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Committee on Financial Services

United States House of Representatives

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Mr. Chairman and Members of the Committee, my name is John Garrison. I am Chairman, President and Chief Executive Officer of Walden Savings Bank, a mutual institution in Walden, New York. Walden Savings Bank was established 126 years ago and has $115 million in assets.

I am also on the Board of Directors of America’s Community Bankers and serve as both ACB’s Chairman of the Coordinating Committee on Credit Unions and the Chairman of the Community Bankers Association of New York Coordinating Committee on Credit Unions. ACB is the national trade association for 2,000 savings and community financial institutions and related business firms. The industry has more than $1 trillion in assets, 253,000 employees and 14,500 offices. ACB members have diverse business strategies based on consumer financial services, housing finance and community development.

Summary of Position

The banking industry coalition, which includes ACB, the American Bankers Association, the Independent Bankers Association of America, the American League of Financial Institutions, National Bankers Association and the Association of Military Bankers, has agreed upon a legislative proposal that represents a reasonable and rational compromise to the unlimited expansion of a certain portion of the credit union industry. The three key points are:

  • No current credit union customer should lose his/her relationship with his/her credit union.
  • A majority of credit unions (including community development credit unions) would continue to operate as they do currently and would maintain their current regulatory treatment and tax-exempt status.
  • Other bank-like credit unions would be able to continue activities – including expansion by adding new common bonds – but would be subject to tax rules generally applied to cooperatives that are engaged in a business, community reinvestment requirements, and tightened safety and soundness regulations.

Congress should use this occasion to look at the remaining differences between credit unions and other insured depositories to determine whether, and under what circumstances, certain advantages and differentiated regulatory and tax treatment are justified.

ACB is not opposed to credit unions. However, credit unions which serve geography-based, community-chartered, or multiple-employer groups should be treated like any other banking institution and subject to federal taxation and the requirements of the Community Reinvestment Act. In addition, ACB supports:

  • amending the Federal Credit Union Act to prevent these institutions from continuing to be insulated from state taxation; and
  • allowing individual credit unions to convert to a bank or thrift charter without undue interference from the National Credit Union Administration. ACB strongly supports freedom of charter choice.

ACB opposes legislation which would allow a single credit union to encompass ever-expanding multiple-employer groups. We believe that those credit unions which have chosen to outgrow their mission and have increasingly assumed bank-like characteristics should be welcomed into full citizenship in the financial community, with all the rights and obligations that entails.

Background and Analysis

In 1934, Congress created a federal charter for credit unions to serve people of modest means as voluntary associations of closely-linked individuals with a well-defined common bond, such as being employees of the same company. Credit unions have been exempt from paying taxes and meeting the regulatory responsibilities that apply to banks, such as those of the Community Reinvestment Act.

Since then, however, the credit union industry has exploded into a $425 billion business, frequently providing diversified financial services to a wide array of customers. Many credit unions have expanded beyond the original intent of their charter. Since 1982, the NCUA, the regulator for federal credit unions, has permitted natural person credit unions to expand by adding select employee groups to membership. In addition, a geography-based community charter, which permits a credit union to accept as members persons who live, work, worship, or go to school in a specified geographic area, has been developed. Such credit unions often enroll individuals who do not share a common bond, offer product lines virtually identical to banks, operate from large, publicly accessible facilities, maintain extensive branch networks, and advertise in public media.

The largest and most aggressive credit unions operate like banking organizations, and receive most of the credit union industry’s annual tax break of one billion dollars. That tax break is increasing, and within seven years, is likely to reach to three billion dollars a year. That tax break would grow even faster if H.R. 1151 is signed into law.

Like credit unions, mutual savings banks were created to serve people of modest means. Mutuals pay taxes and comply with CRA requirements. Credit unions do not. If a credit union operates like a mutual savings bank or any other bank, then it should be treated similarly.

