Banks: Make Credit Unions Subject to Community Reinvestment Act

Banking groups call for credit unions to be included in CRA regulations in comments on updated proposed rules.

As federal regulators rewrite rules governing the Community Reinvestment Act (CRA), the banking industry is renewing its call for the agencies to seek legislation that would subject credit unions to the CRA.

“Some credit unions have grown into regional and even national financial institutions that receive significant government benefits to serve LMI (Low-to-Moderate Income) individuals, yet they are not required to demonstrate through measurable standards that they are meeting their service obligations,” the American Bankers Association (ABA) and state banking associations said, in commenting on the proposed rules.

The Independent Community Bankers of America (ICBA) have adopted a similar position.

Background on the Issue

Congress enacted the reinvestment act in 1977 as part of an effort to push banks to meet the needs of their communities, including low- and moderate-income communities. Federal banking regulators enforce the law by conducting examinations. In 1995, the law was tailored in an effort to account for different sizes and business models.

The FDIC, the OCC and the Federal Reserve issued proposed updated rules for the CRA in May, after abandoning an OCC proposal that was issued by the Trump Administration. Comments on the proposed rules were due on August 5.

Credit Unions and the CRA

Credit unions never have been subject to the CRA and the NCUA is not a party to the rules. Regulators alone could not subject credit unions to the CRA; it would take congressional action to do so.

Credit union trade groups have consistently argued that credit unions should not be evaluated under the CRA, since credit unions were created to serve people of modest means. Further, they say field of membership rules would make it difficult for regulators conducting CRA evaluations.

Pushback from Banking Groups

Bankers don’t buy those arguments.

The ABA told the agencies that credit unions are targeting wealthy communities and serving wealthy consumers.

The banking association said that according to S&P Global, banks are much more likely to be located in at-risk communities than credit unions. In addition, the groups asserted that recent purchases of community banks by credit unions demonstrate the need for CRA expansion.

“Community banks pay taxes and comply with the Community Reinvestment Act, but once the transaction closes, the bank’s CRA obligations cease to exist and the acquiring credit union has no CRA responsibility to the community,” the ABA and its state affiliates noted. “This outcome is nonsensical.”

The ICBA made similar arguments.

Mickey Marshall, the trade group’s director of regulatory legal affairs, wrote that “relaxations” to field of membership restrictions and the member business lending cap exemption for low-income credit unions have made credit unions “functionally indistinguishable from commercial banks.”

He said further that growth-oriented credit unions are leveraging their tax-exempt status to “engage in a spree” of community bank purchases, adding that once the purchase is consummated, the financial institution is not subject to the CRA.

“In the absence of the transparency and regulatory obligations created by the CRA, it is foreseeable that the level of community reinvestment conducted by the combined institution will decrease,” Marshall contended.