Financial feud: Banks take on credit unions in fight for money, services

The banking industry has been quietly waging a war against credit unions.

“I wouldn’t call it a war…. There’s a policy disagreement between banks and credit unions. I guess you could call it a feud,” said Keith Leggett, a senior economist in the Office of the Chief Economist at the American Bankers Association (ABA) in Washington, D.C.

At the core of the disagreement is the expansion of financial services by some credit unions and their tax-exempt status.

“The tax-exempt status is well-deserved and being earned by the credit unions every day,” said Michael Lanotte, senior vice president and general counsel of the New York State Credit Union League (NYSCUL) in Albany, N.Y. “They pay every type of tax that other corporations pay except for a corporate income tax.”

“We’re not taxed because we take care of our members and give them our profits back in the form of better rates, dividends, free services; we don’t have the same kinds of service charges that banks do. (We have) minimal service charges,” said Raymond Dowling, president and chief executive officer of Stamford Credit Union. We return the income to the members in the form of lower loan rates and higher deposit rates. We make sure our deposit rates are very competitive. Basically, we take care of the members.”

With credit unions, the banking industry maintains that it just wants to level the playing field.

Credit unions say the field is tilted totally in favor of banks.

Banks believe that credit unions should just do what they were originally set up to do: serve those of modest means.

Credit unions say they’ve been doing that since the first one was started in New Hampshire in 1909.

On ABA’s Web site, aba.com, there is a button that connects to Operation Credit Unions, which urges bankers to contact Congress and oppose the expansion of credit unions into other financial services.

“One of the key things that has taken place is the credit unions are pushing are what is known as the Credit Union Regulatory Improvements Act (H.R. 2317). It’s not really a regulatory improvements act, but rather a charter enhancement,” Leggett said. So that is why you have this feud taking place.”

The credit unions are trying to undo what Congress put in place in the summer of 1998 in the Credit Union Membership Access Act, Leggett said. Congress then limited the business-lending authority of credit unions, capping the aggregate amount of business lending to 12.25 percent of their assets.

Leggett said that back then Congress wanted to send a public policy message that said credit unions should remain in their traditional niche in the financial services area. “Credit unions don’t like that. The reason why Congress put in place the business-lending cap was to say their focus should be on serving consumers and primarily people of modest means.”

Leggett contends that is credit unions move more aggressively into business lending, there will be less resources available to serve people of modest means.

The Stamford credit union, which was chartered in the1950s to serve the employees of the city of Stamford, including police, fire and teachers, does not make business loans. Earlier this year, it was ranked seventh in the nation in mortgage originations for credit unions with assets of $20 million to $50 million. It made $13.3 million in loans for the third quarter of 2005.

“If you make a commercial real estate loan, that’s a million maybe two million-dollar loan — and maybe even bigger — and the problem you run into is how many car loans could that equate to for people of modest means. It really represents a diverting of resources.”

Lanotte counters by saying credit unions are the most restricted of any type of financial institution when it comes to business lending. “We have the most regulations and we have the lowest cap as to the percentage of total assets that may be lent out in business loans … savings banks and other thrifts are at 20 percent. Credit unions prior to 1998 had absolutely no restrictions.”

Only a small number of credit unions are involved in business lending, which are generally for small loans, he said. “At this point in time, any loan over $50,000 has to be reported to the regulator as a business loan. These are loans that are, by and large, are made because the credit union members are being turned away by the banks. These are the loans that are too small for them … there is no profit, that’s OK, that’s their model; they are for-profit institutions.”

Leggett replies: “Our contention is if credit unions really want to get into these activities, there is an option for them. They can change their charter. Congress has recognized that institutions have unique roles in the financial services arena. And basically if you want to become a commercial lender, to make business loans, what you should look at is converting to a bank charter.”

“Frankly, I have no problem with my banking brethren,” Dowling said. “Banks have their niche which is way, way larger than our niche.

“Banks are as profitable as they’ve ever been. They make huge profits, all of which go right to the stockholders,” he said. “The most significant difference between banks and credit unions is banks make these huge windfall profits for their stockholders and credit unions give their profits back to their members.”

What are people saying about mortgages today:

Rates on 30-year mortgages edged down last week to a seven-month low. Mortgage-giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages fell to 6.3 percent, down slightly from 6.31 percent two weeks ago. It put rates at the lowest level since they were at 6.24 percent the first week of March.

Bank of Hawaii, Central Pacific Bank, Territorial Savings Bank and Wells Fargo Home Mortgages all cut their 30-year mortgage rates to 5.75 percent this week.

Most people think of a mortgage as a means to an end. After all, you buy a house, not a home loan. But a mortgage is much more than the path to homeownership. It is a financial instrument that must be managed, just like any other financial investment.