The credit union tax exemption is under increasing scrutiny in Washington following a record number of acquisitions of tax-paying community banks last year, but that isn’t stopping the industry from seeking increased powers for the largest credit unions.

With federal data showing credit unions are failing to meet the needs of the high-poverty areas that they’re subsidized to serve, credit unions must focus on serving that mandate before they attempt to expand their taxpayer-funded subsidies into other areas.

Amid reports of credit unions abandoning their mission, concerns over the impact of taxpayer subsidies on credit union acquisitions of tax-paying community banks, and questions from Congress on reports of discriminatory lending practices, industry advocates are pushing to raise the statutory cap on the industry’s lending to member businesses.

But this is a smokescreen from an industry increasingly under the microscope. With most credit unions exempt from the 12.25% asset threshold due to their low-income designation and the vast majority of credit unions nowhere near the cap in the first place, this push by credit union advocates is designed merely to allow the largest and fastest-growing credit unions to expand their taxpayer-subsidized turf.

This lobbying push is not about unleashing lending; it’s about further unleashing taxpayer largesse for large financial institutions that are increasingly acquiring locally based, tax-paying community banks.

Rather than expanding the powers of the largest credit unions, policymakers should instead examine how federal tax subsidies are fueling a concerning increase in credit unions acquiring tax-paying community banks.

According to a recent Independent Community Bankers of America analysis of publicly available federal data, these deals facilitate consolidation of locally based financial institutions by involving large credit unions that often cross state lines well outside their fields of membership. Since 2010, more than 80% of charter acquisitions involved a credit union with more than $1 billion in assets, while more than 40% involved a credit union headquartered in a different state than the acquired bank.

With nearly two-thirds of acquired banks experiencing an increase in net operating income in the five years leading up to their acquisition, credit unions are purchasing well-performing competitors — and eliminating tax-paying local institutions in the process.

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Unfortunately for affected communities, data on SBA lending — which also does not count against credit unions’ business lending cap — show these deals end up harming local lending.

Community banks account for roughly 69.3% of SBA loans provided by banks and credit unions since 2010, compared to 2.8% from credit unions. In service areas affected by credit union acquisitions in which community banks participated in SBA programs, SBA lending fell after the acquisition nearly 80% of the time.

Home Mortgage Disclosure Act lending data show a similar impact on mortgage lending. In service areas affected by an acquisition: 61% experienced an increase in mortgage denial rates. In areas where denial rates rose, the median increase was nearly 10 percentage points. Clearly, credit unions are not replicating the lending practices of the banks they acquire.

The impact of acquisitions is particularly concerning given the stark disparities between community banks and credit unions in serving lower-income areas.

Since 2010, community banks represented 76.5% of SBA lending in the highest-poverty counties, compared with just 1.8% from credit unions — showing community banks are outperforming credit unions even in the lower-income communities that credit unions receive a tax subsidy to serve.

This community bank lending translated to supporting 433,227 jobs in high-poverty areas, compared to just 16,415 jobs supported by credit unions. Overall, community banks issued a total of $305 billion in SBA 7(a) and 504 loans, nearly 25 times more than credit unions. In rural regions, particularly in the Great Plains, the South, and Appalachia, community banks were often the only SBA lenders present.

In other words, credit union acquisitions pose a significant threat to the communities that are most reliant on community banks as an economic lifeline.

With the credit union industry’s tax exemption tilting the scales in its favor, this policy failure demands a policy response. Eliminating the federal tax exemption for credit unions over $1 billion in assets will help ensure taxpayer dollars no longer subsidize community banking consolidation and reduce banking options for consumers and small businesses.

If taxed at the same rate as local community banks, tax payments from the largest credit unions would have totaled $2.6 billion in 2024. That additional tax revenue could have funded the annual cost of education for 168,338 K-12 students or hired 34,793 police officers.

With even credit union advocates acknowledging that the industry’s evolution is eroding the rationale for its generous tax benefits, the data is clear that the economic outlook for our nation’s local communities depends on a much-needed change to federal credit union policy.