By Hannah Wallace August 31, 2006

To the average consumer, not much differentiates LandMark Bank from Sarasota Coastal Credit Union. Both are Sarasota-based, both have roughly $200 million in assets and both lend to consumers and businesses in Southwest Florida. Customers can visit a handful of branches of either and feel comfortable knowing their money is insured by the federal government.

Unlike LandMark, though, Sarasota Coastal doesn't have to pay corporate taxes. The same is true for Tampa-based Suncoast Schools Federal Credit, the country's eighth-largest credit union, with $4.4 billion in assets.

That's because the Federal Credit Union Act of 1934 exempted credit unions from taxes to help blue-collar and marginalized groups get loans and financial services.

It would be an understatement to say that a lot has changed in the lending industry since then. Deregulation in the last 30 years has enabled banks to cross state lines, sell investments and consolidate, while credit unions started making mortgages, lending to businesses and offering services beyond their core membership.

When Coastal opened in 1953, for example, it served only teachers. But now anyone living, working or worshipping in Sarasota, Manatee and Charlotte counties can bank at one of Coastal's six branches.

That's got bankers crying foul, and not just in Florida.

After strong lobbying by the powerful American Bankers Association, Congress is looking into the tax-exempt status of credit unions and recently asked the industry to make a case for why it should continue to be tax exempt.

"If it walks like a bank, talks like a bank and acts like a bank, it's a bank," says Tom Quale, president and CEO of LandMark Bank, which opened in 2000 and has five branches. "It's unfair for them to operate just like a bank and have tax-exempt status."

"The lines have been blurred," agrees Jim Parrish, who was a banker for 30 years and is now a finance counselor for the Florida Small Business Development Center at the University of South Florida in Tampa. "Credit unions are even doing SBA loans."

Credit unions counter that being bigger doesn't mean they've deviated from their charter. "We don't have stockholders, and all of the profits go back to our membership in the form of lower rates" and higher interest rates on deposits, says Karen Kruszewski, vice president of marketing for Sarasota Coastal Credit Union. "We are a community credit union, and we serve more blue-collar, low-income people."

If Congress restricts credit union markets or takes away their tax-exempt status altogether, Florida's 4 million credit union customers, many of whom have learned to count on free checking and lower interest loans, could pay higher fees. And if that happens, credit unions would have a harder time competing against banks. Just like banks, credit unions have begun consolidating in recent years. In 1990 there were 14,543 credit unions; that number is down to 9,087 and expected to drop to 6,800 by 2015.

In November, the House Ways and Means Committee asked the National Credit Union Administration, the industry's government regulatory body, to gather information and make its case for continuing tax exemption. The NCUA is compiling data; no date has been set yet for another hearing.

Both bankers and credit union officials agree that if Congress acts at all, it probably won't take away the tax-exempt status of all credit unions, which also have a powerful lobbying voice now. But that's about all they agree upon.

A curtailing of credit union activities, either in the members or geographic areas they serve or the amount of business loans they can make (now limited to 12.5 percent of all loans) will either level the playing field for community banks, such as LandMark, that compete harder for local business, or spell the death of credit unions-depending on which side is talking.

"Once you start taxing credit unions, they become banks, to be acquired by bigger banks, and then they cease to exist," says Mark Ivester, vice president of communications for the Florida Credit Union League.

But banking interests point to billion-dollar credit unions like Suncoast and say it's a "matter of fairness."

"Credit unions are getting larger and larger," says Bret Rock, spokesman for the Florida Bankers Association. "They let you be a member regardless of where you live. They're not hiding the fact that anyone can join."

Forming a More Perfect Union

The first credit unions started in Europe in the mid-1800s. Workers and farmers pooled their money to lend to one another because it was the only way for them to get loans. The democratic, egalitarian idea spread to the United States, but Congress waited decades to give credit unions any kind of legal status.

Communities formed cooperatives informally until 1909, when the first state-chartered credit union opened in Massachusetts. The credit union movement grew dramatically. In passing the Federal Credit Union Act of 1934, Congress reasoned that credit unions were serving a public good by offering services to groups ignored by the bigger banks, thus earning tax-exempt status.

Credit unions became the place union autoworkers could get a loan for a washing machine or to start a Christmas fund. They weren't viewed as full-fledged financial service centers. But that started to change in 1982, when the National Credit Union Administration began allowing credit unions to expand services to businesses deemed too small to have their own. More than 150,000 unrelated groups joined credit unions during the next decade until the Supreme Court put a ban on the practice in 1996. The credit union industry began to organize, and that decision was overturned a few years later by Congress with the Credit Union Membership Act.

Whether businesses are small enough to qualify under the act has become a moot point as more credit unions, such as Coastal, change to a community charter, which allows them to serve anyone in a geographic area.

Today there are more than 9,000 credit unions, with 82 million members and deposits exceeding $520 billion. But banks still control 92 percent of the financial services market.

Bankers have grumbled about credit unions from the beginning, but in the last few years, as credit unions have expanded, they've started to roar. And they're especially outraged to see the name of a credit union atop a sports arena. Digital Federal Credit Union recently paid $5.2 million for the naming rights to the Centrum Center in Worcester, Mass. The ABA cited it repeatedly when it testified in front of the Ways and Means Committee.

"We don't want to take tax exemption from mom-and-pops," says Rock, a spokesman for the Florida Bankers Association in Tallahassee, one of the nation's most powerful banking lobbies. "We want the ones acting like banks to play by the same rules. Is it fair that a billion-dollar credit union pays less in taxes than a community bank?"

The credit union industry says that with banks controlling most of the lending business, they have nothing to complain about, and they're gearing up for a fight.

"We're not worried about making the case," says Ivester. "For 60 years, banks have been running around saying, 'It's just not fair and they have all these other tax breaks.' I don't want to hear about it."

Quale of LandMark says his bank paid $600,000 in taxes last year; and because Coastal doesn't pay federal income taxes, its lenders can undercut him on local business loans.

"It used to be aimed at teachers, and now anyone can join," Quale says. "It's at variance with the original charter. It's an overall industry issue that needs to be addressed."

Credit unions say they've had to expand to survive, and unlike banks, they're limited in commercial lending already. "The old-style memberships, such as those offered by businesses as a perk, are drying up," says Ivester. "Credit unions are simply reacting to the market."

Regardless of how big credit unions get, as long as banks control the market, Congress is unlikely to do anything, predicts Ben Bishop, chairman of the board of Allen C. Ewing & Company in Jacksonville, which provides corporate financial services to all types of lending institutions in Florida.

"It isn't right and it's unfair" for credit unions to be tax exempt, says Bishop. "But credit unions have an identity of serving the needs of the little fellow, and politicians aren't going to touch that. On the other side, banks are doing so well, it's awfully hard to feel sorry for them."

Bishop thinks the problem will take care of itself as many large credit unions decide to convert to a thrift charter, which enables them to have public offerings and operate for profit. A majority of their members have to approve the change, but a few credit unions have done so already, including Community Credit Union of Plano, Texas. "That will be the vehicle" that leads to the demise of credit unions, he says.

In the meantime, banking officials are encouraged that Congress is even questioning the tax exemption-something they didn't think possible 20 years ago. "We think it's a step in the right direction," says Rock. "It's just a matter of time."

Filed under
Show Comments