Financial Institutions: Issues Regarding the Tax-Exempt Status of
Credit Unions (03-NOV-05, GAO-06-220T).
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.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-06-220T
ACCNO: A40977
TITLE: Financial Institutions: Issues Regarding the Tax-Exempt
Status of Credit Unions
DATE: 11/03/2005
SUBJECT: Banking law
Banking regulation
Comparative analysis
Credit unions
Executive compensation
Financial institutions
Income taxes
Internal controls
Reporting requirements
Tax exempt organizations
Tax exempt status
Cooperatives
******************************************************************
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GAO-06-220T
Testimony
Before the Committee on Ways and Means, House of Representatives
United States Government Accountability Office
GAO
For Release on Delivery Expected at 10:00 a.m. EDT
Thursday, November 3, 2005
FINANCIAL INSTITUTIONS
Issues Regarding the Tax-Exempt Status of Credit Unions
Statement of Richard J. Hillman, Managing Director
Financial Markets and Community Investments
GAO-06-220T
Mr. Chairman Thomas and Members of the Committee:
I am pleased to be here today to discuss issues regarding the tax-exempt
status of credit unions. Credit unions are the only type of financial
institution currently exempt from federal income taxes.1 As we have noted
in a prior testimony before this Committee, the size of the tax-exempt
sector has grown in recent years in both the number and assets of
institutions.2 Today's hearing on issues related to the credit union
tax-exempt sector is timely in light of current and projected fiscal
imbalances and renewed emphasis on accountability and governance in both
the corporate and nonprofit sectors. A comprehensive examination could
help determine whether exempt entities such as credit unions are providing
services that are commensurate with their favored tax status, and whether
an adequate framework exists for ensuring that these entities are meeting
the requirements for tax-exempt status. The information that I am
providing today is based primarily on prior work completed on the credit
union industry and on ongoing work underway for this Committee.3
Based on your request, I will discuss:
o the historical basis for the tax-exempt status of credit
unions;
o 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;
o the extent to which credit unions offer services that are
distinct from those offered by banks of comparable size;
o 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
o 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:
o 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
o Recently, arguments for taxing credit unions have centered on
creating a "level playing field" among financial institutions in
terms of taxation, referencing the notable recent growth of the
credit union industry to support the idea that credit unions
compete more and more directly with banks. Proponents of taxing
credit unions also point to the potential revenue associated with
repealing the tax exemption. There is also some debate regarding
the extent to which credit unions are serving people of modest
means, especially in comparison with small banks. In response,
opponents of taxation have argued that credit unions remain
distinct-both organizationally and operationally-from other
financial institutions, and that taxation would jeopardize the
safety and soundness of credit unions by adversely impacting their
net worth or capital levels, which are restricted to retained
earnings. Opponents also note that other depository institutions
do have opportunities for tax relief as S-corporations. Federal
estimates of the potential tax revenues fall within a somewhat
narrow range-$1.2 billion to $1.6 billion annually-while
nongovernmental sources have produced higher estimates of up to
$3.1 billion annually.
o 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.
o As credit unions have become larger and begun offering a wider
variety of services, the issue of whether these institutions are
serving households with low and moderate incomes has become a
matter for debate. Yet, limited comprehensive data are available
on the income of credit union members. In prior work on the credit
union industry, our assessment of available data -the Federal
Reserve's 2001 Survey of Consumer Finances and other
studies-suggested that credit unions served a slightly lower
proportion of households with low and moderate incomes than
banks.5 To NCUA's credit, it has established programs that are
intended for low-income individuals and underserved areas.
