Federal Financial Analytics and acclaimed researcher Karen Shaw Petrou earlier this month released a new report titled “The Credit-Union Equality Commitment: An Analytical Assessment.” This report analyzes the current state of affairs in the credit union industry by focusing on to what extent credit unions are fulfilling their original mission outlined in the 1934 Federal Credit Union Act. The results of the report? Mostly what we already knew – and then some.
FedFin’s report confirmed that credit unions are no longer sticking to their mission of serving persons of “small means.” Their members are disproportionally middle- to upper- income households. Based on recent reports about “toy” loans and $11 million executive compensations, this was not surprising. Citing the lack of “meaningful common bond,” the report also found that credit unions continuously “focus on provident and productive lending, instead converting business objectives to profit maximization.” In layman’s terms, credit unions are choosing their loans based on what they can get out of it – money.
All in all, the report makes one point very clear: credit unions aren’t living up to their mission of serving the underserved, and in many cases, have abandoned that pursuit altogether.
The report also concluded that not only are credit unions failing their purpose, but that they are actually putting vulnerable populations at risk when doing so. By focusing on increasing their own profits, credit unions today often make risky loans in the hopes for greater returns. When these loans fail however, as we saw with the taxi medallion epidemic, credit union members and taxpayers as a whole are forced to make up for these losses. This report raises a key question for policymakers: why is the US government giving a major tax exemption to institutions that are not only neglecting to use said tax exemption for the right reasons, but are also harming American taxpayers in the process by pursuing self-serving lending practices?
And don’t worry – the credit unions’ regulator NCUA did not walk away unscathed from this research. The report holds them responsible for credit unions skirting their mission, citing major “regulatory arbitrary advantages” and “less stringent safety-and-soundness regulations.” After analyzing NCUA’s practices, FedFin found that the agency maintains no system for measuring mission fulfillment. More importantly, the report found that NCUA’s definition of “low-income” reaches a much wider demographic than the established norm in other methodologies, therefore opening the doors for further charter arbitrage.
And of course, instead of taking ownership of these problems, credit union leadership has chosen to divert attention away from these findings by questioning the credibility of the report, continuously emphasizing the sourcing and funding. This, however, doesn’t answer our questions. It’s simply a way to point the blame elsewhere. Recent headlines support everything found in this report – from taxi medallion failures, to embezzlement cases, to an incompetent regulator. The industry can no longer hide from these harsh realities. And even so, if they claim the findings in this report are “nonsense,” why not disprove them with their own research? They won’t, because they can’t.
According to the report, credit union assets now exceed $1.5 trillion and account for 9.2 percent of U.S. insured deposits. At the same time, wealth inequality is one of the most difficult issues in this country to resolve. Policymakers can no longer turn a blind eye to these institutions that were established to combat this major problem, but instead blatantly refuse to do so. This report shows it’s time for a serious review of the credit union industry’s behavior and whether it is truly worthy of the advantages, both regulatory and financial, it continues to receive.