State lawmakers in Colorado are doing something that members of Congress have refused to do. They have said that credit unions cannot buy banks. State legislators in Tennessee have said the same thing. As you might expect, bankers are pleased. Credit union officials are not.

In recent months, the Colorado Legislature rejected a recommendation from the state’s Division of Regulatory Agencies that credit unions be permitted to purchase state banks. A Colorado House of Representatives banking bill contained a provision permitting such purchases, but the state Senate did not pass the proposal.

The GoWest Credit Union Association pushed hard for the House provision. “At a time when banks in Colorado and nationally continue to close branches and reduce people’s access to financial services, there must be an option for banks to sell to credit unions that are simultaneously opening branches to ensure local financial access for all,” the association wrote, in an issue brief.

The association added, “The option for a bank to decide to sell to a credit union would provide benefits to the bank as well as to the Coloradans who would be more likely to retain a community-focused financial institution relationship, in-person branch access, and local jobs.”

The Colorado Bankers Association pushed back. “Credit unions want you to believe a bank has a choice of who they sell to,” the association wrote, in a form letter the group wanted bankers to send to their state lawmakers. “They do not. Banks have an obligation to their stockholders to accept the highest sale offer. The tax-free status of credit unions gives them an unfair buying advantage.”

While the provision was killed this year in the state Senate, the bankers’ association warned that the issue may return in the next legislative session.

The Tennessee General Assembly enacted legislation this year stating that state banks may only be acquired by financial institutions insured by the Federal Deposit Insurance Corporation. Since credit unions are not insured by the FDIC, the bill effectively prohibits them from purchasing banks in that state.

Previously, the Tennessee state’s banking regulator had found that credit union purchases of banks violated a state law prohibiting bank purchases by entities that are not bank holding companies. The Tennessee Court of Appeals disagreed and ruled that the statute did not prohibit purchases by credit unions. That is when the state legislature stepped in, passing legislation making it clear that credit unions cannot purchase state banks in Tennessee.

The new law “will protect the future of the banking industry by ensuring credit unions cannot acquire banks to gain more traction in their expansion efforts,” Colin Barrett, president of the Tennessee Bankers Association, wrote following passage of the legislation.

Tennessee and Colorado are not the only states where the battle over bank purchases by credit unions has played out:

• In 2022, the Mississippi State Legislature enacted a measure banning state bank purchases by credit unions.
• Last year, a Minnesota court said it would not overturn a decision by state banking officials that a purchase of a state-chartered bank by a credit union was prohibited by state law. In deciding the case, the court said it was choosing to “afford the executive branch proper deference and also to recognize and take advantage of the presumed expertise of a state executive branch agency.”
• In 2022, a Nebraska judge affirmed a decision by the Nebraska Department of Banking and Finance to deny an application by GreenState Credit Union of North Liberty, Iowa, to purchase Premier Bank in Omaha, Nebraska.

Some national banking trade groups are attacking credit union purchases from another angle. The Independent Community Bankers of America has asked the FDIC to reject the purchase of First Financial Northwest Bank of Reston, Washington, by Global Credit Union of Anchorage, Alaska. The ICBA contends that since the credit union is not subject to the Community Reinvestment Act, the merged institution no longer would be required to report on activities to support the communities it serves.

In New York, banking trade groups have asked the New York Department of Financial Services to delay the merger of Catskill Hudson Bank and the Hudson Valley Credit Union. Under the merger, announced in January, customers of the bank would become members of the credit union.

“We believe this acquisition warrants careful and transparent consideration and scrutiny due to the recent significant shifts within the credit union industry, particularly their unchecked expansion and continued exemption from most taxes and the Community Reinvestment Act,” Claire Cusack, head of the New York Bankers’ Association and John Witkowski, chief of the Independent Bankers of New York, wrote in in an April letter.

The two presidents/CEOs said they “strongly object” to the acquisition of a tax-paying bank by a largely non-tax-paying credit union. They added that since the credit union is not subject to the Community Reinvestment Act, they believe that the merged institution will be able to reduce their assistance to low- and moderate-income communities.