However, NCUA does not collect comprehensive data such as the
overall income of individuals benefiting from these programs to
allow definitive conclusions about the membership served.
o Most credit unions are not specifically subject to reporting
requirements that would disclose information on executive
compensation or assessments of internal controls for financial
reporting-information that can enhance public confidence in
tax-exempt entities. Publicly available financial reports reflect,
and support, strong governance and transparency-essential elements
in assuring that tax-exempt entities operate with integrity and
effectiveness and maintain public trust. For example, public
disclosure of revenue and expenses, such as the compensation of
officers and directors, enhances transparency. However, most
credit unions do not individually file the Internal Revenue
Service (IRS) form that would provide such information-Form 990,
Return of Organization Exempt from Income Tax-because of
exclusions and group filings.6 Further, as we noted in a 2003
report, credit unions with assets over $500 million are not
subject to internal control reporting requirements applicable to
banks and thrifts under the Federal Deposit Insurance Corporation
Improvement Act (FDICIA), which are similar to the reporting
requirements of public companies affected by the Sarbanes-Oxley
Act of 2002.7 As we suggested in 2003, making credit unions of
$500 million or more subject to the FDICIA internal control
reporting requirements would provide a commensurate tool to NCUA
and appropriate state regulators to ensure that credit unions
establish and maintain internal control structure and procedures
for financial reporting purposes.
Credit unions have historically occupied a unique niche among
financial institutions. Credit unions differ from other depository
institutions because they are (1) not-for-profit entities that
build capital by retaining earnings (they do not issue capital
stock), (2) member-owned cooperatives run by boards elected by the
membership, and (3) tax-exempt. Like banks and thrifts, credit
unions have either federal or state charters. Federal charters
have been available since 1934, when the Federal Credit Union Act
was passed. States have their own chartering requirements. As of
December 2004, the federal government chartered about 62 percent
of the slightly more than 9,000 credit unions and states chartered
the remainder. Both federally and state-chartered credit unions
are exempt from federal income taxes, with federally chartered and
most state-chartered credit unions also exempt from state income
and franchise taxes.
Another distinguishing feature of credit unions is that they may
serve only an identifiable group of people with a common bond.
More specifically, credit union membership may be based on one of
three types of common bond: single, multiple, or community. For
example, a group of people that share a single characteristic,
such as a common profession, could constitute the "field of
membership" for a 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 banks not having a
capital stock represented by shares, from federal income tax.11
Further, the Revenue Act of 1916 exempted from taxation
cooperative banks without capital stock organized and operated for
mutual purposes and without profit.12 However, credit unions were
not specifically exempted in either of these acts. Their
tax-exempt status was addressed directly for the first time in
1917, when the U.S. Attorney General determined that credit unions
closely resembled cooperative (mutual savings) banks and similar
institutions that Congress had expressly exempted from taxation in
1913 and 1916.
The Federal Credit Union Act of 1934 authorized the chartering of
federal credit unions. The stated purpose of the act was to
"establish a further market for securities of the United States
and to make more available to people of small means credit for
provident purposes through a national system of cooperative
credit, thereby helping to stabilize the credit structure of the
United States." The 1934 act did not specifically exempt federal
credit unions from taxation. In 1937, the act was amended to
exempt federal credit unions from federal tax and limit state
taxation to taxes on real and tangible personal property.13 Two
reasons were given for the exemption: (1) that credit unions are
mutual or cooperative organizations operated entirely by and for
their members; and (2) that taxing credit unions on their shares,
much as banks are taxed on their capital shares, places a
disproportionate and excessive burden on the credit unions because
credit union shares function as deposits.14
The Revenue Act of 1951 amended section 101(4) of the 1939
Internal Revenue Code to repeal the tax-exempt status for
cooperative banks, savings and loan societies, and mutual savings
banks, but it specifically provided for the tax exemption of
state-chartered credit unions.15 While the act's legislative
history contains extensive discussion of the reasons why the
tax-exempt status of the other mutual institutions was revoked, it
is silent regarding why the tax exempt status of credit unions was
not also revoked.
The Senate report accompanying the Revenue Act of 1951 stated that
the exemption of mutual savings banks was repealed in order to
establish parity between competing financial institutions.16
According to the Senate report, tax-exempt status gave mutual
savings banks the advantage of being able to finance growth out of
untaxed retained earnings, while competing corporations
(commercial banks) paid tax on income retained by the corporation.
