On March 12, 2009 the Community Reinvestment Modernization Act of 2009 was introduced in the House of Representatives (H.R. 1479). This far-reaching bill would extend the Community Reinvestment Act (CRA) beyond banks, which have been covered since 1977, to other financial institutions: mortgage banks, financial holding companies, insurance companies, securities companies, and “mainstream” credit unions. Low-income designated credit unions (LICUs), such as community development credit unions (CDCUs), would be specifically exempted under the proposed legislation.
In view of this legislative development and the current challenges to the credit union movement, we would like to restate the position of the National Federation of Community Development Credit Unions (Federation).
As in the past, the Federation does not support the extension of CRA to the credit union industry.
Community Development Credit Unions and the Federation
The Federation represents more than 230 credit unions in 46 states and the District of Columbia that serve low-income urban, rural, and reservation-based communities. They range from the smallest of all depositories, with less than $1 million in assets, to credit unions with more than $1.7 billion in assets, which despite their larger size are focused on serving predominantly low-income communities.
CDCUs and other low-income credit unions occupy a unique position in the financial marketplace. There are no other depository institutions with an explicit commitment to this population. We welcome the recognition the bill’s supporters have extended to low-income credit unions, by exempting them from the proposed legislation. However, even though the Federation’s member credit unions would not be directly affected by the legislation, we do not support the extension of CRA to the rest of the credit union movement. In taking this position, we are reaffirming the stance that the Federation has maintained for more than a decade.
CRA Expansion and Modernization Are Important
We want to state clearly and emphatically that the Federation supports CRA and believes that it has been immensely important to the revitalization of our nation’s distressed areas. It is vital to recognize the value of CRA and to repudiate categorically the baseless charges that have circulated in the last year that CRA lending was somehow responsible for the subprime crisis and financial meltdown. These charges fly in the face of the facts, and have been rejected by the Federal Reserve, the OCC, and many others.
We believe that CRA must, indeed, be expanded and modernized so that it reflects the migration of vast amounts of money to entities that are not subject to reinvestment regulations. We understand, moreover the growing desire for regulatory uniformity, especially as it concerns risk management and consumer products, such as mortgages.
The Credit Union Difference
Credit unions are different from mortgage banks, securities firms, insurance companies, or other entities to which the proposed CRA legislation would apply. The credit union differences are fundamental, and they have never been more apparent than in the current financial crisis.
Credit unions are non-profit, member-owned cooperatives. They have no outside shareholders who demand ever-increasing quarter-over-quarter profits. Excessive executive compensation has not been an issue with credit unions. Credit unions have, for the most part, maintained a direct relationship with their borrowers, enabling many of them to rapidly restructure and modify mortgage loans. This contrasts markedly with institutions which are intimately and inextricably bound in the complex chain of securitization that has greatly hindered efforts to untangle the foreclosure crisis.
In short, we believe that the basic philosophic and structural principles of the credit union movement can well serve as a template for the restructuring of the entire financial system.
CRA and Credit Unions
The Federation has opposed the extension of CRA to credit unions for a decade. We have done so for a number of reasons. Credit unions are already covered by the Home Mortgage Disclosure Act (HMDA) as well as a range of consumer protection laws. Credit unions have been in the forefront of developing affordable alternatives to high-cost payday and other predatory loans, and they have largely avoided the wealth-draining mortgage products that have produced this crisis.
We believe that a cost-benefit analysis does not support the extension of CRA to credit unions. The compliance burden and cost on credit unions, most of which are far smaller than banks, has grown enormously over the last decade, and CRA would add to it. That in itself would not be a basis for rejecting CRA, if substantial benefits were to result. However, we do not believe that CRA would change the financial practices of many credit unions nor result in significant expansion of credit to underserved markets. Few credit unions do the kind of project financing that large banks do, and that are a signature of urban CRA activity; they simply lack the resources and expertise for those types of projects. Many credit unions do not offer business loans at all – though many have made “microenterprise” loans for years, and credit unions have been recognized by bank regulators for making the kind of small, affordable, unsecured loans to individuals that banks have been reluctant to make.
As mentioned, mortgage lending by credit unions already falls under HMDA, and credit unions nationwide have actually increased their mortgage lending substantially in the past year, even while banks have been cutting back to insulate and protect their assets. Finally, the broader credit union movement, including many of the largest institutions in the country, have markedly expanded their outreach and their support for low-income credit unions, as evidenced by the growth of the Federation’s Community Development Partners initiative, which includes some of the largest credit unions in the nation.
CRA and the Current Challenges to the Credit Union Movement
On the whole, the credit union movement is sound and well capitalized. But no part of the financial system has been immune from the toxic overflow of the mortgage crisis. In California, Florida, and other areas where the crisis is most acute, credit unions have suffered losses not because of loans they made, but because of the collateral damage inflicted by other financial institutions. The collapse of the housing market, the halt in new home construction, rising unemployment in the service sector – these and other factors have wounded the low-wage members and borrowers of credit unions. Without jobs, workers in hard-hit areas have been unable to pay for their credit union auto loans, for example, and have turned in their keys – trapping them without transportation to seek new employment.
Implementing CRA for credit unions at this point could hardly come at a more difficult time for the industry. Notwithstanding the effects of our nation’s disastrous economic situation, credit unions are now being required to replenish their investment in the National Credit Union Share Insurance Fund, which insures deposits in nearly all credit unions in the United States. As a consequence, many, if not most, credit unions are projecting negative net earnings for 2009.
Adding CRA to the compliance costs faced by credit unions may, in fact, have the unintended consequence of decreasing credit union investment in low-income communities. It may divert resources and focus to compliance instead of maintaining or expanding the voluntary investments that credit unions have made, and are increasingly making.
Make no mistake: those investments may be vital to the survival and health of the community development credit union movement. Low-income credit unions are especially vulnerable in this severe recession. Their members live on the economic margins, and those margins are being obliterated. The Federation’s projections for 2009 envision as many as three-fourths of all CDCUs losing money, in large part because of the NCUA-imposed share insurance charges. In a worst case scenario, we face an epidemic of forced mergers and liquidations of low-income credit unions.
Now, more than ever, CDCUs need the support of the entire cooperative financial system. We trust and expect that support by “mainstream” credit unions will continue to grow, but we fear that CRA could unintentionally hinder many credit unions’ ability to voluntarily expand this type of assistance at a crucial time in our nation’s history.