Credit unions' CRA exemption helped sink Navy Federal

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"Attention, congressional cleanup crew: We have a fair lending spill in the military aisle!"

Navy Federal's racial discrimination allegations are not going away without congressional and Consumer Financial Protection Bureau investigations and possibly some credit union legislative and regulatory changes.

Had Navy Federal been subject to the Community Reinvestment Act, which it opposes more than anything except federal taxes, it may have avoided this reputational disaster.

This is because CRA, like the canary in the fair lending coal mine, identifies disparity and other lending problems before they get out of control. 

CRA should cover credit unions, especially large ones and those acquiring banks. Until then, effective CRA self-regulation is better than no CRA regulation.

How bad is the Navy Federal problem?

Using the most recent 2022 Home Mortgage Disclosure Act data, CNN found Navy Federal had the widest white/black disparity by far in mortgage approval rates of the 50 largest mortgage originators, including bank and nonbank lenders.

Navy Federal approved more than 75% of white borrowers but less than 50% of Black borrowers, including applicants with similar incomes and debt-to-income ratios. Navy Federal's white/Black disparity was nearly three times the average for the three biggest CRA-covered banks.

With nearly 5,000 credit unions, why is this a (Navy) federal case?

First, with $165 billion in assets it's by far the nation's largest credit union, more than three times the size of its nearest competitor.

Second, whenever one institution dominates an industry, there are "too big to regulate" questions. It's hard for a regulator to say no to its biggest "customer." I first raised this concern over 20 years ago with Washington Mutual, which dominated the thrift industry and its regulator's budget. Both that thrift and its regulator are history.

Third, we expect more from the dominant industry player, especially in terms of fair lending.  Every big bank, especially those over $10 billion in assets, should have an outstanding CRA rating. We should expect no less from the largest credit unions.

Fourth, Navy Federal's 13 million members are mainly current and former military. Since roughly half are minorities, about 10% more than our population, fair lending must be a priority.

Credit unions are subject to fair lending laws but not CRA. Examiners evaluate and publicly rate bank lending and community development performance. This hopefully ensures banks are serving their entire community, including low- and moderate-income areas and households.

Politics and policy

Senate Democrats ask regulators to probe Navy Federal

Navy Federal, the nation's largest credit union, is facing a lawsuit about its allegedly discriminatory mortgage lending practices.

By Claire Williams

January 12

Since about 60% of LMI households are minorities, CRA's focus on meeting LMI credit needs is important to fairly meeting minority credit needs.

CRA enhances fair lending compliance, but no CRA increases fair lending risk. Just ask Navy Federal.

Although CRA exams happen every three years, bank CRA officers, analysts, directors and outside consultants continuously monitor CRA performance, usually quarterly but often monthly. They adjust marketing, mortgage broker contacts, special loan programs and other activities to help ensure LMI households and small businesses are fairly served. About 98% of banks have satisfactory or better CRA performance

Had Navy Federal been subject to CRA, it would have likely reversed its disastrous course into the fair lending iceberg by identifying and correcting its serious disparity gap before it was reported to HMDA or reported by CNN.

Congressional, administration and community group critics of the banking industry have piled on excessive and unfair regulations like the new CRA final rule. They should instead be leveling the regulatory playing field with CRA, federal taxes and annual reporting of  branch deposits by credit unions.

We don't need AWS Next Gen Stats to predict this probably won't happen with the tremendous congressional support of credit unions, especially with the merger of its two main trade groups.

There are, however, some partial legislative and regulatory solutions. 

First, is Senator Warren's previously proposed "CRA lite" bill. Her home state of Massachusetts' CRA law covering credit unions reports the percentage of outstanding-rated banks is 2.5 times that for credit unions. This suggests their state-chartered banks are doing a much better job serving their LMI communities.

Second, at a minimum, CRA should be imposed on the largest credit unions, starting with those with assets over $10 billion covered by the CFPB. This would impact just 22 credit unions, 1% by number, with 25% of industry assets. The burden of the CRA final rule is on banks over $600 million but mostly on the 132 banks over $10 billion, 3% by number, with 88% of industry assets. So, why not level the playing field for the biggest players?

Third, CRA outstanding community development guidelines should be imposed on any credit union, regardless of size, that has purchased a bank and eliminated their CRA coverage. Why should those former bank customers potentially be at higher fair lending risk? These guidelines would require 1% of purchased bank assets as community development loans, another 1% as community development investments and one community development service per month per billion dollars of purchased bank assets.

Until there is a level playing field, all credit unions should follow three CRA self-regulating recommendations.

First, their boards should adopt a formal community reinvestment program. This would include appointing a CR officer and committee; providing director and officer CR education; delineating local assessment areas; assessing community credit needs; following the above community development guidelines; monitoring the final CRA rule and its legal challenge; and attending bank CRA webinars and conferences. To Navy Federal's credit, it recently had three representatives at the nation's largest CRA conference.

Second, credit unions should use published CRA exam procedures to conduct annual internal CRA audits — effectively mock CRA exams — with individual test and overall ratings. These should be compared not only to published performance evaluations of peer banks but also those of any purchased bank to hopefully show the same or better CRA performance at the resultant credit union.

Third, they should promote their CR programs to show how they are helping their entire community, including LMI areas and people. Their website should include CR program accomplishments and the equivalent of a CRA public file.

Until we have a level playing field, such credit union CRA self-regulation will not only help ensure service to their entire community but hopefully avoid another Navy Federal problem.