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Testimony: 

Before the Committee on Ways and Means, House of Representatives: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 10:00 a.m. EDT: 

Thursday, November 3, 2005: 

Financial Institutions: 

Issues Regarding the Tax-Exempt Status of Credit Unions: 

Statement of Richard J. Hillman, Managing Director: 

Financial Markets and Community Investments: 

GAO-06-220T: 

GAO Highlights: 

Highlights of GAO-06-220T, testimony before the Committee on Ways and 
Means, House of Representatives: 

Why GAO Did This Study: 

Unlike other depository institutions, credit unions are exempt from 
federal corporate income taxes. Recent legislative and regulatory 
changes to credit union membership restrictions and allowable products 
and services have blurred some of the historical distinctions between 
credit unions and other depository institutions. As a result, some 
observers have raised questions about whether tax exemption provides 
credit unions with an advantage over other depository institutions and 
whether the original basis for tax exemption is still valid. 

As part of its continuing oversight of the tax-exempt sector, the House 
Committee on Ways and Means asked GAO to address (1) the historical 
basis for the tax-exempt status of credit unions; (2) the arguments for 
and against taxation, including estimates of potential revenue from 
eliminating the exemption; (3) the extent to which credit unions offer 
services distinct from those offered by banks of comparable size, and 
serve low-and moderate-income individuals; and (4) the extent to which 
credit unions are required to report information on executive 
compensation and assessments of their internal controls. 

What GAO Found: 

Congress originally granted tax-exempt status to credit unions in 1937 
because of their similarity to other mutually owned financial 
institutions that were tax-exempt at that time. While the other 
institutions lost their exemption in the Revenue Act of 1951, credit 
unions specifically remained exempted. The act’s legislative history is 
silent regarding why the tax-exempt status of credit unions was not 
revoked. More recently, the Credit Union Membership Access Act of 1998 
indicates that credit unions continue to be exempt because of their 
cooperative, not-for-profit structure, which is distinct from other 
depository institutions, and because credit unions historically have 
emphasized serving people of modest means. 

Arguments for taxing credit unions center on creating a “level playing 
field” since credit unions now compete more directly with banks. 
Proponents also point to associated potential revenues, with federal 
estimates ranging from $1.2 billion to $1.6 billion per year. Opponents 
of taxation argue that credit unions remain distinct—organizationally 
and operationally—from other financial institutions and taxation would 
impair their capital levels. 

Prior GAO work has found that relatively large credit unions offer many 
of the same services that same-sized banks offer, while smaller credit 
unions tend to provide more basic financial services. Limited 
comprehensive data exist on the income of credit union members. GAO’s 
assessment of Federal Reserve data suggested that credit unions served 
a slightly lower proportion of low- and moderate-income households than 
banks, but the lack of comprehensive data prevents definitive 
conclusions. 

Most credit unions are not subject to reporting requirements that 
provide information on executive compensation or internal controls. 
Specifically, federal credit unions are not required to file the 
Internal Revenue Service form that most other tax-exempt entities must 
file and some states allow credit unions to file on a group basis. 
Further, credit unions are not subject to internal control reporting 
requirements applicable to banks and thrifts, an item we identified for 
Congressional action in 2003. 

Credit Union Industry Size and Assets Distribution, as of December 31, 
2004: 

[See PDF for image] 

[End of figure] 

www.gao.gov/cgi-bin/getrpt?GAO-06-220T. 

To view the full product, click on the link above. For more 
information, contact Richard Hillman at (202) 512-8678 or 
hillmanr@gao.gov. 

[End of section] 

Mr. Chairman Thomas and Members of the Committee: 

I am pleased to be here today to discuss issues regarding the tax- 
exempt status of credit unions. Credit unions are the only type of 
financial institution currently exempt from federal income 
taxes.[Footnote 1] As we have noted in a prior testimony before this 
Committee, the size of the tax-exempt sector has grown in recent years 
in both the number and assets of institutions.[Footnote 2] Today's 
hearing on issues related to the credit union tax-exempt sector is 
timely in light of current and projected fiscal imbalances and renewed 
emphasis on accountability and governance in both the corporate and 
nonprofit sectors. A comprehensive examination could help determine 
whether exempt entities such as credit unions are providing services 
that are commensurate with their favored tax status, and whether an 
adequate framework exists for ensuring that these entities are meeting 
the requirements for tax-exempt status. The information that I am 
providing today is based primarily on prior work completed on the 
credit union industry and on ongoing work underway for this 
Committee.[Footnote 3] 

Based on your request, I will discuss: 

* the historical basis for the tax-exempt status of credit unions; 

* arguments for and against the taxation of credit unions, including 
estimates of the potential tax revenues from eliminating the tax-exempt 
status of credit unions; 

* the extent to which credit unions offer services that are distinct 
from those offered by banks of comparable size; 

* the extent to which credit unions are serving low-and moderate-income 
individuals, including relevant programs of the National Credit Union 
Administration (NCUA) that target these individuals; and: 

* the extent to which credit unions are required to report or make 
public certain information such as executive compensation and 
assessments of their internal controls for financial reporting. 

In summary, we found that: 

* The basis for continuing tax exemptions for credit unions, although 
not often articulated in legislation over the years, appears to be 
related to the perceived distinctness of credit unions and their 
service to people of modest means. Congress originally granted tax- 
exempt status to credit unions in 1937 because of their similarity to 
other mutually owned financial institutions that were tax exempt at 
that time. While the other institutions lost their exemption in the 
Revenue Act of 1951, credit unions specifically retained the exemption. 
The legislative history on the 1951 act did not articulate a rationale 
for the continued exemption of credit unions. However, more recent 
legislation (the Credit Union Membership Access Act of 1998 or CUMAA) 
states that credit unions are exempt from taxes because "they are 
member-owned, democratically operated, not-for-profit organizations 
generally managed by volunteer boards of directors, and because they 
have the specified mission of meeting the credit and savings needs of 
consumers, especially persons of modest means."[Footnote 4] 

* Recently, arguments for taxing credit unions have centered on 
creating a "level playing field" among financial institutions in terms 
of taxation, referencing the notable recent growth of the credit union 
industry to support the idea that credit unions compete more and more 
directly with banks. Proponents of taxing credit unions also point to 
the potential revenue associated with repealing the tax exemption. 
There is also some debate regarding the extent to which credit unions 
are serving people of modest means, especially in comparison with small 
banks. In response, opponents of taxation have argued that credit 
unions remain distinct--both organizationally and operationally--from 
other financial institutions, and that taxation would jeopardize the 
safety and soundness of credit unions by adversely impacting their net 
worth or capital levels, which are restricted to retained earnings. 
Opponents also note that other depository institutions do have 
opportunities for tax relief as S-corporations. Federal estimates of 
the potential tax revenues fall within a somewhat narrow range--$1.2 
billion to $1.6 billion annually--while nongovernmental sources have 
produced higher estimates of up to $3.1 billion annually. 