The report stated that the exempt status of savings and loans was
repealed on the same grounds. Moreover, it stated that savings and
loan associations were no longer self-contained mutual
organizations, for which membership implied significant
investments over time, risk of loss, heavy penalties for
cancellation of membership or early withdrawal of shares, and in
which members invested in anticipation of becoming borrowers at
some time. Instead, investing members were simply becoming
depositors who received relatively fixed rates of return on
deposits that were protected by large surplus accounts, and
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.
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.
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 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 S-corporations are taxed only
once at the shareholder level, whether or not the income is
distributed. Corporations that elect Subchapter S status are
subject to certain restrictions on the number of shareholders and
capital structure. For example, an 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 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.
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.
1Qualified financial institutions can elect to avoid federal corporate
income tax as Subchapter S corporations (S-corporations). S-corporation
tax status mainly allows small, closely held corporations meeting certain
requirements to elect to eliminate corporate-level taxation. S-corporation
shareholders are taxed on their portion of the corporation's taxable
income, regardless of whether they receive a cash distribution. For more
information on S-corporations, see GAO, Banking Taxation: Implications of
Proposed Revisions Governing S-Corporations on Community Banks,
GAO/GGD-00-159 (Washington, D.C.: Jun. 23, 2000).
2GAO, Tax-Exempt Sector: Governance, Transparency, and Oversight Are
Critical for Maintaining Public Trust, GAO-05-561T (Washington, D.C.: Apr.
20, 2005), and GAO, Nonprofit, For-Profit, and Government Hospitals:
Uncompensated Care and Other Community Benefits, GAO-05-743T (Washington,
D.C.: May 26, 2005).
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).
4See Public Law 105-219 (Aug. 7, 1998), 112 STAT. 914. The Federal Credit
Union Act of June 26, 1934 refers to "make more available to people of
small means credit for provident purposes." While these statutes have used
"small means" and "modest means" to describe the type of people who credit
unions might serve, these terms are not defined in the statutes.
5GAO-04-91.
Background
6Most tax exempt entities annually must file a Form 990 with the IRS. Form
990 is publicly available and contains various revenue and expense
information, including compensation data for officers, directors,
trustees, and key employees.
7GAO-04-91.
Rationale for the Historical Tax Exemption of Credit Unions
8See GAO/GGD-91-85 for additional background on the history of NCUA and
state field of membership regulatory policies.
9A 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.
11Public Law 63-16.
12Public Law 64-271.
13Public Law 416.
14H.R. Rep. No. 75-1579, at 2 (1937).
15Public Law 80-183.
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.
Arguments for and against Taxation of Credit Unions
Arguments for Taxation
19See GAO, Banking Taxation: Implications of Proposed Revisions Governing
S-Corporations on Community Banks, GAO-00-159 (Washington, D.C.: June
2000).
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.
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.
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).
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).
Historical Distinctions between Credit Unions and Other Depository Institutions
Have Continued to Blur
Figure 1: Credit Union Industry Size and Total Assets Distribution, as of
December 31, 2004
Note: This figure depicts credit union industry distribution in terms of
the number of federally insured credit unions in a particular asset size
category and the percentage of industry assets that are held by credit
unions in that category.
As credit unions' assets have grown in recent years, credit unions have
generally shifted to larger loans such as mortgages. Between 1992 and
2004, the amount of first mortgage loans held grew from $29 billion to
$130 billion, while that of new vehicle loans increased from $29 billion
to $71 billion and that of used vehicle loans increased from $17 billion
to $85 billion. In terms of the relative importance of different loan
types, we compared the growth in the amounts of various loan types
relative to credit unions' assets over the same period. Amounts held in
first mortgage loans grew from around 11 percent of assets in 1992 to
around 20 percent of assets in 2004, while amounts held in used vehicle
loans grew from just under 7 percent to slightly more than 13 percent.
As shown in figure 2, larger credit unions generally held relatively
larger loans (e.g., first mortgage loans) than smaller credit unions,
which generally held relatively more small loans (e.g., used vehicle
loans). Since 1992, the amount of first mortgage loans held relative to
assets has more than doubled for credit unions with over $1 billion in
assets, from around 12 percent to over 25 percent of assets, while it has
grown less than 40 percent for credit unions with less than $100 million
in assets, from around 9 percent to slightly more than 12 percent of
assets.
