Confessions of a credit union executive turned community banker

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In the first six months of this year, 11 tax-exempt credit unions have bought commercial banks — matching the number of similar acquisitions that took place in all of 2023. The trend is having a damaging effect on the financial services industry, and I ought to know. As a former credit union executive-turned community banker, I've seen both sides of this dangerous game.

When I began my career at a $130 million credit union, I was astounded by the flexibility afforded within the credit union framework. While our product offerings were basic at first, upon obtaining a community charter, the credit union underwent a transformation, as the floodgates were opened for us to compete more aggressively with traditional banks. We diversified our offerings to include mortgage lending, indirect lending, in-house credit cards and an array of online banking services.

The pivotal moment came in 2008 when we ventured into commercial lending, quickly establishing ourselves as the seventh-largest credit union in Texas in terms of commercial lending portfolio within a span of three to five years. Our ability to offer lower rates, better terms and fewer fees facilitated our rapid growth, enabling us to extend commercial loans beyond our traditional market boundaries. Transitioning to a state charter from a federal one further expanded our opportunities for growth, as did obtaining a low-income designation, which provided us with higher variances on certain regulatory limits related to lending.

In other words, credit unions like mine were allowed to utilize our tax-exempt status to undercut the competition and weaken the product diversity of tax-paying entities. We weakened community banks and their capacity to meet the credit needs of our communities, utilizing every loophole the government provided us to do so. Now, capitalizing on that weakness and further exploiting their tax exemption to outbid other acquirers, credit unions are gobbling up banks at a record pace.

Some might view this trend positively, arguing that government-subsidized "nonprofit" entities are purer in their practices and motives than profit-driven institutions. However, it is essential to scrutinize the nonprofit status of many credit unions. The nonprofit status of credit unions no longer supports the mission of providing low-cost credit to individuals of modest means. Rather, the status allows credit unions to spend lavishly on technology, facilities, executive compensation and naming rights of sporting facilities. This comes at the cost of profits which could be returned to credit union members. Further, some credit unions now provide compensation for their board members, in direct contrast to the volunteer model of governance which is standard for most nonprofit organizations.

Hiding beneath the surface of this issue a harsh truth: Credit unions lack the ability to effectively underwrite and monitor credit risk in commercial lending at scale. In 2016, regulators lowered commercial underwriting standards to allow for credit unions to grow in commercial lending. Just a few months before the COVID-19 pandemic, American Banker asked, "Are credit union business loans poised for problems?" Then-vice chair of the Credit Union National Association Lending Council, Ray Lindley, admitted that credit unions' commercial underwriting had never been tested by a natural economic cycle. Credit unions dodged the bullet of scrutiny and exposure of their weaknesses with the massive influx of liquidity and restructuring of loans during the pandemic era. Today, credit unions have more than doubled their commercial loans from 2019, currently holding $160 billion as of the first quarter of 2024, according to the National Credit Union Administration.

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In almost any market, you'll find credit unions making loans that no other bank would make. They do so not out of benevolence, but because they lack expertise for effective commercial underwriting. When credit unions' commercial lending practices are eventually subjected to an organic credit cycle, there will be substantial losses and potential threats to credit union members.

We are at a critical moment. As credit unions emulate the practices of community banks, benefiting from the tax exemptions at the federal level and minimal taxes at the state level, the unfairness is on display for all to see. It's well past time to examine the regulatory frameworks to ensure parity and integrity within the financial services sector.

The adage "if it walks like a duck and quacks like a duck, it must be a duck" holds true for credit unions; if they emulate banks in their operations, product offerings and acquisition strategies, they effectively function as banks. So why aren't they regulated like banks? Or taxed like banks? It's time to end these absurd disparities.

Now is the time to restore credit unions to their intended niche. It's past time to shut down the scourge of credit unions buying banks. It's time to put credit unions back into their place before they do more harm to customers and communities.