Turf battle grows between banks, credit unions

Should a credit union be allowed to be more like a bank?

That is the question local and federal officials are asking, and the answers differ dramatically depending, not surprisingly, whether the respondent is a bank or the credit union.

Locally, state Banking Commissioner Peter Hildreth is drafting up new regulations that would – for the first time – give the Banking Department some guidelines when deciding when state-charted credit unions can be allowed to expand beyond their restricted membership.

Nationally, credit unions are backing legislation that would give them greater flexibility, especially in expanding commercial lending.

Banks charge that credit unions are increasingly treading on their turf. They argue that some credit unions are acting essentially the same as banks, with membership definitions so broad that they might as well define themselves as serving all “carbon-based life forms” said Jerry Little, spokesperson of the New Hampshire Bankers Association.

Yet, Little emphasized, credit unions don’t have to pay federal corporate income tax (they do have to pay the state business enterprise tax), and they aren’t subject to the same rules – particularly the federal Community Reinvestment Act – that banks have to deal with.

While Little stopped short of urging that any credit unions be taxed – a call for any new taxation is a nonstarter these days – he did say that those credit unions that act like a bank should be regulated like one.

“The issue is that a growing number of credit unions are no longer alternatives to banks. They have become banks,” said Little. “They are big boys now, and they should come out and play on the same competitive field with the rest of us.

Instead they choose to hide behind their nonprofit status.”

Keith Leggett, senior economist for the American Banking Association, puts things in even starker terms.

“The empire builders within the credit union industry are silently, subtly taking away your customers,” he warned member banks. “In fact, they won’t be happy until they snatch all of your customers.”

Both right?

But credit unions emphasize that no matter how big they have grown, and no matter how widespread their membership, they are different from banks: They aren’t in business to make a profit, and they are answerable to their members, not shareholders.

“We were created to be like banks, nonprofit alternatives to banks. The problem is that banks don’t like the competition,” said Dan Egan, president of the New Hampshire Credit Union League. “If being a credit union was such an advantage why don’t they change their charter to be a credit union?”

“I think they are both right,” said Martha Yeager, a staff member of the American Friend Service Committee which has specialized in community reinvestment. “At a commercial bank, the profits do go to shareholders, while a credit union’s profits get plowed back to the membership. Still, there should be some rules so that credit unions do serve the entire community they are covering.”

It’s true that credit unions have come a long way.

According to the latest statistics supplied by the industry, federally insured credit unions hold some $557 billion in assets.

Figures on state credit unions are harder to come by, but nationally 82 credit unions hold $1 billion in assets and more than a thousand have $100 million in assets.

Locally, the largest credit union — Service Credit Union – has $753 million in assets.

Nationally, credit unions are still dwarfed by banks, whose assets are measured in the hundreds of trillions. And while locally credit union market share has been holding steady, their reach has grown.

More than a third of state-chartered credit unions have geographical membership areas. Some, like Service Credit Union — which covers every county but Coos and whose reach extends into Massachusetts and to military families in Germany – have a much broader base than many community banks. For example, membership in four other state-chartered credits unions — St. Mary’s Bank, Granite State Credit Union, Telephone Credit Union of New Hampshire and Holy Rosary Regional Credit Union — is open to anyone who lives or works anywhere in the state.

Federally chartered credit unions have to outline a detailed business plan if they wish to expand their geographical membership, leading many federal community credit unions to switch to state charters, since New Hampshire has no such rules at all.

In New Hampshire, to expand geographically all a credit union needs to do is change its bylaws, although such bylaw changes have to be approved by the banking commissioner.

“It’s totally up to the commissioner to approve them or turn them down,” said Hildreth. “But I should have a reason to do that in the rules.”

Hildreth is in the middle of drafting such rules. While they won’t be as restrictive as the federal regulations, the credit union should be able to show it can serve the new members as well as “what is the need in that location for servicing them,” Hildreth said.

The need for such rules, Hildreth said, were especially evident when he considered the application of Northeast Credit Union.

Northeast, originally a military-based credit union, had switched from federal charter in 1997, said President Peter J. Kavalauskas. At the time, it expanded its membership so that it could serve anyone who lives and works within 25 miles of its offices, which are located on the Seacoast and in Manchester and Concord (as well of all civilian and military government employees throughout the state).

That change covered most of the state, and the credit union expanded to 42,000 members.

