It's a question that's been on the minds of financial service regulators, credit union executives, trade association leaders and even some credit union members over the past few months: Should credit unions define the term "modest means"?
As Paul Gentile pointed out in his very astute Aug. 23 column, the question has yet to receive a unanimous answer. While the NCUA has not said whether it favors a definition, Mr. Gentile noted that some in the credit union industry have already expressed support for defining the term. Meanwhile, Mr. Gentile himself listed numerous reasons why defining modest means is not appropriate.
Obviously, there's a lot to be considered. First and foremost is whether the credit union industry can demonstrate to Congress that it is carrying out its historic mission without having to come up with a definition that imposes additional limitations on how credit unions serve their members. After all, credit unions are already the most heavily regulated institutions in the financial services industry, with restrictions on field of membership, capital and investments, to name just a few.
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NAFCU has spent many months seriously contemplating these and other questions, carefully considering how credit unions can best demonstrate their service. But from the beginning, we have remained steadfast against the notion that "modest means" needs to be defined.
Many in the credit union industry seem to have overlooked that in passing the Credit Union Membership Access Act in 1998, Congress "found" that:
"(1) The American credit union movement began as a cooperative effort to serve the productive and provident needs of individuals of modest means…
(2) Credit unions continue to fulfill this public purpose…
(3) Credit unions…are exempt from Federal…taxes because they are member-owned, democratically operated, not-for profit organizations generally managed by volunteer boards of directors and because they have the specified mission of meeting the credit and savings needs of consumers, especially persons of modest means."
Looking back to the Federal Credit Union Act in 1934, Congress noted it was creating the credit union system "…to establish a further market for securities of the United States to make more available to people of small means credit for provident purposes through a national system of cooperative credit…" In my view, not too much has changed in the intervening 70-plus years.
In fact, NAFCU's analysis of the Federal Reserve's most recent Survey of Consumer Finances (SCF) shows that credit unions are serving their members well, including those on the lower end of the income scale. Credit union respondents tend to be younger, have lower net worth, fewer assets and higher debt than the overall SCF respondents. The higher debt levels for credit union members versus all respondents indicate that those lower-income members are getting access to credit at a greater rate than at other financial institutions.
Analysis of credit union respondents versus bank respondents reveals that credit union members have a lower mean age, have fewer assets and more savings. The median income for credit union members in the lowest quintile is 47% lower than for bank respondents. The credit union members in the remaining four quintiles all have median incomes at least 70% lower than bank respondents.
The SCF data show a similar trend with financial assets for credit union members, which are at least 66% lower than bank respondents and are as much as 90% lower. Credit union members do manage to save, however. Both their mean and median savings are higher than for bank respondents, indicating access to savings accounts and other savings products. This is especially important for the lower-income members.
When the NAFCU Board met with the Federal Reserve last December, as it has done so for 14 years now, we raised the issue of credit union service to members. For example, we noted that Home Mortgage Disclosure Act data indicate credit unions approve a higher percentage of real estate loans to low- and moderate-income borrowers compared to other financial institution lenders. We also noted that credit unions approve real estate loans that are smaller in size, and charge significantly less than other lenders, not only with respect to all mortgage approvals, but also with respect to mortgage applicants with incomes of less than $40,000 and those of minority status.
We recognize that the SCF and the HMDA data are subject to interpretation and are not the only yardsticks for measuring credit union service. Nonetheless, the point is, there are already some pretty clear indicators available to prove that credit unions are fulfilling their historic mission. Perhaps some in our industry feel that we can't provide meaningful data until we first define modest means, but NAFCU does not see it that way. While a person's income level is certainly one factor that could be used in judging credit union service, it cannot be the only one. More qualitative, socioeconomic factors, such as debt level, financial and non-financial assets, net worth, number of dependents, age, level of financial literacy, debt management skills, job-skill set, etc., are all factors that are independent of income, but nevertheless significantly impact one's financial status. It is also important to note that by the nature of the credit union industry, every credit union is different, with field of membership restrictions that limit their ability to provide financial services to the American public.
For these reasons, there is simply no basis or reason to define modest means. The credit union industry should not be pigeonholed anymore than any other segment of the financial services industry. Imposing a specific definition of modest means on credit unions would severely undermine the cooperative structure that Congress created, with credit unions forced into showing favoritism toward one group of members over another. That's not what credit unions are about. We need to stop worrying about the technical specifics of modest means and just do what we do best–provide all of our membership outstanding financial products and services.
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