This article originally appeared in American Banker on June 25, 2018.
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 percent 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. Mega credit unions will do what megabanks do: follow the money. This is already happening — witness PenFed’s partnership with Berkshire Hathaway Home Service to target luxury high-end real estate. This is made clear in PenFed’s own pitch: “We will consistently represent your best interests by applying our superior knowledge of luxury real estate, extensive connections and unique skills to successfully market and sell your luxury home.”
As credit unions grow and the common bond between members shrinks, prior forces to limit excess executive compensation also diminish. Unlike nearly every other nonprofit, federal credit unions are exempt from filing IRS forms that disclose executive compensation. Excess compensation has occurred—just look at Melrose Credit Union, a New York credit union with just over $1 billion in assets that paid its CEO over $1 million in total compensation, as it was on its way to insolvency. Last year, Melrose lost $290 million under the NCUA’s conservatorship.
One wonders what PenFed’s senior executives are earning as part of the credit union’s aggressive growth strategy. The credit union apparently disclosed senior management compensation in note 15 of its 2013 report (which has been subsequently removed from the PenFed website). Its annual reports no longer contain that information, nor any details regarding compensation from its side business ventures, such as the real estate partnership with Berkshire.
If the NCUA is going to expand field of membership requirements, it should also expand executive compensation disclosure requirements for all federally insured credit unions, particularly for anyone that is seeking to take advantage of these new rules.
The NCUA’s decision to further weaken field of membership constraints will not likely impact my small, community-focused U.S. Senate Federal Credit Union. Like most credit unions, it is content to fulfill its mission to provide basic financial services to those who share the common bond of employment in the U.S. Senate or Congress’ Government Accountability Office. However, it will certainly benefit PenFed’s goal to quintuple in size, providing more funds to expand partnerships in luxury real estate or luxury cars. Will the NCUA be up to the task of keeping a close eye on these mega credit unions and all of their various side partnerships, joint business ventures and executive compensation? Or will we witness regulatory capture similar to when only a few giant thrifts were able to exert substantial influence over the now- defunct Office of Thrift Supervision?
Time will tell, but history suggests this is not likely to end well.