* As the credit union industry has evolved, the historical distinction 
between credit unions and other depository institutions has continued 
to blur. The number of credit unions declined between 1992 and 2004, 
although the total assets of the industry have grown. As of 2004, 
credit unions with more than $100 million in assets represented about 
13 percent of all credit unions and 79 percent of total assets. The 
consolidation in numbers and concentration of assets has resulted in 
two distinct groups of credit unions: a few relatively large 
institutions providing a wide range of services that resemble those 
offered by banks of the same size, and a number of smaller credit 
unions that provide basic financial services. For example, the loan 
portfolios of larger credit unions tend to hold more mortgage and real 
estate loans, resembling those of similarly sized banks. Smaller credit 
unions tend to carry smaller loans such as car loans. Additionally, 
larger credit unions tend to offer a range of products and services 
similar to those offered by banks. 

* As credit unions have become larger and begun offering a wider 
variety of services, the issue of whether these institutions are 
serving households with low and moderate incomes has become a matter 
for debate. Yet, limited comprehensive data are available on the income 
of credit union members. In prior work on the credit union industry, 
our assessment of available data --the Federal Reserve's 2001 Survey of 
Consumer Finances and other studies--suggested that credit unions 
served a slightly lower proportion of households with low and moderate 
incomes than banks.[Footnote 5] To NCUA's credit, it has established 
programs that are intended for low-income individuals and underserved 
areas. However, NCUA does not collect comprehensive data such as the 
overall income of individuals benefiting from these programs to allow 
definitive conclusions about the membership served. 

* Most credit unions are not specifically subject to reporting 
requirements that would disclose information on executive compensation 
or assessments of internal controls for financial reporting-- 
information that can enhance public confidence in tax-exempt entities. 
Publicly available financial reports reflect, and support, strong 
governance and transparency--essential elements in assuring that tax- 
exempt entities operate with integrity and effectiveness and maintain 
public trust. For example, public disclosure of revenue and expenses, 
such as the compensation of officers and directors, enhances 
transparency. However, most credit unions do not individually file the 
Internal Revenue Service (IRS) form that would provide such 
information--Form 990, Return of Organization Exempt from Income Tax-- 
because of exclusions and group filings.[Footnote 6] Further, as we 
noted in a 2003 report, credit unions with assets over $500 million are 
not subject to internal control reporting requirements applicable to 
banks and thrifts under the Federal Deposit Insurance Corporation 
Improvement Act (FDICIA), which are similar to the reporting 
requirements of public companies affected by the Sarbanes-Oxley Act of 
2002.[Footnote 7] As we suggested in 2003, making credit unions of $500 
million or more subject to the FDICIA internal control reporting 
requirements would provide a commensurate tool to NCUA and appropriate 
state regulators to ensure that credit unions establish and maintain 
internal control structure and procedures for financial reporting 
purposes. 

Background: 

Credit unions have historically occupied a unique niche among financial 
institutions. Credit unions differ from other depository institutions 
because they are (1) not-for-profit entities that build capital by 
retaining earnings (they do not issue capital stock), (2) member-owned 
cooperatives run by boards elected by the membership, and (3) tax- 
exempt. Like banks and thrifts, credit unions have either federal or 
state charters. Federal charters have been available since 1934, when 
the Federal Credit Union Act was passed. States have their own 
chartering requirements. As of December 2004, the federal government 
chartered about 62 percent of the slightly more than 9,000 credit 
unions and states chartered the remainder. Both federally and state- 
chartered credit unions are exempt from federal income taxes, with 
federally chartered and most state-chartered credit unions also exempt 
from state income and franchise taxes. 

Another distinguishing feature of credit unions is that they may serve 
only an identifiable group of people with a common bond. More 
specifically, credit union membership may be based on one of three 
types of common bond: single, multiple, or community. For example, a 
group of people that share a single characteristic, such as a common 
profession, could constitute the "field of membership" for a single- 
bond credit union. Field of membership is used to describe all the 
individuals and groups, including organizations, which a credit union 
is permitted to accept for membership.[Footnote 8] More than one group 
having a common bond could constitute the membership of a multiple-bond 
credit union. And, persons or organizations within a well-defined 
community, neighborhood, or rural district could form a community-bond 
credit union. Further, credit unions can offer members additional 
services made available by third-party vendors and by certain profit- 
making entities with which they are associated, referred to as credit 
union service organizations (CUSO).[Footnote 9] 

Rationale for the Historical Tax Exemption of Credit Unions: 

The tax-exempt status of credit unions originally was predicated on the 
similarity of credit unions and mutual financial institutions; however, 
while Congress did not always cite its reasons for continuing this 
exemption, recent legislation mentions the cooperative structure and 
service to persons of modest means as reasons for reaffirming their 
exempt status.[Footnote 10] The Revenue Act of 1913 exempted domestic 
building and loan associations (now called "savings and loans"), and 
mutual savings banks not having a capital stock represented by shares, 
from federal income tax.[Footnote 11] Further, the Revenue Act of 1916 
exempted from taxation cooperative banks without capital stock 
organized and operated for mutual purposes and without profit.[Footnote 
12] However, credit unions were not specifically exempted in either of 
these acts. Their tax-exempt status was addressed directly for the 
first time in 1917, when the U.S. Attorney General determined that 
credit unions closely resembled cooperative (mutual savings) banks and 
similar institutions that Congress had expressly exempted from taxation 
in 1913 and 1916. 

The Federal Credit Union Act of 1934 authorized the chartering of 
federal credit unions. The stated purpose of the act was to "establish 
a further market for securities of the United States and to make more 
available to people of small means credit for provident purposes 
through a national system of cooperative credit, thereby helping to 
stabilize the credit structure of the United States." The 1934 act did 
not specifically exempt federal credit unions from taxation. In 1937, 
the act was amended to exempt federal credit unions from federal tax 
and limit state taxation to taxes on real and tangible personal 
property.[Footnote 13] Two reasons were given for the exemption: (1) 
that credit unions are mutual or cooperative organizations operated 
entirely by and for their members; and (2) that taxing credit unions on 
their shares, much as banks are taxed on their capital shares, places a 
disproportionate and excessive burden on the credit unions because 
credit union shares function as deposits.[Footnote 14] 

The Revenue Act of 1951 amended section 101(4) of the 1939 Internal 
Revenue Code to repeal the tax-exempt status for cooperative banks, 
savings and loan societies, and mutual savings banks, but it 
specifically provided for the tax exemption of state-chartered credit 
unions.[Footnote 15] While the act's legislative history contains 
extensive discussion of the reasons why the tax-exempt status of the 
other mutual institutions was revoked, it is silent regarding why the 
tax exempt status of credit unions was not also revoked. 

The Senate report accompanying the Revenue Act of 1951 stated that the 
exemption of mutual savings banks was repealed in order to establish 
parity between competing financial institutions.[Footnote 16] According 
to the Senate report, tax-exempt status gave mutual savings banks the 
advantage of being able to finance growth out of untaxed retained 
earnings, while competing corporations (commercial banks) paid tax on 
income retained by the corporation. The report stated that the exempt 
status of savings and loans was repealed on the same grounds. Moreover, 
it stated that savings and loan associations were no longer self-
contained mutual organizations, for which membership implied 
significant investments over time, risk of loss, heavy penalties for 
cancellation of membership or early withdrawal of shares, and in which 
members invested in anticipation of becoming borrowers at some time. 
Instead, investing members were simply becoming depositors who received 
relatively fixed rates of return on deposits that were protected by 
large surplus accounts, and borrowing members dealt with savings and 
loans in the same way as other mortgage lending institutions.[Footnote 
17] 

More recently (in 1998), CUMAA amended the Federal Credit Union Act to, 
among other things, allow multiple-bond federal credit unions under 
certain circumstances (such as a general limitation on the size of each 
member group to 3,000 members).[Footnote 18] In addition, CUMAA 
reaffirmed the federal tax exemption of credit unions, despite 
contentions that allowing multiple-bond credit unions would permit 
credit unions to become more like banks. Specifically, the findings 
section of CUMAA stated: 

Credit unions, unlike many other participants in the financial services 
market, are exempt from Federal and most State taxes because they are 
member-owned, democratically operated, not-for-profit organizations 
generally managed by volunteer boards of directors and because they 
have the specified mission of meeting the credit and savings needs of 
consumers, especially persons of modest means. 

