Credit Unions Are Not the Mom-And-Pop Lenders They Pretend to Be

Commentary about business and finance.
Dec. 11 2013 6:00 AM

Bad Credit

Credit unions look like mom-and-pop lenders. In truth, they make up a trillion dollar behemoth regulated by the same lawyers and lobbyists who once served these institutions.

(Continued from Page 1)

Trade groups portray credit unions as humble Davids fighting dreaded banking Goliaths, sponsoring national ad campaigns with populist slogans like “Don’t tax my credit union.” One such ad, sponsored by the Credit Union National Association, tells viewers, “You didn’t save your money to make someone else rich”—a reference to banks, whose profits go to their shareholders.

Top executives at big credit unions, however, can pull down eight-figure pay packages and golden parachutes to rival all but the biggest banks. David Maus, CEO of the Public Service Employees Credit Union in Denver, was paid $11 million in 2010. Cheney, top lobbyist for the Credit Union National Association, received $1.3 million in compensation in 2012, tax filings show.

Promoting Growth, Adding Risk

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When they’re not defending their special tax status, credit unions lobby for rule changes that would allow them to act more like banks, take more risks, and grow. And they often find sympathetic ears at the NCUA.

Chairman Matz, for example, has repeatedly urged Congress to allow credit unions to boost commercial lending. And she exempted many from the legal cap on business lending by helping them qualify as “low-income credit unions.” Between August 2012 and August 2013 alone, the number of credit unions in that group leapt 72 percent, from 1,140 to 1,961.

Most credit union managers lack the expertise to run prudent small-business-lending programs, says Jim Blaine, CEO of the nation’s second-biggest credit union by assets, State Employees’ Credit Union in Raleigh, N.C.

“If you’re going to go into it, you’d better be good, and there are very few credit unions that can do it at this point,” says Blaine, whose credit union has rejected members’ pleas to do commercial lending.

His view is borne out in government audits that have found that credit unions with business lending programs are more likely to fail.

’57 Chevy

Metsger’s devotion to credit unions bloomed early. When he was 19, he needed a car to get to his job scrubbing toilets at a local school in Oregon. Portland Teachers Credit Union lent him $350 to buy a used ’57 Chevy, and he was hooked. To this day, Metsger, 62, remains a member of the credit union and an aficionado of old cars. He worked as a teacher, then an investigative reporter, before a visit to Salem on behalf of his credit union board inspired him to run for the state Senate.

Rick Metsger
Rick Metsger in his first public meeting as a board member of the NCUA, which oversees the credit union industry, on Sept. 12. Metsger is sitting beside NCUA Chairman Debbie Matz.

Photo courtesy NAFCU

“My issue was concern about citizens, ordinary citizens, having access to credit union services—low-cost financial services—so they can find a better life,” Metsger said in a 2010 political speech about his first campaign. “With the help of thousands and thousands of credit union volunteers and consumer advocates, I was successful.”

Metsger received roughly $120,000 in campaign money from the credit union industry during his 12-year political career, more than he got from any other industry. He defended the industry’s political spending after leaving office, as a paid consultant for the Northwest Credit Union Association, previously known as the Credit Union Association of Oregon. That group alone accounted for almost half of his donations from credit unions. Serving in Oregon’s Legislature is a part-time job. Between sessions, Metsger worked as a PR consultant for clients including several credit unions and the Credit Union Association of Oregon.

In the statehouse, he pushed several pieces of legislation aimed at strengthening and expanding the industry. He supported bills that would allow credit unions to take deposits from government agencies to bolster their capital cushions. He supported boosting their commercial lending, which can increase risk. And he advocated expanding the pools of people from which credit unions can draw their members. His work pleased the Credit Union Association of Oregon so much that in 2009 they named him “Legislator of the Decade.”

Backwater Bailouts

Metsger begins his job as regulator at a moment of upheaval for the National Credit Union Administration. The 1,262-employee agency is headquartered in a new brick building across from a train station in Alexandria, Va., about 7 miles south of the better-known bank regulators clustered around the White House and Treasury buildings. Its location, and the credit union industry’s relatively modest size, long rendered the NCUA a sleepy backwater of financial regulation.

Attention shifted to the NCUA after the financial crisis, when massive losses on risky mortgage bonds forced it to shutter five teetering “wholesale” credit unions whose failures would have upended the entire system. The regulator took them over, borrowing $19.2 billion from the government to bail out the system. It still owed about $3.9 billion as of last month.

