The U.S. Senate on the verge of confirming two nominees to the board of directors that oversees the National Credit Union Administration (NCUA). The agency is tasked with regulating and supervising America’s credit unions.
It is an agency at a crossroads. Questionable decisions made by the NCUA, as well as a willful disregard for problems facing the industry, have created two different kinds of credit unions: billion-dollar credit unions that are little more than banks that don’t pay federal business taxes, and a wilting number of small neighborhood credit unions committed to serving less-affluent Americans in underserved areas.
The NCUA’s newest board members will play a large role in tackling this serious imbalance.
About 300 credit unions possess assets of more than $1 billion. While that number amounts to just 5 percent of credit unions, that group enjoys a staggering 75 percent of credit union net earnings.
Congress never could have envisioned billion-dollar credit unions when it created small, neighborhood nonprofit cooperatives to spur community savings and lending during the Great Depression. Yet this segment of the industry has lobbied the NCUA for new powers, such as commercial lending authority and the ability to raise capital from profit-seeking investors.
Investor capital authority is perhaps the best example of how NCUA’s efforts ignore the needs of small credit unions.
The NCUA is considering allowing private outside financers to invest in credit unions, and may even give “knowledgeable institutional investors” the opportunity to make these investments. Since “knowledgeable institutional investors” is regulatory speak for Wall Street, it’s clear which segment of credit unions such a rule would benefit.
Few pension funds, insurers, mutual funds, or hedge funds are realistically going to be willing to invest in debt from a small, local credit union. On the flip side, those same Wall Street players may be quite interested in helping PenFed — one of America’s largest credit unions — achieve its plans to triple in size, from $25 to $75 billion, by 2025.
With its focus on growing the largest credit unions even larger, the NCUA has forgotten how credit unions are supposed to operate. At their core, credit unions are not-for-profit cooperatives, set up so their customers are ultimately the decision-makers for the institutions.
Investor capital could change all of that.
First, profit-seeking investors will demand a profit, even if they only hold debt. In the real world, this will change the way credit unions operate. Even if investors aren’t given board seats or a formal role in the management of the institution, a credit union’s CEO would be much more likely to listen to the concerns of hedge fund manager than those of a member with a personal checking account.
Even beyond fears about investor capital ruining the purpose of credit unions, there is a growing concern about larger credit unions operating in ways that don’t sync with their nonprofit missions.
Billion dollar credit unions regularly adopt the marketing practices of Fortune 50 companies. One credit union recently spent $120 million to buy naming rights to an NBA arena. Another sponsored Monday Night Football. Still more plastered their names on nationally televised top-tier college bowl games.
Even though the largest credit unions are nonprofits, they’re buying smaller commercial banks, purchasing ad agencies, setting up real estate brokerages, and paying their CEOs seven and eight-figure salaries.
While the NCUA seems happy to turn their heads at this flouting of credit unions’ nonprofit status, smaller credit unions are growing frustrated and embarrassed by the actions of their larger brethren, and the decisions of their regulator.
Whether they know it or not, NCUA is creating an uneven playing field in the marketplace by creating a regulatory environment that benefits the largest credit unions. And by kowtowing to the interest and desires of those at the top of the industry, the agency is making it more difficult for community-focused credit unions to survive. By playing favorites, the NCUA is actually incentivizing consolidation in the industry. The result will be fewer choices for consumers.
And all of this supported by government tax subsidies and without any mandate to focus on the poor.
Unless the NCUA does something to change the current trend, credit unions will be little more than a group of billion-dollar actors in search of profits while exploiting their not-for-profit structures. That’s well and good if you’re a for-profit enterprise, but hardly appropriate for a government-favored industry whose regulator may have forgotten the statutory purpose of those it regulates.
The newest NCUA board members must fix the agency. By ending preferential treatment of the largest credit unions and stopping them from exploiting their nonprofit structures, the NCUA can show it is serious about restoring fairness and common sense, while protecting the original mission of the credit union movement.
Drew Johnson Drew Johnson is a senior fellow at the National Center for Public Policy Research. To read more of his reports — Click Here Now.