Mission Creep In Federal Credit Unions

Mission Creep In Federal Credit Unions

Credit unions are a cousin of more traditional banks, except they provide services to members who are generally part of a similar community. These institutions provide lower-cost financial services to members, and tend to be more community-oriented than their more traditional deposit-taking counterparts. They are also exempt from federal income tax and other lending regulations imposed on other banks.

Writing in The Wall Street Journal, Ryan Tracy documents the alarming expansion of the Pentagon Federal Credit Union (PenFed) in a “drive to 75” initiative to bring the union’s assets to $75 billion by 2025, compared to the current $23 billion.

In recent years, PenFed has revved up auto lending, become a national leader in home-equity loans, introduced new credit cards and boosted CD rates. It held down costs and invested online, leaving it with about 2,500 employees and 47 branches for 1.7 million members.

PenFed promised merger partners better service and rates for customers. A 2016 deal with Belvoir Federal Credit Union also included a combined $500,000 bonus to three Belvoir executives, records show. Afterward, some former Belvoir employees said PenFed rejected loans Belvoir would have approved and told them to stop baking cookies for customers.

PenFed denies it rejected viable loans and says it boosted membership as well as charitable donations at the Fort Belvoir military installation, part of philanthropy that this year will top 2% of 2017 earnings.

Some former PenFed employees described feeling overloaded. In January 2017, with five mergers pending, one compliance official emailed colleagues: “This is an operational risk.”

The limited scope of credit unions (as traditionally designed), makes them safer than other banks, justifying their lighter regulatory burden. However, such aggressive expansion indicates PenFed is beginning to look more like a traditional bank, engaging in a form of regulatory arbitrage. As Anat Admati, professor at Stanford University and co-author of The Bankers’ New Clothes tweeted on the matter:

I didn't find this helpful.This was helpful. Please let us know if you found this article helpful.
By |2018-08-02T13:46:32-07:00August 2nd, 2018|Blog, Financial Regulation|