Citadel redlining case shows credit unions should be under CRA

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The signature federal law designed to promote economic opportunity for people and places formerly excluded from the financial system has a glaring hole. Regulators and lawmakers have fresh reason to close that hole, in the form of the Department of Justice's latest settlement of a redlining case.

Citadel Federal Credit Union recently agreed to spend $6.5 million to resolve DOJ redlining allegations. While Citadel maintains its innocence, the DOJ's filings in the case offered troubling evidence that the credit union was systematically depriving Black customers in Philadelphia of mortgage capital and branch banking services from 2017 to 2021.

It is harder for a traditional bank to get away with this stuff. Such failures and business practices are commonly uncovered in traditional banking through federal Community Reinvestment Act examinations, as in the case of Luther Burbank Savings. Every few years, federal CRA examiners descend on a bank's books, scrutinizing them for indications of compliance or noncompliance with the CRA rules that prohibit such practices and drive capital into underserved places. This functionally reinforces other key civil rights protections including fair lending laws like the Equal Credit Opportunity Act, or ECOA, as CRA examinations bring rigorous oversight of their lending to underserved people.

So how did Citadel manage to carry on like this for five years? How did a deposit-holding institution in the Philadelphia area effectively wall Black and Latino borrowers out of its offerings for so long, yet find itself able to resolve the matter for the modest price of $6.5 million?

Because credit unions don't have to care about CRA. The law written to right the economic wrongs of 20th century racism doesn't cover credit unions. Cases like Citadel's are a stark demonstration that we need to strengthen fair lending protections for credit union customers under ECOA, but the case's implications for CRA reform are perhaps less obvious. Applying CRA to credit unions will inherently strengthen both monitoring and enforcement, as their business practices in underserved communities face new transparency.

You can imagine why the carve-out would have made sense to lawmakers in the 1970s. But in 2024 it looks like a dangerous mistake. Credit unions made almost 18% of all mortgages in 2023 and about 20% of refinancing and cash-out refi loans, up from pre-pandemic levels of 8% and 7%, respectively. Credit unions made $761 billion in loans in the fourth quarter of 2022, more than twice their level in the final months of 2012. 

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Their footprint among depositories has radically expanded, too: A sector that held a hair over $1 trillion in deposits in 2012 was carrying nearly $2.2 trillion at the end of 2022. Those vastly larger deposits are also far more concentrated, as the number of credit unions in operation fell from almost 7,000 to well under 5,000 over that same decade. 

Set numbers aside in favor of business practices, and the picture looks quite similar. The specialty nature of credit unions is less and less real: Attesting in writing that you are passionate about space exploration is all it takes to open an account with the NASA Federal Credit Union, for example. Credit unions are even buying traditional banks now.

Credit union business offerings today look a whole lot like those of traditional banks, except in the credit card business where they are subject to sensible rate caps that don't apply to banks. It is an expansionist sector whose most significant members aggressively market their services nationwide, utilizing the same modern technologies that banks use to extend profitable credit far from the places where they have physical branches.

Redlining activities, such as those the DOJ alleged at Citadel, violate ECOA rather than CRA, since the latter looks at income instead of at race (a deficiency in CRA that I and others urge regulators to correct). But the two enforcement systems complement one another in important ways. While not a perfect universal detection system, extending CRA to cover credit unions would both improve oversight and drive new capital into neglected communities as the firms move into compliance with the law's requirements. 

Citadel's CEO described the settlement as "a vital opportunity to enhance our commitment to proactive community engagement." That commitment is voluntary, at present. But bringing credit unions under CRA would ensure that they face an affirmative and binding obligation to those same people and places — instead of leaving communities to depend upon the goodness of executives' hearts.

If credit unions want to operate like banks, then they should be regulated like banks. If the rationale for omitting deposit-takers from CRA was that they were not designed to serve whole communities, then the fact that they now do serve vast nonspecialized audiences means it's time to bring them into the tent.