In 2004, North Island Credit Union funded three SBA real estate loans worth $4.2 million. This expanded service to members is bringing pressure from banks, says Rick Haynie, governmental affairs officer at the credit union. (photo/Maya Ellman)

One of the first pieces of business before the Utah House of Representatives this year wasn’t a highway improvement or education bill, but a resolution asking the U.S. Congress to remove the tax-exempt status from credit unions. The resolution is expected to have little effect, but is symbolic of the increasingly hostile turf and tax brawl between banks and credit unions. Bankers say they have no problem with nonprofit, income tax-exempt credit unions tending to their traditional role as dispensers of mortgages and car loans to employee members.

But these aren’t your daddy’s credit unions. The larger CUs, like San Diego’s North Island Credit Union, San Diego County Credit Union and Mission Federal Credit Union, exceed more than a billion dollars in assets. About 11,000 credit unions serve more than 80 million members nationally, with assets of nearly $490 billion.

A few credit unions are moving onto what had once been exclusively banker turf, setting up business lending departments and getting certified as Small Business Administration lenders. With SBA nationally expected to lend north of $16 billion this year, the market is huge. In 2004, North Island funded three SBA real estate loans worth $4.2 million. This expanded service to members is bringing pressure from the banks.

“The attacks have grown more vociferous and angrier the last couple of years,” says Rick Haynie, a lawyer and governmental affairs officer at North Island Credit Union. “Our members are business people, they’re garage owners, restaurateurs, someone who wants to build an apartment building, and our members ask us to make business loans. Credit unions have been making business loans since day one; we made loans to farmers and butchers and bakers. They were loans to our members who happened to be in business.”

Bankers say they’re all for competition, but credit unions operating in the $1 million to $5 million lending sweet spot of small commercial banks is not what they had in mind.

“There are two types of credit unions,” says Discovery Bank CEO Jim Kelley. “One that fits the mold of what CUs used to be, such as the employees-based credit union. It’s when your membership is open to everybody and you’re not a co-op, you’re more of a bank and they should be paying their fair share of taxes.” Kelley says the credit union’s tax exemption lets the CUs undercut community banks on rates. “When we come up on a deal against a credit union in L.A. that is doing a $14 million deal, and participation lending with 10 or 12 other credit unions, that’s a completely different animal,” Kelley explains. “There are CUs that are (pricing loans) 1/2 percent to 3/4 percent lower than us, and they sell it as the tax difference.”

Last year, the banks found a sympathetic ear in Rep. Bill Thomas (R-Calif.), chairman of the powerful House Ways and Means Committee that, among other duties, writes federal tax law.

In a March 2004 speech to the Federation of American Hospitals Forum, Thomas asked, “What is the good and worthy core for which they were given the nonprofit -— therefore tax preferred — status? I think some of it’s gotten at least murky or lost in their attempt to build and grow and provide services to the point that if I put one down on paper and said profit or nonprofit, you couldn’t tell the difference. When the only common thread between people who belong to a credit union is that you are warm and sometimes vertical or that you all drive on one major highway — I mean literally, this is the rationale for folks who can belong to a credit union.”

A government tax committee found that the federal government could realize $1 billion a year from taxing credit unions. But Thomas’ bluster hasn’t resulted in federal legislation to remove the exemption.

“He hasn’t had a hearing on credit unions per se,” says Pat Keefe, spokesman for the Washington, D.C.-based Credit Union National Association (CUNA). Keefe says Thomas’ inquiry is on the tax-exempt status for several types of nonprofits, and credit unions are but one example. “I would not say Thomas is a huge admirer of credit unions,” Keefe adds.

In San Diego, Cabrillo Credit Union CEO Robin Lentz is part of a local committee that keeps its eyes on legislative trends. “I know the Bush administration is against adding more taxes, and removing the tax exempt status from credit unions would be a tax increase,” she says.

Credit unions tend to minimize the effect they have on the marketplace. As Haynie puts it, “Citicorp is larger than the entire credit union industry.”

But Lentz hints that smaller commercial banks, including the 15 or so that have opened in San Diego in the last four years, may be feeling the heat. “I don’t think the big banks really care, we’re almost an afterthought,” Lentz says. “I think we compete more with the community banks than with the Wells Fargos. Some of the larger banks won’t even touch a business loan under $1 million.”

Lentz says she’s all for a level playing field but she doesn’t believe that credit unions have become de facto banks. “We don’t act like a bank; our structure is completely different. We do have to turn a profit — the difference between banks and credit unions is that banks can go out and sell stock. We have to make our money through earnings. We didn’t say to the banks you can’t have any new powers you didn’t have 50 years ago. Show us how you’re being harmed by credit unions.”

As the deadline passed last month for the introduction of bills, no state law was introduced to remove the credit unions’ state tax exemption. But bank lobbyists are pushing it.

“We’re in favor of removing the tax-exempt status for those credit unions that look like and operate like banks,” says Anissa Yates, spokesperson for the California Bankers Association. “The community CU as it was formed definitely served a purpose, was focused on a very specific membership and allowed people to unite to save their money.”

Keefe says he believes an act of Congress would be necessary to overturn CUs’ tax exemption at either level. “The tax exemption is rooted in federal law and applies to all credit unions, state chartered or federal.”

The credit unions’ real strength is at the grass roots, Keefe says. “The vast majority of our 86 million members like their credit unions and we take every opportunity to point that to members of Congress.”