Confessions of a Credit Union Executive Who Turned Community Banker | Credit Union Journal

designer491 – stock.adobe.com

In the first half of this year, 11 people were exempt from tax credit cooperatives bought commercial banks — equal to the number of similar acquisitions that took place in the whole of 2023. This trend has detrimental impact on the financial services sectorand I should know. As a former credit union executive and current community banker, I’ve seen both sides of this dangerous game.

When I started my career at a $130 million credit union, I was amazed at the flexibility offered within the credit union. While our product offerings were initially basic, after we became a community charter, the credit union transformed as the floodgates opened for us to compete more aggressively with traditional banks. We diversified our offerings to include mortgages, indirect loans, internal credit cards, and a range of online banking services.

The turning point came in 2008 when we entered commercial lending, quickly becoming the seventh largest credit union in Texas by commercial loan portfolio within three to five years. Our ability to offer lower rates, better terms, and fewer fees facilitated rapid growth, allowing us to extend commercial loans outside the traditional boundaries of the market. The transition from federal to state charter further expanded our growth opportunities, as did obtaining low-income designation, which provided us with greater exemptions from certain regulatory limits related to lending.

In other words, credit unions like mine have been able to use our tax-exempt status to undermine competition and undermine the diversity of products available to taxpaying entities. We have weakened community banks and their ability to meet the credit needs of our communities by exploiting every loophole the government has provided us with to do so. Now, by exploiting that weakness and by further exploiting their tax-exempt status to outbid other buyers, credit unions are gobbling up banks at a record pace.

Some may view this trend positively, arguing that government-funded “nonprofit” entities are purer in their practices and motives than for-profit institutions. Nevertheless, it is important to examine the nonprofit status of many credit unions. The nonprofit status of credit unions no longer supports the mission of providing cheap credit to people of modest means. Instead, this status allows credit unions to spend lavishly on technology, facilities, executive compensation, and rights to name sports facilities. This comes at the expense of profits that could be returned to credit union members. In addition, some credit unions now provide compensation to their board members, in direct contrast to the volunteer-based management model that is standard for most nonprofits.

Beneath the surface of this problem lies a brutal truth: credit unions lack the capacity to effectively underwrite and monitor credit risk in large-scale commercial lending. 2016regulators lowered commercial issuance standards to allow credit unions to expand into commercial lending. Just months before the COVID-19 pandemic, American Banker asked, “Are loans provided by credit cooperatives prone to problems?” At the time, Credit Union National Association Lending Council Vice Chairman Ray Lindley acknowledged that credit unions’ commercial credit ratings have never been tested by the natural economic cycle. Credit unions have dodged the bullet of scrutiny and exposure of their weaknesses thanks to a massive influx of liquidity and loan restructurings during the pandemic era. Today, credit unions have more than doubled their commercial lending since 2019, now holding $160 billion as of the first quarter of 2024, according to National Credit Union Administration.

In almost every market you will find credit cooperatives providing loans that no other bank would do this. They do this not out of benevolence, but because they lack the experience in effective commercial underwriting. When credit union lending practices are eventually subjected to the organic credit cycle, there will be significant losses and potential risks to credit union members.

We are at a critical juncture. As credit unions emulate the practices of community banks, taking advantage of federal tax exemptions and state minimum taxes, the injustice is there for all to see. It is long past time to examine the regulatory framework to ensure parity and integrity in the financial services industry.

The saying “if it walks like a duck and quacks like a duck, it must be a duck” rings true for credit unions; if they imitate banks in their operations, product offerings, and acquisition strategies, they are effectively operating like banks. So why aren’t they regulated like banks? Or taxed like banks? It’s time to end this absurd disparity.

Now is the time to restore credit unions to their intended niche. It is long past time to end the scourge of credit unions buying banks. It is time to restore credit unions to their place before they do more harm to customers and communities.