Kreis: VSECU and the B word — is it bias?

Editor’s note: This op-ed is by Donald M. Kreis, associate director and assistant professor of law at the Institute of Energy and the Environment of Vermont Law School. He also serves on the board of the Vermont Journalism Trust, parent organization of VTDigger.org.

The question of whether the Vermont State Employees’ Credit Union (VSECU) – and, by extension, all of Vermont’s state-chartered credit unions – may publicly describe what they do as “banking,” turns on many things. But one thing it should not turn on is the subjective opinion of the commissioner of Financial Regulation that the Legislature lets credit unions get away with not paying a tax he believes they ought to pay.

The Department of Financial Regulation is scheduled to hold a hearing next month to determine whether the VSECU is violating Vermont law by using the words “bank,” “banking,” “banker,” “banking co-op,” “banking cooperative,” “not for profit banking cooperative,” or “any other similar sounding word or name” to describe itself, its services, or its activities. The hearing is subject to Vermont’s Administrative Procedure Act, which is supposed to assure that such contested cases proceed according to notions of fairness and due process.

A hearing officer will preside at next month’s hearing. But the ultimate decisionmaking authority is vested in Financial Regulation Commissioner Steve Kimbell. And Kimbell has made at least one public comment that suggests he is biased – perhaps too biased.

Here is what Kimbell said, as quoted by the Times Argus newspaper: “If I’m a state-chartered bank and I pay the bank franchise tax and I’m in competition with a credit union providing very similar services, I think I’d take exception if they started pitching themselves as a place to do banking . … If the credit unions want to pay the franchise tax, they can go ahead and do that.”

What did the commissioner mean by “go ahead and do that”? Though Kimbell could possibly argue he meant “go ahead and pay the franchise tax,” it seems far more likely he meant “go ahead and use all the words and phrases my department is trying to stop you from using.” Admittedly, he was more equivocal when discussing the franchise tax angle with VTDigger. (“The theory underlying the legislation on the books is consumer protection. … Consumers need to know what kind of financial institution they’re dealing with, and I suspect we’ll look into how valid that need is any more.”)

The franchise tax in question is the one imposed by section 5836 of title 32 of the Vermont Statutes Annotated. Credit unions are exempt from this tax pursuant to section 30901 of title 8 – an exemption adopted by the Legislature in 2005.

It’s not up to the commissioner of Financial Regulation to determine whether the Legislature did the right thing by exempting credit unions from a tax to which investor-owned financial institutions are subject. Worse, his comment comes dishearteningly close to a suggestion that he would apply the law he is tasked with applying differently if only credit unions would volunteer to pay the franchise tax.

Courts traditionally give administrative decision makers like Kimbell pretty wide latitude when it comes to the level of impartiality the state and federal constitutions impose on judges. The Vermont Supreme Court’s most recent reported decision on this subject – In re JLD Properties of St. Albans, decided in 2005 – lays out the relevant standard quite plainly.

“It is beyond dispute that a fair trial before an impartial decisionmaker is a basic requirement of due process, applicable to administrative agencies as well as to the courts,” stated the opinion. “Thus, it is settled that due process demands impartiality on the part of those who function in judicial or quasi-judicial capacities. … [But] it is equally settled that all questions regarding a decisionmaker’s impartiality do not necessarily involve issues of constitutional validity. … Nor is an administrative decisionmaker necessarily disqualified as a matter of law even where he or she has taken a position in public, on a policy issue related to the dispute, in the absence of a showing that he or she is not capable of judging a particular controversy fairly on the basis of its own circumstances.”

The applicability of the bank franchise tax is clearly a “policy issue related to the dispute” between the VSECU and the Department of Financial Regulation. But the case law, and common sense, suggest that Kimbell is entitled to the presumption and honesty, impartiality, and good faith.

Still, the commissioner should explain what he meant about the bank franchise tax, especially because he suggested in a different interview that his policy judgment may well be outcome-determinative. “The theory underlying the legislation on the books is consumer protection,” Kimbell told VTDigger.org. “Consumers need to know what kind of financial institution they’re dealing with, and I suspect we’ll look into how valid that need is any more.”

On the merits, Kimbell should leave credit unions alone. The plain language of the statute does not preclude credit unions from referring to banks or banking in its promotional materials. Even if the statute is ambiguous, it should be interpreted in a manner that advances its fundamental purpose – which is to protect the public from financial fraudsters, not credit unions.

A credit union is a cooperative – a democratically controlled business organization that has no outside investors and is owned 100 percent by the people who use the business. Unlike commercial banks and other investor-owned enterprises, a credit union is not in business to extract wealth from the community it serves. Vermont may be the most cooperatized state in the union – nearly every major city and town has a food co-op, Cabot Cheese is owned by a cooperative, two electric utilities are cooperative and the state even has a cooperator in chief, lifetime Putney Food Co-op member Peter Shumlin. The idea that consumers might confuse their local credit union with a financial institution with the word “bank” in its name is absurd.

In fact, if Kimbell ends up ruling against the VSECU, it will likely engender rather than resolve confusion. This is because federal law grants federally chartered credit unions the right to use the word “banking” and its variants. The pending case applies only to state-chartered credit unions like the VSECU.

The cooperative difference provides a principled basis for the distinction Kimbell dislikes between credit unions and investor-owned banks when it comes to the bank franchise tax. The levy can, and should, be regarded as a tax on profits that would otherwise go to investor, of which credit unions have precisely none. If this in some sense gives credit unions an advantage of their much larger investor-owned counterparts, so be it! To the extent that Vermont’s public policy favors cooperatives over other forms of business enterprise, in the financial sector or otherwise, it is a point of pride.

A bitter irony is at work here, particularly for those who indulge Vermont’s penchant for fancying itself more evolved and enlightened than the state to its immediate right. As it turns out, the nation’s oldest and perhaps its most venerable credit union happens to be in New Hampshire. The name of that state-chartered credit union? St. Mary’s Bank.