Credit Unions Eye Bank Conversion Amid Increasing Threats To Movement's Tax-Exempt Status

By Ray Birch

WASHINGTON—More credit unions are considering converting to a mutual bank as the result of the increased threat to the movement’s tax status, according to Luse Gorman.

“Several credit unions are now contemplating a mutual bank conversion in order to prepare for the potential loss of their tax-exempt status,” said Luse Gorman Partner Jeff Cardone, citing factors such as the budget reconciliation process and potential efforts to consolidate NCUA into other federal regulators that are adding to the angst. “Credit unions are thinking that if they are taxed, what does that mean for the credit union business model.”

As CUToday.info reported, President Donald Trump has removed the two Democratic NCUA board members, Todd Harper and Tanya Otsuka, with some analysts stating the move could be a preliminary step in a move to consolidate NCUA under another federal regulator.

iStock-Philip Hoeppli

Washington analysts have stated that this year’s tax fight is the toughest credit unions have faced. And now, with the tax effort in the budget reconciliation process, experts fear that’s when the CU tax break might be taken away—in an early morning conversation and deal that credit unions will not be able to step in and address with lobbying efforts.

Cardone is among those who believe the credit union tax exemption is strongly being considered, and it is at great risk through the reconciliation process.

“If credit unions lose their tax-exempt status, it's going to be done through the budget reconciliation process, and that means it could happen very quickly and swiftly,” he said. “I think that's the great concern. If Congress were trying to do it from a more traditional piece of legislation, where you're going to get debate around it, I think that would give credit unions more of an opening to lobby against it, and to further share their story with lawmakers. That's why the concern is significantly higher now than it has been in the past.”

No Stockholders

Cardone emphasized that converting to a mutual bank does not mean the organization will become a stock entity.

“And, there's a lot of commonality between the mutual bank charter and the credit union charter,” he said. “I think that's driving the interest, too, to a degree, in addition to taxation.”

Cardone said credit unions considering this step today are the ones that are very “forward-looking” and are evaluating all options.

Cardone emphasized the number of CUs looking at a mutual bank charter today is not a concerning total.

Jeff Cardone

“We won’t, all of a sudden, see a lot of filings or announcements that credit unions are converting. It's more about them being ready, given the unknown,” he explained.

Cardone said the bank lobby was smart to come out and not advocate for taxing all credit unions. As CUToday.info reported, the Independent Community Bankers of America put out a policy position recommending that credit unions above $1 billion in assets be taxed.

“There are about 4,500 credit unions today, and about 400 or 500 are above $1 billion. So, this is a smaller set of credit unions that would be taxed,” Cardone noted.

Cardone added he does not believe credit unions buying banks harms them in Washington’s eyes as Congress searches for budget bill “pay-fors.”

“Credit union purchases of banks are just such a small piece of the overall bank M&A landscape,” he said. ‘

The pioneer of credit union purchases of banks, Michael Bell, shared the same stance in a previous CUToday.info report.

Road Ahead For Those Considering Conversion

Cardone, in an interview with Tyfone, outlined what would be ahead for credit unions considering conversion to a mutual bank.

“A credit union must obtain prior approval from the OCC or the relevant state chartering authority to convert to a mutual bank,” he said. “The application process is extensive and requires the preparation of pro forma financial statements and projected capital levels as a bank, a comprehensive business plan—including a strategy for meeting Community Reinvestment Act obligations—revised lending, ALCO, and BSA/AML policies, and a detailed analysis of how the credit union’s operations will comply with applicable banking regulations. Additionally, the experience of the board and senior management in banking will be closely evaluated.”

Cardone noted that while the NCUA does not have the authority to approve or deny a mutual bank conversion, it does oversee the member voting process for such proposals.

“Critics argue that the NCUA has implemented a burdensome and inefficient process that discourages conversions,” he said. “For instance, before the board and member votes can take place, members must receive four separate notices: one before the board vote and three more at 90, 60, and 30 days prior to the member vote. This process is not only costly and time-consuming for credit unions but also frustrating for members.”

Finally, even after member approval, the NCUA must still approve the voting procedures and methods used in the member vote, Cardone said.

“As a result, the NCUA retains the authority to challenge or invalidate a vote, even if members support the conversion,” he reminded.

In a previous CUToday.info report, Jeff Rendell also addressed the possibility of CU conversions to a bank if the tax exemption is lost.