United States Government Accountability Office

GAO Testimony 

Before the Committee on Ways and 

Means, House of Representatives

FINANCIAL INSTITUTIONS

Issues Regarding the TaxExempt Status of Credit 

Unions 

Statement of Richard J. Hillman, Managing Director 

Financial Markets and Community Investments 

For Release on Delivery

Expected at 10:00 a.m. EDT 

Thursday, November 3, 2005

 

GAO-06-220T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

November 3, 2005

FINANCIAL INSTITUTIONS 

Issues Regarding the Tax-Exempt Status 

Highlights of GAO-06-220T, testimony of Credit Unions 

before the Committee on Ways and 

Means, House of Representatives 

Unlike other depository

institutions, credit unions are

exempt from federal corporate 

income taxes. Recent legislative

and regulatory changes to credit

union membership restrictions and

allowable products and services 

have blurred some of the historical 

distinctions between credit unions

and other depository institutions. 

As a result, some observers have 

raised questions about whether tax 

exemption provides credit unions 

with an advantage over other

depository institutions and whether

the original basis for tax exemption 

is still valid. 

As part of its continuing oversight 

of the tax-exempt sector, the House 

Committee on Ways and Means 

asked GAO to address (1) the 

historical basis for the tax-exempt 

status of credit unions; (2) the 

arguments for and against taxation, 

including estimates of potential 

revenue from eliminating the

exemption; (3) the extent to which 

credit unions offer services distinct 

from those offered by banks of

comparable size, and serve low-and

moderate-income individuals; and 

(4) the extent to which credit 

unions are required to report 

information on executive

compensation and assessments of 

their internal controls. 

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 remained 

exempted. The act’s legislative history is silent regarding why the tax-exempt 

status of credit unions was not revoked. More recently, the Credit Union 

Membership Access Act of 1998 indicates that credit unions continue to be 

exempt because of their cooperative, not-for-profit structure, which is 

distinct from other depository institutions, and because credit unions 

historically have emphasized serving people of modest means. 

Arguments for taxing credit unions center on creating a “level playing field” 

since credit unions now compete more directly with banks. Proponents also 

point to associated potential revenues, with federal estimates ranging from 

$1.2 billion to $1.6 billion per year. Opponents of taxation argue that credit 

unions remain distinct—organizationally and operationally—from other 

financial institutions and taxation would impair their capital levels. 

Prior GAO work has found that relatively large credit unions offer many of 

the same services that same-sized banks offer, while smaller credit unions 

tend to provide more basic financial services. Limited comprehensive data 

exist on the income of credit union members. GAO’s assessment of Federal 

Reserve data suggested that credit unions served a slightly lower proportion 

of low- and moderate-income households than banks, but the lack of 

comprehensive data prevents definitive conclusions. 

Most credit unions are not subject to reporting requirements that provide 

information on executive compensation or internal controls. Specifically,

federal credit unions are not required to file the Internal Revenue Service 

form that most other tax-exempt entities must file and some states allow 

credit unions to file on a group basis. Further, credit unions are not subject 

to internal control reporting requirements applicable to banks and thrifts, an 

item we identified for Congressional action in 2003.

Credit Union Industry Size and Assets Distribution, as of December 31, 2004 

www.gao.gov/cgi-bin/getrpt?GAO-06-220T.

To view the full product, click on the link 

above. For more information, contact Richard 

Hillman at (202) 512-8678 or 

hillmanr@gao.gov.
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 taxexempt 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 completed 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; 

 1

Qualified 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 Scorporations, see GAO, Banking Taxation: Implications of Proposed Revisions

Governing S-Corporations on Community Banks, GAO/GGD-00-159 (Washington, D.C.: 

Jun. 23, 2000). 

2

GAO, 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). 

3

 GAO, 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). 

Page 1 GAO-06-220T 
• 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, 

 4

See 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. 

Page 2 GAO-06-220T 
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. 

Additionally, 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 lowincome 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. 

 5

GAO-04-91. 

Page 3 GAO-06-220T 
• 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 SarbanesOxley 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. 

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) taxexempt. 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 

Background 

 6

Most 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. 

7

GAO-04-91. 

Page 4 GAO-06-220T 
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 single-bond 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 community-bond credit union. Further, credit unions 

can offer members additional services 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

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 

Rationale for the 

Historical Tax 

Exemption of Credit

Unions

 8

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

membership regulatory policies.

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). 

10Internal 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. 

Page 5 GAO-06-220T 
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. 

 11Public Law 63-16. 

12Public Law 64-271. 

13Public Law 416. 

14H.R. Rep. No. 75-1579, at 2 (1937). 