Arguments for and against Taxation of Credit Unions: 

At various times, the executive branch has proposed taxing credit 
unions, generally endorsing the creation of a "level playing field" 
among financial institutions in which organizations engaged in similar 
activities would be taxed similarly. Proponents of taxation contend 
that larger credit unions compete with banks in terms of the services 
they provide. Proponents also have questioned the extent that credit 
unions have remained true to their historical mission of providing 
financial services to persons of modest means. In response, opponents 
of the taxation of credit unions have argued that credit unions remain 
distinct organizationally and operationally from other financial 
institutions, providing their membership with services they would not 
receive from other institutions. Opponents also have argued that 
taxation would hinder the ability of credit unions to build capital 
(which is restricted to retained earnings), jeopardizing their safety 
and soundness. Finally, opponents have argued that other depository 
institutions, particularly smaller banks, also have opportunities for 
tax and regulatory relief such as S-corporation status.[Footnote 19] 
Some studies have attempted to quantify potential tax revenue from 
repealing the tax exemption, with estimates ranging from $1.2 billion 
to $3.1 billion, depending on the fiscal year considered, tax rates 
used, and other underlying assumptions. 

Arguments for Taxation: 

Unlike income retained by most other financial institutions, income 
retained by credit unions is not taxed until it is distributed to 
members. Thus, tax exemption allows credit unions to utilize untaxed 
retained earnings to finance expansion of services. Proponents of 
taxing credit unions claim that this ability to use untaxed retained 
earnings provides credit unions with a competitive advantage over banks 
and thrifts. In 1978, the Carter administration proposed that the tax- 
exempt status of credit unions be gradually eliminated to mitigate this 
advantage and establish parity between credit unions and thrift 
institutions. The administration also argued that the relaxation of 
rules regarding field of membership criteria, the expansion of credit 
union powers, and the rising median income of credit union members 
indicated that credit unions were no longer true mutual institutions 
serving low-income workers excluded from banking services elsewhere. 

In 1984, the Department of the Treasury (Treasury) report to the 
President included a proposal to repeal the tax exemption of credit 
unions, which also argued that the exemption gave credit unions a 
competitive advantage over other financial institutions and its repeal 
would "eliminate the incentive for credit unions to retain, rather than 
distribute, current earnings." In 1985, the Reagan administration 
proposed taxing credit unions with more than $5 million in gross 
assets, but would have maintained the exemption on credit unions with 
less than $5 million of gross assets, since it was reasoned that taxing 
small credit unions would significantly increase the administrative 
burden for a relatively small revenue increase.[Footnote 20] Similarly, 
in the budget for fiscal year 1993 the first Bush administration 
proposed taxing credit unions with assets of more than $50 million. 

More recent arguments for the taxation of credit unions note the strong 
growth rates among large credit unions, which tend to offer a wider 
array of services. As a result, taxation proponents argue that larger 
credit unions compete with banks in terms of the services they provide 
and the households to which they provide these services. They question 
both the extent to which credit unions serve people of modest means and 
pass on their tax subsidy to members. While limited data are available 
to evaluate the income of credit union members--which precludes any 
definitive conclusion--some studies, including one of our own, indicate 
that credit unions serve a slightly lower proportion of households with 
low and moderate incomes than banks.[Footnote 21] We discuss this issue 
in more detail later in this statement. 

Arguments against Taxation: 

Arguments against repealing the tax exemption for credit unions assert 
that the exemption does not offer competitive advantages and that it is 
justified by the unique services credit unions offer and by their 
capital structure. As we reported in 1991, credit unions as 
organizations are exempt from federal and state income taxes. However, 
the income that their members receive is taxed. Members who receive 
dividends on share accounts are taxed on that income, just as 
depositors at commercial banks are taxed on interest income from 
savings or checking accounts. If credit unions distribute all income to 
shareholders and do not retain earnings at the entity level, all income 
will be taxed at the individual level. In this case, credit unions 
would have little tax advantage relative to taxable mutual financial 
institutions, whose income is taxed once at either the individual or 
entity level. 

In 2005 and in previous testimonies, trade and industry groups and 
private individuals presented arguments supporting the tax-exempt 
status of credit unions, maintaining that tax-exempt status is 
justified because credit unions provide unique services, such as small 
loans, financial counseling, and low-cost checking accounts that for- 
profit financial institutions are unable or unwilling to 
provide.[Footnote 22] They stated that taxing credit unions would lead 
credit unions away from their mutual, nonprofit orientation and 
structure, leading to reductions in these types of services. They also 
testified that taxation would hinder credit unions in building 
reserves, and since credit unions do not have the ability to raise 
capital through the sale of stock, their safety and soundness would be 
jeopardized. They argued that while the number of large credit unions 
has grown over the last 10 years, they hold a relatively small share of 
overall depository institution assets. Opponents also argued that there 
is no clear rationale for targeting larger credit unions because, 
regardless of asset size, larger credit unions retain a distinct 
organizational structure and must still adhere to limits on their field 
of membership as sanctioned by Congress. Furthermore, they argued that 
larger credit unions, relative to smaller credit unions, were more 
stable and efficient and therefore better able to offer programs 
targeted to low-and moderate-income households. 

Opponents of credit union taxation also have argued that other 
financial institutions are not without tax privileges and tax relief. 
Specifically, credit union trade organizations have pointed out that an 
increasing number of banks have converted to S-corporation status and, 
thereby, have avoided paying corporate income taxes. In general, U.S. 
tax law treats corporations and their investors as separate taxable 
entities. Corporate earnings are taxed first at the corporate level and 
again at the shareholder level, as dividends if the corporation 
distributes earnings to shareholders, or as capital gains from the sale 
of stock. In contrast, the earnings of S-corporations are taxed only 
once at the shareholder level, whether or not the income is 
distributed. Corporations that elect Subchapter S status are subject to 
certain restrictions on the number of shareholders and capital 
structure. For example, an S-corporation may not have more than 75 
shareholders, all of whom must be U.S. resident individuals (except for 
certain trusts and estates) and may issue only one class of stock. 
Prior to 1996, banks and other depository institutions could not elect 
S-corporation status. A provision of the Small Business Job Protection 
Act of 1996 repealed this prohibition. 

