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NCUA to Hatch: Eliminating Tax Exemption Could Result in Taxpayer Bailout
Tuesday, April 24, 2018 6:45 AM

Removing the federal tax exemption for credit unions would devastate credit unions and could lead to a taxpayer bailout of the Share Insurance Fund, NCUA Board Chairman J. Mark McWatters told Senate Finance Chairman Orrin Hatch (R-Utah). McWatters also said that if Congress removes the exemption, it also would have to remove the field-of-membership and other restrictions on credit unions to keep the system safe and sound.

McWatters’ comments came in a response to a letter Hatch sent to him in February questioning whether the credit union tax exemption is outdated. View document.

“We believe that eliminating the credit union tax exemption, without also eliminating the statutory restrictions on credit unions, would almost certainly have a detrimental effect on the credit union system and increase losses to the Share Insurance Fund, which could ultimately fall to U.S. taxpayers,” McWatters said.

Hatch had said the NCUA has relaxed field-of-membership constraints, opened the door to the use of alternative capital, and lifted limits on business lending. He also said the federal credit union common bond requirements have been watered down through “regulatory interpretations and a dearth of enforcement in recent decades.”

McWatters said in his letter that regulatory changes adopted by the NCUA are consistent with federal law and the spirit of President Trump’s executive order on regulatory relief.

NCUA conducted an analysis of the impact on credit unions if the tax exemption were eliminated, McWatters noted. That analysis found that for the share insurance fund to remain sound, Congress also would need to eliminate the field of membership restrictions, member business loan limits, investment capital restrictions, investment authority restrictions, and other restrictions imposed by federal law.

“In other words, a safety and soundness issue would most likely arise if credit unions are not offered a level playing field with other taxed depository institutions, including an option to make something akin to an S corporation election for purposes of taxation,” McWatters said.

He added that the strict structural limits that Congress placed on credit unions distinguish them from other financial institutions, and in the eyes of Congress that justified the tax exemption. He said the agency has endeavored to consistently construe the authority of federal credit unions to allow them to serve the needs of their members, while, also remaining true to federal law.

Hatch had asked whether the agency maintained records on associational charters that were rejected because they did not meet NCUA common bond requirements.

McWatters said the agency has processed 1,890 requests to serve associational groups since its rules were updated in 2015. Of those, 79.58 percent of the applications were approved and 0.16 percent were rejected. McWatters said the low denial rate was the result of the agency working with credit unions to find solutions for a possible denial.

"Congress established the tax exemption based on credit unions' not-for-profit structure and their mission to promote thrift and provide access to credit," said Cornerstone Credit Union League Chief Advocacy Officer Jim Phelps. "By all accounts, and as conveyed in Chairman McWatters' letter to Sen. Hatch, the NCUA is fulfilling its supervisory and regulatory role per the Federal Credit Union Act. Removing the credit union tax exemption would put the entire system at risk."