ABA: CRA Should Be Applied to Large CUs

Congress must do more to ensure that the nation’s largest credit unions are accountable to their statutory mission to serve individuals in low- to moderate-income areas, the American Bankers Association (ABA) said in a new ABA Data Bank post.

Citing data from S&P Global, ABA Chief Economist James Chessen noted that among large credit unions with more than $500 million in assets, the majority of branches—73%—are currently concentrated in middle- and upper-income communities, while just 6% are located in low-income areas.‌

“These largest credit unions receive the highest dollar benefit from the tax exemption, yet they have chosen to focus their resources on the well-to-do rather than using their tax advantage to help expand cheaper credit to those who need it most,” Chessen wrote. “Simply put, they are using their tax-exempt status to make profitable consumer and business loans to people who do not need taxpayer-subsidized financial services and can afford to shop around for financial products elsewhere.” By contrast, he noted that of all the credit union branches headquartered in low-income communities, two out of three are operated by small credit unions.‌

One way Congress could ensure greater accountability for large credit unions would be to require them to comply with the Community Reinvestment Act (CRA), as taxpaying banks are required to do, Chessen said. “If these credit unions are in fact meeting the needs of low- and moderate-income people, they should have no fear of demonstrating that explicitly as banks must do.”‌

ABA’s blog post echoed findings from a report issued last year by Federal Financial Analytics that highlighted the need to impose mission-related requirements on credit unions. In recent days, writings by the National Taxpayers Union and the Tax Foundation have also emphasized the immediate need for Congress to revisit the credit union tax exemption.

Read the blog post.

Cato Institute: Don't Extend CRA to CUs

The Cato Institute recently wrote that it would be a mistake to extend the Community Reinvestment Act (CRA) to credit unions.

According to the paper, applying CRA regulations to credit unions would be counterproductive and impose additional compliance burden.

The Cato Institute argues that the credit union common-bond requirements are at once redundant and incompatible with CRA. The article notes that common-bond provisions ensure that credit unions are serving their constituents, which is the objective of CRA.

But the existence of a common-bond is not prima facie evidence that a credit union is serving its entire field of membership. It is possible that the credit union is only serving a small segment of its membership.

The paper also states that CRA compliance relates to bank lending activities within a geographic area. The author argues that there are credit unions with a common-bond based upon profession, social, or demographic groups and thus, CRA is not applicable.

There are two problems with this argument. First, the number of credit unions with community or geographic common-bonds has grown. These credit unions should be subject to a lending test. Second, the paper ignores the fact that Massachusetts examines all state chartered credit unions regardless of common bond. This suggests that CRA can be structured in such a way to evaluate whether a credit union is serving its defined community.

Furthermore, the paper states that evidence shows that credit unions are already serving CRA-targeted populations. But the paper ignores research by the National Community Reinvestment Coalition, which found that state chartered credit unions in Massachusetts outperformed federal credit unions in Massachusetts in serving underserved communities.

The paper makes an additional argument that the common-bond provisions facilitate risk management by giving credit unions information about the credit quality of their borrowers. This is a quaint old-fashion notion about how credit unions operated. While this may be true for tiny church-run credit unions, it does not reflect today's risk management practices of large credit unions.

The paper does conclude that if policymakers have issues about the changing nature of the credit union business model, this can be addressed by revising the Federal Credit Union Act.

Read the paper.

Bill Won't Require CUs to Comply with CRA and Will Allow All FCUs to Add Underserved Areas

Legislation introduced in the House and Senate on March 13, the American Housing and Economic Mobility Act, will exclude credit unions from complying with the Community Reinvestment Act.

Section 203 of the bill, which will be known as The "Community Reinvestment Reform Act of 2019," would strengthen obligations under the Community Reinvestment Act (CRA) to provide credit to low- and moderate-income communities by extending the law to cover more non-bank mortgage companies, promote investment in activities that help poor and moderate-income communities, and strengthen sanctions against institutions that fail to follow the rules.

