Bank Lawyer's Blog

CRA Extension: Let's Focus On The Real Issues

We're waiting on pins and needles for the details of the next great idea for disposing of toxic assets on the balance sheets of big banks by enticing private investors to participate in working out those assets with a government whose word is no bond, and which blows with the prevailing winds. Let's hope the buyers get their money up front, then move to a country with no extradition treaty with the U.S. Otherwise, when Congress and/or the American people decide the deal was too good for private equity, they'll change it or punitively tax it retroactively

While we squirm with anticipation, we can't help but notice that Texas Rep. Eddie Bernice Johnson is pushing forward with a bill to extend the coverage of the Community Reinvestment Act to non-banks, such as credit unions and non-bank mortgage lenders. It's been something that liberal Democrats have been targeting for years, including Barney Frank. It's expected that Republican opponents will trot out the tired shibboleth that the CRA "caused" the subprime mortgage crisis. As we argued last December, that argument is simply not sustainable by anyone other than those who favor their Kool-Aid laced with cyanide. Even Sheila Bair and John Dugan agree on that point.

As The Washingtonn Independent noted last week, the Federal Reserve Board recently offered further support for our position.

Amid the ongoing debate over mortgage lending reform, a top federal regulator took a seat before Congress last week and debunked the myth — popular among conservatives — that a law encouraging loans to low-income communities has been largely responsible for the nation’s housing crisis.

“I can state very definitively,” Sandra Braunstein, director of the Federal Reserve’s consumer and community affairs division, said during a House Financial Institutions subcommitte hearing Wednesday, “that from the research we have done, the Community Reinvestment Act is not one of the causes of the current crisis.”

[...]

She cited a Federal Reserve Board analysis which found that, in 2006, CRA-covered banks operating in CRA-targeted neighborhoods accounted for just six percent of the risky, high-cost loans largely responsible for the housing crisis. Mortgage loans are considered high-cost when interest rates are at least three percentage points higher than those of conventional mortgages.

“So I can tell you,” Braunstein said, “if that’s where you’re going, that CRA was not the cause of this loan crisis.”

[...]

“Our analysis of the data finds no evidence, in fact, that CRA lending is in any way responsible for the current crisis,” Fed board member Elizabeth Duke said in a speech before representatives of the banking industry last month. “The CRA is designed to promote lending in low- to moderate-income areas; it is not designed to encourage high-risk lending or poor underwriting.”

Advocates are quick to point out that the CRA includes a safety and soundness provision that discourages bad loans. “It has a built-in check saying that [banks] have to lend in a way that’s good for the institution and good for the community,” said Danna Fisher, legislative director at the National Low Income Housing Coalition.

Of legitimate concern to banks, however, is that Johnson's bill would require regulators to determine whether lenders are adequately serving all minorities, not merely low income communities, as is the case under the existing CRA. The addition of new criteria will give extortionists consumer advocacy groups more ammunition to extract money concessions from banks that want to merge, acquire another institution, or branch. One more layer of cost of regulatory compliance at a time when pressures on banks' bottom lines are greater than ever. The fight should be over whether this extension of federal law is necessary in light of its costs, and the battle ought to be waged on statistical evidence, not on ideological cant.

There's plenty of fodder to feed a "healthy debate" about the extension of CRA to new areas and covered lenders. Raising straw men won't give credibility to the law's opponents.

How About A Moratorium On Moratoriums?

Word came today from Teresa Rice, General Counsel of the Minnesota Bankers Association, that a major amendment was made on the Minnesota Senate floor on Monday of this week that exempts loans originated by state or federal banks, savings banks, or credit unions from the one-year foreclosure "deferment" provided by the Minnesota "Subprime Borrower Relief Act of 2008." The law has been making banks in the land of a thousand lakes sweat a bit (a lot, actually). In an e-mail to me today, Tess stated that the proposed legislation "is the first major bill in a long time that the Minnesota Bankers Association has had to completely oppose." At the rate the cynics in state legislatures across the country are churning out this chum, it may not be the last.