Figure 2: Loan Types as a Percentage of Total Assets, Smallest versus
Largest Credit Unions, 1992-2004
The discrepancy between smaller and larger credit unions is more apparent
through an analysis of more recently collected data on more sophisticated
product and service offerings, such as the availability of automatic
teller machines (ATM) and electronic banking (see table 1). While less
than half of the smallest credit unions offered ATMs and one-third offered
transactional websites, nearly all larger credit unions offered these
services.
Table 1: Credit Union Size and Offerings of More Sophisticated Services,
as of December 31, 2004
Percentage of institutions offering the following services
Website
Financial
Financial services
services through Electronic
Group through audio applications
Asset assets the response for new
range Number (billions) Internet or phone ATMs 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 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.
Figure 3: Percentages of Credit Unions and Banks Holding Various Loans, by
Institution Size, as of December 31, 2004
Notes: Data are based on all federally insured credit unions, banks, and
thrifts filing call reports. We excluded insured U.S. branches of
foreign-chartered institutions and banks that we determined had emphases
in credit card or mortgage loans. Credit union data on other consumer
loans may include member business and agricultural loans. Agricultural and
business loans for credit unions include both member business loans and
participation in nonmember loans.
The Extent to Which Credit Unions Serve Persons of Modest Means Is Not
Definitively Known because of Limited Data and Lack of Indicators
While credit union fields of membership have expanded, the extent to which
they serve people or communities of low or moderate incomes is not
definitively known. In 1998, CUMAA affirmed preexisting NCUA policies that
had allowed credit unions to expand their field of membership and include
underserved areas.30 After the legislation was passed, NCUA revised its
regulations to enable credit unions to serve larger communities or
geographic areas. As they have become larger and begun offering a wider
variety of services, questions have been raised about whether credit
unions are more likely than banks to serve households with low and
moderate incomes. However, limited comprehensive data are available to
evaluate the income of credit union members. Our assessment of available
data -the Federal Reserve's 2001 Survey of Consumer Finances (SCF) and
other studies-provided some indication that, compared with banks, credit
unions served a slightly lower proportion of households with low and
moderate incomes. Although NCUA has undertaken initiatives to enhance the
availability of financial services to individuals of modest means, as of
October 15, 2005, it had not implemented our 2003 recommendation to
develop indicators to evaluate the progress credit unions made in reaching
the underserved.
Credit Unions Can Serve More People and Larger Areas because CUMAA Permitted
NCUA to Continue Preexisting Policies That Expanded Field of Membership
In 1998, the Supreme Court ruled against NCUA's practice of permitting
federally chartered credit unions based on multiple bonds.31 Subsequently,
Congress passed CUMAA, which specifically permits multiple-bond credit
unions. The act permits these credit unions to retain their current
membership and authorizes their future formation.32 Figure 4 provides
additional information on the percent and assets of federally chartered
credit unions by bond type. While multiple-bond credit unions have
constituted on average slightly under 50 percent of all credit unions
since 2000, they tend to be larger than the other two types of credit
union bonds in terms of asset size.33 For example, at year-end 2004,
multiple bond credit unions made up 45 percent of the total number of
federal credit unions but represented 57 percent of federal credit union
assets.
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. S: 1759(b), (d), as amended.
Figure 4: Percent and Assets of Federally Chartered Credit Unions, by
Bond, 2000-2004
Note: NCUA provided revised data for the year 2000 from that previously
provided for our 2003 report.
In addition to permitting multiple-bond credit unions, CUMAA further
qualifies the definition of community bond. The act adds the word "local"
to the preexisting requirement that community-based credit unions serve a
"well-defined community, neighborhood or rural district," but provides no
guidance on how "local" or any other 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.
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.
Limited Comprehensive Data Are Available to Evaluate Income of Credit Union
Members
While it has been generally accepted that credit unions historically have
emphasized service to people with modest means; currently, there are no
comprehensive data on the income characteristics of credit union members,
particularly those who actually receive loans and other services. Industry
groups and consumer advocates have debated which economic groups benefit
from credit union services, especially in light of the credit unions'
exemption from federal income taxes. As stated in our 1991 report, and
still true, none of the common-bond criteria available to federally
chartered credit unions refer to the economic status of their members or
potential members.