But it was a policy change by the NCUA that helped lay the groundwork for the crisis.

Wholesale credit unions, also called corporates, provide short-term loans and investment services to retail credit unions. They traditionally served these customers in defined regions, but the board decided in the late 1990s to let them serve credit unions across the country, forcing them to compete with one another. Seeking to offer the highest returns, some corporates invested in complex, risky mortgage bonds that were at the heart of the 2008 financial crisis—threats that government auditors had warned about in 1995 and 2004.

Bill Cheney, the million-dollar CUNA lobbyist who attended Metsger’s luncheon, was sued in 2010 by the NCUA because he sat on the board of WesCorp, one of the biggest failures. The judge in the case later dismissed the charges against Cheney and the other directors. Cheney settled a separate lawsuit related to his service as a director of U.S. Central, the biggest failed corporate credit union.

Credit unions have spent $4.8 billion of their members’ money paying down the bailouts, on top of the $5.6 billion they lost in the failures. They could pay up to $3.9 billion more to close out the Treasury debt, according to NCUA estimates.

Cleaning Up and Scaling Up

Now the agency is under pressure to ensure there is no repeat of 2009. It has retooled the rules and oversight practices for corporates, imposing new risk management requirements and limits on how much of any single investment type they can buy. If one appears shaky, it will automatically trigger requirements to raise capital and cease paying dividends.

This get-tough campaign contrasts with the agency’s efforts to help credit unions grow and thrive. The regulator spent $5.5 million last year on an office that offers free, private consulting services to small credit unions and those designated as serving low-income members. A brochure of marketing tips from the office advises, “Encourage tellers and loan officers to cross-sell products at every touch point with the member.”

They also softened rules that defined distinct groups eligible for membership. Today, for example, anyone can join the NASA Federal Credit Union simply by agreeing to become a member, cost-free, of the American Consumer Council.

“There really are no longer any restrictions on membership,” says Blaine, the credit union CEO.

Among the agency’s key goals for 2012, according to its annual report: boost awareness of credit unions among young people; classify more credit unions as low-income, so they are subject to looser rules and extra subsidies; and increase the number of potential credit union members so the industry can keep growing.

There are no meaningful safeguards to prevent the NCUA from being completely filled with industry veterans and allies. By law, only one of the three board members can be a recent credit union employee or affiliate. None of the current board members count, agency spokesman John Fairbanks said.

Not Metsger, who was paid by a major trade group until the month he was sworn in. Not Michael Fryzel, who was a lawyer for credit unions until he was sworn in in July 2008. And not Matz, who was a senior executive at Andrews Federal Credit Union until roughly a year before she was nominated to her second stint on the board. Credit union industry groups don’t count for purposes of the rule and Matz took off just enough time to avoid being considered a recent employee.

Metsger said in an email that he avoids conflicts of interest by “never letting my associations … direct my decision-making,” and by seeking guidance from ethics lawyers.

Tension in the Family

Credit union lobbyists bristle at the idea that they wield too much influence over the regulator. As evidence, they cite issues on which they disagree with the NCUA. Trade groups, for example, have argued that closer inspection of credit unions’ lightly regulated subsidiaries would be unnecessary and invasive. In November, the board proposed new reporting requirements for the entities, some of which made shoddy loans that contributed to recent credit union failures.

CUNA and the regulator have locked horns more often since the crisis, Cheney says, because of all the new rules the board has imposed over industry objections.

“If there’s some sort of a family crisis, it can create tension in the family, and certainly we had a crisis in the financial services industry,” he says. “But any time the pendulum starts to swing, the question is, ‘When has it swung too far?’ ”

If the credit union industry has agreed with his decisions, Metsger said, that does not mean he made the decisions merely to please industry. He broke with the industry at least once, he notes, by supporting a 2007 proposal in the state legislature to curb risky and abusive mortgage lending that credit unions hated.

Metsger says he will continue to strike a “fine balance” in his new role, engaging industry stakeholders and hearing them out, but remaining focused on the agency’s mission—protecting the health of the credit union industry.

“I’m very cognizant of it,” he says. “That doesn’t mean you always guess exactly right, but you do the best you can.”

The Center for Public Integrity is a nonprofit, independent investigative news outlet. For more of its stories on this topic go to publicintegrity.org.

Correction, Dec. 11: Due to a production error, Rick Metsger was misidentified as the man standing on the right in a photograph on the first page. He is standing on the left.

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