credit Union 

based in Raleigh, North Carolina. Coastal was originally chartered in 1967 to serve 

the employees of IBM Corporation. Today, Coastal has $1.54 billion in assets, over 

148,000 members, and has a field of membership that includes employees of over 

1,000 companies and associations as well as their family members and members of 

their households. Coastal promotes on its Web site the ease with which anyone can 

walk into a branch with $10 and become a member saying, ‘‘The Coastal Capital 

Club is a non-profit association established to promote the education and benefits 

of savings, investments, and retirement planning. By joining the Coastal Capital 

Club for a one-time non-refundable $10 membership fee, you qualify for Coastal 

Federal Credit Union membership.’’ The National Credit Union Administration is 

turning a blind eye to this blatant overreaching to attract members. 

These large, new breed credit unions are also aggressively seeking business lending opportunities. A March 30, 2005, article of Credit Union Times is illustrative 

in this regard. The article reports that Coastal Federal Credit Union launched a 

member business lending (MBL) division in 2003, saying, ‘‘In less than two years, 

the credit union has closed $120 million in MBLs and sold $63 million in business 

loan participations.’’ Increasingly, Coastal has ventured into complex commercial 

real estate transactions above the $1 million mark ‘‘with the average loan being 

about $4.2 million.’’ To get around the National Credit Union Administration’s 12.25 

percent of assets MBL cap, Coastal has brought in credit unions in North Carolina, 

Virginia, Oregon, Texas, and Florida for participations. Meanwhile, Coastal’s business credit card services are described as ‘‘robust with several hundred cards in rotation with limits ranging between $25,000 and $100,000.’’ 

These highly vocal, large credit unions are clamoring for increased powers, while 

using the veil of regulatory relief. The Credit Union Regulatory Improvements Act 

of 2005, H.R. 2317, which is currently under consideration, would expand credit 

unions’ business lending authority from the current cap of 12.25 percent to 20 percent of total assets and would exclude all business loans of less than $100,000 from 


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the cap, up from the current $50,000 cap. The caps were put into place by Congress 

to help ensure that credit unions focus on serving people of modest means instead 

of making multi-million dollar commercial loans. The new breed of credit unions has 

left that mission behind and consequently the rationale for retaining their tax exempt status is no longer valid. 

One argument for retaining the Internal Revenue Code Section 501(c) tax exemption that has been consistently advanced by the credit union industry is that imposing taxation would be devastating to the industry. If the credit union industries in 

Canada and Australia are any guide, the American credit union industry’s argument is unfounded. In Canada, credit unions have been taxed since 1972, while the 

Australian government phased in taxation of that nation’s credit unions over a three 

year period during the 1990s. The credit union industries in those two countries 

have now been subject to taxation for years, but they continue to thrive. 

Another argument that has been advanced for credit unions retaining their tax 

exemption is that they are cooperative, member-owned and not-for-profit. As others 

have noted, many banks and savings institutions are also cooperatively owned and 

reinvest their profits in the institution or in the community. These mutual banks 

and savings associations lost their tax exemption in 1952 when Congress determined that they were in active competition with commercial banks. At the time, mutual banks and savings associations could not operate outside a 50-mile radius and 

could not offer checking accounts or commercial loans. The credit unions of today 

already have far broader powers than the mutual banks and savings associations 

had available to them when they became subject to corporate taxation. 

The Credit Union National Association’s own statistics indicate that credit union 

members have a higher average household income than nonmembers and General 

Accounting Office statistics also support that conclusion. A Tax Foundation study 

placed the tax loss from perpetuating the credit union tax exemption at $12.6 billion 

between 2004 and 2008. When a single American family pays more tax than the 

entire credit union industry, something is wrong. The new breed of credit unions 

opens its doors to practically anyone and can afford to sponsor sporting events and 

pay for multi-million dollar headquarters, but it balks at the idea of paying its fair 

share. The competitive inequalities which have emerged need to be addressed. The 

banking industry in North Carolina welcomes fair competition and thanks the Committee for examining this important issue. 

If you have any questions, please do not hesitate to contact me. 

Sincerely, 

Thad Woodard 

President & CEO 

Æ 


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