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.

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Illustration by Charlie Powell

Minutes after Rick Metsger took the oath of office to become the newest overseer of the nation’s credit union industry, he walked a few blocks up the street to break bread with executives and lobbyists for the firms he now regulates. The luncheon in his honor was held at an elegant, $4 million Capitol Hill party and meeting space called Credit Union House. It drew a tightknit group of business leaders, advocates, and regulators—the most powerful people in a financial industry that holds more than $1 trillion in assets but which most Americans know little about.

Metsger, whose ascent they had gathered to toast, was one of their own, a fellow true believer in credit unions who would now police the industry as one of three board members of the National Credit Union Administration. He is typical of the regulators, lawyers, and lobbyists who make comfortable livings shuttling between overseeing and promoting the credit union industry. Together, they guard its wholesome reputation, forged during the Great Depression, when credit unions were set up to help poor people whom banks refused to serve.

Metsger had served on the board of his own credit union. He won a seat in the Oregon state Senate with the help of thousands of credit union volunteers and tens of thousands of dollars from the industry. A decade later, as chairman of a key committee, he helped pass legislation allowing credit unions to enter new lines of business. He worked as a paid consultant for a regional industry lobbying group even after President Barack Obama nominated him to the board in May. He ended the contract just weeks before he arrived in Washington to be sworn in on Aug. 23.

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Ethics watchdogs question whether someone with such deep roots in an industry can cut through the wholesome, folksy rhetoric that its lobbyists use to push for weaker rules and less enforcement. As the NCUA board tries to fix the failures that led to a little-publicized industry-wide bailout in 2009, the concern is especially pressing. If the industry can persuade regulators to allow more risk in the system, the board’s decisions could plant the seeds of the next big taxpayer bailout.

“This is a person who is an advocate for the credit union industry, and he is now in charge of monitoring the credit union industry,” says Craig Holman, a lobbyist for Public Citizen, which advocates for transparency in elections and government. “It will be difficult for Metsger to question the industry’s perspective because he appears to share it in most respects.”

Metsger says he obtained approval from the agency’s ethics lawyers before attending the luncheon and paid out-of-pocket the $40-per-plate cost of food for him and his family.

After inquiries from the Center for Public Integrity, the NCUA’s inspector general is reviewing the lawyers’ advice to Metsger and revisiting the agency’s earlier analysis of any potential financial conflicts, according to Sharon Separ, who oversees investigations for the independent, internal watchdog office. A formal investigation would follow if the facts warrant it, she said.

Big Business

Credit union advocates work hard to cultivate the industry’s image as quaint and community oriented. In reality it’s a massive and growing business. In 2012, the nation’s 6,800-odd credit unions—with 94 million depositors—earned $8.5 billion in net income and held more than $1 trillion in assets. The biggest credit union, Navy Federal, holds $55.4 billion in assets and earned $792.3 million last year. It recently became the nation’s 20th-biggest mortgage lender.

Like banks, credit unions provide financial services such as deposit accounts and loans to consumers. Unlike banks, they are barred from risky activities that would not serve customers, like investing in most derivatives, and are exempt from paying most taxes. They are required to return excess earnings to their member-customers, for example by offering lower rates on loans or higher interest on deposits. The tax exemption is expected to cost the government $1.66 billion next year, according to the White House’s budget office.

Metsger

New credit union overseer Rick Metsger (L) is congratulated by Northwest Credit Union Association CEO Troy Stang.

Photo courtesy NCUA

Much of that extra income is diverted to finance the industry’s advocacy efforts, reducing the benefits available for customers. Credit unions spent more than $600 million of their members’ money since 2008 on trade groupslobbyistspolitical donationsnaming rights to sports arenas, and other efforts to promote what they call “the credit union movement,” according to a new analysis of public documents by the Center for Public Integrity.

“This isn’t a charity, it’s big business,” says Marvin Umholtz, a former credit union executive who now consults for both credit unions and banks.