Jim Nussle, President and CEO of the Credit Union National Association, wrote that the bill "properly recognizes the distinctions that exist between credit unions and banks when meeting community needs."

An earlier version of this bill introduced in the last Congress would have applied CRA to credit unions that did not have a ,ow-income designation.

Section 204 of the bill will allow a federal credit union regardless of common bond type to add underserved areas. Currently, only multiple common-bond credit unions can add underserved areas. The bill would also add reporting requirements for a federal credit union adding an underserved area and require the National Credit Union Administration to annually publish certain information.

The legislation was introduced in the Senate by Senators Elizabeth Warren (D-MA), Kirsten Gillibrand (D-N.Y.), and Edward Markey (D-MA). In the House of Representatives, the bill sponsors were Representatives Cedric Richmond (D-LA), Barbara Lee (D-CA), Gwen Moore (D-WI), Elijah Cummings (D-MD), Mark Pocan (D-WI), Ayanna Pressley (D-MA), Rashida Tlaib (D-MI), Susan Wild (D-PA), Eleanor Holmes Norton (D-D.C.), Steve Cohen (D-TN), Jamie Raskin (D-MD), Ro Khanna (D-CA), Joe Kennedy III (D-MA), and Suzanne Bonamici (D-OR).

Read the text of the bill.

Senator Warren Introduces Bill to Extend CRA to CUs that Are Not Low-Income

Senator Elizabeth Warren (D - MA) introduced on September 26 legislation, American Housing and Economic Mobility Act, that would extend the Community Reinvestment Act (CRA) to more financial institutions, including credit unions that are not designated as low-income.

The bill will also promote investment in activities that help poor and middle-class communities and will strengthen sanctions on financial institutions that do not comply with the rules.

However, the bill would exclude 2,544 low-income designated credit unions from CRA requirements, including some of the largest credit unions in the country.

The bill further proposes billions of dollars of new investments into affordable housing trust funds.

To pay for the bill, Senator Warren proposes to return the estate tax thresholds to their levels at the end of the George W. Bush administration and to impose more progressive tax rates above those thresholds.

Credit union trade associations, as expected, oppose the extension of CRA to any credit unions.

Read the press release.

Read the bill's text.

Read a summary of the bill.

Op-Ed: Larger CUs Should Be Subject to Same Regulations as Banks

In an American Banker op-ed, Aaron Klein, a fellow at the Brookings Institution and policy director at the Center on Regulation and Markets, calls for banklike credit unions to be subject to the same regulations as banks.

Klein stated there is a handful of large credit unions that "want to grow into national financial institutions, serving anyone and everyone."

Klein identifies Pentagon Federal Credit Union (PenFed) with its aggressive growth strategy as the poster child of these mega credit unions.

The op-ed noted that anyone can join PenFed, which contradicts the concept of common bond.

Klein wrote: "If anyone can be part of your field of membership, then you should have a duty to adequately serve everyone."

Klein called on the National Credit Union Administration to require the largest credit unions comply with Community Reinvestment Act to ensure they remain committed to their missions and communities, not cherry-picking high-dollar customers.

He also called for disclosure of credit unions’ executive salaries, as nearly every other nonprofit organization is required to do.

Read the BankThink opinion.

CUs Buying Banks Are Here to Stay, But Raise Policy Issues

The American Banker is reporting that a trend has emerged of credit unions buying banks.

In the first quarter of 2018, four such deals were announced. In comparison, six deals were announced during 2017.

Michael Bell, an attorney at Howard & Howard law firm who specializes in these transactions, estimates that there are approximately 150 credit unions with the capital, management experience, and desire to buy banks. He told the American Banker that he is currently working on 20 possible deals.

However, these transactions suggest that the lines of distinction between banks and credit unions are blurring and raise several issues that need to be addressed by policymakers.

