Philadelphia Fed Finds Credit Unions Have Mixed Record of Serving Low-Income Households in Region

While banks' assets in the three-state area grew 40% from 2004 to 2024 adjusted for inflation, assets at credit unions grew 87%, driven largely by the expansion of large credit unions. And credit union loan portfolios more than doubled (+123%) over the 20 years.

“Credit unions have emerged as a key source of consumer finance,” Lei wrote. “While their deposits and total assets represented only about 1/10th of those held by banks and thrifts, credit unions have emerged as a key source of consumer finance — especially in real estate, auto lending — and, more recently, commercial lending markets.”

Credit union loans in the area at the end of 2024 included 33% first mortgages, 15% other residential real estate, 30% auto loans, 10% personal loans and credit cards and 8.5% commercial loans.

Credit union growth outpaced banks of all sizes in major lending sectors:

• Residential real estate lending rose 44.7% from 2017 to 2024 among credit unions in the region, while rising 5.6% among banks.
• Auto lending rose 134% among credit unions from 2011 to 2024, and 149% among banks.
• Credit card lending rose 11% among credit unions from 2011 to 2024, and fell 56% among banks.
• Commercial lending rose 132% among credit unions from 2017 to 2024, and grew 4.2% among banks.

Credit union gains in commercial lending were spurred by changes in regulations in 2017 that lifted limits on nonmember business loans, eased collateral requirements and eliminated the requirement for full personal guarantees by borrowers.

“They have broadened their presence beyond their traditional markets of real estate and auto lending into sectors in which they historically haven’t specialized,” Lei wrote. “As credit unions continue to grow and evolve beyond their traditional niche their expanding role in shaping access to credit and financial services warrants closer attention.”

The three-state area’s 451 credit unions include 211 with a Low-Income Credit Union (LICU) designation. Lei said these credit unions are specifically designated to serve low-income communities, but data showing their progress is “inconclusive, partly because of insufficient data.”

Two areas where Lei measured banks' and credit unions' service to low-income people was in their branch deployments and their home loan originations and denial rates.

Credit unions looked best in branching. Lei used S&P Global Market Intelligence data that showed branches in the area (including those of institutions based outside the area) fell from 1,400 in 2011 to 1,219 in 2024 (-13%), while falling 28% to 4,655 for banks.

Credit unions had 27% of their branches in low- and moderate-income (LMI) census tracts in 2024, down from about 29% in 2011, compared with 21% for banks in 2024 and a similar proportion in 2011.

Lei said banks’ relatively stable presence in low-income areas over the past decade suggests “they were closing similar shares of branches in LMI and non-LMI neighborhoods, which may be partially attributed to Community Reinvestment Act (CRA) requirements that ensure banks (but not credit unions) are not neglecting LMI neighborhoods.”

Credit unions compared less favorably to banks using Lei’s measures from Home Mortgage Disclosure Act (HMDA) data.

Lei compared credit unions with small banks — those with less than $1 billion in assets.

He found credit unions deny a higher proportion of mortgage applications than small banks across census tracts of all income levels, but especially for those in low-income tracts. In 2023, credit unions rejected 27% of purchase mortgage applications in low-income tracts, compared with only 8% for small banks.

Neither low borrower income nor high requested amounts explained the difference.

“To the contrary,” he wrote, “applicants served by credit unions in LMI tracts tended to have slightly higher incomes than served by small banks across tract types (except in 2023), and they were also applying for similarly sized or slightly smaller loans in LMI and middle-income areas.”

Lei said lower borrower creditworthiness might be a factor in credit unions’ higher denial rates. Another reason might be that credit unions were less likely than small banks to originate government-insured mortgages — such as FHA or VA loans — in LMI neighborhoods. However, they originated similar or higher shares of such loans in higher-income areas.

That skittishness might in turn be explained in part by credit unions keeping a much higher portion of their originations on their balance sheets than banks, Lei wrote.

Contact Jim DuPlessis at Jim.DuPlessis@arc-network.com.