In Broadside, ABA Calls for ‘Top-to-Bottom’ Assessment of CU Industry

Using strong language, the banking industry’s largest trade group is asking the national agency that regulates credit unions to conduct a “top-to-bottom assessment” of the nonprofit lenders.

The industry has long been a vocal critic of the corporate tax exemption that credit unions enjoy, as well as what some might call an overreach when it comes to credit unions’ field of membership expansions and some of the services they provide.

The American Bankers Association Thursday sent a letter to the National Credit Union Administration requesting the agency review whether the modern day credit union industry is meeting its targeted, statutory mission to serve people of “small means.”

The formal request follows this week’s release of a new report from Federal Financial Analytics that documents how many in the industry are allegedly falling short of that goal. The letter also asks the NCUA inspector general to investigate the report’s findings.

“Federal Financial Analytics’ report identifies several troubling issues that merit further investigation by NCUA’s Inspector General and action by the NCUA Board,” ABA President and CEO Rob Nichols wrote in the letter. “This report should serve as a wake-up call to the agency that this $1.5 trillion industry cannot be trusted to meet its statutory mission to serve low- and moderate-income households without appropriate oversight.”

The letter asks the NCUA to review whether it needs to impose mission-related requirements; whether NCUA regulation and supervision is substandard and poses increasing risks to the credit union system and whether NCUA’s definition of “low-income” is misleading.

The letter also asks the NCUA to review whether credit unions’ mandate to offer credit for “provident or productive” purposes is all but ignored by NCUA regulation, and if credit union acquisitions of banks show a changed mission.

The report found that the average U.S. credit union has $275 million in assets and there are 308 credit unions with assets over $1 billion as of the end of 2018. The largest credit union, Navy Federal, now has assets exceeding $103 billion. U.S. credit union assets now exceed $1.53 trillion.

Much of the unions’ growth has occurred since 2005, despite the interruption caused by the financial crisis. Credit union deposits have expanded 108 percent since 2005, now comprising 9.2 percent of all federally-insured deposits. This rate eclipses the growth rate of both large and small banks.

The growth of credit unions is surprising, according to the report, given the general view that modern banking requires economies of scale possible only at large financial-services firms.

“This paper demonstrates that credit unions enjoy ample regulatory-arbitrage advantages that have contributed to charter arbitrage – i.e., credit unions use their lower-cost structure, less stringent regulation and expansive product powers to transform credit union charters from mission-driven providers of equality-essential services into for-profit enterprises that are difficult to distinguish from insured depositories without like-kind tax, regulatory or governance freedom,” the report stated.

In response to the paper, National Association of Federally-Insured Credit Unions spokesperson Jacqueline Ramsay issued a statement saying “the paper offers scant evidence for the conclusions reached and makes no mention of banker efforts to prevent credit unions from serving underserved communities.”

Beyond the letter to NCUA, ABA said it is considering additional steps it can take in response to the report and its findings.