FOM Expansion is at Heart of Case
Virginia Credit Union (VACU) is aiming to add 10,000 members from the Medical Society of Virginia (MSV), a coveted consumer segment.
In response, seven community banks in Virginia as well as the Virginia Bankers Association (VBA) are challenging the move, claiming the CU is overstepping its bounds by effectively seeking to operate like a traditional bank.
This battle has now been going on for more than a year and could eventually end up before the Supreme Court of Virginia.
Why do banks claim this is unfair?
Credit unions face lighter tax and regulatory burdens owing to their status as non-profit, member-owned, and therefore, tax-exempt organizations. Banks, conversely, are taxed as corporations and face much heavier regulatory burdens. Credit unions are designed to help members who might not always be able to use traditional banks, hold savings and checking accounts or access other financial products.
Banks don't want credit unions operating within what they consider their territory. Essentially, they are worried about losing customers, and perhaps someone else doing a better job looking after them.
Although this particular case in Virginia has drawn much recent attention, the issue is far larger in scope. Under the initial Federal Credit Union Act of 1934, CUs operated within a strict set of laws and guidelines. In 1998, Congress relaxed these rules, allowing credit unions to expand charters and membership-bases, and therefore operate more along the lines of other banks and financial organizations.
Unsurprisingly, this had led to continual pushback from banks claiming this gives CUs an unfair advantage and who, in this instance, feel VACU has gone too far in seeking to add 10,000 new members to its books. Such a move, they maintain, should incur the same taxation and regulation faced by traditional banks as it surpasses the legal number of members state credit unions may add at a single time, which is currently 3,000.
Landmark case for credit unions?
In order to resolve this dispute, the State Corporation Commission of Virginia (SCC) held a virtual hearing in July of 2020, with recommendations from the examiner to be passed on to the Bureau of Financial Institutions, which will have the final say.
For the time being, the MSV’s membership move is on hold until the matter is settled. There is a possibility the case may even go as far as the Supreme Court of Virginia, with the potential to become a historic landmark decision for credit unions across the country.
As both sides await the decision, the only indication of a resolution so far has come via an SCC examiner who said in October of last year there was no reason not to allow the VACU’s proposed field of membership expansion.
Naturally, this won't make bankers in Virginia or elsewhere very happy, as VBA President and CEO Bruce Whitehurst laid out: “The credit union industry is two industries. Thousands of small credit unions have single common bonds and operate as they were intended when given the tax exemption in the 1930s,” he says. However, “a smaller group of large credit unions are multibillion-dollar institutions—the functional equivalent of banks—and they are accessed through multiple common bonds or community charters where members live, work or worship.”
The VCUA is precisely one of such multibillion-dollar institution, with 200,000 members, and $4 billion in total assets. This is one reason why, should the case go against them, the bankers may look to take their fight to the state’s Supreme Court. A VCUA victory would set an undoubtedly strong precedent for credit unions across the country, while at the same time dealing a setback to the banks seeking to curb their ability to grow and expand.