Credit Unions Go Large and Go Rogue

On October 27 in Las Vegas, National Credit Union Administration (NCUA) Chairman Kyle Hauptman waved around a Venetian Resort poker chip in one hand, and a $100 bill in the other. On the keynote stage of Money20/20, a finance and banking trade conference, Hauptman touted the great potential of stablecoins, a kind of cryptocurrency that pegs its value to a more stable asset, like dollars. Stablecoins are like poker chips, Hauptman explained: a symbol whose reliable value depends on secure conversion into a sovereign monetary instrument.

Glossing over the deeper resonances one might acknowledge when likening cryptocurrencies to poker chips, Hauptman said stablecoins may buoy credit unions’ long-term business prospects, enabling new capacities such as instantaneous bank settlements. He added that he and his colleagues on the NCUA’s board have put a lot of care into issuing productive crypto-related guidance—even during the blockchain-averse Biden years.

As of April, however, Hauptman has no colleagues. The rest of the three-member board—Democrats Tanya Otsuka and Todd Harper—was fired by the Trump administration. Otsuka and Harper are contesting their dismissal in federal court. Their appeal has turned into a drawn-out affair, including a reinstatement in July, followed shortly thereafter by a federal appeals court’s stay on the ruling.

In an interview with The American Prospect, Harper said he and Otsuka have filed an emergency petition with the Supreme Court, leveraging British law and framer logic to emphasize the importance of their roles as regulators of financial institutions. Allowing presidents to fire appointees like them “would undermine the ability of financial regulators to maintain trust in the financial system,” Harper said.

Hauptman, a Republican appointed by President Trump in December 2020, essentially is in sole charge of regulating credit unions, a banking-adjacent sector boasting nearly $2 trillion in deposits, 144 million members, and over 4,000 federally insured institutions. Established in the 1930s, credit unions presented a promising way to address the uneven access to credit that was prolonging the Great Depression. Underbanked and disenfranchised people couldn’t access the funds needed to rebuild, and the cooperative credit union offered one way to put local savings to work.

Federally chartered credit unions’ legal structure is a vestige of that era: They are not-for-profit entities technically owned by their members rather than shareholders. They do not pay federal corporate income taxes, and don’t have to disclose executive pay. And since they’re understood as inherently community-oriented, they’re exempt from many landmark banking laws, such as the Community Reinvestment Act (CRA).

Most credit unions still look like the cooperative institutions of yore. But a few have taken advantage of these exemptions and “strayed from their mission” at the expense of consumer welfare, according to Aaron Klein of the Brookings Institution. The largest credit unions impose overdraft fees with far greater frequency than banks, sometimes illegally, and others target vulnerable consumers, like young Marine recruits, for lucrative gain. Some revel in their wealth: The Pentagon Federal Credit Union has a private jet; the CIA’s credit union put its name on the Washington Commanders’ stadium; and a small New York credit union paid its CEO more than $1 million—even as it faced insolvency.

Without a clear quorum for most activities, Hauptman is in a holding pattern as long as Otsuka and Harper’s status on the NCUA board remains uncertain. But Hauptman doesn’t appear interested in holding back supersized credit unions that have strayed from the sector’s roots and are buying up the competition. Will this lead to credit unions continuing to look more like big banks, or will banks strike back and knock out a threat to their dominance?

TODD HARPER, THE TRUMP ADMINISTRATION’S Democratic nominee to the NCUA in 2019, chaired the board during the Biden administration. Among his initiatives was compelling credit unions holding more than $1 billion in deposits to disclose data related to their overdraft fees. The data showed how, despite holding just 10 percent of all banking deposits in the U.S., credit unions charged 47 percent of the total industry’s overdraft fees.

Many credit unions “were coasting on overdraft fees,” Harper told the Prospect. “And who do overdraft fees fall on? Well, they fall on the underserved, the very people who were supposed to be helped by credit unions’ existence.” He added that the disclosures may have compelled some credit unions to put more effort into extending loans, rather than extracting revenue from customers through fees.

But Hauptman has since discontinued this disclosure requirement, claiming that, among other negative outcomes, journalists use this data to “write click-bait articles that are often devoid of any business or economic sense.” And unlike Harper, who sought rulemaking to require federally chartered credit unions to disclose the compensation of their highest-paid executives, Hauptman has not spoken prominently about the topic. The NCUA did not respond to several interview requests.