At least we didn't have to face the astonishing prospect of federally-chartered banks and thrifts pulling out the big stick of federal preemption and then having state banks, thrifts and credit unions cry about a competitive disadvantage (or simply switch charters). Then again, "eligible foreclosed loans" that were originated by non-financial institution lenders and purchased by banks and thrifts (and securities that are backed by such loans) are still in for impairment.

Housing Wire's Paul Jackson reported yesterday on a similar one-year moratorium bill passed by the New York Assembly (along with three other consumer protection measures). It does not appear to contain an exemption for banks, thrifts and credit unions. If it makes it through the Senate and is signed by the governor, perhaps we'll get to see how "astonishing" are the actions of federally-chartered banks and thrifts in pushing preemption. The legislation would give the trial court the right and obligation to determine a new mortgage payment for the duration of the moratorium in an amount "which will preserve the relative financial interests of both parties under terms which are equitable and just." Cool. No rewrite of the mortgagee's contract there, is there? No, there isn't, according to one of the bill's sponsors.

Under the terms of the bill, lenders would need to certify their complete cost of carry — traditionally, around 1.5 percent of unpaid principal balance per month — which would be paid by the borrowers in lieu of their full mortgage payment during the stay period.

Specifically, the bill says that the “lender must establish to the satisfaction of the court the minimum monthly amount necessary to preserve their relevant financial position so as to prevent an erosion of the mortgagee`s financial position.”

Amusingly, the bill also says that “the purpose is to postpone the mortgagee’s profit and not to cancel or alter the terms of the mortgage agreement.” For one thing, lenders don’t profit from a foreclosure, so the bill is essentially winding up losses for all parties, not postponing some sort of phantom profit; for another, the bill most certainly alters the terms of the borrower’s mortgage agreement — that’s the very textbook definition of a one-year moratorium on payments.

Don't throw ugly facts into a perfectly positioned political spiel, Paul. The force of logic's irrelevant to a cynic. Speaking of which, Sheila Bair ought to be on board with this bill, regardless of its financial impact on any FDIC-insured institutions. It appears to be pro-consumer, and underlying financial reality is not a consideration.

The long-term foreclosure moratorium appears to be the flavor of the day for pols eager to show the voters that they'll stand up for the little guy and face down evil  mortgage lenders. New York State Assembly Speaker Sheldon Silver spun it so well.

"The federal government was quick to bail out big businesses like Bear Stearns from near-collapse, but seems to have all but forgotten the everyday common household victims of this national crisis," said Silver. "We in the Assembly Majority want to see New York's families stay in their homes and our communities to remain intact. Our package is not a bail out. It's an assistance program to help homeowners in our state keep the American dream from turning into a nightmare."

That's right, the unique "bailout" of Bear Stearns to prevent a general collapse of the financial system (which even economic moralists like Warren Buffet and Charlie Munger thought was a justified exception to the "moral hazard" rule) is the same as artificially delaying the foreclosure of thousands of subprime loans to borrowers who can't pay them now and won't be able to pay them in a year. And the fact that it's an election year means that "the Assembly Majority" doesn't give a rat's tukus that the effect of such legislation won't make a silk purse out of a sow's ear, which will still be attached to the same lipstick-wearing pig when the moratorium expires. Of course, that will be after November 2008, won't it? At that point, while the voter/borrower pigs are butchered, the legislator pigs will be back grunting at the public trough.

Speading the Joy

According to today's American Banker (paid subscription required), Barney Frank addressed the National Association of Federal Credit Unions and gave them the good news and the bad news. The good news was that he supported reform legislation being pushed by credit unions (the Credit Union Regulatory Improvements Act) that would raise the cap on business lending to 20% of a credit union's assets, from 12.25%, and would let any credit union, regardless of charter type, add underserved areas to its field of membership, increase lending investment limits, and ease restrictions on mergers and conversions. The bad news was that he intends that credit unions be subject to the Community Reinvestment Act.

"The principle that every financial institution has some responsibility to its community is where we start," he said. "How that is enforced is flexible … . I do not think that what we come up with will be any added burden for most of the credit unions."

