Washington Update – Reframing the Credit Union Debate

By Rob Nichols, ABA President and CEO

For too long, banks with legitimate concerns about unbridled credit union growth have been portrayed as Goliath picking on David. The truth is that in many states, a credit union is one of the largest local financial institutions, outranking most of the state’s community banks in size.

But rather than trying to convince policymakers or the public that central casting got it all wrong—that it’s big credit unions that are harming small banks—ABA, with guidance from our long-standing banker Credit Union Task Force, has made a deliberate effort in the past two years to raise the level of awareness about credit union policy issues and excesses among third parties and the media.

We believe this strategy is effectively reframing the debate from banks vs. credit unions to credit unions vs. taxpayers, a crucial step toward drawing more oversight of the industry.

More people now are questioning whether credit unions, which enjoy a generous federal tax exemption, are earning this benefit. Even major media outlets like The Wall Street Journal, The New York Times and National Public Radio have turned a critical eye to credit union practices—running stories on the lax enforcement of meaningful membership restrictions and an expose of the industry’s taxi medallion loans, which imposed predatory terms on thousands of taxi drivers and drove some credit unions out of business.

The most recent criticism comes from a respected independent research firm—Federal Financial Analytics, run by veteran banking policy analyst Karen Shaw Petrou who has a strong interest in matters of economic inclusion. ABA commissioned the study but had no editorial control over Federal Financial Analytics’ research and conclusions.

Petrou’s study assessed not only the extent to which credit unions meet their mission, but also how their federal regulator judges and enforces it. The paper found, among other things, that credit union members are disproportionately from middle- and upper-income households, that the National Credit Union Administration maintains no data on credit unions’ effectiveness at providing financial services to people of “small means,” and that its definition of “low-income” is far more expansive than that used by other federal agencies.

This lack of credit union mission compliance is the rub for Petrou. “Sometimes the question of credit-union mission compliance is seen as an us-versus-them battle between bankers and credit unions,” she said. “This study readily acknowledges the vital role credit unions can and should play in household financial services—its goal is not to question credit unions, but to remind policy-makers of their vital mission to ensure that taxpayer-benefits received are credit-union benefits earned.”

ABA does not disagree. We have long maintained that there is a role for credit unions in our financial services ecosystem. But that role has become blurred as some credit unions increasingly look and act like banks, even purchasing them.

It’s past time for policymakers to take a truly critical look at today’s $1.5 trillion credit union industry to ensure the American taxpayer is not being cheated. We have called for just such scrutiny, urging NCUA in particular to conduct a “top-to-bottom assessment” of whether the industry is meeting its targeted, statutory mission to serve households of “small means.” We have also asked the NCUA Inspector General to review the regulator’s role in allowing credit unions to lose sight of their mission.

In the meantime, ABA is continuing to challenge NCUA in the courts. Our lawsuit against NCUA over its expansive field of membership rule is still active; we won two of four counts, are appealing the other two, and a decision could come any day.

But we are excited to move our case to the court of public opinion—and even more encouraged that the response isn’t a knee-jerk dismissal of our grievances as competitive sour grapes. Others are now seeing the serious implications of credit unions’ mission failures and lax oversight, and such awareness is crucial to achieving a level playing field.