To illustrate this point even further, I would like to talk for a moment about a situation that I take very much to heart, one reminiscent of the story of David and Goliath. Unfortunately, as the little guy in this story, I do not even have a slingshot. The Hudson Valley Federal Credit Union in Poughkeepsie, NY has over $850 million in assets compared to the $115 million in my institution. Hudson Valley is approximately 30 miles from my bank, and offers savings and checking accounts, certificates of deposits, IRAs, and most types of loans and accounts that banks offer, such as mortgages, consumer loans, credit cards. Formerly the IBM credit union, Hudson Valley now encompasses a wide array of different groups, including BJ’s Wholesale Club, Mohonk Mountain House, Family Health Center, Hyde Part Nursing Home, Staff Lighting, Friendly Honda/Acura/Isuzu/Suzuki, and Marshall and Sterling Insurance. Volunteers and staff of Dutchess County Girl Scout Council #158 and Dutchess County Council of the Boys Scouts of America #374,as well as their relatives, are also eligible to join. Finding a common bond across these groups is a real stretch. It is worth noting that I pay 41% of my income in federal and state income taxes. I pay a state sales tax, and yes, even a room tax on my hotel room. Hudson Valley in 1996 earned nearly $10 million, of which it paid ZERO in taxes.

I comply with the Community Reinvestment Act, fair lending requirements, and undergo a certified audit annually. We have a conservative, yet proper, way of computing bank capital. I offer free checking for everyone. I could go on and on. Before you vote on the credit union issue please look carefully at all the issues. I think you will understand. The issue is truly about community institutions all across the United States competing with community tax-subsidized credit unions, and not the mega-banks.

The Supreme Court Decision

As we all know, the U.S. Supreme Court ruled that multi-employer credit unions violate the statutory common bond requirements. The Court held that the National Credit Union Administration’s 1982 policy permitting multi-employer credit unions violated the requirement for a single occupational common bond. Writing for the majority, Justice Clarence Thomas said NCUA’s interpretation of the statute "is contrary to the unambiguously expressed intent of Congress that the same common bond of occupation must unite each member of an occupationally defined federal credit union." The ruling does not affect the majority of credit unions that always have been in compliance with the law.

In response to the decision, ACB, the ABA, and the IBAA have stated publicly that they will not ask the district court to make existing credit union customers lose their accounts or credit union access. Instead, the group will seek a prohibition against further, tax-subsidized expansion of existing multi-employer credit unions beyond their permitted common bond. Consistent with this approach, ACB supports H.R. 3265, introduced by Rep. Chris Cannon (R-UT), to grandfather in anyone who belonged to a federal credit union as of February 25, 1998.

If the common bond were to be eliminated, as the credit union industry is suggesting, then the primary distinction separating credit unions from other depository institutions will have been eliminated. This would open the floodgates to unbridled expansion of credit unions and their tax subsidy.

The legislative proposal developed by the banking trade groups to address credit union issues is aimed at the minority of credit unions that operate like banks. Most credit unions do not resemble the AT&T Family Credit Union – a huge financial organization with its 150,000 customers and reportedly 560 subgroups. ACB wants to work with Congress to ensure that those credit unions which abandon their original mission will have the same obligation as banks and savings institutions to pay taxes and to play by the same rules. Congress took a similar step in 1952, when it provided for equivalent treatment for mutual savings institutions.

Credit Unions and Mutual Savings Institutions: The Case for Taxation

Large or small, mutual banks and credit unions are similarly organized. As financial cooperatives, they are controlled by their members. Their members have an ownership interest in the capital of their institutions. The major source of funding for both credit unions and mutual savings institutions is retail deposits. Both traditionally serve smaller retail savers and over 95 percent of their depositors have balances under $100,000. This core deposit base of stable money represents the saver who is looking toward the future and planning for a better life for his or her family. Credit unions and mutual savings institutions loan a high percentage of their deposits to residents and businesses in the local community.

All post-tax earnings go back into the institution and to its customers. The way credit unions operate – where income earned from borrowers is returned to savers after expenses and required allocations to reserves – is not different in substance from that of a mutually organized saving and loan association or a mutual savings bank, except for the tax subsidy. Even a mutual life insurance company has a great deal in common with credit unions, but they pay taxes too.