Like credit unions, mutual thrifts are owned by their depositors and 
their equity is derived from retained earnings. Mutual thrifts are 
permitted a tax deduction for amounts paid or credited to their 
depositors as dividends on their accounts if the amounts may be 
withdrawn on demand (subject only to the customary notice of intention 
to withdraw). These dividends are taxed only at the depositor level, 
whether they represent interest or a return on equity, so that mutual 
thrifts are taxed only on retained earnings. Further, some farmer's 
cooperatives are allowed additional tax deductions for dividends on 
capital stock and distributions to patrons. The earnings of a 
cooperative generally flow through to the patron and are taxed once at 
that level. Finally, some other similar entities, like rural electric 
associations and telephone cooperatives are tax-exempt.[Footnote 23] 

Estimates of the Potential Tax Revenues from Taxing Corporations Vary 
Widely Based on the Source and Underlying Assumptions: 

Governmental entities have attempted to estimate the potential revenue 
to the federal government from repealing the tax exemption that ranged 
from $1.2 billion to $1.6 billion on an annualized basis. In a 2001 
report, the Department of the Treasury estimated potential revenue 
between $1.2 billion and $1.4 billion annualized over the five year 
period from 2000-2004, and $1.4 and $1.6 billion over the ten-year 
period from 2000 to 2009, if all credit unions were taxed. More 
recently, in Analytical Perspectives, Budget of the United States 
Government Fiscal Year 2005, Treasury estimated the potential tax 
revenue from repealing the credit union tax exemption at $7.88 billion 
from fiscal years 2005 through 2009, or $1.58 billion on average 
annually.[Footnote 24] However, according to Treasury officials, the 
2005 Analytical Perspectives estimate did not account for any 
behavioral changes in response to taxation by credit unions in contrast 
with estimates from their earlier 2001 study. The Joint Committee on 
Taxation in a February 2005 Congressional Budget Office report 
estimated that taxing credit unions with assets greater than $10 
million dollars would potentially raise $6.5 billion from fiscal years 
2006 through 2010, or $1.3 billion on average annually over that five 
year period.[Footnote 25] 

Nongovernmental entities have produced estimates that tend to be higher 
than the estimates generated by government agencies. A study issued by 
the Tax Foundation, which was funded by the Independent Community 
Bankers of America, estimated the potential revenue from taxing all 
insured credit unions to be as high as $3.1 billion per year when 
averaged over the 10-year period from 2004 to 2013.[Footnote 26] 
Another private study conducted by Chmura Economics & Analytics for the 
Jefferson Institute for Public Policy estimated the revenue from taxing 
all credit unions to be $1.89 billion in 2002, when the same corporate 
tax rate as banks paid was applied to credit unions (in categories 
differentiated by asset size).[Footnote 27] In reviewing these studies, 
we note that assumptions vary on the tax rates imposed and the response 
of credit unions to the imposition of taxes (such as distributing 
higher dividends, lowering loan rates, or increasing deposit rates, 
which would reduce taxable income and therefore potential tax revenue). 
However, large credit unions, though small in numbers, are responsible 
for a disproportionate amount of the potential tax revenue as compared 
with small credit unions. 

Historical Distinctions between Credit Unions and Other Depository 
Institutions Have Continued to Blur: 

Since 1992, credit unions have become less distinct from other 
depository institutions of similar size, particularly in terms of the 
products and services offered by larger credit unions. Between 1992 and 
2004, the total assets held by federally insured credit unions more 
than doubled, while the total number of federally insured credit unions 
declined. As a result of the increase in total assets and the decline 
in the number of federally insured credit unions, the credit union 
industry has seen an increase in the average size of its institutions 
and a slight increase in the concentration of assets. Total assets in 
federally insured credit unions grew from $258 billion in 1992 to $647 
billion in 2004, an increase of 150 percent. During this same period 
the number of federally insured credit unions fell from 12,595 to 
9,014. As of the end of 1992, credit unions with more than $100 million 
in assets represented 4 percent of all credit unions and 52 percent of 
total assets; as of the end of 2004, credit unions with more than $100 
million in assets represented about 13 percent of all credit unions and 
79 percent of total assets. From 1992 to 2004, the 50 largest credit 
unions (by asset size) went from holding around 18 percent of industry 
assets to around 24 percent of industry assets. 

This industry consolidation contributed to a widening gap between two 
distinct groups of federally insured credit unions--larger credit 
unions, which are relatively few in number and provide a wider range of 
services, and smaller credit unions, which are greater in number and 
provide more basic banking services. Figure 1 illustrates institution 
size and asset distribution in the credit union industry, with 
institutions classified by asset ranges. As of December 31, 2004, the 
2,873 smallest credit unions--those with $5 million or less in total 
assets--constituted almost one-third of all credit unions but slightly 
less than one percent of the industry's total assets. Conversely, the 
98 credit unions with assets over $1 billion (up to just under $23 
billion) held 33 percent of total industry assets but represented just 
1 percent of all credit unions. In our 2003 report, we noted that as of 
December 31, 2002, 71 credit unions with assets over $1 billion held 27 
percent of total industry assets. 

Figure 1: Credit Union Industry Size and Total Assets Distribution, as 
of December 31, 2004: 

[See PDF for image] 

Note: This figure depicts credit union industry distribution in terms 
of the number of federally insured credit unions in a particular asset 
size category and the percentage of industry assets that are held by 
credit unions in that category. 

[End of figure] 

As credit unions' assets have grown in recent years, credit unions have 
generally shifted to larger loans such as mortgages. Between 1992 and 
2004, the amount of first mortgage loans held grew from $29 billion to 
$130 billion, while that of new vehicle loans increased from $29 
billion to $71 billion and that of used vehicle loans increased from 
$17 billion to $85 billion. In terms of the relative importance of 
different loan types, we compared the growth in the amounts of various 
loan types relative to credit unions' assets over the same period. 
Amounts held in first mortgage loans grew from around 11 percent of 
assets in 1992 to around 20 percent of assets in 2004, while amounts 
held in used vehicle loans grew from just under 7 percent to slightly 
more than 13 percent. 

As shown in figure 2, larger credit unions generally held relatively 
larger loans (e.g., first mortgage loans) than smaller credit unions, 
which generally held relatively more small loans (e.g., used vehicle 
loans). Since 1992, the amount of first mortgage loans held relative to 
assets has more than doubled for credit unions with over $1 billion in 
assets, from around 12 percent to over 25 percent of assets, while it 
has grown less than 40 percent for credit unions with less than $100 
million in assets, from around 9 percent to slightly more than 12 
percent of assets. 

Figure 2: Loan Types as a Percentage of Total Assets, Smallest versus 
Largest Credit Unions, 1992-2004: 

[See PDF for image] 

[End of figure] 

The discrepancy between smaller and larger credit unions is more 
apparent through an analysis of more recently collected data on more 
sophisticated product and service offerings, such as the availability 
of automatic teller machines (ATM) and electronic banking (see table 
1). While less than half of the smallest credit unions offered ATMs and 
one-third offered transactional websites, nearly all larger credit 
unions offered these services. 

Table 1: Credit Union Size and Offerings of More Sophisticated 
Services, as of December 31, 2004: 

Asset range: $10 million or less; 
Number: 7,859; 
Group assets (billions): $138; 
Percentage of institutions offering the following services: 
Financial services through the Internet: 37.8; 
Financial services through audio response or phone: 44.3; 
ATMs: 47.0; 
Electronic applications for new loans: 25.3; 
Website: Informational: 16.0; 
Website: Interactive: 4.0; 
Website: Transactional: 32.9. 

