The proposed formation of a trust bank by seven Michigan credit unions gives new fodder to a long-standing battle in the financial services industry.
Bankers view the planned Credit Union Trust as another instance where credit unions that operate tax-free are going beyond their original intent and mission. Credit unions counter that they are merely responding to their members and market demands.
In forming the trust bank, the partner credit unions want the ability to serve members who need or want trust and investment services, rather than refer them elsewhere, oftentimes to a bank.
“All of the partners have seen opportunities that our members are looking for these services, and we’ve not been able to say ‘yes’ to them to date,” said Scott McFarland, the CEO of Berrien Springs-based Honor Credit Union.
“This allows us to say ‘yes,’” McFarland said. “When an opportunity arises, you have two choices: You can open the door and investigate the opportunity, or you can just leave the door closed and the opportunity is there.”
Honor Credit Union joined with six others across Michigan to seek state regulatory approval for Credit Union Trust, which will offer members of partner credit unions trust, investment and related services. Credit Union Trust will not accept deposits or offer loans.
The Michigan Department of Insurance and Financial Services formally accepted an application seeking regulatory approval from Credit Union Trust. A decision should come this fall, clearing the way for the Farmington Hills-based trust bank to open in the first quarter of 2019.
Robert Sajdak, an industry veteran who worked 35 years at Comerica Inc., serves as CEO.
The seven credit unions involved collectively committed $5 million in capital to form Credit Union Trust, Sajdak said. They are:
- Alpena Alcona Area Credit Union, Alpena
- Community Choice Credit Union, Farmington Hills
- ELGA Credit Union, Burton
- Frankenmuth Credit Union, Frankenmuth
- Honor Credit Union, Berrien Springs
- Members First Credit Union, Midland
- Team One Credit Union, Saginaw
The seven institutions combined have more than 100 branch locations across Michigan, 435,000 members and assets totaling $3.62 billion. The founding partners have no plans right now to seek or add equity partners for Credit Union Trust.
“This is where we’re starting and that would be something that we would have to talk about as owners down the road,” McFarland said.
The credit unions united to form the new trust bank after the state Legislature in 2016 updated the law governing credit unions in Michigan. The changes made in the law allow credit unions to provide trust services through an existing or newly formed trust bank.
Credit Union Trust would serve members of the seven equity partners. Opening services to members of other, non-partner credit unions in the state is “way down the road,” McFarland said.
“We really want to make sure that we have it right before we would extend it to anybody else,” he said.
As the seven partners behind Credit Union Trust await regulatory action on their application, trade groups representing bankers in Michigan voiced objections.
The Michigan Bankers Association is “watching carefully” as state regulators review the application, said President and CEO T. Rann Paynter.
“This is certainly new and different,” Paynter said.
The move by credit unions into trust and investment services while enjoying tax-exempt status “should cause policymakers some significant pause,” said Patricia Herndon, the MBA’s senior vice president of government relations. Larger credit unions have an “anemic record” of lending to low-income populations, contrary to their original mission, Herndon said.
On the other hand, banks must adhere to the federal Community Reinvestment Act requirements to serve low- and moderate-income neighborhoods in their markets.
“There’s a significant disconnect that needs to be evaluated” at both the state and federal level, Herndon said.
Mike Tierney, president and CEO of the Community Bankers of Michigan, argues that Credit Union Trust is one more example of credit unions straying beyond their original missions to serve people of “modest means,” and “there’s no way trust powers have anything to do with people of ‘modest means.’”
As member-owned institutions, credit unions have the market advantage of operating without paying state or federal taxes, Tierney said.
Banks have often raised that complaint about growing credit unions, especially as they expanded with broader fields of membership and moved into commercial lending.
SETTING UP A FIGHT
The Community Bankers of Michigan plans to oppose the application to state regulators for Credit Union Trust, although Tierney concedes “it’s going to be a difficult fight that we’ll take on because the law does allow it.”
Still, he said, “it’s time for a strong public debate.”
Bankers years ago “didn’t fight hard enough” against allowing credit unions to broaden their fields of membership and to offer commercial loans, “and it’s really blurred the difference between the two industries,” Tierney said. The filing of the Credit Union Trust application “is the hottest I’ve seen (CBOM members) in a long time,” he said.
“It’s not that we’re afraid of competition. There’s plenty of competition out there. Credit unions have had an unfair advantage for many years,” Tierney said. “It’s not right and there needs to be a more level playing field. They are no longer serving the purpose they were created for, so they should be taxed just like a community bank is taxed. At some level, when a credit union gets to $1 billion (in assets) or some mark, they’re no longer operating as they were originally chartered to operate.”
McFarland of Honor Credit Union counters that credit unions are adapting to change.
As members’ needs and market demands evolve, credit unions need to adjust their role accordingly, he said.
“It’s unrealistic to believe the needs of the consumer don’t change — in our case, our members’ (needs),” McFarland said. “An organization, to truly fulfill that mission, has to change and adjust and look at new things to be relevant. If credit unions only had a savings account and a checking account, we wouldn’t be relevant in our members’ lives.”