In many ways, mutual savings institutions were the precursors of credit unions. Both were founded along the same lines – by individuals, for the collective good of themselves and their neighbors, who likewise lacked the financial wherewithal required to gain access to the banking system of that time. Like credit unions, mutual savings institutions were created by a banding together of like-minded individuals striving to meet a perceived community need.

The first mutual savings institution, The Provident Institution for Savings, was established in Boston over 160 years ago. Provident had one clear goal: to encourage thrift among low- and middle-income persons. In fact, its founders explicitly dedicated the institution to providing a "means of contributing to the welfare of the working classes," remarkably similar to the purpose subsequently expressed in the 1934 Federal Credit Union Act: to serve "people of small means."

Like credit unions, new savings institutions were popular because of their ease of use – workers could deposit as little as five cents or a dollar and could withdraw their money as needed.

But despite the many similarities between mutual savings institutions and credit unions, there is a distinct difference: mutual savings institutions, unlike credit unions, are pay taxes.

Why? Because in 1952 Congress determined that although savings institutions provided many benefits to the community, the savings industry had matured to the point where it was appropriate to give it the full responsibilities of their commercial bank brethren. As a result, savings institutions lost their tax exemption in 1952, but remained in mutual form. Mutual institutions survived, even after losing their tax subsidy and have prospered. Today, mutual savings institutions are taxed in exactly the same way as other savings institutions and banks. Notably, among insured depository institutions, only credit unions remain untaxed.

The taxation of the mutual savings industry did not bring about its demise, nor would it bring about the demise of bank-like credit unions. Arguably, taxation brought about the more rapid maturity of the savings industry, compelling it to compete without the benefit of a government subsidy. While the majority of credit unions still fulfill their original mission and deserve a continued tax break, the large, bank-like credit unions surely do not.

Today’s mutual savings institutions are vibrant contributors to the economy, paying their fair share, no longer dependent on a government subsidized tax exemption. Why cannot bank-like credit unions do the same?

There is no longer a valid reason to continue the tax subsidy of credit unions that compete head-to-head with community banks. The tax subsidy of bank-like credit unions is not just unfair to other depository institutions; it is unfair to all taxpayers who must pay for this subsidy. It is an unfairness exacerbated by the fact that, according to several surveys, credit union customers, on average, earn more than the rest of the population. It is difficult to justify having all taxpayers subsidize the borrowings of an income group whose members are more affluent than the average citizen.

Continued tax breaks are probably justified for those credit unions with a "true" common bond. But at some point, large credit unions that draw from a wide geographic area and sell every financial product imaginable should have the same tax requirements as apply to banks and savings institutions.

CRA For Credit Unions

ACB strongly believes that the Community Reinvestment Act should be applied to geography-based or community-chartered credit unions and to credit unions serving multiple-employer groups. It is in these "come-one, come-all" credit unions, where the common bond has been severely, if not totally, diluted, that the application of CRA is needed to ensure that all segments of the community are being served. There is no other way for these geography-based credit unions to demonstrate that their lending programs benefit all segments of their local communities. Credit unions should be required to reach out and serve all members of the communities they serve, including low- and moderate-income customers. The continued growth and prosperity of our communities depend on the commitment of all depositories to reinvest in communities, not just FDIC-insured institutions.

It makes absolutely no sense for credit unions to remain exempt from CRA based on an outmoded and outdated notion of membership that often is no longer reflective of reality. When Congress adopted CRA in 1977, it exempted credit unions for a simple reason: credit unions were small institutions with a small amount of assets serving a small number of customers. They then had significant field of membership restrictions in place. Today, the segments of the local community served by credit unions are in many parts of the country indistinguishable from those served by banks and savings institutions.

I fail to see the rationale in the credit unions’ opposition to CRA. If credit unions are doing such a good job of serving their communities, then it should be no problem for them to comply with CRA. Perhaps credit unions oppose CRA because compliance requires the commitment of resources and time. Perhaps credit unions oppose CRA because they do not want to incur these costs in order to sustain a competitive edge.