15Public Law 80-183. 

Page 6 GAO-06-220T 
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 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.

 16S. Rep. No. 82-781 (1951). 

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. 

Page 7 GAO-06-220T 
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. 

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. 

Arguments for and 

against Taxation of 

Credit Unions 

Arguments for Taxation 

 19See GAO, Banking Taxation: Implications of Proposed Revisions Governing SCorporations on Community Banks, GAO-00-159 (Washington, D.C.: June 2000). 

Page 8 GAO-06-220T 
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. 

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 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 

Arguments against 

Taxation 

 20See the President’s Tax Proposals to the Congress for Fairness, Growth, and Simplicity, 

May 1985, 247-248. 

21GAO-04-91, p.16. 

Page 9 GAO-06-220T 
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 

 22Representatives 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. 

Page 10 GAO-06-220T 
subject to certain restrictions on the number of shareholders and capital 

structure. For example, an S-corporation 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 S-corporation 

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 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

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

Estimates of the Potential 

Tax Revenues from Taxing 

Corporations Vary Widely 

Based on the Source and 

Underlying Assumptions 

 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). 

24U.S. Department of the Treasury estimates as published in Analytical Perspectives: 

Budget of the United States Government, Fiscal Year 2005, (Washington, D.C.: 2004). 

Page 11 GAO-06-220T 
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. 

 25Joint Committee on Taxation estimates as published in the Congressional Budget Office’s 

Budget Options (Washington, D.C.: February 2005). 

26John A. Tatom, Competitive Advantage: A Study of the Federal Tax Exemption for

Credit Unions (The Tax Foundation: Washington, D.C.: 2005). 

27Chmura Economics & Analytics, An Assessment of the Competitive Environment 

Between Credit Unions and Banks (Jefferson Institute for Public Policy: Virginia, May 

2004). 

Page 12 GAO-06-220T 
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 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 one-third 

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. 

Historical Distinctions 

between Credit 

Unions and Other 

Depository 

Institutions Have 

Continued to Blur 

Page 13 GAO-06-220T 
Figure 1: Credit Union Industry Size and Total Assets Distribution, as of December 31, 2004 

>$1 billion

>$500 million

to $1 billion

>$250 million

to $500 million

>$100 million

to $250 million

>$10 million

to $100 million

>$5 million

to $10 million

$5 million

or less

Credit

union assets Number of credit unions Percentage of total assets

1,382 1.6

3,604 18.89

644 15.8

266 14.5

147 15.5

2,873 0.9

98 32.9

Source: GAO analysis of NCUA Form 5300 data.

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. 

Page 14 GAO-06-220T 
Figure 2: Loan Types as a Percentage of Total Assets, Smallest versus Largest Credit Unions, 1992-2004 

Source: GAO analysis of NCUA Form 5300 data.

 New vehicle loans

 First mortgage loans

 Credit card loans

 Other real estate loans

 Used vehicle loans

 Member business loans

Percentage of total credit union assets

0

5

10

15

20

1992 1994 1996 1998 2000 2002 2004

1992 1994 1996 1998 2000 2002 2004

1992 1994 1996 1998 2000 2002 2004

1992 1994 1996 1998 2000 2002 2004

1992 1994 1996 1998 2000 2002 2004

1992 1994 1996 1998 2000 2002 2004

Percentage of total credit union assets

0

5

10

15

20

25

Percentage of total credit union assets

0

5

10

15

20

Percentage of total credit union assets

0

5

10

15

20

Percentage of total credit union assets

0

5

10

15

20

Percentage of total credit union assets

0

5

10

15

20

25

25

25

25

25 $100 million or less in assets

Over $1 billion in assets

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 

Page 15 GAO-06-220T 
automatic teller machines (ATM) and electronic banking (see table 1). 

While less than half of the smallest credit unions offered ATMs and onethird 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 representing around 6 percent of total assets of both 

Page 16 GAO-06-220T 
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.

 28Credit 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

year-end 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

industry—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.

Page 17 GAO-06-220T 
Figure 3: Percentages of Credit Unions and Banks Holding Various Loans, by Institution Size, as of December 31, 2004 

Institution 

assets range Number

Assets

(dollars

in billions)

Percentage of institutions with the loan type

$100 million

or less

Greater than $100

million, but less

than or equal to 

$250 million

Greater than $250

million, but less

than or equal to 

$500 million

Greater than $500

million, but less

than or equal to

$1 billion

Greater than

$1 billion

Total

7,859 $138

3,604 186

644

2,169

102

343

Credit unions

Banks

266

973

94

343

147

467

101

323

98

426

213

1,549

9,014

7,639

647

2,744

First mortgage

Junior mortgage

and home equity Credit card Other consumer 

Agricultural 

and business

Source: GAO analysis of NCUA and FDIC call report data.

