Magazine article American Banker

Banklike Credit Unions Should Follow Bank Rules

Magazine article American Banker

Banklike Credit Unions Should Follow Bank Rules

Article excerpt

Byline: Aaron D. Klein

The vast majority of credit unions in America happily serve their important mission of providing financial services to well-defined communities. A small handful, however, want to grow into national financial institutions, serving anyone and everyone.

These few credit unions just won a major regulatory battle as the National Credit Union Administration approved new rules that open up field of membership requirements to more easily create national credit unions. This decision will advantage a handful of mega credit unions, further tilt the playing field against community banks and exacerbate existing regulatory challenges that the NCUA has yet to focus on.

At a minimum, if the NCUA is going down the path of allowing anyone to be part of a few credit unions, then it ought to require compliance with the spirit of the Community Reinvestment Act and enhance oversight of executive compensation.

Most credit unions are small: Out of 5,573, the average asset size is under $250 million, and only seven are over $10 billion. It is within this handful of credit unions, particularly those that are seeking aggressive growth strategies, where the impact of this new rule will be most keenly felt. One of the biggest beneficiaries of this new rule will be PenFed Credit Union.

Originally the credit union for employees of the War Department (now the Defense Department), PenFed changed its strategy to aggressively expand by increasing membership and growth through merger. PenFed's publicly stated goal is to grow the credit union by 588% over a decade, with an aim of being a $75 billion mega credit union.

PenFed markets itself as providing "Great Rates for Everybody," a slogan that itself contradicts the concept of a common bond. Anyone who donates a small sum to a charity is immediately eligible for membership. Ironically, it is easier to get a loan from PenFed than it is from USAA, which is a bank not a credit union. Unlike PenFed, USAA actually enforces a common-bond dealing with military service.

Some might say, so what's the problem with that? There are several. First, banks that serve the general public are required to reinvest in communities under the Community Reinvestment Act. Credit unions are exempt from the CRA, under what was a logical supposition that their common bond membership constituted their community. They were, by definition, serving their community. If anyone can be part of your field of membership, then you should have a duty to adequately serve everyone.

The NCUA and Congress almost required CRA compliance for credit unions in the late 1990s. Given the NCUA's new rule, it ought to actively consider and ultimately require mega credit unions that behave like banks to comply with CRA tests. …

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