The National Credit Union Administration board is charged with supervising the industry and overseeing the $11.7 billion fund that insures credit union deposits, so that customers are protected if their lender fails. To prevent costly failures, the board monitors the industry and imposes sanctions on weak credit unions. In effect, the board controls how much risk the institutions can take on, and how quickly they can expand.

The board’s expansionist policies have helped credit unions add more than 11 million members in the past 10 years and boost lending more quickly than banks. Their assets have doubled since 2001.

“You can think of them as providing regulatory oversight, but you can also think of them as cheerleaders and enablers,” says Kathleen Clark, an expert in government ethics and professor at Washington University School of Law. It’s a common problem when regulators are “ideologically in line” with the companies they oversee, she says.

Interests Overlap

Metsger, like the other two members of the NCUA board, bounced straight from promoting credit unions to writing the rules for them. It is a typical trajectory inside the clubby world of the “credit union movement,” where regulators often embrace the view that credit unions are inherently good, and more credit unions are good for the United States.

Credit Union House
Credit Union House, a party and meeting spot situated a few blocks from the U.S. Capitol. The industry used millions in untaxed earnings to build this “home away from home for credit union advocates.”

Photo via Google Earth

Among the guests at Metsger’s luncheon was his new boss, NCUA Chairman Debbie Matz, a credit union executive between her two stints as a regulator. Troy Stang, CEO and lobbyist in Oregon for the Northwest Credit Union Association, organized the event—and had Metsger on his payroll until earlier that month. Bill Cheney, the industry’s top lobbyist in Washington, was a director of the two credit unions whose losses after the financial crisis led to a $19 billion taxpayer bailout.

picture from the event shows the four locked in amiable conversation at Credit Union House, the swank party space built by lobbyists, for lobbying. How they handle issues facing the industry may set the stage for the next credit union crisis—or guarantee a safe and sound system for decades to come.

Metsger says his new job requires a different mode of advocacy, one focused on ensuring the industry’s financial strength. He says friendly gestures by industry advocates, like the luncheon celebrating him, won’t cloud his judgment as a regulator.

“You want to make sure you keep this arms-length, but you also need to have a dialogue with folks and you don’t want to make them feel like you’re in isolation—‘Oh, no, I can’t be seen with you,’ ” he said in an interview.

Cheney said the event made sense because the northwest trade association is a part owner of Credit Union House and Metsger had consulted for the group. “I don’t think that creates any undue influence with the regulator whatsoever,” Cheney said.

Mission Creep

Federal credit unions were set up during the Great Depression to serve working-class people who were being turned away by banks. The 1934 law that created them says they would provide credit for “people of small means … to stabilize the credit structure of the United States.”

The industry has strayed from that mission. Fewer than one-third of federal credit union members earn less than 70 percent of the median income in their community. Bank customers are more likely to be low-income than credit union customers, according to Federal Reserve data. At the same time, regulators are deeming a record number of credit unions “low-income” or “small,” designations that carry generous benefits, such as the ability to accept deposits from nonmembers and make more commercial loans. Changes in federal law also broadened the mission of the credit union system.

Credit unions have erected a sprawling advocacy machine to protect their tax break from attacks by bankers who believe it confers an unfair advantage. There are 43 leagues like the Northwest regional group; two major national lobbies—the Credit Union National Association and the National Association of Federal Credit Unions; charitable foundations; groups representing low-income, corporate, and other credit union subgroups; for-profit subsidiaries; quasi-independent companies like CUNA Mutual, which charges credit unions for services then pumps tens of millions back into their advocacy network; and even a think tank, the Filene Research Institute.

The groups collected more than $160 million in membership dues and other payments from credit unions from 2008 through 2011, the most recent year for which thorough data are available. That income helps pay for causes like Credit Union House, where dozens of political fundraisers are held each year. Four of the state credit-union leagues that own the house put up more than $300,000 apiece to help build it. Hundreds of credit unions and trade groups make annual donations. If you trace it back, all of that money comes from the pockets of credit union members who pay the fees and interest that make up a credit union's earnings.