46.5

96.3

97.4

98.7

98.9

98.3

99.3

97.9

100.0

96.7

53.1

97.4

%

97.8

74.8

95.1

98.5

97.0

98.6

96.8

100.0

95.1

62.0

85.9

56.6%

85.1

14.1

30.3

86.1

36.6

90.5

34.7

92.9

39.9

50.7

24.3

45.4%

97.4

100.0

98.9

100.0

98.3

100.0

97.9

100.0

97.2

99.9

97.9

99.8%

48.1

96.2

97.9

62.8

97.8

66.7

97.2

79.6

96.5

18.7

97.0

13.1%

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. 

Page 18 GAO-06-220T 
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 

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.

The Extent to Which 

Credit Unions Serve 

Persons of Modest 

Means Is Not 

Definitively Known 

because of Limited 

Data and Lack of 

Indicators 

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 

 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. 

31National Credit Union Administration v. First National Bank & Trust Company. 522

U.S. 479 (1998). 

32See 12 U.S.C. § 1759(b), (d), as amended. 

Page 19 GAO-06-220T 
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 

Dollars (in billions)

Year

Source: NCUA.

0

20

40

60

80

100

2000 2001 2002 2003 2004

0

50

100

150

200

250

2000 2001 2002 2003 2004

Multiple bond

Single bond

Community

50 45 48 48 46

39 38 36

41

36

17

13 14

9

19

Federally chartered credit unions by charter type Assets of federally chartered credit unions by charter type

Year

Percentage of credit unions

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 

 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. 

Page 20 GAO-06-220T 
“well-defined community, neighborhood or rural district,” but provides no 

guidance on how “local” or any other 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-

 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. 

Page 21 GAO-06-220T 
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 Lowand 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 moderateincome 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. 

 36CRA 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. §§ 2901, 2903, and 2906 (2000). Federal bank and thrift 

regulators conduct CRA examinations to evaluate the services that depository institutions 

provide to low- and moderate-income 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. 

Page 22 GAO-06-220T 
Figure 5: Income Characteristics of Households Using Credit Unions versus Banks,

and Low and Moderate Income versus Middle and High Income 

Percentage of households

Low and moderate income

Middle and upper income

Source: 2001 SCF.

42

58

36

64

0

10

20

30

40

50

60

70

Households

only and primarily

using banks

Households

only and primarily

using credit unions

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. 

Page 23 GAO-06-220T 
Figure 6: Income Characteristics of Households Using Credit Unions versus Banks,

by Four Income Categories

Percentage

16

26

19

16

22

17

43

41

Upper income

Middle income

Moderate income

Low income

Source: 2001 SCF.

0

10

20

30

40

50

Households only and

primarily using banks

Households only and

primarily using credit unions

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). 

Page 24 GAO-06-220T 
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 communities.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 lowincome 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 lowincome 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 

 39Credit 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). 

40 The 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. 

41 Section 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. 

Page 25 GAO-06-220T 
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; 

• access 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). 

 42A “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. 

Page 26 GAO-06-220T 
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. 

0

100

200

300

400

500

600

2000 2001 2002 2003 2004

Year

Source: NCUA.

Credit unions

 43Quoted from NCUA Chartering and Field Membership Manual, March 2003, p.3-4 & 3-5.

Page 27 GAO-06-220T 
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. 

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 taxexempt 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 

NCUA Has Not Fully 

Implemented Our 

Recommendation to 

Develop Indicators to 

Evaluate Credit Union 

Progress in Reaching the 

Underserved 

Credit Unions Lack 

Transparency on 

Executive 

Compensation and 

Larger Credit Unions 

Do Not Have to 

Report on 

Effectiveness of 

Internal Controls 

 44GAO-04-91, p. 83. 

Page 28 GAO-06-220T 
“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 taxexempt 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

 4512 U.S.C. § 1831m; 12 C.F.R. Part 363 (2003). 

Page 29 GAO-06-220T 
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 SarbanesOxley 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 

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 

Sarbanes-Oxley 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. 

Page 30 GAO-06-220T 
For further information regarding this testimony, please contact Richard 

Hillman at (202 512-8678) or hillmanr@gao.gov. Individuals making key 

contributions to this testimony include Janet Fong, May Lee, John Lord, 

Harry Medina, Jasminee Persaud, Barbara Roesmann, and Richard 

Vagnoni. 

Page 31 GAO-06-220T 

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