Banker concerns about credit union mergers are overblown
For years, taxicab drivers have been able to get the credit they need to purchase medallions necessary to operate in New York City and elsewhere from credit unions and banks that specialized in this type of lending. But the cab industry has been under pressure in recent years as ride-sharing services have reduced demand for taxi services and drastically cut into the value of the medallions.
Consequently, the credit unions primarily engaged in the business of medallion lending have suffered high delinquency and charge-offs. Four New York City credit unions have borne the brunt of this disruption.
But what the credit union system did when these credit unions got in trouble sets us apart from the banking industry. Instead of closing the credit unions and shutting off access to credit union services, other credit unions stood up and worked with the regulators on emergency mergers.
The first of these came in 2016 when Long Island-based Bethpage Federal Credit Union absorbed Montauk Credit Union, followed by Teachers Federal Credit Union absorbing both LOMTO Federal Credit Union and Melrose Credit Union in 2018.
The latest example is Progressive Credit Union’s merger with Pentagon Federal Credit Union. Progressive, founded in 1918, has about 3,000 members and has held a national charter for one hundred years. PenFed is the nation’s third-largest credit union but has always served the national defense community.
Emergency mergers are rare and always done with extreme care, making sure that merging credit unions makes sense for all impacted members and helps protect the National Credit Union Share Insurance Fund. Had these mergers not been approved, all credit unions — and their members — would have borne the cost of the eventual failure of the medallion credit unions.
By taking on these credit unions, Bethpage, Teachers and now PenFed are epitomizing credit unions’ “people helping people” philosophy.
Bankers don’t see it this way, of course. They’re concerned that this most recent merger will impact PenFed’s mission and reach. And they're going to try to convince Congress that this move should jeopardize the credit union tax status. But nothing could be further from the truth.
The PenFed-Progressive merger will not affect PenFed’s mission or reach. PenFed already has a presence in all 50 states as a multiple-bond credit union. And PenFed leaders have said publicly that the credit union has no plans to change its membership focus.
Frankly, it is hard to take bankers seriously when they make any claim regarding credit unions’ tax status — after all, banks just received a $26 billion tax break. But in this case, there is simply no connection. The tax status is based on credit unions’ structure and mission: their structure as not-for-profit financial cooperatives and their mission to promote thrift and provide access to credit for provident purposes. Period.
Membership is at the core of what it means to be a credit union. But field of membership has nothing to do with the tax status. The concept of field of membership and common bond was originally a tool to determine creditworthiness, developed at a time when credit scores and other more sophisticated creditworthiness tools did not exist.
The indisputable fact is that by approving these mergers the National Credit Union Administration has fulfilled its mission to promote credit unions and protect the share insurance fund. Members of troubled credit unions will continue to receive highly valued credit union services and the broader credit union industry will not see a degradation of the share insurance fund as a result of lending concentration in a disrupted industry. This is a good outcome for all involved.