Tuesday, October 4, 2022

Report: Credit unions fail serving ‘modest means’

Late last month, a study by Karen Shaw Petrou from Federal Financial Analytics found credit unions are not meeting their statutory mission of serving individuals of “modest means.”

The study also confirmed that credit union members are disproportionately from middle- and upper-income households.

The report also notes that credit unions’ lack of “mission compliance” deepens economic inequality in the United States. Some of Karen Shaw Petrou’s other findings included the following points:
NCUA imposes no mission-related requirements on any credit union: Credit union regulation is often premised on profit maximization, not mission compliance. The regulatory framework does not focus on the “small means” mission.

The federal credit union regulatory agency NCUA has redesigned the credit-union business model into one often indistinguishable from banks, without the comparable CRA requirements or a duty to serve low- and moderate-income households.

Credit unions are not fulfilling their mission absent regulatory imperatives:  Credit unions appear to lend disproportionately to higher-income households and to deny a greater proportion of African-American borrowers than whites of comparable risk profiles.

NCUA regulation is substandard:  NCUA capital requirements and other safety-and-soundness rules are considerably more relaxed than those applicable to banks and require significant revision.

Similarities to S&L industry: In today’s reality, the credit union industry is similar to the 1980s savings & loan crisis. Credit unions are enabled by a captive regulator.  Credit union promotion of “toy loans” (e.g., private aircraft), wealth-management services and multi-million-dollar commercial real estate loans not only furthers economic inequality, but also poses safety-and-soundness risks.

Credit union acquisitions of banks tell a story of how the marketplace and regulatory environment has moved: Recently there has been a large number of smaller community banks that have been acquired by credit unions. These acquisitions do a lot of things, but one of the most obvious conclusions one can draw by watching these transactions is the prior mission differentiation between banks and credit unions is now immaterial.

We believe it’s clear from the report that credit unions are not using their tax subsidy to benefit consumers significantly or serve those of “small means.” We also believe policymakers must examine the credit union tax exemption, particularly when so many large, bank-like credit unions have strayed from their mission.

You can visit OBA.com to download the full report.