Asset range: Greater than $100 millions to $250 million; 
Number: 644; 
Group assets (billions): $102; 
Percentage of institutions offering the following services: 
Financial services through the Internet: 94.7; 
Financial services through audio response or phone: 97.4; 
ATMs: 95.0; 
Electronic applications for new loans: 82.1; 
Website: Informational: 3.7; 
Website: Interactive: 2.2; 
Website: Transactional: 92.2. 

Asset range: Greater than $250 to $500 million; 
Number: 266; 
Group assets (billions): $94; 
Percentage of institutions offering the following services: 
Financial services through the Internet: 98.5; 
Financial services through audio response or phone: 98.5; 
ATMs: 96.6; 
Electronic applications for new loans: 89.8; 
Website: Informational: 0.8; 
Website: Interactive: 1.5; 
Website: Transactional: 97.0. 

Asset range: Greater than $500 million to $1 billion; 
Number: 147; 
Group assets (billions): $100; 
Percentage of institutions offering the following services: 
Financial services through the Internet: 98.0; 
Financial services through audio response or phone: 98.0; 
ATMs: 98.0; 
Electronic applications for new loans: 92.5; 
Website: Informational: 2.0; 
Website: Interactive: 1.4; 
Website: Transactional: 95.9. 

Asset range: Greater than $1 billion; 
Number: 98; 
Group assets (billions): $213; 
Percentage of institutions offering the following services: 
Financial services through the Internet: 98.0; 
Financial services through audio response or phone: 98.0; 
ATMs: 98.0; 
Electronic applications for new loans: 95.9; 
Website: Informational: 1.0; 
Website: Interactive: 2.0; 
Website: Transactional: 96.9. 

Asset range: Total; 
Number: 9,014; 
Group assets (billions): $647; 
Percentage of institutions offering the following services: 
Financial services through the Internet: 51.2; 
Financial services through audio response or phone: 51.2; 
ATMs: 53.3; 
Electronic applications for new loans: 33.1; 
Website: Informational: 14.3; 
Website: Interactive: 3.7; 
Website: Transactional: 40.7. 

Source: GAO analysis of NCUA Form 5300 data. 

Note: Data are based on all federally insured credit unions filing call 
reports. 

[End of table] 

Despite the growth in credit union assets over recent years, the credit 
union industry remains much smaller than the banking industry, with 
credit unions representing around 6 percent of total assets of both 
industries.[Footnote 28] For example, at the end of 2004, the largest 
credit union had nearly $23 billion in assets, while the largest bank, 
with $967 billion in assets, was larger than the entire credit union 
industry combined. 

Although credit unions are on average much smaller than banks, larger 
credit unions and banks of comparable size tend to offer the same 
products and services (see fig. 3).[Footnote 29] In particular, nearly 
all banks and larger credit unions reported holding first mortgage 
loans, while a majority of the smaller credit unions did not. 

Figure 3: Percentages of Credit Unions and Banks Holding Various Loans, 
by Institution Size, as of December 31, 2004: 

[See PDF for image] 

Notes: Data are based on all federally insured credit unions, banks, 
and thrifts filing call reports. We excluded insured U.S. branches of 
foreign-chartered institutions and banks that we determined had 
emphases in credit card or mortgage loans. Credit union data on other 
consumer loans may include member business and agricultural loans. 
Agricultural and business loans for credit unions include both member 
business loans and participation in nonmember loans. 

[End of figure] 

The Extent to Which Credit Unions Serve Persons of Modest Means Is Not 
Definitively Known because of Limited Data and Lack of Indicators: 

While credit union fields of membership have expanded, the extent to 
which they serve people or communities of low or moderate incomes is 
not definitively known. In 1998, CUMAA affirmed preexisting NCUA 
policies that had allowed credit unions to expand their field of 
membership and include underserved areas.[Footnote 30] After the 
legislation was passed, NCUA revised its regulations to enable credit 
unions to serve larger communities or geographic areas. As they have 
become larger and begun offering a wider variety of services, questions 
have been raised about whether credit unions are more likely than banks 
to serve households with low and moderate incomes. However, limited 
comprehensive data are available to evaluate the income of credit union 
members. Our assessment of available data --the Federal Reserve's 2001 
Survey of Consumer Finances (SCF) and other studies--provided some 
indication that, compared with banks, credit unions served a slightly 
lower proportion of households with low and moderate incomes. Although 
NCUA has undertaken initiatives to enhance the availability of 
financial services to individuals of modest means, as of October 15, 
2005, it had not implemented our 2003 recommendation to develop 
indicators to evaluate the progress credit unions made in reaching the 
underserved. 

Credit Unions Can Serve More People and Larger Areas because CUMAA 
Permitted NCUA to Continue Preexisting Policies That Expanded Field of 
Membership: 

In 1998, the Supreme Court ruled against NCUA's practice of permitting 
federally chartered credit unions based on multiple bonds.[Footnote 31] 
Subsequently, Congress passed CUMAA, which specifically permits 
multiple-bond credit unions. The act permits these credit unions to 
retain their current membership and authorizes their future 
formation.[Footnote 32] Figure 4 provides additional information on the 
percent and assets of federally chartered credit unions by bond type. 
While multiple-bond credit unions have constituted on average slightly 
under 50 percent of all credit unions since 2000, they tend to be 
larger than the other two types of credit union bonds in terms of asset 
size.[Footnote 33] For example, at year-end 2004, multiple bond credit 
unions made up 45 percent of the total number of federal credit unions 
but represented 57 percent of federal credit union assets. 

Figure 4: Percent and Assets of Federally Chartered Credit Unions, by 
Bond, 2000-2004: 

[See PDF for image] 

Note: NCUA provided revised data for the year 2000 from that previously 
provided for our 2003 report. 

[End of figure] 

In addition to permitting multiple-bond credit unions, CUMAA further 
qualifies the definition of community bond. The act adds the word 
"local" to the preexisting requirement that community-based credit 
unions serve a "well-defined community, neighborhood or rural 
district," but provides no guidance on how "local" or any other part of 
this requirement should be defined.[Footnote 34] However, after the 
passage of CUMAA, NCUA revised its regulations to make it easier for 
credit unions to serve increasingly larger areas (e.g., entire cities 
or counties). As a result, NCUA approved a community-based charter 
application in July 2005 covering Los Angeles County with a potential 
membership of 9.6 million. 

Limited Comprehensive Data Are Available to Evaluate Income of Credit 
Union Members: 

While it has been generally accepted that credit unions historically 
have emphasized service to people with modest means; currently, there 
are no comprehensive data on the income characteristics of credit union 
members, particularly those who actually receive loans and other 
services. Industry groups and consumer advocates have debated which 
economic groups benefit from credit union services, especially in light 
of the credit unions' exemption from federal income taxes. As stated in 
our 1991 report, and still true, none of the common-bond criteria 
available to federally chartered credit unions refer to the economic 
status of their members or potential members. 

Information on the extent to which credit unions are lending and 
providing services to households with various incomes is scarce because 
NCUA, industry trade groups, and most states (with the exception of 
Massachusetts and Connecticut) have not collected specific information 
describing the income of credit union members who obtain loans or 
benefit from other credit union services.[Footnote 35] Credit unions-- 
even those serving geographic areas--are not subject to the federal 
Community Reinvestment Act (CRA), which requires banking regulators to 
examine and rate banks and thrifts on lending and service to low-and 
moderate-income neighborhoods in their assessment area.[Footnote 36] 
Consequently, NCUA and most state regulators do not require credit 
unions to maintain data on the extent to which loans and other services 
are being provided to households with various incomes. 

