Tax-Exempt Credit Unions

Position

• ICBA urges Congress to end the unwarranted federal tax subsidy of growth-obsessed credit unions with $1 billion or more in assets and/or promote increased tax parity between credit unions and community banks.
• ICBA staunchly opposes credit unions’ exploitation of their tax subsidy and lax regulatory environment to acquire locally based community banks.
• ICBA urges Congress to use its oversight authority to investigate the National Credit Union Administration’s failure to adequately regulate and supervise the industry and to adhere to the original purpose of the credit union tax exemption.
• ICBA opposes expanded powers for credit union service organizations, which are independently owned, for profit, and not supervised by any federal agency, and supports legislation that would provide NCUA with authority to examine third-party service companies.
• ICBA opposes NCUA’s weakening of safeguards on commercial lending, field of membership, and the growing use of credit union subordinated debt, which allows outside investors to exploit the credit union tax subsidy.
• ICBA supports applying Community Reinvestment Act requirements to credit unions comparable to and with the same asset size distinctions as banks and thrifts.
• Credit unions should be subject to fair lending exams with the same frequency as banks. While FDIC reviews thousands of banks for compliance with fair lending laws every year, NCUA only conducts approximately 50 annual fair lending exams of credit unions and is not permitted to conduct fair lending exams of state-chartered credit unions.
• ICBA urges states to prohibit the placement of public deposits in tax-exempt credit unions.
• ICBA believes that federal credit unions should submit form 990 tax filings as do other tax-exempt organizations.
• ICBA stands ready to partner with state banking association campaigns to raise awareness among state legislators and the public, urging them to protect community banks and the communities they serve.

Background

Credit union acquisitions of banks surged to record levels, with 22 announced acquisitions in 2024, representing more than $11 billion in bank assets potentially lost. Ten of these deals crossed state lines. Credit unions are effectively “weaponizing” their tax subsidy and lax regulatory standards. Larger, out-of-market credit unions are displacing smaller, locally based community banks and other credit unions, creating an environment that is less competitive, has more systemic risk, and offers fewer choices for consumers and small businesses.

Credit unions used their tax exemption to avoid paying nearly $4 billion in federal income taxes in 2024 while holding $2.2 trillion in tax-free assets. Credit unions use this tax exemption to inflate the purchase price of banks to one-and-a-half times book value. The 450 credit unions with $1 billion or more in assets represent 80 percent of the industry’s assets but comprise only 10 percent of the total number of credit unions. The industry is increasingly top heavy.

Credit unions were chartered by Congress to enable people of small means with a “common bond” to pool their resources to meet their basic deposit, savings and borrowing needs. Credit unions have become larger, more complex, and bank-like in their size, powers, product and service offerings, and fields of membership. Credit unions comprise nearly half the country’s federally insured depositories. Credit union acquisitions of community banks and their branches have accelerated rapidly, with the last five years seeing approximately a 400 percent increase over the previous five years. NCUA has significantly deregulated field of membership (FOM) protections over that same time period.

State-level advocacy has been gaining momentum. To counter the negative impact of credit union-bank acquisitions, policymakers in several states have begun responding. Mississippi enacted a law requiring acquired bank assets to remain under the control of an FDIC-insured institution. The Nebraska banking department separately ruled that only chartered financial institutions organized to do business in the state may participate in a cross-industry acquisition or merger – rejecting an attempted bank acquisition by an out-of-state credit union. And Colorado state lawmakers voted down legislation to allow credit unions to hold municipal deposits and other public funds.

Advocate for Commonsense and Appropriately Tailored Laws and Regulations for Community Banks

ICBA believes that regulation should be calibrated to risk posed to consumers and to the financial system. Regulation that may be appropriate for a large, systemically risky bank with dedicated and expansive compliance resources is an unwarranted burden for a community bank and a diversion of critical resources. We urge policymakers to further refine and calibrate regulation of community banks so that they may better serve their communities.