M. Edward Culpepper, President of the Arizona Credit Union League, Comments on Banks Attack on Credit Unions Over Tax-Exempt Status, Oversight

By Bill Conroy
17 Sep 1990
The Business Journal-Phoenix & The Valley Of The Sun; Pg. 25
Copyright 1990

The credit union industry has dubbed it "Operation Grassroots," and here in the Valley backers of the campaign trumpet their support by sporting T-shirts emblazoned with that slogan. They also have a rallying call: "This Is War."

The opponent in the war is the banking industry. At stake is the sacred standing of credit unions as tax-exempt institutions governed by a federal regulatory system that is separate from the banking regulatory system.

The collapse of the thrift industry; the current federal budget crunch, and accusations by the banking community that the tax-exempt status of credit unions is threatening the survival of small banks have become the ammunition for what leaders in the credit union industry contend is an assault on their continued existence as viable financial institutions.

"We have no problem with credit unions competing with banks or with their success in doing that," says D. Gordon Murphy, executive vice president of the Arizona Bankers Association, Phoenix. "But we do have a big problem with the fact that community banks with $150 million in assets or less are competing side-by-side with credit unions on an unlevel playing field in which they have to pay taxes and the credit unions do not.

"We have a problem with the fact that they are not carrying out their responsibility as corporate citizens by paying federal and state income taxes, and instead are allowing their competitors to pay their way for them while they take a free ride.

"The whole mythology of the credit union has to be unmasked," Murphy claims.

But M. Edward Culpepper, president of the Arizona Credit Union League Inc., Phoenix, says the move under way in Congress and the banking community to place credit unions under the same regulatory umbrella as banks and to take away their tax-exempt status is faulty in concept and threatens the survival of the industry. He says credit unions have been successful because they satisfy a consumer demand for financial institutions that will act in the public's best interest, not solely in the interest of corporate stockholders or on the basis of pure profit goals.

Although the state's credit union industry is a mere fraction of the size of the Arizona banking industry, Culpepper says credit unions have posted a better earnings performance over the past 18 months than the state banking industry.

According to information released by the National Credit Union Administration and the state Banking Department, the state's 80 credit unions had assets of about $2.7 billion as of June 30, 1990, compared with total bank assets of about $30.3 billion as of the same date.

But the state's banks collectively lost about $25 million during the first six months of 1990, following a $490 million loss in 1989; the credit unions posted a net gain of $3.3 million in 1989 and a net gain of more than $4.5 million for the six months ended June 30.

In addition, Culpepper says the credit union industry's deposit insurance fund, which is overseen by the NCUA, is in better shape than the Federal Deposit Insurance Corp.'s fund, which oversees bank deposit insurance. He says the NCUA deposit insurance fund has $1.28 for every $100 of insured deposits, compared with 70 cents per $100 of insured deposits in the FDIC fund.

"The ultimate goal of the banks is to cause the disappearance of the credit union industry," Culpepper says. "If they are successful in getting credit unions taxed and in forcing them under the same regulatory umbrella as the banking industry, what advantage will there be to being a credit union?

"Why should we tear down the credit union industry simply because it's successful? We should be looking at why it's successful and try to emulate it."

Murphy counters that credit unions are no longer cigar-box operations offering a limited range of financial services to narrowly defined membership populations. Today, Murphy argues, credit unions have broad membership bases that in some cases allow almost anyone in a community to join. And they offer an expanded array of financial services that rivals those offered by most banks -- including checking accounts, charge cards, IRA programs, commercial loans and insurance services.

Murphy alleges that credit unions effectively have attracted business away from small banks by using their tax-exempt status to offset the cost of offering more attractive rates on products.

Credit unions "have company cars and executive perks and salaries and club memberships," Murphy says. "Their status as nonprofit organizations operating only in the consumer's interest is a myth. They're a business."

Culpepper agrees that the credit union industry offers a wide variety of financial services, but he stresses that there is no law that gives banks the right to enjoy monopoly status with respect to those services. He adds that credit unions will "continue to expand in the area of financial services if it's of financial benefit to our members."

Culpepper also takes issue with the banking community's contention that the tax exemption for credit unions should be questioned because some of those institutions have broad membership criteria.

"Credit unions were granted their tax exemption because they are nonprofit financial cooperatives, not on the basis of who we serve," Culpepper says.