No, of course not Barn. No more burdensome for credit unions than it is for banks and thrifts, who find CRA a pleasant exercise along the lines of dealing with loan sharks who threaten to break your kneecaps if you don't pay the "vig" on time and with the demands of terrorists who claim that they will execute one bank employee for every hour that you do not supply them with $1 billion (US) in unmarked bills and a Gulfstream V stocked with Tattingers, Dewar's, and 5 blond hookers with "large American breasts."

I recall a bank acquisition in the 1980s on which I worked while living in a Rocky Mountain metropolis. I worked for the buyer, which we'll call "Gonzo Bank," in honor of the late, great inventor of Gonzo Journalism, Aspen resident, and consumer of mass quantities of Mescaline, Hunter S. Thompson. Gonzo Bank was bushwhacked by a "community activist organization" we'll call SCUM (Society to Cut Up Money). SCUM called the local press, then held a noisy "rally" (i.e., riot) inside the bank's lobby at its downtown headquarters. They chanted slogans regarding the bank's failure to support inner city housing, and railed to the press and the cameras that there was no way a bank with such a poor CRA record should be allowed to acquire another financial institution, notwithstanding the fact that the bank had received a "satisfactory" CRA rating from its primary federal regulator. In a counterstrike of sheer brilliance, the bank agreed to contribute six figures to SCUM and to a fund for inner city housing administered by SCUM. SCUM's objections magically melted away.

Yes, credit unions need a taste of the third world thug-o-cratic tactics that only federal "do-good" legislation, enforced by the ruling classes of the "professionally aggrieved," are able to inflict. If banks and thrifts have to put up with this, there's no reason that credit unions shouldn't, especially if they're going to get all those juicy reforms that will make it difficult to tell a  bank from a credit union except when you're discussing net income "before taxes" and "after taxes."

Race To The Bottom: Part Deux

In June, when the FDIC issued its final Affordable Small-Dollar Loan Guidelines and FDIC Chairman Sheila Bair was pressing commercial banks to compete with payday lenders for the "Mini Me" loan biz, even banks in states like North Carolina, which kicked out the bottom feeders, were rolling their eyeballs in disdain at the prospect of rushing in to fill the breach. Among other problems, the Guidelines "encourage" banks to cap the APR at 36 percent.

"The $64 question is what interest rate or credit cost do you need to give the lender an incentive to make these small loans, based on their risk and size," said N.C. Commissioner of Banks Joe Smith.

"My impression of the banks' perspective is that these are slightly to very much riskier than most loans, so their question is if they charge a rate that gets them a return, will they be vilified? Or if they charge a rate everyone thinks is reasonable, how much will they lose?"

[Lets briefly take a detour and touch on the issue of the "annual percentage rate" of payday loans, since a post I did last March that mentioned, in passing, that typical payday loan APRs were in the neighborhood of 390% drew the charge from a junior associate at a law firm in some backwater burg that I was being "ridiculous" to use an annual percentage rate in describing the yield on a payday loan, inasmuch as most payday lenders charged a flat fee (say, $15 per $100 borrowed) and most payday loans only lasted a week or two. Even if my critic's contention as to average loan maturity was accurate (and it was not, since most payday loans are rolled over repeatedly), he "overlooked" the requirements of the Truth In Lending Act, which requires the finance charge to be disclosed in the form of an APR, so that (as the FTC explains in its consumer alert   entitled "Payday Loans = Costly Cash") the consumer may "[c]ompare the APR and the finance charge (which includes loan fees, interest and other types of credit costs) of credit offers to get the lowest cost." Therefore, like the FTC, the FDIC and the rest of the thinking man's (and woman's) bar, we will use annual percentage rates when discussing yields on payday loans, "ridiculous" or not.]

The North Carolina banks banks profiled in the linked article didn't believe that there was enough bang for the buck to justify dipping their toes in the shallow water. Even the lone credit union that offered a payday loan-like product wasn't making any money on it because it was barred by state law from charging more than an 18% APR and it was actually requiring the loan to be paid back in 90 days. If it had only rolled the loan over (and over and over) and neglected to comply with the usury laws, it might, like Madonna, have been able to "get into the groove" and make some real payday lender-like money.

