NH banks to challenge credit unions' tax status
More than 20 New Hampshire bankers are headed to Washington, D.C., on Tuesday to make their case to the state's congressional delegation regarding the tax-exempt status of credit unions, which are taking a larger and larger slice of the financial services pie.
They'll be armed with a 35-page analysis compiled by well-known New Hampshire economist Brian Gottlob of PolEcon Research in Dover, full of charts and graphs to make the case that credit unions look and act like banks, and should be taxed accordingly.
Pressure from the nation's commercial and community banks to "level the playing field" with credit unions is nothing new, but the battle has taken on new urgency as credit unions propose higher limits on their ability to make business loans.
Given the strident tone struck by some of the state's bankers in a conference call with New Hampshire reporters on Thursday, competition between banks and credit unions is turning into all-out war in the state where the credit union was born.
Gottlob crunches the numbers to show that credit unions have been growing faster than banks since the Great Recession, and to support the banker's contention that credit unions are not doing their share to provide services in the poorest parts of the state.
He claims the primary objective of credit unions has shifted from serving low- and moderate-income consumers to capturing market share and boosting earnings to provide capital for expansion, especially since the credit unions are not subject to the Community Reinvestment Act, which mandates loans to low- and moderate-income borrowers.
Bank of New Hampshire President Mark Primeau, chairman of the state bankers association, singled out two of the largest credit unions in the state, Service Federal and St. Mary's, for what he called palatial new buildings in Portsmouth and Manchester respectively.
"No bank office in the state has anywhere near the size or expansiveness of those two buildings," he said.
The original restrictions on credit unions were designed to limit their ability to compete with banks by strictly defining who could be a depositor and borrower, with the idea that credit unions would use their tax advantage to serve low-income borrowers and depositors shunned by commercial banks.
St. Mary's, the first credit union in the nation, was originally chartered by French Canadian families in Manchester who were unserved by banks in the city at that time. St. Mary's is the only credit union in the country, because of its unique state-granted charter, that can accept anyone as a customer.
It's name is actually St. Mary's Bank, even though it operates as a credit union.
According to the Federal Credit Union Act of 1934, federal credit union memberships "shall be limited to groups having a common bond of occupation, or association or to groups within a well-defined neighborhood, community or rural district."
That distinction fell apart, as credit unions chose to define their "field of membership" with fairly broad geography. Several New Hampshire credit unions state on their websites that "membership is available to anyone living in New Hampshire."
Bankers are hoping, at the very least, that lawmakers will not raise the limit on commercial lending by credit unions from the current 12.25 percent of assets.
Ultimately, they are hoping to convince them that credit unions should pay the federal corporate income tax and the state business profits tax, as a matter of fairness and because government needs the money.
Taxing the credit unions in New Hampshire would raise $3 million each year for the state treasury, the bankers maintain.
The GFA Federal Credit Union, which started out as the Gardner (Mass.) Franco-American Credit Union, defines its "field of membership" as all of Worcester County and Southern New Hampshire. In a move that represents what the bankers are talking about, GFA became the first credit union in the country to acquire a community bank with the purchase of Monadnock Community Bank last year.
Tina M. Sbrega, president and CEO of GFA, said the distinction between banks and credit unions has been a benefit to consumers that lawmakers will be reluctant to change.
Credit unions face a number of restrictions in return for their tax-exempt status, she said. In addition to the limit on commercial lending and restrictions on membership, they cannot raise money in the stock market, and they cannot pay their directors.
Debate not new
Paul Gentile, president of the New Hampshire Credit Union League, said this debate is nothing new: "Congress has been asked to look at this over and over by the bankers, and it has reaffirmed every time the value of the tax exemption and the value of the credit union structure, which enables members to benefit through lower fees, better rates and higher dividends."
He said the growing market share of credit unions has a lot to do with consumer dissatisfaction with banks, and changes in the tax code won't affect that.
Gottlob observes in his report, "In part, this movement toward smaller institutions was in response to fallout from the housing market crash and financial crisis of the past decade, but it also reflects perceived differences in the satisfaction with, and price of, the service customers receive at banking institutions."
Absent any change in tax policy, credit unions will continue to grab market share because their tax-free status enables them to hoard capital and offer lower fees and higher interest rates, according to bankers.
That may be good for a small group of mostly well-off consumers in the short term, they say, but over the long haul it will mean less services for the most needy, less revenue for the government and an uneven playing field in the financial services sector.
"It's fundamentally an issue of fairness," said Primeau, "particularly in an era at the state and federal level when we have such severe budgetary issues."