Do Credit Unions Give Credit Where Equality is Due?

U.S. credit unions in 2019 are far from the proverbial church-basement financial clubs – now, credit unions are a $1.5 trillion sector of the U.S. financial industry.  Given the extent of the U.S. equality crisis, $1.5 trillion dedicated to affordable, sustainable financing would not only adhere to the 1934 statutory mission that binds credit unions to this day, but also make a heck of a difference for low-and-moderate income households.  Do credit unions in fact adhere to their mission and thus earn the sweeping tax and regulatory benefits taxpayers provide to encourage them to do so?  A new Federal Financial Analytics study* finds that credit unions sadly fall far short.

Often, the credit-union debate is framed in competitiveness terms – that is, whether credit unions use federal benefits to compete with undue advantage against community banks or other financial institutions.  Debate often also focuses on whether or not one or another credit-union activity is permissible under law.  This paper addresses another question: regardless of whether credit unions out-compete other financial institutions or do so within the parameters of the law, do institutions with an express mission to serve persons of “small means” through “provident” and “productive” financial services still serve that mission.  Looking at this question analytically for the first time in at least a decade, the FedFin paper finds that:

  • Beginning in 1937, credit unions were granted significant benefits premised on this mission. By 2019, there is significant evidence of charter arbitrage, with credit unions actively promoting lending for purchases they frequently describe as “toys” (e.g., private aircraft), offering wealth-management services, and offering multi-million dollar commercial real estate loans.  All of these activities, which have grown dramatically in recent years, pose not only economic-equality, but also safety-and-soundness risks, especially at the height of the U.S. business and financial cycle.
  • Credit-union members are disproportionately middle- and upper-income households, with the sector’s regulatory definition of “low-income” reaching into higher-income groups than allowed under the criteria established by other federal-government agencies. As a result, low-income credit unions – a special designation granted additional benefits – serve areas as wealthy as Greenwich, Connecticut.
  • Credit unions chartered to serve low-income households not only mostly serve higher-income customers, but also principally provide subprime automobile lending with disproportionately high default rates.
  • Credit unions appear to lend disproportionately also to higher-income households in low-income areas and to deny a greater proportion of African-American borrowers than whites of comparable profiles.

What we recommend:

  • mission enforcement and targeting by the National Credit Union Administration based on verifiable data that measure low-and-moderate income households in generally-accepted ways;
  • targets for provident and productive lending and enforcement to ensure that loans seemingly to small-means households are not predatory products such as taxi-medallion loans;
  • new profit incentives to ensure that smaller, mission-oriented credit unions have viable, profitable charters; and
  • enhanced safety-and-soundness rules to protect credit-union members and their communities – not to mention taxpayers – from the high cost of credit-union failures.

* This paper represented the views of Federal Financial Analytics, Inc.  Funding for this research was provided by the American Bankers Association, which was not granted editorial authority over the paper’s content, methodology, or findings. These were solely the responsibility of Federal Financial Analytics, Inc.

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