Lyndsey Medsker, spokesperson for the Community Financial Services Association of America, which, according to another article, represents about 60 percent of the payday loan industry, said the 36% annual percentage rate cap was a non-starter for commercial banks.

"There's an effort to cap loans at 36 percent annual rate, which the FDIC guidelines suggest. How that works into two- week loans is $1.38 per $100," she says. "I know payday lenders can't make money on that, so banks couldn't possibly either."

As an alternative, a bank could do it the Wells Fargo way.

Wells Fargo & Co. started a direct-deposit cash advance program in 1994, intended as a short-term solution for small emergencies. It's available for all customers with a direct deposit of $100 or more a month, allowing them to borrow up to $500. The bank charges $2 for every $20 borrowed, which can translate into interest rates comparable to those of payday lenders.

Kathy Bolner, Wells Fargo community banking president for Central Texas, says despite the high cost, the bank has an advantage over payday lenders.

"Direct-deposit advance is an efficient way for them to have access to funds in an emergency situation," Bolner says. "But we spend a lot of time visiting with them about the full financial picture as opposed to just reacting to an emergency."

Of course, Wells Fargo's a national bank, not subject to the FDIC guidelines and their "suggested" cap. Wells Fargo's way would not be the way for a state chartered, non-FRB-member bank.

It's too soon to be certain, but early indications appear to be that this effort of Ms. Bair's is being met by most banks with a big, fat yawn.

Cornfed Consideration

A thoughtful reader from the heartland pointed out to me that while grandstanding New "Yawkers" may be making grand gestures to draw attention to the fact that credit unions are (gasp) tax exempt competitors of banks, slow-paced Kansans are taking a more deliberate and, perhaps, more ominous approach. Ominous, that is, if you're a credit union in Kansas.

The 2007 legislative session is nearing its end. But the year's key policy debate appears just to be starting for the state's credit unions.

The chairwoman of the Senate Financial Institutions and Insurance Committee says she plans to ask legislative leaders to create a special committee later this spring to study credit unions' "fields of membership."

A 2006 study by the Legislative Division of Post Audit said the Kansas Department of Credit Unions had been too liberal in its application of the state's law regarding membership for credit unions. The results, the study said, are credit unions that serve too broad a range of consumers.

Sen. Ruth Teichman, R-Stafford, agrees.

"They've overstepped," says Teichman, a banker and leader of the financial institutions committee. "It appears to me they are violating the law."

In the end, the Kansas Bankers Association -- long a competitor of the state's credit unions -- asked for a special legislative committee to study the issue. The Senate committee agreed earlier this year. Teichman says she plans to make the request of legislative leaders, who are expected to comply.

[...]

The bankers association says credit unions have left their traditional roles of serving low- and moderate-income Kansans through what state law calls a "common bond" of membership, such as through an employer or church.

Many credit unions -- the post-audit study declared -- don't have a single "common bond," such as serving only teachers or union mechanics. Many serve a variety of employees from a variety of industries.

Sounds familiar, eh?

Credit Union regulators and trade groups disagree, to no one's surprise.

The Kansas Department of Credit Unions says of the state's 90 credit unions, 43 of them have a single common bond. But 47 of them have multiple common bonds.

But John Smith, the department administrator, says the KDCU has applied the law the same since it was created by the state banking commission in 1968. In fact, the department says credit unions have been chartered with multiple common bonds since the 1950s.

"That has always been the practice," Smith says. "We have a real mixture of fields of membership. A lot of that continues today."

Many credit unions have expanded their fields of membership through mergers that have helped credit unions remain viable, Smith says. He says if the Legislature decides the law hasn't been followed, it should alter the law to reflect the department's practices.

"I don't think you could unwind what's been done," he says.

Yet, that may happen. I assume that the "special committee" will consider that factor, among others.