In addition to the merger with Hudson Valley Bank, the credit union is acquiring eight branches of other banks, according to the two trade group officials. “Simply put, a credit union’s acquisition of a bank defies its original mission and structure to serve small groups of people of modest means,” they concluded.

While some state lawmakers and regulatory agencies have acted on credit union-bank purchases, the same cannot be said for Congress, despite two recently announced mergers.

In the past month, the Atlanta Postal Credit Union and its subsidiary, Center Parc CU have agreed to purchase Affinity Bank, another Georgia Financial Institution. In addition, Gesa Credit Union, located in Richland, Washington, announced plans to acquire Security State Bank, another Washington financial institution.

Rebeca Romero Rainey, president/CEO of the Independent Community Bankers of America, objecting to these two mergers, noted that so far this year, 11 credit union-bank purchases have been announced. “The dangerous trend of tax-exempt credit unions buying banks expands the federal tax exemption for more than $2 trillion in credit union assets, displaces trusted providers of credit in local communities, and demonstrates the urgency of addressing the burdensome regulatory environment,” she said.

The National Credit Union Administration looks at the statistics from a broader perspective.  In a December memo to NCUA Chairman Todd Harper, Kelly Lay, the NCUA’s director of the Office of Examination and Insurance, said that credit union-bank mergers are only a small part of the overall consolidation occurring in the financial services industry. She wrote that between 2011 and Sept. 30, 2023, the NCUA approved 64 purchases of banks by credit unions. By comparison, she reported that during the first nine months of 2023, there had been 90 bank-to-bank purchases and 108 credit union-to-credit union mergers.

Nonetheless, Romero Rainey renewed her call for congressional committees to hold hearings and for the Government Accountability Office to study the issue. She added that Congress should consider an exit fee on such deals to try to capture the value of tax revenue lost when the acquired bank’s business activity becomes tax exempt.

Romero Rainey cited an ICBA poll conducted by Morning Consult as evidence that the public is not aware of the credit union tax exemption. The poll of 4,416 adults conducted Jan 11-15, 2024, showed that just 21% were aware of the credit union tax exemption and 68% said they thought credit unions were simply another type of bank. In the poll, which had a margin of error of plus/minus 1%, 54% of those responding said that Congress should investigate whether the credit union tax exemption is still warranted.

The American Bankers Association also criticized credit union-bank deals. “Credit unions are swallowing up tax-paying banks at an alarming rate, using the tax break lawmakers granted them to serve people of modest means,” Robert Flock vice president in ABA’s Office of Strategic Engagement and Harris Simmons chairman/CEO of Zions Bancorporation and past chairman of the American Bankers Association recently wrote.

America’s Credit Unions and state credit union leagues criticized banking trade groups for their position. “Bankers — who spend their lives trying to squeeze every penny of profit out of their customers — still cannot seem to comprehend that credit unions are tax-exempt because of their cooperative not-for-profit structure, which aligns the interests of the credit union with its member-owners,” they wrote in a March letter to congressional tax-writing committees.

Congress is extremely unlikely to tackle the issue this year, since it an election year and, as a result, there is a shorter legislative schedule. Next year may be another story. House Financial Services Committee Chairman Rep. Patrick McHenry, R-N.C., has announced his retirement, so if Republicans retain control of the House, there will be a new chairman. At least one of the candidates for the position, Rep. French Hill, R-Ark., raised the credit union-bank merger issue during a hearing last year.

To add to the possible incentives to change the exemption next year, there may be a large tax fight on Capitol Hill. Two conservative taxpayer groups, the Tax Foundation and the National Taxpayers Union, have said that Congress could eliminate the credit union tax exemption as a way to pay for an extension of the Trump Administration’s “Tax Cuts and Jobs Act,” which expires next year.

Some state legislatures are still in session and could yet consider legislation that would affect credit union-bank purchases. Flock and Simmons said that several other state legislatures are examining the issue, adding that in addition to those that already have taken action, “policymakers in other states will likely encounter this issue as multibillion credit unions target new markets for growth.”