Capital Corner: Consumer Criticism Puts Credit Unions in the Hot Seat

Thanks to a flurry of critical news coverage, the image of credit unions being a pro-consumer beacon is being questioned on Capitol Hill and in DC regulatory agencies. The question: is this a tectonic political shift, or temporary criticism that will dissipate in a short period of time.

It’s well known that Navy Federal Credit Union has been in the headlines, and now, for the first time in decades, Members of Congress are saying this is the time to consider putting new lending requirements on credit unions. At a June House Financial Services Committee hearing with Consumer Financial Protection Bureau Director Rohit Chopra, Congressman Emanuel Cleaver (D-MO) raised the issue of alleged lending discrimination by Navy Federal Credit Union and asked for Chopra’s views on applying a “similar process to CRA that would be used in credit unions like Navy Federal.”

Two weeks later, at another Committee hearing, Congressman Steven Horsford (D-NV), Chairman of the Congressional Black Caucus, raised the Navy Federal issue in the context of legislation he is working on: “I led a letter demanding answers to reporting that… there were potentially discriminatory lending practices” at Navy Federal. Horsford noted that he and Rep. Cleaver are drafting legislation to unearth additional information about credit union lending practices.

Credit union overdraft protection fees are under scrutiny by DC think tanks and, in the media, adding another layer of complexity to the political landscape facing the industry. In a series of tweets by Brookings Institution financial services fellow Aaron Klein, he has criticized what he terms “disproportionate” ODP fees by larger credit unions relative to those charged by banks.

Separately, in May several TV reports took aim at military credit unions for charging enlisted personnel excessive overdraft fees (without mentioning that, at $20 per occurrence the costs were still below financial industry averages). This bad press elicited a bipartisan letter from eight US Senate Banking Committee members in early June, spearheaded by Sen. Warren, that accused the credit union of “predatory overdraft practices.”

Taken together, these episodes point to a possible erosion of support for credit unions on Capitol Hill. In his exchange with CFPB Director Chopra, Rep. Cleaver, generally, a credit union ally over his 30-year career in Congress, said, “I’m very concerned about what's happening” on the credit union mortgage lending discrimination allegations.

A senior House Democratic staffer echoed the Congressman’s comments immediately following that hearing, noting that “there’s disappointment if not real anger about the charges being leveled at credit unions. Your image has been punctured,” while a Senate staffer who viewed the ODP tweets asked to be reminded “why exactly should credit unions receive special treatment when this happens.”

The next few months will be critical in determining how lasting and deep the damage is from these episodes. Legislation containing the CRA-like provisions for credit unions is unlikely to become law this Congress, although Senator Warren’s Senate sponsorship puts it in a category of extra concern given her prominent role in shaping financial services policy. Paralleling this could be ongoing regulatory restrictions on overdraft and other “junk” fees being contemplated by CFPB.

In other words, now is the time for extra vigilance in Washington, for the entire credit union system.