Federal Reserve Board Data Suggest That Credit Unions Serve a Slightly 
Lower Proportion of Low-and Moderate-Income Households Than Do Banks: 

Our prior work, which included an analysis of data from the Federal 
Reserve Board's 2001 SCF, suggested that credit unions overall served a 
lower percentage of households of modest means (low-and moderate-income 
households combined) than banks.[Footnote 37] More specifically, while 
credit unions served a slightly higher percentage of moderate-income 
households than banks, they served a much lower percentage of low- 
income households. We combined the SCF data into two main groups-- 
households that primarily and only used credit unions versus households 
that primarily and only used banks.[Footnote 38] As shown in figure 5, 
this analysis indicated that about 36 percent of households that 
primarily and only used credit unions had low or moderate incomes, 
compared to 42 percent of households that used banks. Moreover, our 
analysis suggested that a greater percentage of households that 
primarily and only used credit unions were in the middle and upper 
income grouping than the proportion of households that primarily and 
only used banks. 

Figure 5: Income Characteristics of Households Using Credit Unions 
versus Banks, and Low and Moderate Income versus Middle and High 
Income: 

[See PDF for image] 

Note: We used the same income categories as used by federal regulators 
in their CRA examinations. 

[End of figure] 

We also looked at each of the four income categories separately. As 
shown in figure 6, this analysis suggested that the percentage of 
households in the low-income category that used credit unions only and 
primarily (16 percent) was lower than the percentage of these 
households that used banks (26 percent). In contrast, more moderate-and 
middle-income households were likely to use credit unions only and 
primarily (41 percent) than banks (33 percent). Given that credit union 
membership traditionally has been tied to occupational-or employer- 
based fields of membership, that higher percentages of moderate-and 
middle-income households using credit unions is not surprising. 

Figure 6: Income Characteristics of Households Using Credit Unions 
versus Banks, by Four Income Categories: 

[See PDF for image] 

Note: We found no statistical difference in the percent of upper-income 
households when the "primarily and only" using credit union group and 
the "primarily and only" using bank group were compared. 

[End of figure] 

We also attempted to further explore the income distribution of credit 
unions members by separately analyzing households that only used credit 
unions or banks from those that primarily used credit unions or banks. 
However, the results were ambiguous and difficult to interpret, due to 
the characteristics of the households in the SCF database. For example, 
because such a high percent of the U.S. population only uses banks (62 
percent), the data obtained from the SCF is particularly useful for 
describing characteristics of bank users but much less precise for 
describing smaller population groups, such as those that only used 
credit unions (8 percent). 

Other relatively recent studies--notably, by the Credit Union National 
Association and the Woodstock Institute--generally concluded that 
credit unions served a somewhat higher-income population. The studies 
also noted that the higher income levels could be due to the full-time 
employment status of credit union members.[Footnote 39] Officials from 
NCUA and the Federal Reserve Board also noted that credit union members 
were likely to have higher incomes than nonmembers because credit 
unions are occupationally based. A National Federation of Community 
Development Credit Unions representative noted that because credit 
union membership is largely based on employment, relatively few credit 
unions are located in low-income communities.[Footnote 40] However, 
without additional research, especially on the extent to which credit 
unions with a community base serve all their potential members, it is 
difficult to know whether the relative importance of full-time 
employment is the primary explanatory factor. 

NCUA Has Established Initiatives That Target Low-Income Individuals and 
Underserved Areas: 

NCUA recently has established two initiatives to further enhance the 
availability of financial services to individuals of modest means: the 
low-income credit union program and expansion into underserved areas. 
According to NCUA, its Low Income Credit Unions (LICU) program is 
designed to assist credit unions whose members are of modest means in 
obtaining technical and financial services. LICUs grew in number from 
more than 600 in 2000 to nearly 1,000 by the end of 2004. To obtain a 
low-income designation from NCUA, an existing credit union must 
establish that a majority of its members meet the low-income 
definition.[Footnote 41] According to NCUA, credit unions that meet 
this criterion are presumed to be serving predominantly low-income 
members. Also, newly chartered credit unions can receive low-income 
designation based on the income characteristics of potential members. 

Credit unions that receive a low-income designation from NCUA are 
measured against the same standards of safety and soundness as other 
credit unions. However, NCUA grants benefits that other credit unions 
do not have, including: 

* greater authority to accept deposits from nonmembers such as 
voluntary health and welfare organizations; 

* access to low-interest loans, deposits, and technical assistance 
through participation in NCUA's Community Development Revolving Loan 
Fund; 

* ability to offer uninsured secondary capital accounts and include 
these accounts in the credit union's net worth for the purposes of 
meeting its regulatory capital requirements;[Footnote 42] and: 

* a waiver of the aggregate loan limit for member business loans. 

NCUA has stated that one of its goals is to encourage the expansion of 
membership and make quality credit union services available to all 
eligible persons. It has done so in part by allowing credit unions to 
expand into underserved areas in recent years, from 40 in 2000 to 564 
in 2004 (see fig. 7). 

Figure 7: Credit Union Expansions into Underserved Areas, 2000-2004: 

[See PDF for image] 

[End of figure] 

CUMAA and NCUA's Interpretive Ruling and Policy Statement (IRPS) 03-1, 
the Chartering and Field of Membership Manual, allows credit unions to 
include in their fields of membership, without regard to location, 
communities in underserved areas. The Federal Credit Union Act defines 
an underserved area as a local community, neighborhood, or rural 
district that is an "investment area" as defined by the Community 
Development Banking and Financial Institutions Act of 1994--that is, 
experiencing poverty, low income, or unemployment.[Footnote 43] In 
order to expand into an underserved area, credit unions must receive 
approval from NCUA by demonstrating that a community qualifies as an 
investment area. Credit unions must also provide a business plan 
describing how the underserved community will be served. Finally, 
although the underserved and LICU initiatives are intended to help 
serve the underserved, NCUA does not collect data such as overall 
income levels of individuals using specific credit union products. 

NCUA Has Not Fully Implemented Our Recommendation to Develop Indicators 
to Evaluate Credit Union Progress in Reaching the Underserved: 

Although NCUA has targeted underserved individuals and areas, in our 
2003 report on credit unions we found that NCUA had data on potential-
-but not actual--membership of low-and moderate-income individuals in 
underserved areas adopted by credit unions. We recommended that NCUA 
use tangible indicators, other than potential membership, to determine 
whether credit unions have provided greater access to credit union 
services in underserved areas.[Footnote 44] 

As of October 15, 2005, NCUA had not adopted any indicators. According 
to NCUA, it has established a working group to study credit union 
success in reaching people of modest means. NCUA indicated that the 
working group was exploring meaningful measures of success for this 
objective, determining how to best quantify the measures with available 
or readily obtainable data. The working group has also been evaluating 
the impact of other regulations, such as the Privacy of Consumer 
Financial Information, on the collection and use of such data. 
According to NCUA officials, as of October 15, 2005, the working group 
had not issued its report or recommendations. 