Credit union supporters point out that credit unions only control about 5% of the market. That's 5% too much for bankers, who believe that if credit unions are going to stretch "common bond" boundaries to the limits of elasticity, and compete with commercial banks for the same base of depositors and borrowers, they ought to pay the same taxes. Anyone who shops for rates realizes that credit unions offer better rates on deposits and loans than their local commercial banking competitors, due to the tax free nature of their income. It's a tremendous competitive advantage.

I speak from personal experience. My wife joined a local credit union, open to residents of the state of Texas (how's that for a narrow common bond), because it offered the best interest rate on an IRA certificate of deposit with the term she desired. I would have called her a traitor to my cause, but the fringe benefits our relationship then would have been endangered and--with all due respect to commercial banks--I'm a weak man when it comes to fringe benefits.

At any rate, while a bold statement made solely to gain publicity may make the loudest public splash, the beneath the waves, "silent running" of a special committee might be a more productive method to craft a legislative "fix" to a problem that continues to irk community banks.

We'll keep our eyes on the land of waving wheat to see how it goes. The fact that the fight against credit unions is being led by the chair of the Financial Institutions and Insurance Committee of the Kansas Senate, a woman described by her web page as a "banker/farmer," means that credit unions in Kansas won't take the threat lightly.

Land of the Futile Gesture

I grew up in New York State, as did both of my parents and both sets of grandparents, so I have fond memories of the Empire State. I just thank G-d that today, I'm a Texan. And screw you, Natalie Maines.

Current Governor and perennial school yard bully, Eliot ("Fritz") Spritzer, wants to know how to preserve New York City as the financial hub of the known universe. Naturally, he's appointed a blue ribbon panel to answer this burning question.

New York Governor Eliot Spitzer's office said he has signed an executive order creating a commission to identify ways for New York to retain and enhance its status as a world financial capital.

The panel, known as the New York State Commission to Modernize the Regulation of Financial Services, will review all current financial-services statutes, regulations, rules and policies and propose legislative and other necessary changes, Spitzer's office said Tuesday.

This, from a guy who spent most of his time as Attorney General hounding the most innovative financial geniuses on cleaning up corruption in Wall Street for the sake of his political ambitions good of the common man. I've got a short answer for you Fritz: urge Congress to repeal SOX and then move to California. That ought to boost the standing of New York into the ionosphere.

Not to be outdone by the Democratic thug in Albany, a grandstanding Republican state legislator from Orange County, New York has introduced a bill that he, and every proponent and opponent, agree is not l ikely to become state law and, if it should become law, is preempted by federal law.

A bill proposed in New York state to tax federally chartered credit unions has little chance of becoming law, a Western New York banker and credit union CEO concede, but it should raise public awareness of the issue.

"This is a step in the right direction. It might take a lot of time but it should shed light on the merits of the issue that banks need a level playing field and on what is fair," says Salvatore Marranca, president and CEO of Cattaraugus County Bank. He also is a former president of the Independent Bankers Association of New York State.

He and Ann Brittin, president and CEO of Cornerstone Community FCU - though they are on opposite sides of the issue - agree that a law in New York, or any other state, has little chance of passage because it would be trumped by a federal law that grants the tax exemption to credit unions.

The bill, introduced in April by state Sen. Thomas Morahan, a Republican representing Rockland and Orange counties, would eliminate the exemption that allows federally chartered credit unions to do business in the state tax-free.

"Many federal credit unions have become very large with hundreds of millions of dollars in assets, often equal in size to regular banks," Morahan said in a memorandum accompanying the bill. "However, credit unions are not required to pay the same taxes that regular banks are."

The National Credit Union Administration, which regulates federal credit unions, said federal law would Prue-empty any state law that attempts to revoke the exemption.

Bankers groups, while they oppose the exemption, also agree that federal law takes precedence.

Yes, I see now: by introducing a bill that will never pass and if passed will be preempted, Rep. Morahan has brought to the public's attention the previously unknown facts that some credit unions are large and all are tax exempt. Right now, I'm vibrating like a tuning fork with fury at this outrageous state of affairs. I'm certain that New York voters feel the same.

