Time to call credit unions' shield of legitimacy into question

A long time ago, at a publication far, far away, I used to cover the Commodity Futures Trading Commission. At the time, the agency — led by then-Chair Gary Gensler, now performing the same role at the Securities and Exchange Commission — was plowing through a raft of Dodd-Frank implementation rules, virtually all of which were aimed at gaining visibility into, and regulating, the swaps market.

Swaps gained notoriety after 2008 and were widely seen as a significant contributing factor to the financial crisis. The Dodd-Frank Act instructed the CFTC to bring that market to heel. Throughout that process, there was significant pushback from the companies that would be regulated under the new regime, and it tended to be phrased something like this: If you regulate this market, it will become more expensive for the poor farmer to hedge his wheat crop, for the coal miner to hedge against price fluctuations, for the businessman to hedge against unforeseen risks. The swaps market performs legitimate and critical functions in the market, and this quest to root out bad actors, the argument goes, will invariably harm the good guys more than it hurts the bad guys.

But then you look at statistics about the composition of the swaps market, and commodity swaps — the ones meant to save the poor farmer — are just a tiny portion of the overall market, and even within that market, almost all the trading volume is for energy commodities, not wheat. Also, there isn't much that you can hedge with a swap that you can't also hedge with futures contracts that have been around for 100 years, though perhaps not as simply. So in this argument, the farmer has become a shield of legitimacy — the good guy whose legitimate uses of swaps shields the speculator from greater scrutiny.

Once you get hip to that dynamic, you can't unsee it — and you end up seeing it everywhere. Sports teams need their cities to pay for a new stadium because if you don't it will hurt small-business owners; you can't regulate cryptocurrency because that would stifle innovation; my kids need a Nintendo Switch or else their eye-hand coordination will suffer and they will be forever uncool.

Mortgages

Navy Federal faces lawsuit, allegations of racial bias in mortgage lending

December 18, 2023 8:06 PM

I thought of this as I was reading about a lawsuit filed against Navy Federal Credit Union — the country's largest credit union, and one of which I am personally a member — alleging widespread discrimination against mortgage applicants of color. The suit was spurred by an investigation from CNN that found that more than half of Black mortgage applicants were denied while 75% of white applicants with similar credit profiles were approved. To be sure, there is more to know that is yet unknown about the underwriting practices at Navy Federal to determine whether wrongdoing took place — that's what courts are for. But it pokes a hole in the rationale behind why credit unions and banks are treated so differently from a regulatory perspective.

For example, credit unions are not subject to the Community Reinvestment Act because, as the logic goes, they are nonprofit entities that are by definition designed to improve credit access to their fields of membership. But if your field of membership is really broad or worded so as to be essentially nominal, then that rationale doesn't really make sense anymore. And there is some evidence, albeit dated, that credit unions lag behind banks in lending to low- and moderate-income borrowers — which would suggest that underserved communities might benefit from having credit unions get the same kick in the pants that their community bank peers will be subject to under the revamped CRA rules. 

That isn't to say that credit unions are bad or engaged in discrimination — the vast majority of credit unions are small and their fields of membership are meaningful deterrents. Credit unions are also subject to the same fair lending laws that everyone else has to obey. But it's starting to seem like the notion, codified in statute, that credit unions are ipso facto benevolent to our most vulnerable borrowers is in need of rethinking.