Credit Unions Lack Transparency on Executive Compensation and Larger 
Credit Unions Do Not Have to Report on Effectiveness of Internal 
Controls: 

Most credit unions are not subject to IRS and other federal reporting 
requirements that would disclose information such as executive 
compensation and assessments of internal controls for financial 
reporting--information that can enhance public confidence in tax-exempt 
entities. Public availability of key financial information (that is, 
transparency) can provide incentives for ethical and effective 
operations as well as support oversight of the tax-exempt entities. At 
the same time, the disclosure of such information helps to achieve and 
maintain public trust. 

Recognizing the importance of transparency for tax-exempt entities, 
Congress made returns of the IRS Form 990 (Return of Organizations 
Exempt from Income Tax) into publicly available documents. Since tax 
exemptions are granted to entities so that they can carry out 
particular missions or activities that Congress judges to be of special 
value, the public availability of Form 990 promotes public oversight. 
Most tax-exempt organizations, other than private foundations with 
gross receipts of $25,000 or more, are required to file Form 990 
annually. The form contains information on an organization's income, 
expenditures, and "activities" including compensation information for 
officers, directors, trustees, and key employees. IRS also uses these 
forms to select organizations for examination. 

However, most credit unions do not individually file Form 990. In 2002 
and 2003, credit unions filed 1,435 and 1,389 Form 990s, respectively. 
On August 23, 1988, IRS issued a determination that annually filing 
Form 990 was not required for federal credit unions because of their 
status as tax-exempt organizations under section 501(c)(1) of the 
Internal Revenue Code. Depending on the state, some state-chartered 
credit unions file through a group filing process. For these states, 
IRS receives only the names and addresses of individual credit unions. 
As a result, scrutiny of the compensation of credit union executives 
and other key personnel is difficult. As you are aware, we have ongoing 
work in this and other areas, and we hope to provide you with 
additional information on the compensation of credit union executives 
and officials as part of this follow-up work. 

As noted in our 2003 report, the Federal Credit Union Act, as amended, 
requires credit unions with assets over $500 million to obtain an 
annual independent audit of financial statements by an independent 
certified public accountant. But, unlike banks and thrifts, these 
credit unions are not required to report on the effectiveness of their 
internal controls for financial reporting. Under FDICIA and its 
implementing regulations, banks and thrifts with assets over $500 
million are required to prepare an annual management report that 
contains: 

* a statement of management's responsibility for preparing the 
institution's annual financial statements, for establishing and 
maintaining an adequate internal control structure and procedures for 
financial reporting, and for complying with designated laws and 
regulations relating to safety and soundness; and: 

* management's assessment of the effectiveness of the institution's 
internal control structure and procedures for financial reporting as of 
the end of the fiscal year and the institution's compliance with the 
designated safety and soundness laws and regulations during the fiscal 
year. [Footnote 45] 

Additionally, the institution's independent accountants are required to 
attest to management's assertions concerning the effectiveness of the 
institution's internal control structure and procedures for financial 
reporting. The institution's management report and the accountant's 
attestation report must be filed with the institution's primary federal 
regulator and any appropriate state depository institution supervisor, 
and must be available for public inspection. 

The reports, with their assessments and attestations on internal 
controls, allow depository institution regulators to gain increased 
assurance about the reliability of financial reporting. Also as we 
stated in our 2003 report, the extension of the internal control 
reporting requirement to credit unions with assets over $500 million 
could provide NCUA with an additional tool to assess the reliability of 
internal controls over financial reporting. 

Moreover, bank and thrift reporting requirements under FDICIA are 
similar to the public company reporting requirements in the Sarbanes- 
Oxley Act of 2002. Under Sarbanes-Oxley, public companies are required 
to establish and maintain adequate internal control structures and 
procedures for financial reporting; the company's auditor is also 
required to attest to, and report on, the assessment made by company 
management on the effectiveness of internal controls. As a result of 
FDICIA and the Sarbanes-Oxley Act, reports on management's assessment 
of the effectiveness of internal controls over financial reporting and 
the independent auditor's attestation on management's assessment have 
become normal business practice for financial institutions and 
businesses. 

In a letter dated October 2003, NCUA's Chairman stated that while the 
Sarbanes-Oxley Act does not apply specifically to federal credit 
unions, certain provisions may be appropriate to consider for some 
federal credit unions. Federal credit unions are encouraged (but not 
required) to consider the guidance provided and are urged to 
periodically review their policies and procedures as they relate to 
matters of corporate governance and auditing. 

Mr. Chairman, this concludes my prepared statement. I would be pleased 
to respond to any questions you or other Members of the committee may 
have. 

Contact and Acknowledgments: 

For further information regarding this testimony, please contact 
Richard Hillman at (202 512-8678) or hillmanr@gao.gov. Individuals 
making key contributions to this testimony include Janet Fong, May Lee, 
John Lord, Harry Medina, Jasminee Persaud, Barbara Roesmann, and 
Richard Vagnoni. 

FOOTNOTES 

[1] Qualified financial institutions can elect to avoid federal 
corporate income tax as Subchapter S corporations (S-corporations). S- 
corporation tax status mainly allows small, closely held corporations 
meeting certain requirements to elect to eliminate corporate-level 
taxation. S-corporation shareholders are taxed on their portion of the 
corporation's taxable income, regardless of whether they receive a cash 
distribution. For more information on S-corporations, see GAO, Banking 
Taxation: Implications of Proposed Revisions Governing S-Corporations 
on Community Banks, GAO/GGD-00-159 (Washington, D.C. Jun. 23, 2000). 

[2] GAO, Tax-Exempt Sector: Governance, Transparency, and Oversight Are 
Critical for Maintaining Public Trust, GAO-05-561T (Washington, D.C. 
Apr. 20, 2005), and GAO, Nonprofit, For-Profit, and Government 
Hospitals: Uncompensated Care and Other Community Benefits, GAO-05-743T 
(Washington, D.C. May 26, 2005). 

[3] GAO, Credit Unions: Financial Condition Has Improved, but 
Opportunities Exist to Enhance Oversight and Share Insurance 
Management, GAO-04-91 (Washington, D.C. Oct. 27, 2003) and GAO, Credit 
Unions: Reforms for Ensuring Future Soundness, GAO/GGD-91-85 
(Washington, D.C. Jul. 10, 1991). 

[4] See Public Law 105-219 (Aug. 7, 1998), 112 STAT. 914. The Federal 
Credit Union Act of June 26, 1934 refers to "make more available to 
people of small means credit for provident purposes." While these 
statutes have used "small means" and "modest means" to describe the 
type of people who credit unions might serve, these terms are not 
defined in the statutes. 

[5] GAO-04-91. 

[6] Most tax exempt entities annually must file a Form 990 with the 
IRS. Form 990 is publicly available and contains various revenue and 
expense information, including compensation data for officers, 
directors, trustees, and key employees. 

[7] GAO-04-91. 

[8] See GAO/GGD-91-85 for additional background on the history of NCUA 
and state field of membership regulatory policies. 

[9] A CUSO is a corporation, limited liability corporation, or limited 
partnership that provides services such as insurance, securities, or 
real estate brokerage, primarily to credit unions or members of 
affiliated credit unions. Credit unions can invest up to 1 percent of 
their capital in CUSOs. CUSOs must maintain a separate identity from 
the credit union. See 12 C.F.R. Part 712 (2003). 