We pay these people. Well, "we" don't. New Yorkers pay these people. I feel their pain.

In Texas, we periodically cull the political herd of the stragglers and runts. Usually, we try to pawn them off on D.C. Failing that ruse, I suggest that New Yorkers either retire these chowder heads or find a "bridge to nowhere" project to keep them occupied.

Califonia Commercial Banks vs. Credit Unions: The Raisins of Wrath

Commercial banks in Massachusetts may or may not heed my tongue-in-cheek call to fund their PACs and press for legislation to curb the growing competitive clout of credit unions in that state, but in California, 2007 promises to be a legislative slug-fest.

The California Bankers Association legislative agenda for this year is focused on reining in expansions by credit unions and increasing regulations for non-bank mortgage lenders.

The Sacramento-based CBA, which represents more than 300 banks, isn't pushing any specific legislation itself. Instead, it plans to educate lawmakers about its two main issues.

After losing many battles in the 1990s, the CBA largely stopped challenging credit unions' tax-free status. Although that status still angers bankers, they concede that horse left the barn a long time ago.

But this year, the bankers group is anticipating an expansive play by credit unions. Credit unions still have to ask for regulatory permission to expand their service to a geographic area, and in the past such approvals weren't always forthcoming.

Ah, so the best offense is a good defense! That's a twist on the usual canard.

As is the case whenever you're speaking with legislators, "money talks."

The California Credit Union League, the bankers say, has a war chest for marketing and lobbying efforts to be able to expand more easily and also to fight for other issues.

A "war chest." As big as Jessica Simpson in camouflage combat fatigues? Wisely, perhaps, the article gives us not a clue. It does, however, give us more of the anti-CU spin of flaks for commercial banks.

Credit unions and banks have been battling for years over some primary differences. As cooperatives, credit unions don't pay taxes, which riles bankers who do the same business and pay hefty corporate taxes because they are for-profit operations.

Credit unions look and act like banks but have far less regulatory structure and oversight, said Anissa Routon, senior vice president of marketing and communications for the CBA.

The bankers contend credit unions are far evolved from their historic start as co-ops for small, unbanked groups, such as employees and church members. Credit unions remain limited to serving their "fields of membership," which can be a geographic area or group of workers.

Credit unions are starting to remind me of the weather: everybody talks about them, but nobody does a thing about them.

The CBA's similarly-sized (DD) war chest isn't scaring credit unions, though.

"We continue to look for ways to modernize credit union legislation," said Bill Cheney, chief executive officer of the California Credit Union League. He denied the league has any war chest or agenda. The league is working to expand banking services to people of modest means, those people who often are targeted by cash advance and check cashing companies. "We want to ensure that credit unions have the flexibility to meet their customers' needs. We are looking for better ways for credit unions to serve their members, just as banks are doing for their customers."

Thus, the credit unions set themselves up as the poor little mutual, with empty pockets but hearts lined with gold, just lookin' out for the little guy. If to do that, they've got to battle the capitalist pig oppressor and his commercial banking running dog lackeys, well so be it.

"Bring 'em on!"

Just like Ma Joad puts it so well in The Grapes of Wrath, the "Peeps" will never quit.

Rich fellas come up an' they die, an' their kids ain't no good an' they die out. But we keep a'comin'. We're the people that live. They can't wipe us out; they can't lick us. We'll go on forever, Pa, 'cause we're the people.

And speaking of Woody Guthrie (?), we couldn't let a reference to 1930's-era populism pass by without tying in net neutrality. Why? Because it's our blog, that's why.

All We Need Is Love (And The CRA)

In a surprising twist of the old adage that "the enemy of my enemy is my friend," the president of Western New York's largest credit union is reaching out to small community banks to gather them together in a coalition of the "kinda, sorta" willing, in order to battle a common foe: the Community Reinvestment Act.

When it comes to CRA, Michael Vadala, president of Summit Federal Credit Union, thinks that credit unions and some banks -- especially smaller institutions -- should be allies instead of enemies.

