Credit unions are fighting back against Sen. Elizabeth Warren’s proposal to subject them to the Community Reinvestment Act.
While it’s not expected to make waves in the remainder of the current Congressional session, the plan could gain momentum if Democrats take the Senate in the midterm elections.
The bill, known as the American Housing and Economic Mobility Act, would upend current reform efforts around CRA. Currently CRA only applies to banks insured by the Federal Deposit Insurance Corp. but Warren’s proposal, which was introduced on Tuesday, would extend the requirements to credit unions and nonbank mortgage originators. CUs with a low-income designation – which account for approximately half of the nation’s credit unions – would be exempt from the regulation.
Warren also proposed using billions of dollars of federal funding to build 3.2 million new housing units for lower-income and middle class families.
Two major national trade groups – the Credit Union National Association and National Association of Federally-Insured Credit Unions –
“Big picture, I think this is more of a mile marker and a thought piece than an actionable package,” said Isaac Boltansky, director of policy research at Compass Point Research & Trading. “There is neither the political will nor the time necessary to act on this legislation.”
One concern many credit unions are expected to raise is the expense that additional regulation often brings. Andy Sandler, founder and chairman of Treliant Risk Advisors, cautioned against “unintended consequences” that could arise if the bill moves forward, pointing out that the legislation is laden with personnel and compliance costs, and “creates new risks to the extent that CUs have access to federal funds."
"As a matter of good public policy, why should the lending industry have to subsidize housing more than the building industry?” Sandler asked.
Regardless of how credit unions fare, some analysts have suggested lawmakers would be better served by focusing more closely on housing issues rather than tying such reforms to CRA.
“To the contrary of its intended purpose, CRA creates perverse incentives for lenders to relax credit standards beyond prudent risk taking and in so doing puts affected homeowners at risk for being able to keep their homes,” said Clifford Rossi, executive-in-residence and Tyser Teaching Fellow at the University of Maryland's Robert H. Smith School of Business. “Rather than extend a poorly designed law, Congress ought to be taking a closer look at improving existing federally subsidized FHA loan programs and/or various rental housing initiatives.”
Burden without benefit?
While credit unions are not yet subject to CRA at a national level, CUs in Warren's home state of Massachusetts must already comply with those regulations. The Cooperative Credit Union Association – the joint league serving Massachusetts, New Hampshire, Rhode Island and Delaware – did not respond to CU Journal’s request for comment in time for publication.
CRA’s roots date back to the government’s attempts to stop discriminatory redlining practices by lenders. Lucy Ito, president and CEO of the National Association of State Credit Union Supervisors, pushed back against the notion that CUs should be subjected to a regulation created as the result of policies from for-profit banks.
“We are still analyzing Sen. Warren’s bill, however, credit unions — by design and by law and regulation — only serve their member-owners and do not engage in the ‘redlining’ practices that led to the Community Reinvestment Act,” she said. “As such, subjecting credit unions to the Community Reinvestment Act is a burden and cost without added benefit.”
State credit union leagues across the country were quick to pan the proposal.
“Sen. Warren wants to be a champion for low- and middle-income people, but hurting the financial institutions that serve them is a strange way to do it,” said Paul Stull, president and CEO of the Credit Union Association of New Mexico.
For CUs already helping Americans of modest means, added Stull, CRA would “reduce the very reinvestment [Warren] seeks to support.”
"Congress excluded credit unions from CRA because of our not-for-profit cooperative structure, field of membership restrictions, and lack of history of discriminatory lending practices," said Carolina Willard, president and CEO of the Cornerstone Credit Union League, which represents CUs in Texas, Oklahoma and Arkansas. "As good actors with low-risk profiles, credit unions should not be penalized arbitrarily and lumped in with private, for-profit financial institutions such as banks."
Fourth administrator?
With the legislation arriving at the eleventh hour, Boltansky suggested Warren's bill “could serve as a talking point in the coming battle over the housing trust fund contributions, which is expected to commence once a new FHFA director is sworn in.”
He added that banking regulators "considering a CRA modernization and the senator is offering thoughts on that issue as well."
Because credit unions are not included in the CRA, the law is administered by the Federal Reserve Board, the FDIC and the Office of the Comptroller of the Currency. If enacted, it’s likely that the National Credit Union Administration will round out the list as a fourth administrator.
NCUA declined Credit Union Journal’s request for comment.
“Looking at the legislative history of the Community Reinvestment Act reveals that Congress understood this difference between banks and credit unions – they made a conscious effort to exclude credit unions from CRA,” said Geoff Bacino, a credit union consultant and former NCUA board member. “In my opinion, nothing has changed to alter that difference."