[10] Internal Revenue Code section 501(c) describes 28 categories of 
organizations that are exempt from federal income tax. State credit 
unions are exempt in a category by themselves under section 
501(c)(14)(A). Federal credit unions are exempt under section 
501(c)(l). Section 501(c)(l) exempts certain corporations that have 
been organized under an act of Congress, designated as 
instrumentalities of the United States, and that are exempt from tax by 
the Internal Revenue Code or by certain congressional acts. 

[11] Public Law 63-16. 

[12] Public Law 64-271. 

[13] Public Law 416. 

[14] H.R. Rep. No. 75-1579, at 2 (1937). 

[15] Public Law 80-183. 

[16] S. Rep. No. 82-781 (1951). 

[17] While both banks and thrifts were subject to federal corporate 
income tax after 1951, some special provisions served to reduce their 
tax liability relative to corporations in other industries. Over time, 
Congress scaled back many of these provisions, including special 
deductions for additions to bad debt reserves. 

[18] Public Law No. 105-219. 

[19] See GAO, Banking Taxation: Implications of Proposed Revisions 
Governing S-Corporations on Community Banks, GAO-00-159 (Washington, 
D.C. June 2000). 

[20] See the President's Tax Proposals to the Congress for Fairness, 
Growth, and Simplicity, May 1985, 247-248. 

[21] GAO-04-91, p.16. 

[22] Representatives of the Credit Union National Association, the 
National Association of Federal Credit Unions, and the Consumer 
Federation testified before Congress in 1985 as well as in 2005. 

[23] There are three categories of cooperatives under the Internal 
Revenue Code: (1) exempt farmers cooperatives, described in section 
521; (2) certain mutual or cooperative entities described in section 
501(c)(12), which are exempt from taxation pursuant to section 501(a); 
and (3) taxable cooperatives, governed by subchapter T of the code 
(sections 1381-1388). 

[24] U.S. Department of the Treasury estimates as published in 
Analytical Perspectives: Budget of the United States Government, Fiscal 
Year 2005, (Washington, D.C. 2004). 

[25] Joint Committee on Taxation estimates as published in the 
Congressional Budget Office's Budget Options (Washington, D.C. February 
2005). 

[26] John A. Tatom, Competitive Advantage: A Study of the Federal Tax 
Exemption for Credit Unions (The Tax Foundation: Washington, D.C. 
2005). 

[27] Chmura Economics & Analytics, An Assessment of the Competitive 
Environment Between Credit Unions and Banks (Jefferson Institute for 
Public Policy: Virginia, May 2004). 

[28] Credit union assets grew from $438 billion at year-end 2000 to 
$647 billion at year-end 2004--an increase of 48 percent--while banking 
industry assets grew from $7.5 trillion at year-end 2000 to $10.1 
trillion at year-end 2004--an increase of 35 percent. Credit unions 
represented 6.0 percent of the combined assets of the banking and 
credit union industries as of December 31, 2004, versus 5.6 percent as 
of December 31, 2000. 

[29] Given the disproportionate size of the banking industry relative 
to the credit union industry--the average credit union had $72 million 
in assets versus $1.1 billion in assets for the average bank at year- 
end 2004--we developed peer groups by asset size to mitigate the 
effects of this discrepancy. We constructed five peer groups in terms 
of institution size as measured by total assets, reported as of 
December 31, 2004. We further refined the sample of FDIC-insured 
institutions to exclude those banks and thrifts we determined had 
emphases in credit card or mortgage loans. The largest bank included in 
our analyses had total assets of nearly $23 billion at year-end 2004, 
and the average bank in this peer group sample had $359 million in 
assets. 

[30] The Federal Credit Union Act defines an "underserved area" as a 
local community, neighborhood, or rural district that is an "investment 
area" as defined by the Community Development Banking and Financial 
Institutions Act of 1994. An investment area includes locations 
experiencing poverty, low income, or unemployment. 

[31] National Credit Union Administration v. First National Bank & 
Trust Company. 522 U.S. 479 (1998). 

[32] See 12 U.S.C. § 1759(b), (d), as amended. 

[33] With the exception of the statistics provided for multiple-bond 
credit unions for 1996, NCUA cannot provide us data on federal 
chartering trends before 2000. However, NCUA was able to report that by 
1996, about half of all federally chartered credit unions were multiple-
bond credit unions. 

[34] Pub. L. No. 105-219 § 101. See 12 U.S.C. § 1759(c)(2), as amended. 

[35] The Credit Union National Association, a trade association, 
collects information about the characteristics (for example, income, 
race, and age) of credit union members but not specifically the income 
levels of members who actually receive mortgage and consumer loans or 
use other services. Also, Massachusetts and Connecticut collect 
information on the distribution of credit union lending by household 
income and the availability of services because their state-chartered 
credit unions are subject to examinations similar to those of federally 
regulated institutions. Massachusetts established its examination 
procedures in 1982 and Connecticut in 2001. 

[36] CRA requires federal bank and thrift regulators to encourage 
depository institutions under their jurisdiction to help meet the 
credit needs of the local communities, including low-and moderate- 
income areas, in which they are chartered, consistent with safe and 
sound operations. See 12 U.S.C. §§ 2901, 2903, and 2906 (2000). Federal 
bank and thrift regulators conduct CRA examinations to evaluate the 
services that depository institutions provide to low-and moderate- 
income neighborhoods. However, CRA provides for enforcement only when 
regulators evaluate an institution's application for a merger or new 
branch, requiring that the agencies take an institution's record of 
meeting the credit needs of its community into account. 

[37] The SCF is an interview survey of U.S. households conducted by the 
Federal Reserve Board that includes questions about household income 
and specifically asks whether households use credit unions or banks. It 
is conducted every 3 years and is intended to provide detailed 
information on the balance sheet, pension, income, and other 
demographic characteristics of U.S. households, and their use of 
financial institutions. 

[38] See GAO-04-91, pages 19-23, for a more detailed discussion of our 
analysis and limitations of the SCF data. 

[39] Credit Union National Association 2002 National Member Survey and 
Woodstock Institute, Rhetoric and Reality: An Analysis of Mainstream 
Credit Unions' Record of Serving Low Income People (February 2002). 

[40] The National Federation of Community Development Credit Unions 
represents and provides, among other things, financial, technical 
assistance, and human resources to about 215 community development 
credit unions for the purpose of reaching low-income consumers. 

[41] Section 701.34 of NCUA's Rules and Regulations defines the term 
"low-income members" as those members who (1) make less than 80 percent 
of the average for all wage earners as established by the Bureau of 
Labor Statistics or (2) whose annual household income falls at or below 
80 percent of the median household income for the nation as established 
by the Census Bureau. The term "low-income members" also includes 
members who are full-or part-time students in a college, university, 
high school, or vocational school. 

[42] A "secondary capital instrument" is either unsecured debt or debt 
that has a lower priority than that of another debt on the same asset. 
These subordinated debt instruments are not backed or guaranteed by the 
federal share insurance fund. 

[43] Quoted from NCUA Chartering and Field Membership Manual, March 
2003, p.3-4 & 3-5 

[44] GAO-04-91, p. 83. 

[45] 12 U.S.C. § 1831m; 12 C.F.R. Part 363 (2003).