Military credit unions, advocates make case for carve-out in finance reform bill

Credit unions and associations representing military members are urging lawmakers to oppose a provision in a broad financial services bill that they argue amounts to a tax on troops and their families.

The bill, currently being marked up in the House Financial Services Committee, would impose a fee on financial institutions with more than $10 billion in assets to pay for the costs if the government is forced to take over a failing financial firm.

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Among the large firms with more than $10 billion in assets are three credit unions that lend directly to consumers. Two of those — Navy Federal Credit Union and Pentagon Federal Credit Union — serve members of the military or their family members as well as other Department of Defense employees. The third, the State Employees’ Credit Union in North Carolina, serves government employees.

The Navy credit union has roughly $40 billion in assets, while the Pentagon credit union has roughly $14 billion in assets, according to the most recent information from the National Credit Union Administration (NCUA), the government regulator. The Navy credit union has 3.3 million members and the Pentagon one has roughly 900,000, according to NCUA. The North Carolina credit union has roughly $18 billion in assets, according to its most recent annual report.

The National Association of Federal Credit Unions (NAFCU) has joined forces with military groups to urge lawmakers to alter the legislation so it would not apply to those credit unions. The Military Officers Association of America (MOAA) and National Military Family Association are working on behalf of the credit unions.

“Does Congress really want the men and women of the armed services to pay for a bailout of the next AIG?” NAFCU wrote, referring to the crippled insurance firm American International Group (AIG) that received roughly $180 billion in government bailout commitments.

Retired Vice Adm. Norbert Ryan Jr., president of the military officers association, wrote in a letter to lawmakers on the Financial Services panel that the fee would represent a tax on credit union members that would then be passed on to service members and their families.

“Military credit unions and their members that behaved responsibly should not be penalized for the management failings of other institutions,” Ryan wrote.

NAFCU and the Credit Union National Association, the other large Washington association for the industry, have argued that credit unions were not the main culprits in the financial crisis and should not be subject to the new fee system.

The associations argue that imposing a fee on not-for-profit credit union cooperatives is tantamount to taxing customers of the credit unions directly.

“While large banks can simply push added costs to their investors, every additional operating cost or systemic tax on credit unions translates to lower returns on savings and higher loan interest rates for military customers,” Ryan wrote to House lawmakers.

The fee provision has emerged as a major flashpoint in the broader debate over legislation that would give the government “resolution authority” to deal with failing financial firms.

The provision could change significantly and Financial Services Committee Chairman Barney Frank (D-Mass.) and Federal Deposit Insurance Corporation (FDIC) Chairwoman Sheila Bair have already said they are in favor of levying a fee on firms to establish a rolling fund that could be tapped once a firm fails. Treasury Secretary Timothy Geithner has supported a fee to cover the costs of a takeover, but only after it occurs.

Lawmakers, including Frank, have praised credit unions and have said they were not the responsible for the financial crisis.