These are halcyon days for credit union lobbyists, fresh from a big legal victory, a significant campaign donation tally in the last election and a grassroots network that’s the envy of bankers everywhere.
But the sense that – in the words of Gershwin’s famous ballad Summertime, “fish are jumping, the cotton is high” – may not last long as credit unions are likely to be tested soon in ways they haven’t been in recent memory.
Credit unions are facing a number of tough challenges, including a separate legal test that harkens back to one of the their biggest setbacks two decades ago, an administration committed to tax reform that could threaten their tax exemption, and partisan divisions that seem likely to doom any chance at much-needed regulatory relief.
Industry representatives are confident that they can weather the storm—for now.
“We’ve always stressed Main Street versus Wall Street in taking care of working men and women,” said Dan Berger, the head of the National Association of Federally Insured Credit Unions. “In any political environment, that resonates. Consistent messaging in taking care of the American consumer always works. It’s one of those things. Good policy makes good politics.”
But that may soon be put to the test. The Trump administration is committed to tax reform as one of its big-ticket reforms—and bankers are hoping to put credit unions’ exemption from federal taxes into play.
“If there was ever a time” for re-evaluating the tax exemption “this might be it,” Chris Cole, the Independent Community Bankers of America’s senior regulatory counsel, said in a recent interview.
“Everything’s part of the mix when you’re talking about tax reform,” Berger acknowledged, though he was quick to add that credit unions are well-positioned to defend theirs. “We have the quantitative and qualitative data that shows what we give back to our communities and that shows the value of our tax exemption,” he said.
The potential fight over credit unions’ tax exemption comes as another major legal battle is brewing. The American Bankers Association filed a federal suit in December attacking sweeping changes the National Credit Union Administration made to field-of-membership rules in October. The agency has until March 13 to file its response.
Credit union industry officials say they are confident of victory. “We expect the NCUA to win it,” Berger said. “We’re the bogeyman for bankers. They need to have someone to point at and portray as the bad guy.”
Despite those looming conflicts, credit unions can be forgiven for feeling optimistic.
In September, Independent Community Bankers of America literally made a federal case out of objections to revisions the NCUA made to its member business lending rules.
In particular, the trade group protested a provision that exempted some loans and participations purchased from other lenders from counting against an institution’s statutory member business lending cap.
NAFCU and the Credit Union National Association collaborated to file an amicus brief supporting NCUA, and the lawsuit – which was launched with great fanfare -- ultimately fell flat as a federal judge dismissed the case. The ruling he handed down last month concluded the change in question amounted to nothing more than the elimination of a waiver credit unions had been required to obtain from NCUA before buying a nonmember loan, and thus wasn’t significant enough to sustain a legal challenge.
Though it’s possible ICBA could still file an appeal, observers have suggested the group likely doesn’t have the appetite to pursue it further.
It was a dramatic reversal from another court fight two decades ago. In NCUA vs. First National Bank & Trust, the Supreme Court sided with bankers, issuing a ruling that limited credit unions’ field of membership to a single occupational group
That decision forced the credit union lobby to spring into action. Within months Congress passed the Credit Union Membership Access Act, which reversed the high court ruling and allowed credit union membership to have multiple and community bonds.
Of course, the victory wasn’t total, as the law also ushered in the much-despised cap on member business lending, but it stands as a huge achievement for the industry’s lobbyists.
Echoes of the past
Many see the current field of membership case as an echo of that earlier Supreme Court case. If the decision goes against them this time, however, the chances of Congress moving to help are remote.
In 1998, President Clinton and the Republican-controlled House worked together quickly on a bill. But partisan tensions are at an all-time high since President Trump’s election, making passing anything of substance near impossible.
To be sure, credit unions have boosted their political influence in the past two decades.
CUNA raised a record $5.1 million during the 2016 election cycle, an achievement that Jim Nussle, the group’s president, says puts it “in an elite group of the strongest PACs in the country.”
Better yet, in keeping with the grassroots-centric strength of the CU lobby, most donations were small in size, averaging about $65, according to CUNA Chief Political Office Richard Gose.
“That doesn’t mean we don’t have large donors,” Gose said. “We do; but if you compare us to a lot of other groups the proportion is relatively small.”
Even banking industry representatives were impressed.
“That’s a lot of money,” Cole said, adding that ICBA raised about $2 million in the same timeframe. “It shows you how strongly they support keeping that tax exemption.”
While those kinds of figures may be dwarfed by the kinds of contributions big banks can make, as ICBA and other bankers have learned, credit unions’ success extends far beyond raising money. They’ve built up a powerful grassroots network that is willing to jump into the fray.