Credit unions are exempt from federal income taxation. However, banks are subject to federal taxation. The acquisition of a bank by a credit union shifts income from a taxable base to a non-taxable base. If credit unions are using their tax-exempt status to buy taxpaying financial institutions, then this warrants policymakers revisiting the credit union tax exemption.

In fact, these transactions have attracted the interest of Senate Finance Committee Chairman Orrin Hatch (R - UT), who earlier this year wrote National Credit Union Administration Chairman McWatters questioning whether credit unions have outgrown their tax exempt status.

Credit unions are also exempt from the Community Reinvestment Act (CRA), while banks are not. These acquisitions may potentially create gaps with regard to service and lending to low- and modest-income consumers. The Government Accountability Office reported earlier this year that policymakers should consider extending CRA to credit unions, although the Treasury Department did not act on this recommendation.

Read the story (subscription may be required).

GAO: Expand CRA to CUs

The Government Accountability Office (GAO) is recommending that the Community Reinvestment Act (CRA) be expanded to nonbanks, including credit unions.

The report noted that stakeholders requested that CRA be applied to mainstream credit unions. Advocates believed that subjecting credit unions to CRA would bolster their branching and lending to low-and moderate-income communities. GAO pointed out that National Community Reinvestment Coalition found that during the Great Recession credit unions were more apt to retreat from modest-income neighborhoods than banks, because credit unions are not subject to CRA, while banks are.

GAO further noted that a think tank discussion group recommended that credit unions should be brought under CRA-like regulations. Discussants thought it would make sense for credit unions to perform CRA-like duties in return for maintaining their charters or designations as community development financial institutions.

However, a participant in the nonfederal bank regulator discussion group thought it was unnecessary to expand CRA to credit unions, because credit unions are already owned by their members and play a vital role in their communities.

Other recommendations made by the GAO included revising the lending and service tests and expanding assessment areas.

These recommendations were forwarded to the Department of the Treasury, which is planning to review how CRA is being implemented.

The report was requested by Senator Elizabeth Warren (D - MA) and Representative Elijah Cummings (D - MD).

Read the report.

Massachussets Study: Tax Subsidy Going to Higher Expenses

Credit unions in Massachusetts provide insufficient member benefits to offset the favorable tax and regulatory treatment they enjoy, according to a study released this week by research firm PolEcon.

"The benefits to Massachusetts consumers do not appear significant enough to warrant laws and regulations that, by design, or as a consequence, result in credit unions capturing a larger share of the banking market in Massachusetts," the study found.

The report noted that Massachusetts credit unions have grown in part by gaming the low-income credit union designation, which provides substantial regulatory relief. The number of low-income designated credit unions in Massachusetts has risen from 11 in 2012 to 57 in 2016, in part by counting students within their low-income footprints. However, the study found little benefit to members from the low-income designations.

The four Massachusetts low-income credit unions with assets of more than $1 billion were more likely than banks to make mortgage loans to high-income borrowers and less likely than banks to serve low-income mortgage customers. In addition, since 2002, Massachusetts’ banks have received higher CRA ratings for meeting the needs of lower- and moderate-income individuals than have Massachusetts’ state-chartered credit unions.

Moreover, the study estimated that the corporate tax subsidy provides Massachusetts credit unions with an approximately 32 to 44 basis point annual subsidy that can be allocated toward higher deposit and lower interest rates on loans, higher expense ratios (more overhead expenses), or in greater retained earnings that provide capital for growth. Evidence indicates that while some of the subsidy benefits depositors and borrowers, a greater share goes to retained earnings and higher expense ratios. In fact, Massachusetts’ mutual banks, which have a similar governance structure as credit unions, have significantly lower expense ratios than Massachusetts credit unions.

The study also found that Massachusetts’ largest credit unions are more profitable than Massachusetts’ banks.

The study was funded by the Massachusetts Bankers Association.

Read the study.

