Are Credit Unions Practicing Predatory Lending?

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Senator Elizabeth Warren (D-MA), who is no friend of big banks, recently asked a simple question: should credit unions have to adhere to the Community Reinvestment Act (CRA)?

According the Office of the Comptroller of Currency, the CRA was “enacted in 1977 to prevent redlining and to encourage [banks] to help meet the credit needs of all segments of their communities, including low- and moderate-income neighborhoods and individuals. The CRA extended and clarified the long-standing expectation that banks will serve the convenience and needs of their local communities.”

The majority of financial institutions are subject to the CRA. Credit unions are not. The reason? Because when originally enacted, credit unions were smaller, had fewer assets, and served fewer customers than banks.

Oh what a difference a few decades makes.

Fast forward a few decades and the hundreds of complex multi-billion dollar credit unions are a far cry from those small financial institutions Congress exempted from CRA in 1977.

And based on their response to Sen. Warren’s inquiry, they know it.

Credit unions went into full panic mode at the mere suggestion that they might have to comply with CRA regulations, releasing op-eds and statements and even attacking Sen. Warren’s credibility.

The real question is: why are they panicking if they know they are deserving of their under regulated, tax-exempt status?  Why would credit unions be so opposed to more transparency and less predatory lending if they are adhering to their original charter? If they are living up to their mission of serving communities of modest means, wouldn’t they welcome Sen. Warren’s bill?

They don’t because they aren’t.

Make no mistake about it, the overwhelming majority of credit unions ARE complying with their original mission. The same few who are exploiting their tax-exempt status to grow exponentially, and into unrelated businesses like advertising and real estate, are the ones who have left common bonds and people of modest means on the side of the road with “no speed limits.”

Shortly after news hit that credit unions might be reconsidered under CRA, one of the big credit union’s lobbyists penned an op-ed in the Hill claiming that “there is absolute absence of evidence that credit unions are engaged in lending discrimination.”

That sounds great, if only it were true. One example occurred just this past July when Suffolk Credit Union settled a major lawsuit over lending discrimination against African Americans and Latinos. And that’s just one example of a credit union that actually got caught.

The lobbyists also claimed that credit unions should not be under the CRA because “by statute, credit unions already operate to achieve the purposes of the Community Reinvestment Act.”

Well, that’s all fine and dandy, but sadly credit unions actually don’t effectively serve people of modest means. According to Home Mortgage Disclosure Act data, less than 6% of credit union mortgages were originated to low-income individuals, while over 50% of credit union mortgages were originated to upper-income individuals. Another report found that only 29% of people in the bottom income of distribution used a credit union compared to 48% of the top quarter of income distribution.

And even government agencies have taken note of credit unions not doing their job. Congress even stated that credit unions actually “do a worse job at serving low- to moderate-income households than banks.” So much for living up to that mission. Moving on.

CUNA jumped into the mix, as well, writing a letter to every Senator, trying to stave off accountability and transparency for credit unions, saying “In fact, because credit unions are restricted by statute and regulation in the field of membership they may serve, and generally can only lend to their member-depositors, it is impossible for credit unions even to engage in the kind of diversion of depositor resources that led to the enactment of the CRA in the first place.”

Translation: credit unions couldn’t overstep the field of membership limits, since the regulation they are under has forced them to serve people of modest means only.

However, we already proved that’s not true. Moreover, this “regulation” argument is absurd since the credit union industry essentially regulates itself, and not very well at that.

In fact, this past summer a federal judge reviewed NCUA’s new field of membership rules and declared them invalid and vacated two aspects of them.

With these examples, you have to wonder if the real reason credit unions are terrified of the CRA is because they actually might have to live up to their mission set forth by Congress instead of proving lip service about it. 

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