According to Berger, who served as NAFCU’s executive vice president of government affairs for four years before taking over as CEO in 2013, the industry does a particularly good job of targeting credit union members to support its positions
“All politics is local,” he said. “If you have several credit unions in your district or state that are doing good work in the communities, those stories are being told when we have our fly-ins and people are going up to Capitol Hill to visit members of Congress and their staff.”
The industry’s grassroots network may be its single biggest asset from a lobbying standpoint, according to Gose.
“We have a number of credit unions that are willing to go to their members and communicate with them about candidates who have been supportive to our issues,” Gose said. “This is a great advantage because our credit unions tend to have about 97% favorability with their members. I think you have a combination of that grassroots desire to move credit unions forward and a willingness to communicate about the political landscape.”
Yet there are some who argue that credit unions have missed opportunities over the years.
Keith Leggett, a retired American Bankers Association economist who continues to blog frequently about credit unions, characterized the industry’s big wins as defensive, preserving the existing tax exemption and fending off a member business lending challenge.
Offense not working?
On the other hand, Leggett pointed out that the CU lobby has been unable to eradicate the business lending cap – which restricts the size an institution’s member business lending portfolio to about 12.25% of total assets – or win the power to issue some form of investor capital to supplement their retained earnings.
“They could have expanded their business lending authority early in President Obama’s first term,” Leggett said. “The Treasury favored it and Democrats controlled both houses of Congress.”
Leggett has a point, according to one longtime credit union source who spoke on condition of anonymity. An opportunity to move the needle on member business lending did exist, but the industry was never able to gain any traction with its effort.
Since then, though, credit unions have succeeded in framing bank-credit union battles in their favor, according to the source.
And credit unions clearly played some effective offense in 2016. Through Sept. 30, outstanding member business loans topped $60 billion for the first time, as aggregate membership surpassed 106 million. Meanwhile, the industry’s total net worth grew to $138.6 billion, up 7% from Sept. 30, 2015.
Steadily increasing membership gives the industry even more clout, said Dennis Dollar, a prominent industry consultant who served as NCUA chairman from 2001 to 2004.
“The credit union trades do an excellent job in their Capitol Hill advocacy, but I think a big part of the effectiveness of the credit union lobby is the active involvement of credit unions back home,” Dollar wrote in a recent email. “The local involvement by credit unions supplements the trade association advocacy by showing that the ‘millions of members’ argument actually has legs to stand on politically. The number of credit unions actively engaged in advocacy at the local, state and national level has never been higher from our perspective and that of our credit union clients.”
Slim chance of success?
But even with that network at their command, the chances of significant regulatory relief appear slim. For reform to be enacted, Senate Democrats will have to sign off on any bill, but they have been alienated by Trump’s recent appointments and executive orders on immigration and the Dodd-Frank Act.
Credit unions are hoping to join forces with their nemesis to make common cause if they can.
Berger said one of NAFCU’s big policy goals for 2017 is to get past the warfare with banks and
focus its energies on winning some kind of regulatory relief from Congress.
Extended bickering with banks risks exhausting lawmakers, he said.
For politicians, “it’s one of those things where you’ve got a certain environment; you’ve got friends on both sides,” Berger said. “If you go to the Rotary Club, you see your credit union CEO in the audience; you see your community bank CEO in the audience. They’re just not going to get in a fight between friends.”
Berger promised NAFCU would be “very vigilant” in guarding the tax exemption, but for him, lobbying success in 2017 will be measured by how much the group can advance its regulatory relief agenda.
“We’d love to see repeal of the Durbin Amendment,” Berger said. “We all know price caps don’t work. We’d love to see credit unions exempted from some Consumer Financial Protection Bureau rulemaking. Compliance costs are just huge. It’s the No. 1 issue for my members and credit unions across the country.”
Ditto for CUNA, where Chief Advocacy Officer Ryan Donovan said regulatory relief topped his members’ wish lists.
“If you look at it on paper, the ingredients are there,” Donovan said. “You’ve got a need that has been pretty profoundly demonstrated, not just by credit unions but by small banks, as well. There’s an understanding of the need for relief on Capitol Hill. And I think you have an administration that, all things being equal, is inclined to reduce regulatory burden.”
Fortune favors Wall Street
“The system is rigged in favor of Wall Street banks that can afford to comply with all the rules coming out of Washington,” Donovan added. “Credit unions and community banks can’t spread those costs over the same economy of
scale but they’re required to the same thing. It’s not fair to consumers.”
Berger, for one, is not unaware of the irony in his position. To a large extent, his regulatory relief goals mirror those of community banks. “We agree on 95% of everything. It’s the last five percent that’s 100% of the problem,” he said.
“Look, banks need regulatory relief as well,” Berger said. “Giving us some relief would go a long way toward putting money back into the community.”