Information on the extent to which credit unions are lending and providing
services to households with various incomes is scarce because NCUA,
industry trade groups, and most states (with the exception of
Massachusetts and Connecticut) have not collected specific information
describing the income of credit union members who obtain loans or benefit
from other credit union services.35 Credit unions-even those serving
geographic areas-are not subject to the federal Community Reinvestment Act
(CRA), which requires banking regulators to examine and rate banks and
thrifts on lending and service to low- and moderate-income neighborhoods
in their assessment area.36 Consequently, NCUA and most state regulators
do not require credit unions to maintain data on the extent to which loans
and other services are being provided to households with various incomes.
34Pub. L. No. 105-219 S: 101. See 12 U.S.C. S: 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.
Federal Reserve Board Data Suggest That Credit Unions Serve a Slightly Lower
Proportion of Low- and Moderate-Income Households Than Do Banks
Our prior work, which included an analysis of data from the Federal
Reserve Board's 2001 SCF, suggested that credit unions overall served a
lower percentage of households of modest means (low- and moderate-income
households combined) than banks.37 More specifically, while credit unions
served a slightly higher percentage of moderate-income households than
banks, they served a much lower percentage of low-income households. We
combined the SCF data into two main groups-households that primarily and
only used credit unions versus households that primarily and only used
banks.38 As shown in figure 5, this analysis indicated that about 36
percent of households that primarily and only used credit unions had low
or moderate incomes, compared to 42 percent of households that used banks.
Moreover, our analysis suggested that a greater percentage of households
that primarily and only used credit unions were in the middle and upper
income grouping than the proportion of households that primarily and only
used banks.
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.
S:S: 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.
Figure 5: Income Characteristics of Households Using Credit Unions versus
Banks, and Low and Moderate Income versus Middle and High Income
Note: We used the same income categories as used by federal regulators in
their CRA examinations.
We also looked at each of the four income categories separately. As shown
in figure 6, this analysis suggested that the percentage of households in
the low-income category that used credit unions only and primarily (16
percent) was lower than the percentage of these households that used banks
(26 percent). In contrast, more moderate- and middle-income households
were likely to use credit unions only and primarily (41 percent) than
banks (33 percent). Given that credit union membership traditionally has
been tied to occupational- or employer-based fields of membership, that
higher percentages of moderate- and middle-income households using credit
unions is not surprising.
Figure 6: Income Characteristics of Households Using Credit Unions versus
Banks, by Four Income Categories
Note: We found no statistical difference in the percent of upper-income
households when the "primarily and only" using credit union group and the
"primarily and only" using bank group were compared.
We also attempted to further explore the income distribution of credit
unions members by separately analyzing households that only used credit
unions or banks from those that primarily used credit unions or banks.
However, the results were ambiguous and difficult to interpret, due to the
characteristics of the households in the SCF database. For example,
because such a high percent of the U.S. population only uses banks (62
percent), the data obtained from the SCF is particularly useful for
describing characteristics of bank users but much less precise for
describing smaller population groups, such as those that only used credit
unions (8 percent).
Other relatively recent studies-notably, by the Credit Union National
Association and the Woodstock Institute-generally concluded that credit
unions served a somewhat higher-income population. The studies also noted
that the higher income levels could be due to the full-time employment
status of credit union members.39 Officials from NCUA and the Federal
Reserve Board also noted that credit union members were likely to have
higher incomes than nonmembers because credit unions are occupationally
based. A National Federation of Community Development Credit Unions
representative noted that because credit union membership is largely based
on employment, relatively few credit unions are located in low-income
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
low-income credit union program and expansion into underserved areas.
