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

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.

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.

“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 “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.

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  • Avram Patt

    At this point I really have no doubt that the DFR is pretty deepky biased. Thst’s not something I would have said when this story broke a few days ago, but it is now. This is is a real embarassment for Vermont, really.

  • jed Guertin

    Maybe I’m wrong, but the voice we need to hear from is our Governor Schumlin, you know, the guy that hired Kimbell.

    My wife and I have been VSECU members for over 25 years. Never had a problem understanding that the VSECU was not a “for profit” commercial bank and I doubt if any of the 50,000 current members do either. That by the way Governor is about 8% of the voting public, not counting the other state credit unions.

    As a native Vermonter, I agree with Avram, it sure is an embarrassment to me as it should be to the Governor. Maybe it’s time for all good cooperative banking members to call, write or email the Governor and let him know just how embarrassed we really are.

  • Ronald Pulcer

    Thank you Professor Kreis!

    I’m not a lawyer, so your comments are much appreciated. I’m just a member of 3 credit unions, 2 in VT and one in MI. I am a fairly recent member of VSECU. When I joined VSECU, I knew exactly what it was. The “CU” in VSECU stands for “Credit Union”.

    If the DFR prevails in the cease and desist order against VSECU’s use of the words “bank” and “banking”, they cannot force me to cease and desist from doing my “banking” at VSECU, online or in person.

    People join credit unions for various reasons. For me, one of the reasons was the occasionally poor service and hassle I received from 2 commercial banks decades ago.

    I have my credit card through HSBC (actually the processing was transferred there a few years ago). HSBC appeared before Congress recently amidst money laundering charges (money laundering Mexican drug money).

    JP Morgan Chase recently reported (admitted) a loss of $2 Billion through risky trading. This was later revised to $4 Billion range. In a sense, JP Morgan Chase was gambling with customer deposits.

    Why don’t regulators, State and Federal, go after HSBC and JP Morgan Chase, et al, and stop picking on credit unions like VSECU.

    Why can’t commercial banks competing on good Customer Service, and higher rates for deposits and CDs? Why do they have to resort on lobbying the DFR to inflict legal costs and hassle upon VSECU.

    Vermont students are well-educated in K-12, in comparison to other states. So Vermonters are smart enough to know the difference between a bank and a credit union.

    Will DFR impose a cease and desist order on banks to stop using the word “credit” in their marketing?

    Lastly, the electric ratepayers of CVPS bailed them out in 2000, and were not given their money back. If the DFR imposes a franchise tax on VSECU, it is a further extraction of money from citizens who are credit union members (via the potential of lowered deposit interest rates). We know what happened in the CVPS/GMP case. We can’t let this kind of “extraction” happen again.

  • Carlton Anderson

    As a former employee of VSECU, I was always under the impression banking was the verb like making dough. Credit Unions are great in the sense personal/car “Loan Officers” and “Loan Originators” do not make a commission so no one is pushing to up sell you; the downside is the pay and lack of incentive other than keeping your job.

  • Steve Bentley

    As a former banker as well as a credit union CEO, I would agree with the commenters that feel this is an embarassment and someone with some authority and/or, perhaps common sense which is obviously lacking in our government and system of due process today, should step in and put a stop to this absurd proceeding.
    It is however, in my opinion, great publicity for the credit union industry. I have to remain confident that common sense will ultimately prevail and the evil bankers will lose the battle on this one and further tarnish their image that they themselves have injured so deeply over the course of history. In the meantime, this action serves only to further strengthen the credit union message and mission and provides more public awareness of the credit union mission and the cooperative movement. Cheers to VCECU for fighting the good fight on this one on behalf of all the small credit unions in Vermont and throughout the country that lack the resources to do so themselves.

  • Luci Stephens

    When this tempest arose earlier on Digger’s radar screen, the DFR regulator cited his objectivity by noting a previous business connection to VSECU. As a concerned VSECU member, and VT citizen, I am more troubled by the lack of public assurance that the regulator has NO current business connections to those who will profit if his ruling stands.

    The ruling was based on an interpretation of VSA 8, Chap 204, 14103. That subsection forbids any person but a duly authorized financial institution from advertising themselves as a bank, banking association, etc. or using those designated words or similar sounding words. No where in 14103 is there a specific prohibition against using the common word ‘banking’. I consider myself a normal, reasonable consumer of financial transaction services who would never confuse the use of the common word ‘banking’ with the words ‘bank, banking association’, etc. as they relate to 14103.

    Finally, I can see no logical connection between the tax status of for-profit enterprises, including banks, to rulings on the part of State officials based on Statute sections that have no connection to tax status; 104103 does NOT make a connection to tax/ fee status. That ‘red herring’ argument re: tax/ fee status appears nonetheless in the speech of both the DFR regulator and a Banker’s alliance spokesperson.

    Overall, I am concerned there is a possible appearance of 14103 having been used in a process that ended in a preferential ruling. I hope I am mistaken in that deeply troubling concern.

  • Randy Koch

    What did anyone expect in the first place when Gov, Corporation brought the state’s foremost strong-arm lobbyist into his Adm? The main job of the lobbyist is to subvert any remaining vestiges of grassroots democracy from governance and replace it with control by Vermont’s good old boy heavy hitters. This is a function Kimball still fulfills.