The Kansas Bankers Association, the Kansas Credit Unions Association, and the Kansas Senate have agreed to a compromise that will set boundaries for credit unions’ expansions in Kansas.
The Associated Press reported Thursday that the Senate had passed a bill to define some aspects of credit union operation. The bill passed on a 35-2 vote and will be sent to the Kansas House of Representatives for consideration.
Passage of the bill is not expected to directly affect either the Emporia State Federal Credit Union or the Credit Union of Emporia; banks, however, could be affected by the limitations that would be put on credit unions.
The KBA had asked for a Legislative Post Audit after a handful of credit unions began opening offices outside what the KBA believed were the parameters of state law.
Doug Wareham, KBA lobbyist and senior vice president of government relations, said that his organization had encouraged the audit.
The LPA committee in a May 2006 audit report recommended that the Kansas Department of Credit Unions needed to “strengthen its monitoring efforts and the follow-up procedures it takes to ensure that credit unions comply with laws and regulations.”
The LPA committee found the KDCU had allowed some credit unions authority that may not have been acceptable under Kansas statute.
“The Department of Credit Unions also has allowed some credit unions to expand their fields of membership beyond what Kansas law appears to allow,” the LPA report stated.
“For the most part, the Department has and follows adequate procedures to ensure credit unions’ safety and soundness. However, improvements are needed to strengthen its monitoring efforts and the follow-up procedures it takes to ensure that credit unions comply with laws and regulations.”
Senate Bill 535 was intended to alleviate those concerns in a compromise satisfactory to both credit unions and banks.
Wareham and KBA materials provided background for the issues that concerned bankers’ associations.
The KBA said that credit unions grew out of the Depression. They are member-owned and not-for-profit financial institutions that initially were intended to meet the credit needs of “people with modest means who are ‘associated with one another,’” the materials stated.
Wareham said that state statute mandates that credit unions must be made up of people who are “associated with one another.”
The association can come in one of two ways: They must live in a well-defined neighborhood, community or rural district, or must share a common occupation, association, or employer.
For serving that purpose, both Congress and states granted credit unions exemption from paying federal and state income taxes, according to KBA information.
Wareham said that a handful of credit unions seem to have been claiming the entire state as a “neighborhood.”
The Boeing credit union out of Wichita, for example, had been given approval to open a branch office in Lawrence, he said.
“We don’t have a problem with a credit union that says we’re going to have state employees be our common bond group, and they could have state employees in all 105 counties,” Wareham said. “... Where we have a problem is when they say the common bond is the entire geography of the state.”
That, he said, was what the KDCU, the regulatory department for credit unions, had been allowing. KDCU declined to comment for this story.
Wareham explained the issues from the bankers’ point of view.
“Our issue is when that credit union applies to the department and says, ‘Hey, we want to serve people that are affiliated with the university, plus give us 20 counties,” Wareham said as an example. “They’re combining occupational or association groups.”
The KSB interpretation of the law was that the “association” requirement must be met by either the neighborhood or the employer definition.
“It doesn’t say you can be this AND this,” Wareham said.
The KSB also believes that larger credit unions’ branching out beyond statute boundaries gave them an economic advantage not afforded to banks. There is no difference in functions of banks and credit unions, Wareham said, “other than banks pay state and federal income taxes and credit unions don’t.”
Wareham said that banks pay 35 to 38 percent of their incomes in taxes.
He compared Boeing’s tax liability on a $3.4 million net income — $0 — to the Legacy Bank of Colwich’s tax liability on $2,410,000 net income — $820,000.
“How do we compete with somebody that has a 38 percent income tax advantage over us?” Wareham asked. “Our opinion is there certainly is a line somewhere. The fact is they are saying that their common bond or their field of membership, they’ve outgrown it; it’s not relevant anymore.
“If that’s the case, then their tax privilege status of not having to pay taxes, that they’ve outgrown that, too. They should not be able to have it both ways.”
The new bill deals with the outreach of credit unions, not with tax exemptions.
The Kansas Credit Union Association, a professional organization representing credit unions, agreed to a compromise on an amendment to SB 535 that will impose stronger restrictions on branching out of credit unions, while still allowing some leeway in expanding their territories.
“Philosophically, we still feel that credit unions have not done anything that is outside what our current statute says we can do,” said Marla Marsh, chief executive officer and president of KCUA.
The bill will impact nine credit unions immediately, she said.
“They’re ones that have to select counties within their present field of membership, and they can select those counties up to a population of one million,” said Hailey DaVee, KCUA’s political/public affairs/special affairs supervisor.
To illustrate the situation, Marsh created a fictitious statewide credit union that had authority to operate in the entire eastern half of Kansas.
“For those that are statewide, they would have to pick the counties that are contiguous to each other, that make up a million in population,” Marsh said. “Once they had a million, they can’t have any other counties unless they already have a branch operating there.”
Marsh said that some of the credit unions affected have concerns about the bill.
“We don’t have 100 percent (agreement) but the KCUA was the one speaking on behalf of all credit unions,” she said.
Kansas Sen. Dennis Wilson, who sponsored the bill, said the legislation was a compromise worked out with credit unions and banks and will allow credit unions to keep what they have and focus on future changes.
“This restricts very few credit unions,” the Overland Park Republican said. “They will have room to grow.”
Credit unions now determine membership based on a common bond of occupation or association or groups within a well-defined neighborhood, community or rural district, the Associated Press reported. The bill changes that to membership based on occupation, association or geographic area.
Sen. Phil Journey, a Haysville Republican, said the bill would keep credit unions from growing.
But Sen. Karin Brownlee, an Olathe Republican, said: “They can grow. The claim that Kansans will have fewer choices simply isn’t true.”
She said credit unions don’t pay taxes, which gives them a competitive edge.
Wilson said 60 credit unions come under state authority and 24 others are federally regulated. He said credit unions choosing geographic membership can have up to 500,000 members in addition to what they already have, and the number goes to 1 million for those basing membership on occupations and associations, the AP reported.
A 2006 legislative audit said credit unions had become more like banks because state regulators had allowed them to expand the types of people they can serve and what services they can offer. It questioned whether regulators were complying with the state law to limit membership.