ABA-Funded Study Accuses Credit Unions of Abandoning Their Missions

Credit unions increasingly are abandoning their mission to serve Americans of modest means and are becoming indistinguishable from banks, a private research company said this week, in a study funded by the American Bankers Association.

“Mounting evidence also suggests that the credit-union sector as a whole now largely serves middle- and upper-income households, not those with the ‘small mean’ to which the law dedicates their charters or even those with the ‘modest means’ cited by the industry’s regulator when credit-union customers are judged by the actual income and wealth distributions of U.S. households,” Federal Financial Analytics said, in the report.

“The NCUA’s rulebook is devoid of anything beyond rhetorical nods to the statutory mission clearly demanded by Congress as a condition for credit unions to enjoy numerous benefits and expanded powers,” the firm concluded.

The firm’s clients include several of the nation’s largest banks, as well as the ABA. The company stated that the ABA funded the study, but had no control over the content of the report or its findings.

Credit union trade groups were dismissive of the report, saying that the funding behind it raises serious questions about its findings.

“As the saying goes, ‘you get what you pay for’ and the ABA appears to have gotten exactly what it was looking for: a well-funded, long-winded attack on a movement that for more than a century has provided value and benefit to consumers in ways big and small,” said CUNA Chief Advocacy Officer Ryan Donovan.

“The study was bought and paid for by bank lobbyists and their never-ending efforts to extinguish credit union competition from the marketplace,” said NAFCU spokeswoman Jacqueline Ramsay. “The paper offers scant evidence for the conclusions reached and makes no mention of banker efforts to prevent credit unions from serving underserved communities.”

In the report, Federal Financial Analytics contends that:

• The NCUA’s definition of “low income” is flawed since it defines a “low income” person as anyone with a family income below the greater of 80% of the relevant area or the national median. Most methodologies define “low income” as those with incomes below 50% of the applicable median, the firm said.
• The NCUA allows credit unions to serve a “far wider swath” of households even when specific benefits are supposed to be targeted to low-income families.
• The common bond of membership has largely disappeared, as “credit unions serve large communities of borrowers with little affinity to each other and ample alternative financial providers.” The NCUA has attempted to expand the definition of common bond, the company said.
• Credit unions appear to lend to disproportionately higher-income households in low-income areas and to deny credit to a greater proportion of African American borrowers.
• Policymakers could consider whether credit unions should be more closely monitored to determine whether they are fulfilling their missions.
• There is little outside oversight of the NCUA, since it is self-funded, without any cabinet agency having authority over it.
• Had the NCUA’s capital Prompt Corrective Action been “more robust” during the financial crisis, fewer credit unions might have failed. “The GAO also found that the NCUA acted too slowly or sometimes not at all to prevent costly credit union failures,” the report stated
• The NCUA has not put into effect the required Risk-Based Capital Rule and the proposed regulation and judges asset risk very differently from the one used for banks.

The study suggests that policymakers could consider examining NCUA safety and soundness regulation to ensure that credit union management, not members or taxpayers are responsible for effective internal controls, disciplined earnings objectives and mission compliance.

Donovan disputed the conclusion that credit unions do not serve low-income families.

“More than half of the credit unions in this country are designated low-income credit unions, which means that nearly half of the members they serve are below 80% of the median income level in their community,” he said.

He added that credit unions continued to lend to members during the financial crisis, saying that banks pulled back from their lending.

“And no amount of mercenary spin can change the fact that credit unions remain the best choice for Americans to conduct their financial services,” he said.

However, Rob Nichols, president/CEO of the American Bankers Association said the report contains “troubling details” about the credit union system.

“The report should serve as a wake-up call to regulators and lawmakers that this $1.5 trillion-dollar industry no longer meets its statutory mission to serve low- and moderate-income households,” he said.

He added, “As the report makes clear, a lax regulatory framework is allowing this to happen, and the biggest losers are taxpayers and people of modest means whom credit unions were created to serve.”

Read the full report here.