Wait, credit unions are ‘banks’ now? Not so fast…

• Key insight: Given credit unions’ decades-long deviation from the statutory limits on their operations, it might feel tempting to call them “banks,” but the differences are profound.
• Supporting data: If taxed at the same rate as local community banks, tax payments from the largest credit unions would have totaled $2.6 billion in 2024 — with $580 million going to states and $2 billion to federal coffers. By contrast, community banks paid $15.4 billion in income taxes in 2024.

Community banks are flattered to serve as a model for meeting the needs of local communities (“Every bank is in its own way a community bank,” Oct. 20), but American Banker should not conflate tax-exempt credit unions with tax-paying community banks.

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While credit unions over the years have evolved to increasingly act like banks, with the traditional limits that Congress established to justify their tax exemption eroding over time, the structural differences nevertheless are too great to ignore. If credit unions are to be called “banks,” they should meet the same tax and regulatory standards that banks do.

Let’s start with those credit union tax breaks, which Congress established in 1934 under the condition that credit unions operate as not-for-profit institutions that serve people of modest means with a “common bond,” like working for the same employer or attending the same church. Today, many credit unions have virtually no membership requirements, even marketing “great rates for everyone” to the general public.

While many credit unions across the nation have preserved their industry’s traditional structure and focus on local communities, the largest credit unions have evolved dramatically. At the end of 2024, credit unions over $1 billion in assets represented just 10% of all credit unions while accounting for 77% of the industry’s assets.

If taxed at the same rate as local community banks, tax payments from the largest credit unions would have totaled $2.6 billion in 2024 — with $580 million going to states and $2 billion to federal coffers. By contrast, community banks paid $15.4 billion in income taxes in 2024.

While community banks pay their share to Uncle Sam, large credit unions have increasingly used tax savings to acquire local, tax-paying institutions.

These acquisitions reached a record in 2024 and have kept pace since, often involving large credit unions that cross state lines well outside their fields of membership. For instance, a multibillion-dollar Michigan credit union recently announced its fourth acquisition of a Florida community bank in as many years.

With nearly two-thirds of acquired banks experiencing an increase in net operating income in the five years leading up to their acquisition, credit unions are purchasing well-performing competitors — and eliminating tax-paying local institutions in the process.

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Apart from the impact on tax revenue, an analysis of lending data shows these deals end up harming local lending. Community banks account for roughly 69.3% of Small Business Administration loans provided by banks and credit unions since 2010, compared to 2.8% from credit unions. In service areas affected by credit union acquisitions in which community banks participated in SBA programs, SBA lending fell after the acquisition nearly 80% of the time.

Home Mortgage Disclosure Act data tells the same story. In service areas affected by an acquisition, 61% experienced an increase in mortgage denial rates. Clearly, credit unions are not replicating the lending practices of the banks they acquire.

The lending impact is particularly alarming given the stark disparities between community banks and credit unions in serving lower-income areas. Since 2010, community banks represented 76.5% of SBA lending in the highest-poverty counties, while credit unions represented just 1.8%. In other words, community banks are outperforming credit unions even in the lower-income communities that credit unions receive a tax subsidy to serve.

While Congress has been slow to move on rethinking the credit union tax exemption, policymakers can take an important step toward better understanding how credit unions are using their taxpayer subsidies by aligning credit union transparency standards with other tax-exempt industries.

As the Treasury Department conducts a Form 990 Transparency Initiative to study annual reporting standards for tax-exempt organizations, credit union reporting has become a hot-button issue due to a multimillion-dollar embezzlement scandal in Mississippi. The scheme led to the closure of a tax-exempt credit union just days after its former CEO pleaded guilty to federal criminal charges.

While there is no way to know whether filing a Form 990 would have flagged this nonprofit C-suite fraud sooner, annual reporting requirements provide an important layer of scrutiny for institutions that receive a tax exemption.

Ultimately, favorable credit union policies are tilting the scales in favor of a taxpayer-subsidized industry, which is why Washington should act. In addition to requiring federal credit unions to file Form 990, policymakers should eliminate the federal tax exemption for credit unions over $1 billion in assets to help ensure taxpayer dollars no longer distort the competitive marketplace, subsidize community banking consolidation, and reduce banking options for consumers and small businesses.

With even credit union advocates acknowledging that the industry’s evolution is eroding the rationale for its tax benefits, the economic outlook for Main Street America clearly depends on much-needed changes to federal credit union policy that will keep pace with the industry’s transformation.