According to NCUA, its Low Income Credit Unions (LICU) program is designed
to assist credit unions whose members are of modest means in obtaining
technical and financial services. LICUs grew in number from more than 600
in 2000 to nearly 1,000 by the end of 2004. To obtain a low-income
designation from NCUA, an existing credit union must establish that a
majority of its members meet the low-income definition.41 According to
NCUA, credit unions that meet this criterion are presumed to be serving
predominantly low-income members. Also, newly chartered credit unions can
receive low-income designation based on the income characteristics of
potential members.
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.
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:
o greater authority to accept deposits from nonmembers such as
voluntary health and welfare organizations;
o access to low-interest loans, deposits, and technical
assistance through participation in NCUA's Community Development
Revolving Loan Fund;
o 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
o 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).
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.
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 tax-exempt organizations, other
than private foundations with gross receipts of $25,000 or more,
are required to file Form 990 annually. The form contains
information on an organization's income, expenditures, and
"activities" including compensation information for officers,
directors, trustees, and key employees. IRS also uses these forms
to select organizations for examination.
However, most credit unions do not individually file Form 990. In
2002 and 2003, credit unions filed 1,435 and 1,389 Form 990s,
respectively. On August 23, 1988, IRS issued a determination that
annually filing Form 990 was not required for federal credit
unions because of their status as tax-exempt organizations under
section 501(c)(1) of the Internal Revenue Code. Depending on the
state, some state-chartered credit unions file through a group
filing process. For these states, IRS receives only the names and
addresses of individual credit unions. As a result, scrutiny of
the compensation of credit union executives and other key
personnel is difficult. As you are aware, we have ongoing work in
this and other areas, and we hope to provide you with additional
information on the compensation of credit union executives and
officials as part of this follow-up work.
As noted in our 2003 report, the Federal Credit Union Act, as
amended, requires credit unions with assets over $500 million to
obtain an annual independent audit of financial statements by an
independent certified public accountant. But, unlike banks and
thrifts, these credit unions are not required to report on the
effectiveness of their internal controls for financial reporting.
Under FDICIA and its implementing regulations, banks and thrifts
with assets over $500 million are required to prepare an annual
management report that contains:
o 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
o management's assessment of the effectiveness of the
institution's internal control structure and procedures for
financial reporting as of the end of the fiscal year and the
institution's compliance with the designated safety and soundness
laws and regulations during the fiscal year. 45
Additionally, the institution's independent accountants are
required to attest to management's assertions concerning the
effectiveness of the institution's internal control structure and
procedures for financial reporting. The institution's management
report and the accountant's attestation report must be filed with
the institution's primary federal regulator and any appropriate
state depository institution supervisor, and must be available for
public inspection.
The reports, with their assessments and attestations on internal
controls, allow depository institution regulators to gain
increased assurance about the reliability of financial reporting.
Also as we stated in our 2003 report, the extension of the
internal control reporting requirement to credit unions with
assets over $500 million could provide NCUA with an additional
tool to assess the reliability of internal controls over financial
reporting.
Moreover, bank and thrift reporting requirements under FDICIA are
similar to the public company reporting requirements in the
Sarbanes-Oxley Act of 2002. Under Sarbanes-Oxley, public companies
are required to establish and maintain adequate internal control
structures and procedures for financial reporting; the company's
auditor is also required to attest to, and report on, the
assessment made by company management on the effectiveness of
internal controls. As a result of FDICIA and the Sarbanes-Oxley
Act, reports on management's assessment of the 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.
For further information regarding this testimony, please contact
Richard Hillman at (202 512-8678) or [email protected]. Individuals
making key contributions to this testimony include Janet Fong, May
Lee, John Lord, Harry Medina, Jasminee Persaud, Barbara Roesmann,
and Richard Vagnoni.
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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.
43Quoted from NCUA Chartering and Field Membership Manual, March 2003,
p.3-4 & 3-5.
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.
4512 U.S.C. S: 1831m; 12 C.F.R. Part 363 (2003).
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contact Richard Hillman at (202) 512-8678 or [email protected].
Highlights of GAO-06-220T, testimony before the Committee on Ways and
Means, House of Representatives
November 3, 2005
FINANCIAL INSTITUTIONS
Issues Regarding the Tax-Exempt Status of Credit Unions
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
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