The credit union issues that defined the decade

December 31, 2019 5:00 AM

The 2010s were a historic time for credit unions, with more Americans than ever counting themselves as members. But that higher profile came at a cost. The industry has shrunk by roughly one-third since the start of the decade and attacks from the for-profit banking sector now come at a fever pitch and on a variety of issues. Industry leaders continue to say the movement's DNA hasn't changed, but plenty of other things have, with more changes to come in 2020 and beyond.

It's difficult to narrow 10 years worth of news to just a handful of topics, but the following represent some of the biggest trends that shaped the credit union industry over the past decade.

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More members, fewer CUs

The past decade was marked by historic growth and consolidation within the industry. Credit unions served 119.6 million members at the end of Q3 2019, according to the most recent data available from the National Credit Union Administration, a 33% increase from Dec. 31, 2009. Some of that growth was fueled by the aftereffects of the Great Recession and lingering consumer resentment against big banks. That was what drove Kristen Christian, a Los Angeles-based artist, to launch Bank Transfer Day, a 2011 movement that attempted to spur consumers to switch their banking relationships to credit unions. The movement latched on to that and for many months after ran with the phrase “make every day Bank Transfer Day” as an industrywide tag line. Despite the hubbub surrounding it, Bank Transfer Day was only a temporary boost to membership, and for many institutions the influx of new blood was a reminder that getting consumers in the door is actually the easy part. The harder part is keeping them around and turning them into profitable members with a deep relationship at the credit union.

As membership rose throughout the decade, the number of institutions fell by a similar margin, from 7,554 federally insured credit unions at the end of 2009 to just 5,281 at the end of Q3 – a 30% drop. The early years of the decade were marked by a high rate of conservatorships and involuntary liquidations, and while some credit unions were able to work their way out of conservatorship, many were ultimately closed and merged into larger institutions. Plenty of other CUs merged before things got bad enough to necessitate regulators getting involved. In most cases, the credit unions closing their doors were on the smaller end of the asset range and had limited fields of membership – often serving only one SEG – and those changes over the course of the decade exacerbated “the great divide” between large and small CUs, with bigger shops growing and making money while small and mid-size credit unions struggled to boost membership and turn a profit.

Corporate crisis hangover

Credit unions entered the 2010s reeling from the financial crisis and the Great Recession. While the industry had not engaged in many of the practices that led to the crisis, it was still heavily affected by them. One of the biggest impacts was on corporate credit unions, many of which had purchased faulty mortgage-backed securities. As a result of that, some of the corporates were liquidated while others merged, and the National Credit Union Administration was forced to take out a multibillion-dollar line of credit from the U.S. Treasury in order to prop up the remaining corporates and prevent massive losses to the National Credit Union Share Insurance Fund. As a result, the Temporary Corporate Credit Union Stabilization Fund was established, and CUs spent years paying additional assessments to keep the fund afloat.

NCUA spent the intervening years pursuing litigation against some of the world’s largest banks, and successfully recovered several billion dollars from the likes of RBS and Goldman Sachs. However, the agency also racked up legal bills exceeding $1 billion, which drew criticism from credit unions and lawmakers.

By the end of the decade the Treasury line of credit had been repaid and the stabilization fund merged into the share insurance fund, which resulted in a dividend to credit unions totaling well over $700 million. Many CUs received a hefty rebate, but some industry figures have argued that rebates aren’t enough and that credit unions should be paid back all of what they paid in to the stabilization fund. NCUA pushed back against those claims and no further payouts are expected.

CFPB and RBC

The decade kicked off with uncertainty surrounding how credit unions would be impacted by the newly enacted Dodd-Frank Act. Early on there were major fears that profitability would be undercut by a reduction in interchange as a result of the Durbin Amendment, but that struggle eventually shifted to a wider conflict as the industry fought the Consumer Financial Protection Bureau and its inaugural director, Richard Cordray. The industry spent much of the decade railing against the bureau’s refusal to exempt credit unions from its oversight, despite the fact that only a few CUs are large enough to pass the $10 billion-asset threshold for CFPB supervision. Credit unions, the argument went, were the original consumer protectors, and they don’t need government to tell them how to look out for regular people. But with President Trump’s election and a shift in leadership at the bureau, much of that animosity dried up. While there have been concerns in recent years about how CUs will be impacted by various CFPB rules – particularly those related to small-dollar lending – the fight is now focused on the bureau’s leadership structure and pushing for a bipartisan commission rather than a single director installed by the president. The Supreme Court is expected to take up that matter in March.

