Revisiting the Federal Credit Union Act

News & Insights

We all recognize the jingle: “PenFed’s Got Great Rates for Everyone”. We’ve seen the names of various credit unions plastered across our professional baseball and football stadiums — $120 million at an NBA arena, for example. We’ve watched the prime-time tv commercials encouraging us to join.  But when did credit unions stray from their original, government-mandated mission, to provide thrift to people of modest means who share a common bond and turn into massive, complex, multi-billion dollar financial corporations that also dabble in real estate and advertising on the side?

The original purpose of credit unions was to make credit available and to promote thrift to underserved communities with a common bond through a national system of nonprofit, cooperative institutions. Their genesis was noble and at the time needed.

During the Great Depression, Congress decided to further assist struggling Americans by granting credit unions a tax exemption to assist credit unions with serving low income communities without a major financial burden. In 1934, President Franklin Delano Roosevelt signed the Federal Credit Union Act, which clearly defined the purpose of credit unions and why they were deserving of tax exemption.  As recently as 1998 legislation, Congress reiterated that serving “the productive and provident credit needs of individuals of modest means” is why “the American credit union movement began.”  

Fast forward 84 years later, and things are VERY different. It has become increasingly clear that the largest credit unions are no longer serving people of modest means.  There is no reliable indicator that credit unions fulfil this mission, and indeed, all available data indicates that they do a worse job at serving low- to moderate-income households than banks.  Instead of serving those who most need it, the largest credit unions make business loans to massive corporations, loans for private planes and yachts to wealthy individuals, and mortgages for huge mansions. Thanks to the tax-exempt status granted by Congress decades ago, 304 credit unions have grown into billion-dollar institutions, and in turn, have been able to expand their scope well beyond their original mission.

If credit unions aren’t meeting their mission of serving consumers of modest means, Congress should reexamine the tax exemption that came hand-in-hand with that mission. We need our policymakers to decide how to fix this massive problem in order to save small credit unions and protect American taxpayers.