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.