Part of what moved credit unions’ ire away from the CFPB was a controversial risk-based capital rule first introduced in 2014. The original proposal garnered an historic level of complaints from the industry as thousands of letters poured into NCUA’s headquarters from credit unions, industry groups and lawmakers. The result was enough to prompt a rare walk-back from the regulator, which ultimately reissued the proposal, restructuring the capital standard so its impact would be lessened. The rule was ultimately approved, though it has yet to take effect. In late 2019 the NCUA board once again voted to delay implementation, kicking the can down the road to Jan. 1, 2022, three years after it was originally slated to take effect. The board aims to use that extra time to rework wider capital rules for the industry.

Medallion loans and concentration risk

While credit unions faced plenty of changes during the decade, one of the biggest disruptors came from outside the financial services industry entirely.

The rise of ride-hailing services such as Uber and Lyft didn’t kill the taxi industry but helped – along with many other factors – reduce the use of cabs in several major metropolitan areas, including New York City. And with fewer cab fares, that meant taxi drivers began struggling to pay the bills on their taxi medallion loans. That led to rising delinquencies at many of the credit unions that wrote those loans, some of which were ultimately liquidated while others were merged out with the assistance of regulators.

Those closures had a significant impact on the National Credit Union Share Insurance Fund but also raised concerns about concentration risk at credit unions and how the industry handled medallion loans. NCUA board member Todd Harper used the taxi medallion scandal as an example earlier this year when suggesting the regulator’s focus on risk-based capital could pose a threat to the share insurance fund by ignoring other areas of concentration risk. He subsequently pledged to put forth new rules on that topic in 2020.

NCUA

The National Credit Union Administration board has seen plenty of controversy over the last decade. Along with the negative reaction to the risk-based capital rule, personal tensions have also at times engulfed the board. Not long after board member Mark McWatters joined the panel, he and Chairman Debbie Matz had a series of clashes, with the junior board member a one point openly criticizing Matz’s leadership style before an industry group, suggesting that under her leadership the agency was treating CUs like "Victorian era children — speak when you're spoken to and otherwise mind your manners and go off with your nanny.” Not surprisingly, Matz hit back at that, claiming McWatters should “[step] down from his ivory tower.” Both insisted they shared a cordial relationship and any disagreements were professional rather than personal.

Roughly a year after the height of those tensions, Matz – her term already expired – elected to leave the board before a successor was confirmed. At the time of her departure President Obama had nominated John A. Herrera, SVP for Hispanic/Latino affairs at North Carolina’s Self-Help Credit Union, but with the 2016 presidential election underway at that point, the Republican-led Senate never acted on Herrera's nomination.

Within days of President Trump taking office, McWatters was elevated to acting chairman and later chairman, working alongside board member Rick Metsger, who had taken over as chairman after Matz’s departure. But that still left an empty seat on the panel – later two when Metsger’s term expired – and Trump didn’t move to nominate any new board members until nearly two years into his term. Metsger and McWatters worked together affably, and the latter called their partnership a model for bipartisanship amid a divided government. But some have suggested that with the agency down by one board member and the pair working from differing political parties, there was only so many policies they could move forward without a third vote to break any potential deadlock.

The board returned to full strength this spring and quickly moved ahead with a plan to postpone implementation of risk-based capital and rethink wider capital rules. Guidance for credit unions buying banks is also in the works. But Todd Harper, the junior board member and lone Democrat, has clashed with McWatters and Chairman Rodney Hood on a number of issues already, indicating the board could have another bumpy road ahead.

Charter changes

As the industry consolidated, more often than not the credit unions that closed their doors were ones with more limited fields of membership, serving one or a few select employee groups, such as newspapers, police, church or others.

At the same time, one of the decade’s biggest growth strategies was a simple charter expansion, as CUs either widened their SEG base or, more often, converted to a community charter. As credit unions that focused on taxi medallion lending closed their doors, a few CUs even acquired rare open charters, offering a national footprint that allows anyone nationwide to join.

Amid all this, a host of states – including Michigan, Kansas and Washington – updated their credit union statutes during the decade in a bid to increase parity with federally chartered institutions and make state-chartered shops more competitive. As a result, state charters held nearly half of all industry assets by mid-2019, with state charters growing faster than FCUs by some metrics. NCUA has also undertaken moves to expand growth opportunities for credit unions, but the most high-profile one remains mired in a legal battle.

As noted, more than 2,000 credit unions closed up shop between 2010 and 2019, and it’s not unreasonable to expect total institutions will be under 5,000 by 2021. Many observers have suggested that number could be 3,000 or less by 2030.