Over the years, however, “it is an operating area difficult to explain and communicate to the general public,” so the bank submitted an application to allow it to go statewide in order to market itself better.

A statewide credit union would be “much easier and clearer,” and in the modern age – with ATMs and the Internet — it also is possible to serve people even though they lived much further, Kavalauskas wrote.

“We believe people of New Hampshire should have the right to choose us and the value we provide,” he added.

On June 4, Hildreth turned down the application without a written explanation, though Hildreth did say that in a conversation with Kavalauskas he explained he wasn’t willing to allow any more statewide memberships without any rules.

Shortly after that, Kavalauskas faxed over a preliminary proposal for the bank to serve anyone who “lives, works, worships, transacts business and attends school in six of the state’s 10 counties where they already do business: Strafford, Rockingham, Merrimack, Belknap and Carroll.” That proposal is still pending. Kavalauskas would not comment on Hildreth’s decision or on any guidelines that might be drawn up.

“If the commissioner feels he needs guidelines,” he said. “It’s up to him.”

Ostensibly, representatives of banks and credit unions support the commissioner’s efforts, but the rules had not yet been released at press time. (They were to be issued the week of June 21.)

“The commissioner is on the right track,” said Little. “If you are a small credit union in the southern part of the state, you have no business being in Coos County unless you can show that you can do it and there is a reason for you to do it.”

Egan said he expected the rules to be “relatively benign,” though he also expected banks to push for more restrictions.

“They want to have less people able to use credit unions and we want to have more people able to be served by them,” Egan said.

But if both sides are holding their fire when it comes to local regulation, they are blasting away over a bill – backed by credit unions – to loosen national restrictions on the growing industry.

The Credit Union Regulatory Improvements Act of 2003 would make rules more flexible in allowing credit unions to expand membership. It also would lift the usury ceiling rates, allow credit unions to pay their boards of directors and would enable credit unions, like banks, to more easily sell securities.

But most importantly, it will enable credit unions to increase their commercial lending activities. Currently, credit unions are limited to lending about 12.5 percent of their portfolio for loans over $50,000. The bill would allow them to lend 20 percent of their assets on loans that are larger than $100,000.

Credit unions argue that banks are not adequately servicing small businesses that need loans in the $10,000 to $100,000 range. But
Little said banks have been making those loans, and for lobbyists to say otherwise is tantamount to “going down to Washington to spread lies.”

Little says that credit unions simply want a piece of the commercial loan action. “They are trying to take commercial loans away from commercial banks,” Little said.

“This puts them squarely in competition with the commercial banking industry.”

But credit unions counter that competition is not a bad thing. And there is some echo of that from those trying to help small businesses get loans. While most do acknowledge that banks – particular smaller community banks – are making loans ranging from $10,000 to $100,00, they wouldn’t mind credit unions jumping into the territory.

“The more the merrier,” said Bob Ebberson, a former counselor with the New Hampshire Small Business Development Center.

“It would be great news if they can make that capital more available,” said Jim Cook, a Manchester attorney who specializes in start-up high tech businesses.

Credit unions also are seeking to loosen merger requirements at the federal level. Credit unions, like banks, are increasingly swallowing up one another. Bankers have complained that the federal government has let such mergers go through, even though many of the credit unions were not in bad financial condition, as required under federal rules.

The rules were put in place to keep credit unions small unless when they had to grower larger by necessity, so that they would be more easily governed by their members.

The state, however, has no such requirements, and there were three credit union mergers in the last six months: Seacoast with PEA; Granite State with Acorn; and Telephone with Greater Nashua Federal. All of these mergers – which were approved – were listed on the Banking Department docket, but that docket isn’t widely circulated, and Little was surprised that the mergers escaped public notice.

“If banks planned to merge, there would be a public debate about whether we are going to allow it. Credit unions do it in secret. Nobody is aware it takes place. It’s just another example of the double standard that exists.”

But there should be another standard, said Egan, because credit unions are different. Credit unions may not need to follow the community reinvestment act, but state law does require that its members vote on mergers, something that bank customers never do, unless their bank is a mutual savings bank.

“It’s entirely distinct from the banking community, where mergers are done for the profit of stockholders,” said Egan.

For example, said Egan, “the Community Reinvestment Act was drawn up because banks were redlining (not making enough loans in) poorer communities — the very communities that credit unions were trying to serve.”

Little and the members of his association are “looking for a solution for credit unions where a problem doesn’t exist. Credit unions do serve the communities.” NHBR