Scott Simpson, CEO of America’s Credit Unions (ACU), the federally focused lobbying group representing credit unions, argues that disclosing executive pay would be counterproductive, as consumers don’t appreciate that banks can further compensate executives with equity, which credit unions cannot, given their not-for-profit status. “I do not fear the ability to have a conversation about executive compensation in the marketplace, as long as you, and policymakers, and the public will ask the question, ‘Compared to what?’” he said.

Klein sees this as another example of ACU covering for the largest credit unions. “They are now advocating not on behalf of their legal mission or their members, but largely on [behalf of] multimillionaire executives who want to run banks, get paid like bankers, and rip people off,” he said of the large credit unions.

One of the ways credit unions are growing in size and influence is by purchasing banks. That includes America First Credit Union’s proposed acquisition of Las Vegas–based Meadows Bank, which was co-founded by Lorenzo Fertitta, the former CEO of the UFC sports league. Frontwave Credit Union, which was condemned last year by Senate Democrats for exploiting its customers—especially Marine recruits—with persistent overdraft fees, announced in January the purchase of Community Valley Bank of El Centro, California. And in July, OnPath Credit Union bought Heritage Bank of St. Tammany in southeast Louisiana. Between 2020 and 2024, credit unions acquired $22.3 billion in bank assets.

Banks aren’t above growing through acquisition as well. But credit unions swallowing up banks can lead to a loss in tax revenue, as formerly for-profit institutions convert into not-for-profits. Fertitta’s Meadows Bank, for example, can use America First Credit Union’s not-for-profit status to avoid Nevada’s bank branch excise tax. They wouldn’t even have to file a Form 990 with basic financial information, as most nonprofits do; federally chartered credit unions are exempt from this practice. (The NCUA board’s review of the proposed acquisition appears on hold pending Otsuka and Harper’s legal challenge.)

Trade groups like the Independent Community Bankers of America (ICBA) have pointed to mergers as evidence that larger credit unions are basically operating as banks and should be regulated and taxed as such. They add that credit unions are deploying surplus capital to grow their footprint rather than lowering loan rates or increasing savings rates—an abandonment of their initial mandate.

According to Michael Emancipator of the ICBA, nearly 90 percent of community banks acquired by credit unions were “very profitable,” and weren’t looking to sell until a credit union “came with a pocket full of money to burn” and a generous offer. “I’m not looking to sell my house right now … but if someone were to offer me tomorrow twice what this house is worth, I would be a fool not to sell it,” he said.

THE DESIRE TO TAX CREDIT UNIONS has a long history, primarily from banks that compete with credit unions for deposits. “I have a brochure that I keep from 1949 where a group of banks had challenged the tax exemption of four different kind[s] of financial institutions: production credit associations, mutual savings banks, savings and loans, and credit unions. And in 1951 three of them lost their tax exemption. Only one of them retained it,” said ACU’s Scott Simpson. “For me, it feels like it’s been at least 70 years of the banks being a one-note piano on the credit union tax exemption.”

Yet with large credit unions acquiring banks, the conversation has re-emerged. “We need tax revenue. So I think tax rate committees are scrutinizing any kind of tax breaks that may not continue to serve a particularly useful purpose,” added Sheila Bair, a former chair of the Federal Deposit Insurance Corporation, who penned a Washington Post op-ed against larger credit unions’ ongoing tax exemption.

Advocacy groups say any effort to tax credit unions would hamstring their long-standing mission; starting by solely taxing the larger credit unions, they say, would only build a slippery slope. GoWest, a credit union lobbying group based in the Western U.S., told the Prospect that credit union acquisitions of community banks keep deposits local and help minimize merger-induced job losses. Plus, would we rather have community banks be acquired by a credit union or a big bank?

Aaron Klein of Brookings likened that logic to asking, “Who would you rather have punch you in the face: me or Mike Tyson?” Credit unions, he said, are “tax-exempt nonprofit[s] with a duty to serve members by a common bond. You are subject to a higher legal—and should be ethical—standard in exchange for that limited purpose … You were given a set of legal and regulatory advantages. How does acquiring this bank further your members’ best interest?”