The application of CRA to banks and savings institutions has had positive, sometimes overlooked, effects. CRA has encouraged institutions to further develop successful business opportunities within all segments of their communities. Banks and savings institutions have learned how to mitigate many of the risks associated with affordable housing loans and have been making loans to low-income borrowers for years. Because these borrowers sometimes have non-traditional credit histories, ACB members make the extra effort to qualify an applicant for a loan, consistent with safety and soundness standards. There is no reason why credit unions cannot do the same.

Credit unions say federal CRA rules should not be applied to them because of they can only offer loans to their members. While we appreciate that statement, it presupposes that because a bank can offer financial services to every individual in a community, each member of the community is a customer of the bank. Community credit unions and community banks are no different in their ability to reach out to their communities for customers. Yet the credit unions argue that they cannot be required to reach out to that same community for borrowers of all types and income levels. If banks could use this logic, then could we argue that banks should only be required to make loans to individuals who are its depositors? That has not been a persuasive argument for banks, nor should it be one for community credit unions.

Credit unions say they should be involved in CRA because they already serve the "common person." This statement generally may have been true at one point, but no longer is for most bank-like credit unions. Corporate welfare for credit unions – such as the federal tax subsidy and CRA exemption – perversely benefits those with higher incomes at the expense of those with lower incomes.

All institutions, whether they are savings institutions, commercial banks, or credit unions, should be involved in CRA-type activities – not because of the law, but because it is the right thing to do. Today’s mutual savings institutions are vibrant contributors to the economy, paying their fair share complying with CRA and other regulatory requirements. Many mutual banks demonstrate a commitment even beyond CRA. Managers and employees of my institution, Walden Savings Bank, are involved in a host of programs, which include:

  • helping fund the McQuade Children’s Service, a home for indigent children;
  • sponsoring a school savings program for 15 local schools, which serves as a training facility providing hands-on experience in the banking world;
  • providing scholarship money to all local high schools;
  • joining the Mid-Hudson Loan Fund, where 21 local banks come together in helping to provide small business loans for the community;
  • participating in the Community Preservation Corporation, which funds and revitalizes housing projects in low-income areas;
  • having employees participate directly in fifty-nine different community programs;
  • providing $37,482 in college education for our employees last year; and
  • contributing hundreds of thousands of dollars to community outreach.

ACB member institutions are active in this same way in their communities all across the nation, investing and otherwise demonstrating their commitment to their local communities. Why cannot credit unions that act like banks do the same?

Additional Safety and Soundness Steps:
Licensed Accountants

ACB strongly supports H.R. 2552, the "Credit Union Audit Improvement Act of 1997," introduced by Rep. Bill McCollum (R-FL). Currently, the Federal Credit Union Act doesn’t require insured federal or state credit unions to prepare financial statements in accordance with generally accepted accounting principals or to have an independent audit performed by an independent licensed accountant. Also, the FCUA does not require credit unions to prepare written statements regarding the institution’s compliance with laws and regulations. The McCollum bill protects depositors in federally insured credit unions by requiring credit unions to use licensed accountants to perform external audits.

Treasury Department Recommendations for Regulation

ACB also supports the Treasury Department’s recommendations made last December for more regulation of larger credit unions. In particular, ACB endorses Treasury’s recommendation that larger credit unions have specific, risk-based capital requirements and annual audits by outside public accountants. Treasury’s recommendations also make it clear that credit union regulation should be strengthened to meet the standard of supervision and regulation currently employed for all other federally insured financial institution. ACB endorses Treasury’s recommendation that would utilize "prompt correction action" as an early warning system to identify problems at credit unions.

ACB also believes that the Treasury report should have renewed a 1991 recommendation by the General Accounting Office to separate NCUA as the regulator of credit unions from the NCUA Share Insurance Fund.

