It is crucial for individuals to carefully consider distinctions when choosing a financial institution that aligns with their values and community preferences. By supporting community banks, individuals can actively contribute to the well-being of their local communities.
Community Banks vs. Credit Unions: Understanding the Difference
Credit unions were originally established as not-for-profit financial cooperatives that were limited to serving specific groups with a common bond, often targeting trade professions. However, the landscape has changed drastically since then. Today's credit unions have grown immensely in size and profitability, and they are no longer restricted to serving only those with a common bond. Unfortunately, many of the original restrictions that were in place to balance their tax-exempt status have been lifted, allowing credit unions to enjoy significant tax advantages that impact communities in various ways.
One of the most glaring disparities is the tax-exempt status of credit unions, which has substantial implications for local communities. Unlike tax-paying community banks that contribute to the financial resources and support of public services, credit unions remain exempt from corporate income taxes. This means that they are able to generate substantial profits, as evidenced by approximately $324 million in profits generated by credit unions in Minnesota in 2022, without contributing a single dollar in corporate income taxes.
Furthermore, credit unions also enjoy an exemption from the Community Reinvestment Act (CRA), a federal law enacted in 1977. The CRA was specifically designed to ensure that banks fulfill the credit needs of the communities in which they operate, particularly in low- and moderate-income neighborhoods. By combating discriminatory lending practices and promoting fair access to credit, mortgages, small business loans, and other financial services, the CRA aims to uplift underserved communities. However, credit unions are not bound by these obligations, which raises concerns about their commitment to serving the broader community.
It is crucial for individuals to carefully consider these distinctions when choosing a financial institution that aligns with their values and community preferences. By supporting community banks, individuals can actively contribute to the well-being of their local communities.