Four Federal Credit Unions Switch to State Charters

Both Oregon and Connecticut saw several large credit unions switch from federal charters to state charters at the end of 2014.

In Oregon, $914 million Rogue Credit Union in Medford and $885 million Oregon State Credit Union in Corvallis converted from federal to state charters on January 1. (See story in CU Times).

As a state chartered credit union, Oregon State Credit Union will serve anyone who lives or works in 24 western and central Oregon counties.

In Connecticut, American Eagle Federal Credit Union in East Hartford converted from a federal credit union to a Connecticut credit union. The $1.3 billion credit union will be known as American Eagle Financial Credit Union, Inc. with a proposed field of membership consisting of: persons who live, work, worship, or attend school in, and businesses and other legal entities located in Harford County, Middlesex County, Tolland County, or New Haven County, Connecticut; and, also included are spouses of persons who died while within the field of membership of this credit union, volunteers in the community, employees of this credit union, organizations of such persons, and members of the immediate family or household of such persons, volunteers or employees.

Also, Nutmeg State Federal Credit Union in Rocky Hill switched from a federal credit union to a Connecticut credit union. The $368 million credit union will be known as Nutmeg State Financial Credit Union, Inc. The proposed field of membership will consist of: persons who live, work, worship, or attend school in, and businesses and other legal entities located in Harford County, Middlesex County, Tolland County, or New Haven County, Connecticut; and, also included are spouses of persons who died while within the field of membership of this credit union, volunteers in the community, employees of this credit union, organizations of such persons, and members of the immediate family or household of such persons, volunteers or employees.

Clearly, the two Connecticut credit unions viewed that being granted an expansive community charter was worth the price of complying with the community reinvestment act.

Moreover, since these credit unions' fields of membership are broader than what is permissible at the federal level, Oregon and Connecticut lawmakers should view this as an opportunity to re-evaluate the state's tax treatment of these institutions.

Study Questions the Continuation of CU Tax Exemption

A study by PolEcon for the New Hampshire Bankers Association and the Community Bankers Association of New Hampshire found that New Hampshire banks demonstrate a stronger commitment to New Hampshire’s underserved markets than credit unions.

The study noted that New Hampshire (NH) banks are required to pay both Federal income taxes and the NH Business Profits Tax, and also participate in the Community Reinvestment Act (CRA), while credit unions are exempt from all corporate income taxes and do not participate in CRA.

The study found that 44 percent of community bank branches in the state (68 branches) serve New Hampshire’s least wealthy counties, while only 15 percent of credit union branches (14 branches) serve similar areas.

In addition, the study noted that only 25 percent of the credit union tax subsidy is passed-on to depositors and borrowers, and another one-quarter of the tax subsidy is absorbed in higher (than New Hampshire community banks) non-interest expenses of credit unions. The remainder of the subsidy is used to fund credit union expansion.

The corporate income tax exemption provided to credit unions was originally justified as an incentive for credit unions to provide banking services to lower income areas and individuals. However, the study's findings suggest that the original justifications for exempting credit unions from the corporate income tax are no longer appropriate.

Other key findings of the study are:

• Credit unions are now the largest depository institutions headquartered in the State of New Hampshire and deposits at credit unions are increasingly consolidated in a small number of New Hampshire credit unions.
• New Hampshire credit unions have generally been more profitable than New Hampshire community banks over the past decade, despite having higher expense ratios.
• New Hampshire credit unions are increasingly relying on fee-based income for profitability. Fee-based income at New Hampshire credit unions has risen faster than has fee-based income at New Hampshire community banks.

Read the study.

Looks Like Redlining to Me

Service Credit Union (Portsmouth, NH) currently serves people who live or work in 9 of New Hampshire's 10 counties.

The only county excluded from this $2.3 billion credit union's field of membership is Coos County, which is the poorest county in the state.

According to the Census Bureau, Coos County has a median household income of $41,087. This is 36.5 percent below the state's median household income of $64,664.