"I'm not going to help banks because they certainly don't want to help us," he says. "But I would not be opposed to giving small community banks regulatory relief from CRA. If smaller banks sought it, we wouldn't fight them."

"We wouldn't fight them." Wow, ratchet back the enthusiasm, Mike, before you embarrass yourself!

Community banks should keep firmly in mind all those Christian and democratic partisans in Yugoslavia during WW II who grasped the helping hand of Communist partisan leader Tito and then found themselves on the wrong end of the gun barrel after the Nazis were defeated. Strange bedfellows make...well...strange love.

CRA bubbled up after the November election because with Democrats taking control of Congress, bankers groups and some consumer organizations have begun expressing optimism about forcing CRA-like requirements onto credit unions as they have been applied to banks for years.

[...]

Vadala says credit unions are united in their opposition to CRA, but he also thinks that small banks can make a case for being exempted.

"It's a huge compliance burden for a small-community bank," he said. "And I think an argument can be made that small banks should not be subject to CRA. It's pretty hard to imagine small banks taking money out of a town and investing it, say, in Texas, for example."

I nearly fell out of my chair laughing at that one, having knowledge of a small community financial institution (under $100 million in assets) that raises money from deposits and lends it all over the country, including a whopping portion right here in, say, the Lone Star State, for example.

"Hard to imagine"?

Hardly.

Of course, small banks are responding to Mr. Vadala's "goodwill hunting" gesture like Dick Cheney in a field full of quail.

Salvatore Marranca, president of Cattaragus County Bank, has been a longtime outspoken critic of what he calls credit unions' special privileges that create unequal competition for banks.

"He's (Vadala) right. Small banks should not have to deal with CRA. But we do and it is a burden and helps cause an uneven playing field which credit unions don't have," Marranca said.

Marranca, a former president of the Independent Bankers of New York State, said his Little Valley-based bank is examined by state and federal CRA examiners about four weeks every year. It's time-consuming and costly, he said.

So are taxes that banks have to pay, but not credit unions. Marranca said taxes are a major contributor to the disadvantages small banks face in competing with credit unions.

"Three of my branches have credit unions right across the street. This year I am paying approximately $490,000 in taxes. My competitor 291 yards away is not paying a penny," he said.

In other words, thanks for the support, but I still hate your tax exemption AND your guts!

Vadala said he believes that the war between credit unions and banks is being waged by their respective trade associations more than by individual institutions.

"Having been an NAFCU director for nine years, I've seen it from that perspective. Credit unions and small banks both serve their communities and small businesses, and there are a lot of common interests. There should be less fighting," he said. "I get along well with bankers, though there are some issues like taxation and CRA that we don't talk about."

Unfortunately, as Salvatore's rant proves, regardless of the topic that you start out discussing, the subject will eventually turn around to the credit unions' tax status and then the whole kit and caboodle goes sliding downhill faster than Kirstie Alley's butt when she's off the Jenny Craig diet plan. Pretty soon, you're right back to where the enemy of your enemy is your enemy.

CreditUnionsSuck.Com

According to recent press reports, the battle between commercial banks and credit unions in Massachusetts is getting downright nasty.

The Massachusetts Bankers Association escalated its drawn-out war with credit unions last month when it launched its CreditUnionRuse.com Web site.

The site paints a scathing picture of credit unions as ever-expanding financial institutions that cost taxpayers tens of billions of dollars under an exemption granted them 70 years ago. It's an old flap, one that credit unions counter by saying they are community-based organizations striving to offer the services their members demand.

Banks have long been irked by the tax-free advantage that credit unions have enjoyed. As long as credit unions remained relatively insignificant players in the competition for customers, banks left them alone. However, in recent years, credit unions have been pushing the envelope of "membership," and expanding their banking services, to the point that they're drawing increasing flak from banks. The Massachusetts Bankers Association web site raises (or lowers, depending upon your viewpoint) the fight to a new level.

