PenFed is quickly turning into the poster child for credit union industry problems. The $24.5 billion credit union recently announced its acquisition of Progressive Credit Union, a New York-based credit union struggling to bounce back after providing unsound loans to New York taxi medallions – investments that were already faltering due to growing competition from ride-share companies. And because Progressive was one of the only credit unions with a special grandfathered open charter that granted it the opportunity to pursue nationwide membership, PenFed’s ultimate wish is coming true: the country’s third largest credit union can finally serve, literally, anyone and everyone in the country.
Never mind that PenFed was originally chartered, and in turn granted federal income tax exemption, to focus solely on serving those who have served our nation — the national defense community. As we’ve seen before, PenFed is much more concerned with achieving rapid expansion with no speed limits and will do whatever it takes to dominate national membership, even if that means turning its back on military families in the process.
While this news illustrates major mission creep and wild extension of the credit union’s common bond restrictions, it also sheds light on many other issues about the state of the industry. Let’s start with what brought the need for this “emergency merger” in the first place. Progressive Credit Union is one of many credit unions that got into trouble with taxi medallion loans, with no repercussions from the industry’s regulator. Why didn’t NCUA stop these lending practices before they became a problem large enough to close a credit union altogether? A quick reminder: NCUA’s Share Insurance Fund dropped $744.9 million by the end of the 2018 third quarter, mostly attributed to these ill-founded taxi medallion loans. You’d think that this would be an issue NCUA would take seriously, but instead it has tried to avoid the problem by band-aiding it with this ridiculous merger.
Sadly, taxi medallion loans aren’t the only major warning signs NCUA is missing. The regulator has continuously turned a blind eye to blatant grievances at PenFed, and if it isn’t catching the issues at the nation’s third largest credit union, it likely isn’t catching them anywhere else in the industry.
And then there are the tax issues. PenFed previously stated its goal is to reach $75 billion in assets by 2025—three times its current size. Taxpayers are effectively subsidizing that growth—but that’s only part of the story. PenFed has taken advantage of its tax exemption to buy a whole suite of unrelated businesses. In 2012, PenFed acquired Prudential Coastal Properties, a Florida-based residential real estate firm. Then just last year, PenFed bought WHITE64, the award-winning advertising agency, bringing PenFed’s marketing in-house to reach its national targets, even as WHITE64 continues to serve commercial clients like Hilton.
Federal Credit Unions don’t have to pay taxes on unrelated businesses like other not-for-profits. so these businesses are taxed at the rate of their owner – zero. PenFed has effectively become a new tax shelter. Nice work if you can get it.
While neither the real estate industry nor the advertisement industry do much to benefit military families, they do increase PenFed’s power. It’s become increasingly clear that’s all that is really matters to this credit union.
“If you’re trying to be all things to all people, you’re nothing to no one,” said PenFed CEO James Schenk when claiming that despite the Progressive merger, PenFed will continue to serve the defense community. Kind of contradictory to the “great rates for everyone” and “no speed limit” mantras, don’t you think?
It’s time for NCUA to make a model of PenFed, and make it known that there will be no repeat offenders in the credit union industry. Unfortunately, since NCUA will likely be unwilling to do it, Congress needs to step in and force its hand.