Tax-exempt credit unions—which have seen significant growth in the years since the financial crisis—are increasingly “using their newfound financial heft to compete aggressively for business” against taxpaying banks, according to a Wall Street Journal article published today. As many larger credit unions have grown in scale, they have engaged in higher-risk forms of lending while loosening the common bond requirements and even purchasing taxpaying banks, the article noted.
“They are making lots of loans with high-risk features,” said Federal Financial Analytics’ Karen Shaw Petrou, who was interviewed for the story and who previously conducted an ABA-commissioned study of the credit union industry that found that credit unions have fallen short of their statutory mission to serve customers of small means. For example, credit unions have become particularly involved in auto lending in recent years—now accounting for nearly one-third of outstanding auto loans in the U.S.—and WSJ noted that a large share of these loans are for terms of six years or more, an indication that consumers may end up owing more than the vehicle is worth.
In addition to taking on more risk, WSJ pointed out that the National Credit Union Administration has repeatedly delayed a critical post-crisis rulemaking to set more stringent capital requirements for credit unions. The article noted that “economists and analysts are uneasy about how these bulked-up credit unions will fare in a recession. In another financial crisis, some could fail or shrink, stranding borrowers who prefer not to use banks. In a worst-case scenario, taxpayers could be saddled with the losses.”