"We're asking for a level playing field," said Bruce Spitzer, director of communications for the Massachusetts Bankers Association. "Let the market dynamics decide what prevails. But it's not a level playing field if these credit unions don't pay taxes."

The Lowell Five Cent Savings Bank is facing stiff competition from Jeanne D'Arc Credit Union, which has 13 branches in the Lowell area. Glenn Goldman, the bank's compliance and security officer, said the neighboring credit union has only slightly less assets than his bank's $700 million, yet has no tax liability. The credit union's infringement on commercial customers cuts deeply.

"A credit union can do the great majority of things that a bank can do, but at a 40 percent tax advantage," he said. "We're trying to compete for the same depositors, for the same borrowers, and now for the same commercial depositors and borrowers, but at a significant disadvantage because of the tax issue."

Both sides admit that the issue is a political one and, no matter how much clout commercial banks have at the state level, that clout is likely to do them little good.

Because federal law does not tax credit unions, he said, changing the state law would not accomplish what the banking industry is seeking. Local credit unions could simply switch their state charters to federal ones, thereby dodging all state control, he said.

"I have never supported and do not support now the taxing of credit unions," said [state Senator Andrea F. Nuciforo Jr.]. "It's a simple answer. Federal law does not permit it. It wouldn't improve our situation. We wouldn't generate any more revenue, and it would take from the state the ability to regulate these institutions."

If banks really want to "take it to the mat," snarky web sites directed toward consumers are not likely to get the job done. What a consumer cares about is who offers the lowest loan rate and the highest savings rate. Period. He or she cares not a fig for your "ruse" arguments.

Fuel those engines of change, my banker friends. You know what I'm talking about: PACs. Contribute soon and often to your favorite federal legislators' campaigns and remember the sage advice of Abraham Lincoln's Secretary of War, Simon Cameron: "An honest politician is one who, when he is bought, will stay bought."

New Developments in the Battle between Banks & Credit Unions

Banks have long been jealous of credit unions’ tax-exempt status.  The battle has intensified as credit unions attempt to expand their powers.  Banks believe credit unions have an unfair competitive edge due to their tax-exempt status (and their exemption from the Community Reinvestment Act, an often costly statute for banks and thrifts) and credit unions counter that banks have seen record profits and have no room to complain.  Even the Dallas Fed sees credit unions as one of the threats to community banks:

“Credit unions, aided by favorable legislation and regulation, have emerged as another particularly severe threat to small banks. Beginning in the early 1980s, rule changes gradually relaxed the “common bond” requirement for credit union membership, leading to legislation in 1998 allowing a federal credit union to serve multiple membership groups. The loosening of membership restrictions enhanced growth opportunities, especially when coupled with policies favoring credit unions over banks, such as credit unions’ exemption from both federal taxation and the regulatory requirements of the Community Reinvestment Act.”  (http://www.dallasfed.org/research/swe/2004/swe0401b.html)

Credit Unions in California were dealt a blow this week in their on-going effort to expand services to non-members, particularly minorities and low-income individuals.  California Senate Bill 1292 died in the Assembly Banking and Finance Committee.  It was designed to allow state chartered credit unions to provide certain services to anyone eligible for membership (i.e. they would not be required to have an account with the credit union to receive certain services).  The services included check cashing, issuing money orders, and transferring money to foreign countries. 

The California bill is just one of the many efforts by state and federally chartered credit unions to expand their services, in this instance by providing check cashing privileges to non-members.  Ohio has a bill pending that would permit credit unions to offer check cashing for non-members.    Wisconsin and Michigan permit check cashing for non-members (Michigan expanded the check cashing capabilities of its credit unions this month). 

The US House of Representatives passed the Financial Services Regulatory Relief Act of 2003 (H.R. 1375) in March and begins hearings this month on the Credit Union Regulatory Improvements Act (H.R. 3579).  Expanding the check cashing powers of federally chartered credit unions is a minor provision in these bills, which would greatly expand the powers of federal credit unions.    The battle between banks and credit unions is already acrimonious, but as the House and Senate consider these bills, we can expect the rhetoric to get even worse.
---Anna Dolak