Credit Union Issues

32 Federal Reserve Bank of Atlanta E C O N O M I C R E V I E W Third Quarter 1998 The ensuing debate about limits of credit union membership has extended, quite naturally, to credit union tax status (see, for example, Bickley 1997; McConnell 1998; Robinson 1998). Meanwhile, the U.S. House of Representatives and Senate have overwhelmingly passed and the President has signed a bill that would substantially annul the Supreme Court decision; grandfather past common bonds, membership, and membership eligibility; and establish principles for regulation and determining safety and soundness while leaving credit unions’ favorable tax status intact and limiting their business lending (Anason and McConnell 1998; Anason 1998a, b). The controversy swirling around credit unions is often depicted as a simple fight between a group of small mutual institutions with limited membership, limited (primarily consumer) product powers, and tax exemption and a group of generally larger, generally stockholderowned institutions that are not tax exempt (for example, see McConnell 1998; National Association of Federal Credit Unions 1997; Robinson 1998; and Schaefer 1997). However, the issues and implications of solutions for the conflict are not so simple. Changes in credit union organization and taxation are likely to affect credit unions, their customers, and their competitors in several ways. These include impacts on ease of access to credit union services by consumers; credit unions’ costs, risks, and methods of corporate decision making; their competitive position relative to other financial institutions; and the extent of operations allowed for tax-subsidized entities in providing consumer financial services.1 This article attempts to provide a basis for thinking about current credit union issues. It begins with a brief outline of credit unions’ current place among American depository financial institutions. In order to explain the development of credit unions’ special legal status around the beginning of this century, it outlines the origins of these features as attempts to solve a set of problems that plagued most depository financial institutions of the time. The problems included limited information about individual borrowers who could provide no security and costly procedures for collecting unsecured debt. The article describes how classic credit union characteristics— mutuality and common bond structure—developed to attack these listed problems and how more recent developments are generating pressures to relax common bond limits. The discussion considers the spillover of common bond issues into a debate on tax exemption for credit unions.2 In conclusion, the article turns to some of the likely impacts of changes in credit unions’ legal structure.