Although the battle between bankers and credit unions over the tax-exemption issue is not new, recent events unfolding in the political and business communities have brought that fight to a climax. The collapse of the savings and loan industry in the late 1980s resulted in the passage of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, which, among other reforms geared toward the S&L industry, mandated that two studies of the credit union industry be conducted by the General Accounting Office and the Treasury Department. The studies will examine the entire regulatory and deposit insurance system currently in place for credit unions.

The recommendations from those studies are due in February 1991. Credit unions fear that in the worst-case scenario, the findings of the studies may prompt Congress to eliminate the tax-exempt standing of credit unions and fold their regulatory and deposit insurance systems into the Treasury Department and the FDIC, respectively.

Culpepper asserts that bankers are seizing upon the thrift crisis as a means of taking advantage of "lawmakers who are running scared due to the S&L crisis." He says by fostering a public hysteria that colors credit unions as the stepchild of the thrift industry, bankers are seeking to convince Congress to pull in the reigns on the industry.

Another factor working in favor of the banks' agenda, according to Culpepper, is the harsh political reality that Congress is in desperate need of finding additional sources of revenue to fund the sprawling federal deficit. In addition, he says, Congress wants to find a quick, highly visible fix to help restore national confidence in the nation's financial industry, which is eroding as a result of the thrift bailout.

Unfortunately, Culpepper says one form that easy fix could take is the elimination of a separate regulatory and deposit insurance fund for credit unions -- under the guise of creating more regulatory efficiency -- as well as their tax-exempt status.

"The issue of tax-exempt status for credit unions is a national priority for the American Bankers Association," says Murphy. "Congress is going to have to question the fairness of such an exemption, but their need for additional revenue also is going to force them to confront the issue."

Culpepper stresses that credit unions are not out to replace the thrift industry or to swallow up the deposit base of failed S&Ls. He says the industry will continue to pursue a course of controlled growth targeted toward the needs of its membership. It is the banks, not the credit unions, that are in the midst of a feeding frenzy over the assets of the nation's failed thrifts, he contends.

However, some industry analysts contend that credit unions serve as a natural alternative to banks and are in a good position to grow in the wake of the thrift debacle by attracting a good share of the deposit base from that industry.

As of 1989, according to figures compiled by the credit union industry, thrifts controlled about 32.7 percent of the nation's $3 trillion consumer deposit base, compared to 47.3 percent for banks and 6.2 percent for credit unions. In 1979, when the deposit base was about $1.3 trillion, thrifts controlled 45.4 percent of the market while banks and credit unions had 41.4 percent and 4.3 percent, respectively.

"After World War II, the government looked to the thrift industry to house America; and with the disappearance of the S&Ls, the government will begin looking to credit unions to provide the lifeline income for low- and middle-class America," says David Burns, who will serve as president of a new credit union being organized by the Arizona Retailers Association, Phoenix.

Whether or not it is justified, within the last year credit unions have become the focus of tighter regulations on both the state and federal level. Among the changes in federal regulations were an expansion of the grounds for NCUA issuing "cease and desist" orders, and a hefty increase in the fines that can be imposed on credit unions for regulatory violations.

Ken Johnston, assistant director of the credit union section of the state Banking Department, says his office is stepping up its oversight of credit unions in the state to ensure that "credit unions do not make the same mistakes that S&Ls did."

"One area we are paying particular attention to is loan documentation, because that is an area that thrifts had a lot of problems with," Johnston says.

In addition, effective Sept. 27, the state's new code governing credit unions becomes effective. Although the code was passed through the Legislature this summer with very little opposition and does not contain many substantive changes, Johnston says it represents one of the most up-to-date laws governing credit unions in the nation.

"This legislation provides the superintendent of banks with firm and unequivocal regulatory powers comparable to those exercised by regulators on the federal level," states Charlie Stevens, a lobbyist for the credit union industry.

Culpepper says credit unions have no desire to replace the banking industry and are in no position to challenge the dominance of the nation's financial service giants. But he says credit unions are committed to serving their members and are prepared to fight for their turf.

"We're not backing off," Culpepper stresses.

Murphy adds that the banking industry is stepping up its campaign for tax reform in the credit union industry because it recognizes that the political forces are ripe for such a change.

"Our best hope to get their tax status changed is in the context of our nation's current budget crunch," Murphy says. "In the next couple sessions, Congress is going to have to look at it as an option."

Culpepper Ancestry. The father of M. Edward Culpepper is not currently known by Culpepper Connections! If you know who he is, please contact Warren Culpepper.