End Double Counting Insurance Premiums

The credit union industry is allowed to double count insurance premiums paid to the National Credit Union Share Insurance Fund (NCUSIF). Credit unions count them as assets, while at the same time, the NCUSIF counts them as part of the insurance fund. If these premiums truly are assets for the credit union deposit insurance fund, how can they also be assets for the individual credit unions? This is double counting, which raises safety and soundness concerns and blurs a clear understanding of the capital position of both the industry and the insurance fund.

Banks and savings institutions pay deposit insurance premiums based on a specific percentage of their total domestic deposits. Each bank or saving institution treats the premiums as an operating expense, not as an asset, in their financial statements and therefore does not double count.

The credit union industry’s accounting methods are cause for concern. The General Accounting Office has recommended that Congress require credit unions to expense the one percent deposit insurance premium over a reasonable period of time, to be determined by the NCUA. The NCUA should require credit unions to exclude these amounts from both assets and net worth when assessing capital adequacy. This would have the effect of not counting those dollars toward credit union capital adequacy measures.

A clearer picture of capital within the credit union system would result if credit unions removed their deposit insurance premium contributions from their financial statements over a reasonable time frame and expensed all future premiums made to the NCUSIF. The process of expensing premiums should start now with the bank-like credit unions, at a time when neither the industry nor NCUSIF is under stress, and when favorable industry capitalization and earnings would make this change relatively easy for most credit unions to afford.

Freedom of Charter Choice: The Mutual Savings Bank Option

Some credit unions have chosen to switch to a savings bank charter after a lengthy consideration of a comprehensive strategic plan that is designed to facilitate the longevity of the institution and to enhance its relevance to members. In fact, the first two credit unions to convert – Lusitania FCU and AWANE CU – cited membership-driven reasons for converting, rather than "field of membership" issues. Lusitania FCU was faced with great membership demand for residential and commercial real estate loans; and AWANE CU cited the need to serve the needs of small business owners in multiple states with business and real estate loans. In both cases, a savings bank charter provided flexibility with regulators who are experienced with this mix of business.

Additional credit unions have considered modifications of business structure in order to better serve their communities, but since the initial two conversions, the NCUA has made regulatory requirements much more stringent. Perhaps the greatest challenge facing the management of converting credit unions is getting a majority of members to participate in a vote. From the time the disclosure statement is mailed to members, NCUA rules permit only 30 days to pass before a member shareholder vote is held and the ballots cast. Under current NCUA regulations, reminder mailings must also include another copy of the disclosure document, making document distribution costly and potentially wasteful in the eyes of members. NCUA has refused to permit the adjournment of the shareholders meeting, which would, in practice, extend the time for collecting votes. Compared to cooperative and corporate governance requirements in other industries, these voting requirements are unusually burdensome.

In June 1997, a Wisconsin credit union began the process of converting to a state bank charter. However, the credit union failed to obtain the 50% voting return by a small margin, although those actually voting overwhelmingly approved the transaction. Nevertheless, NCUA refused to allow more time for voting, despite the fact that the NCUA previously authorized a provision in the disclosure document for an adjournment (extension).

In contrast, federal credit unions converting to a state credit union charter and credit unions leaving the federal deposit insurance system for private deposit insurance are required to obtain a response from 20 percent of institution’s members, with a simple majority of the votes cast needed to approve the transaction. The first two credit unions which converted did so under these less burdensome requirements, prior to the current NCUA conversion rules. Similar corporate governance transactions only require approval of just over 10 percent of the members, rather than "50 percent plus one."


ACB does not believe in more laws, more regulations, more controls, and certainly not in more taxes, but we believe all bank-like institutions should all play by the same rules.

Bank-like credit unions are worthy competitors that offer beneficial services to the public, but their managers should have the confidence to operate without undeserved, special benefits in their effort to serve the public more efficiently. Bank-like credit unions seem unwilling to accept a commitment to make our communities better. Perhaps worse, they are robbing taxpayers to pass on benefits to members who are better off than the average American. Congress and the voters should not tolerate this situation, nor permit it to persist.

America’s Community Bankers stands ready to assist in any way possible to address these issues. I will be happy to answer any questions you may have.


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