WASHINGTON and MADISON, Wis. (3/8/10)--Credit Union National Association (CUNA) economists have analyzed a study in Georgia about the impact of credit unions' tax exemption and determined the study is not a complete look at the exemption. The study report--written by Thomas G. Noland of the University of South Alabama and Edward H. Sibbald, a BB&T executive in residence at Georgia Southern University--was published in Southern Business Review (Winter 2010) and compares credit unions in Georgia with similar-asset Georgia banks. They state the "original justification for the tax exempt status of credit unions was the idea that credit unions served lower income borrowers and depositors." "This is not, however, a complete list for the justifications for tax exemption," CUNA Senior Economist Steve Rick wrote in an analysis for CUNA. "They left out that credit unions are not-for-profit, democratic, financial cooperatives, owned by their members. And, credit unions' boards of directors are mostly unpaid volunteers, elected by members." The paper also omitted "that credit unions, with limitations on who they can serve and restrictions on products and services, also have a social mission to provide service to people of modest means as part of their member base," Rick wrote. The Internal Revenue Code acknowledges that credit unions are recognized as tax-exempt "because they issue no capital stock. Under the IRS comments for 501(c)(14) Credit Unions and other Mutual Financial Organizations, the IRS provides a very clear link between tax exemption and the lack of capital stock," said Rick. The Georgia report said the "business model of a credit union is fundamentally different than a commercial bank," but Rick noted the comparison is "apples to oranges," with no attempt to control for the different asset and liability mix between credit unions and banks. The credit union operating platform is designed and staffed to handle large volumes of smaller accounts and smaller loans, Noland and Sibbald said. Banks have eschewed this business area due to the excessive costs--and lower profitability--involved. They note that consumer loans have declined and account for only about 7% of a bank's loan. Credit unions have stepped into the lending void to provide credit to many low-income borrowers who cannot get credit at a bank. Rick cited 2008 HMDA data showing credit union loan approval rates are about 10% higher than non-credit union lenders (69.7% overall to 59.1%, respectively). For low income populations, credit unions' mortgage approval rates were 57% compared with banks' 47.3% , he said. In a "Tax Exemption Benefits" section, Noland and Sibbald list four possible ways the tax exemption benefit would accrue to credit union members: higher deposit rates, lower loan rates, broader extension of consumer credit, and higher retained earnings to boost capital. "The authors excluded from their list, the higher operating costs needed to service many small balance checking accounts and savings deposits, and the lower fees charged by credit unions as compared to banks," said Rick's analysis. The authors write that a previous study used aggregate data does not support the first two benefits, but Rick notes "a quick analysis of bank vs. credit union interest rates, either in your local newspaper or from a reputable interest-rate data source like Datatrac, completely disproves this assertion." Georgia credit unions on average charge 1.94 percentage points less on a used-car loan than did banks during third quarter 2009, according to Datatrac. "This resulted in a $41 million savings for Georgia borrowers," said Rick. "On the deposit side, Georgia credit unions paid 0.42 percentage points more than Georgia banks on money market accounts," a $7 million benefit for Georgia's savers. The authors' conclusion that Georgia banks grew faster than credit unions in the five-year study "is one piece of evidence for the argument that credit unions' tax exempt status has not put banks at a competitive disadvantage," Rick said. The report also concluded that "Banks are generally more profitable than credit unions, but due to the credit unions' tax exempt status, banks wind up earning less income as a percent of assets." "That is exactly what is to be expected from the credit union tax exemption: credit union serving high-cost low-profitability customers, which leads to relatively low earnings," said Rick, "but being able to accumulate capital at a faster pace than banks because credit unions cannot rely on shareholders for additional capital, cannot issue preferred stock and cannot count on capital contributions for a parent holding company." The Georgia report raises a fundamental policy question: "How the federal government can justify backing the National Credit Union Administration's guarantee on deposits with the full faith and credit of taxpayers when these institutions do not pay federal taxes." "The answer is simple," said Rick. "The benefit credit unions offer millions of Americans in the form of lower and fewer fees, lower loan interest rates and higher deposit interest rates is greater than the foregone federal tax revenue. "Also, let's not forget that the cost of the federal government's bailout of the Federal Savings and Loan Insurance Corp. (FSLIC) two decades ago far exceeded the federal taxes paid by the savings and loan industry during its entire history," Rick concluded.