All of the other counties have a median household income of at least $50,000.

It seems like this credit union is more interested in serving the wealthier communities and counties in New Hampshire, while redlining the poorest county in the state.

Banks were accused of redlining in the 1970s and that is why banks are subject to the community reinvestment act (CRA). It seems the time has come to apply CRA to credit unions.

Oregonian: Good Time to Hold A Hearing

The Oregonian Editorial Board called for the state legislature "to hold a hearing and solicit public testimony on how credit unions are carrying out their responsibilities to the community."

While calls to tax credit unions were dismissed by the paper, the editorial stated that "credit unions should assure taxpayers and their customers that they will remain customer-focused," especially the largest credit unions that are behaving "more like banks."

The Oregonian Editorial Board was responding to two bills before the state legislature that would have credit unions document how they are serving low- and moderate-income members and would measure credit union services to underserved areas.

Read the editorial.

Municipal Deposits and Community Reinvestment Act

Several cities in the U.S. Northwest -- Seattle, Portland, and Eugene -- are considering plans to shift funds from large banks to locally-owned financial institutions, including credit unions.

The proposed changes in their financial arrangements arose from the Bank Transfer Day movement.

But before transferring city funds, these cities should analyze the commitment of financial institutions to serve their local communities.

All banks currently are subject to the Community Reinvestment Act and must document how they are serving their local markets or communities. Banks are examined with regard to their compliance with the Community Reinvestment Act.

On the other hand, credit unions (with the limited exception of state chartered credit unions in Massachusetts and community chartered credit unions in Connecticut) are not covered by the Community Reinvestment Act. Therefore, credit unions are not required to document how they are serving their local communities.

As Preeti Vissa, Community Reinvestment Director of The Greenlining Institute, wrote in the American Banker's Bank Think Blog, "the awkward truth is that we don't know nearly enough about the extent to which credit unions overall serve low- and moderate-income consumers. They aren't required to collect and report details on the incomes or other characteristics of members, and because they aren't covered by the Community Reinvestment Act, they do not have to report much of the information that is required from banks."

Because of this lack of transparency, city governments should only deposit taxpayer funds into financial institutions that are covered by the Community Reinvestment Act.

NCRC: CRA for Credit Unions

Testifying before the House Subcommittee on Financial Institutions and Consumer Credit on the Community Reinvestment Act (CRA), John Taylor, President of the National Community Reinvestment Coalition (NCRC), called on Congress to apply CRA to credit unions, as well as to other non-CRA covered entities.

In his testimony, Mr. Taylor said that credit unions have not satisfactorily served minority and working communities, thereby reducing the level of responsible loans in traditionally underserved markets.

Citing a study released last year by NCRC, Mr. Taylor states that “credit unions, which have a statutory duty to serve people of “small means,” issue lower percentages of home loans than banks to minorities, women, and low- and moderate-income communities.”

"NCRC analyzed banks’ and credit unions’ performance on three lending types: home purchase, refinance, and home improvement. Across the three loan types, banks and credit unions were assessed on 69 performance measures scrutinizing: 1) the percent of loans to various groups of borrowers, 2) denial rates confronted by minority compared to white borrowers and lower income compared to upper income borrowers, and 3) approval rates experienced by borrowers. In 2007, banks outperformed credit unions on 44 of the 69 performance indicators (or 64 percent of the time). Credit unions surpassed banks performance only 7 percent of the time, while banks and credit unions performed equally well almost 30 percent of the time. In 2006 and 2005, banks performed better than credit unions on 65 percent of the indicators."

He also pointed out that the NCRC study found that state chartered credit unions in Massachusetts, which are subject to a state CRA requirement, outperformed federal credit unions in Massachusetts in serving underserved communities in Massachusetts.

In his testimony, he states that "mainstream credit unions clearly have the assets, resources, and geographic reach to serve minorities, women, and low- and moderate-income communities."