Feud is Alive and Raw for Banks and Credit Unions

Alexander Hamilton and Aaron Burr. Al Capone and Bugs Moran. The Hatfields and the McCoys. The Montagues and the Capulets: famous feuds that evoke specific images of warring enemies. We know them from history and fiction, but unless you pay close attention to the financial services industry, you may not know much about the blood feud between banks and credit unions.

A credit union is a not-for-profit mutual association owned by its members rather than shareholders. A deposit into a credit union account equates to "shares" evidencing a member's ownership of the association. Credit unions are chartered and regulated by either the state department of financial institutions or by the National Credit Union Association, and "share accounts" are insured by the National Credit Union Share Insurance Fund, similar to the FDIC. A member draws on her share account by issuing a "share draft" rather than a check. Credit unions make consumer loans, home loans, some types of business loans and other traditional banking services. Credit unions cannot offer their services to just anyone. They are limited to "fields of membership" of people or organizations with a "common bond." Credit unions can be small organizations that serve relatively small fields of memberships, such as the employees of a particular plant or business or large financial institutions like the $2 billion Eastman Credit Union in Kingsport.

A bank is a for-profit corporation owned by shareholders. It is chartered and regulated by either the state department of financial institutions in the state of domicile or by the Office of the Comptroller of the Currency if it's a national bank. Banks have customers, not members, and they offer a myriad of deposit and credit and investment products. Bank deposits are insured by the FDIC, and a bank may offer its services to anyone. Banks, like credit unions, range in size from small community banks to multibillion-dollar companies.

The credit union "movement" began in 1844 with a group of weavers in Rochdale, England, who established the Rochdale Society of Equitable Pioneers. They sold shares to members to raise capital necessary to buy goods at lower than retail prices, and then sold the goods at a savings to members. The movement spread to Germany in 1850, to Canada in 1901, and the United States in 1908. Credit unions were originally small organizations of individuals who had something in common, most frequently their jobs. Because these credit unions were member-owned and non-profit cooperatives, they were not taxed.

Over time, credit unions, through effective lobbying efforts, have encouraged the passage of state and federal laws that have expanded their ability to offer a broader range of products and services and take in multiple groups. Some credit unions serve entire communities; some have national fields of membership. Some of these financial institutions are much larger and more complex than community banks.

I grew up in a family that never had a bank account. My father was a member of the Dupont Credit Union in Old Hickory, Tenn. Only people who worked at DuPont and their families could join the credit union. Daddy saved his money in his share account and when he retired, he had enough to buy his retirement farm. He borrowed money from the credit union to buy the house we grew up in, and I watched my parents burn the mortgage papers when they'd paid it in full. He didn't need sophisticated products and services, and the credit union didn't offer them: just plain vanilla savings and home loans. That was a traditional credit union.

Today, the financial services landscape is different, but in some camps and communities, the feud is alive and raw. So why the feud? Banks pay federal and state taxes. Credit unions do not.

Because credit unions are mutuals, they have not been subject to federal taxation. However, mutuality alone cannot be the only explanation for why credit unions are not taxed because other mutually owned enterprises are subject to taxation. Proponents of the exemption from taxation argue that because credit unions cannot raise capital by public offerings of equities, they must be permitted to build capital internally through retained earnings.

For many years, lobbyists for banks and credit unions' grass roots efforts have fought it out in Washington over the taxation issue with banks arguing that when credit unions were true consumer organizations with real common bonds of membership, taxation was not appropriate. Now that many credit unions compete with tax-paying banking organizations for business, the playing field is uneven.  


Kathryn Reed Edge KATHRYN REED EDGE is a member of Miller & Martin PLLC, a regional law firm with offices in Nashville, Chattanooga, and Atlanta. She heads the firm’s Commercial Department and concentrates her practice in representing financial institutions. She is a past president of the Tennessee Bar Association. Her column, “Bank on It,” appears quarterly in the Tennessee Bar Journal.