“Redlining” is the discriminatory practice of fencing off areas where banks avoided investing based on community demographics. This unfair practice increased following the Second World War as a large influx of minority veterans and their families sought to purchase homes and were denied, locking them into a vicious cycle of economic exclusion from the American dream. This banking practice also impacted the extension of business loans which are needed to sustain communities where these same veterans lived, worked, and played. This practice affects minority communities to this day.
Many credit unions were formed in these redlined communities to provide loans and financial services long denied by traditional banks. Plus, as member-owned cooperatives, credit unions return profits to members in the community instead of lining the pockets of distant bank shareholders. As a result, many credit unions carry a Low-Income Credit Union (LICU) designation which provides additional tools and resources that help build and sustain these underserved communities.
The National Credit Union Administration (NCUA) recently approved a technical correction to 12 USC § 701.34 (2), which now includes all military members in calculations to establish LICU designation. This change makes sense from a DEI perspective, as many military members earn 80% or less than the median family income for the metropolitan area where they live or national metropolitan area, whichever is greater. As expected, the bank lobby strongly opposes this correction and has threatened to sue to have it removed, therefore, excluding military inclusion in our nation’s economic recovery effort. I believe the banks are making a mistake. Worse, banks are being hypocritical given their recent efforts in weakening the Community Reinvestment Act (CRA) using the same standards of military inclusion.
Here is how:
In October of 2018, I was asked to review a white paper written by a member of the bank lobby seeking my reaction and public support for a banking proposal that sought to broaden definitions in the CRA, specifically 12 C.F.R §25.41(f).
Essentially, the bank proposal argued that bank branches operating on military installations should be presumed to satisfy all §25.41(f) geographic assessment area exemption requirements and that off-base military banks, such as USAA and First Command Bank, should likewise be exempt since they “predominantly” cater their financial offerings to the military community.
It also recommended that “military community” include everyone within “the arc of a military family’s career,” which lists all active duty military, inactive Reserve or National Guard, military retirees, veterans, dependents or former dependents. That is quite a list. Plus, underpinning the entire argument, the white paper highlighted the “unique financial challenges” and “low pay” for military families. Does any of this sound familiar?
Finally, the proposal recommended that bank regulators should preclude their examiners from requiring banks to identify the Low- and Middle-Income (LMI) military customers since the geographic assessment requirements in 12 C.F.R. §25.41(f) for any military bank would be satisfied. In other words, geographic area requirements no longer apply.
Each of these recommendations was adopted into the Office of Comptroller of the Currency’s final rule which becomes effective this October. Yet, there is much debate whether banks will use their newly weakened CRA restrictions to build and sustain disadvantaged communities or return to their prior practices.
I would like to give the bankers the benefit of the doubt. However, now that banks are twisting the same arguments against the credit union industry in an effort to exclude military members, this should alarm anyone who agreed with the banks original arguments. Plus, there are several fictions and assertions in the banker’s printed arguments that need to be addressed. Let’s set the record straight.
Last summer, ahead of any COVID-19 indications and subsequent economic shutdown, the Defense Credit Union Council was approached by one of its smaller-sized credit unions (<$500 million in assets) seeking to include military members serving overseas. It was proven that many members using an Army Post Office or Fleet Post Office were excluded from the LICU designation calculations. Yet, the existing regulation for LICU designation allowed geographically separated college students using campus mailing addresses to be counted. A disparity was identified.
In asking to include all military, this credit union was joined by many similarly sized credit unions seeking to serve even more of our nation’s historically disadvantaged communities. To this end, a bi-partisan letter (dated 2 August 2019) from the member credit union’s Congressional delegation was written in support of these objectives. DCUC continued to champion this issue in letters, meetings, and industry events well into the Spring of 2020. Altogether, these efforts culminated in the NCUA unanimously approving a technical change to the rule on May 8, 2020.
While the banks weaken protections in the Community Reinvestment Act, this administrative correction will benefit military members by allowing their credit unions to safely acquire more capital through federal grants and remove arbitrary lending caps. These changes allow credit unions to offer better rates on auto, home or even business loans which are tangible benefits that improve the quality of life for all members, especially those who may be financially struggling. This is why credit unions exist. Weakening the CRA does not guarantee the same results since banks use additional revenues to line shareholder pockets instead of reinvesting in the communities in which they are earned.
In fact, broadening LICU eligibility is designed to benefit the communities where our military members retire, obtain employment, and spend their hard-earned dollars. This is why many of our member credit unions, large and small, continue to reinvest in their community. Only a banker would see something nefarious in a financial institution wanting to help these developing communities. And only a banker would argue that size, not community served, should define what a credit union can do for its members. Hopefully the rest of the banking community is better than that. Yet, here we are.
Finally, this change also frees capital to invest in programs and technology that bolster military readiness, teaches military members to manage their finances and save, and protects military families from predatory lenders. Credit unions want their members to progress from savers to prudent borrowers, then from prudent borrowers to home and business owners. It is all part of the credit union difference.
Here’s one final point regarding military land leases since it was awkwardly mentioned in the banker’s article. Once again, the bank lobby is advocating for a proposed amendment in the FY2021 National Defense Authorization Act that would require the Department of Defense (DoD) to treat “for-profit” banks as “not-for-profit” institutions so banks can obtain the same no-cost land leases, as an ultimatum for banks remaining on installations. Yet, there are no restrictions on how banks would use these savings.
If DoD does not grant the banker’s wishes, then the legislation would require DoD to charge credit unions the same as banks under the guise of “equality.” Unless banks can increase their profit margin, they don’t care if there are no remaining financial institutions on the installation. Consequently, the military loses either way.
If banks want to be treated like credit unions, they need to start acting like not-for-profit credit unions. Equal treatment needs to focus on structure and ethos, not on increasing the bank’s profit sustainability. While there are other reasons why the banks’ proposal makes no sense, the fact remains—credit unions are about serving their members. That includes serving their communities. Regardless of banker attempts to block consumer access to credit unions, the Defense Credit Union Council, its member credit unions, along with the entire credit union industry will always put the needs of our members first.