In May, leading up to the passage of the One Big Beautiful Bill Act, which added trillions of dollars in tax cuts for the rich, Sen. James Lankford (R-OK) said taxing credit unions was “not an unfair issue to raise” when larger credit unions are buying up banks. America’s Credit Unions launched an all-out campaign, called “Don’t Tax My Credit Union,” generating more than 830,000 letters to lawmakers and coordinating a digital ad campaign “targeting key tax writers and congressional leaders” with more than 122 million ad impressions. ACU also met with every Republican member of the House Ways and Means Committee, set up multiple meetings with executive branch offices, and liaised with Senate Majority Leader John Thune, Speaker of the House Mike Johnson, House Majority Leader Steve Scalise, Senate Finance Committee Chairman Mike Crapo, and House Financial Services Committee Chairman French Hill. Ultimately, credit unions’ tax-exempt status remained untouched.

Harper, the regulator, agreed that taxing credit unions could create a slippery slope. When Congress initially taxed savings and loan institutions, Harper noted, they did so by only taxing the largest institutions at first; within two decades, all savings and loan institutions were taxed. So all credit unions could eventually see their retained earnings thin in the face of future volatility and wither as a result, leaving critical service gaps across the country.

One potential resolution, Harper said, would be to offer credit unions new powers that have previously been limited by federal lawmakers. For example, a cap limits most credit unions to dedicating up to 12.25 percent of their operations to extending business loans to members. (“A guy by the name of John Roberts” represented the banking groups in a Supreme Court case in the 1990s that eventually led to the creation of this limit, Harper noted.) Lifting that cap “would be a way for credit unions to better compete,” and would benefit micro and small businesses, as “bankers don’t want to make the loan to the baker who needs two new ovens.” It would also diversify credit unions’ loan portfolios, which could be systemically beneficial.

Yet Harper’s thoughts on this long-standing issue don’t seem to be of much concern to ACU. Though it put great effort into maintaining tax-exempt status, it stayed on the sidelines amidst the NCUA’s leadership purge. To Aaron Klein, the lack of uproar may have been because of Harper’s track record in particular as a regulator interested in, well, really regulating.

“You either want an independent regulator or you want a captive regulator; generally, industry wants captive regulators,” Klein said. “It is easy and simple to make a partisan point about the two Democratic regulators and the Republicans. It is more complicated to say Harper had cracked down on the industry in a way in which past regulators, Democrats and Republicans, had not. I believe the latter could be true.”

Simpson, of ACU, responded that the industry “wants a fully functioning, independent regulator,” and that who sits on that board, and the powers of the president to remove them, is a matter for the three branches of government.

WHILE THE FEDERAL UNCERTAINTY PERCOLATES, state-chartered credit unions continue to answer to the mandates of state-level authorities. Crucially, state-chartered credit unions are not exempt from disclosing executive pay. Some states, like New York and Illinois, mandate that state-chartered credit unions abide by major Community Reinvestment Act statutes; other states, like California, have instituted fee disclosure requirements for state-licensed institutions.

Facing downstream fiscal crises largely caused by major interruptions in federal funding under President Trump, some states have begun to tax state-chartered credit unions that exhibit big bank–like behavior. In Washington state, a coalition of progressive and moderate lawmakers imposed a business and occupancy tax on state-chartered credit unions that acquire banks, after five credit unions in the state entered into such deals last year. State Rep. Shaun Scott, a co-sponsor, told the Prospect that credit union representatives were constructive interlocutors during the drafting process.

Joe Adamack, who represents GoWest in Washington state, said he thinks the law won’t lead to new tax revenue for the state, as the entirety of credit unions’ earnings would be hit with a tax if they acquired a bank, not just the proportion relative to the size of the bank’s deposit base. If that’s the case, the tax may categorically prevent something disfavored by policymakers, rather than fill state coffers. Scott added that lawmakers may also look to redefine what constitutes a “community bank,” as many community banks enjoy “huge deductions” under the current framework. This suggests, if anything, that the slippery slope in Washington state may extend into other banking sectors, not from larger, acquisition-hungry credit unions toward the smaller fish.

Yet consumer welfare, systemic risk, and market competitiveness are on the line as Otsuka and Harper’s positions hang in the balance. If their legal challenge fails in the courts, Hauptman’s agenda could more meaningfully come to fruition, as the Trump White House, with Senate approval, would look to fill two vacant NCUA board seats. That could bode poorly for efforts to bring rogue credit unions in line through transparency and prudential scrutiny.

“Regulators often don’t realize the power they have,” Hauptman said in Vegas. “They’re Bamm-Bamm: They don’t realize their own strength.”