NCUA Memo: Credit Unions Are Not Purchasing Banks at Fast Pace

Washington Credit Union Daily obtained memo under Freedom of Information Act

Despite the outcry by the banking community, credit unions are not purchasing banks at a quickening pace, according to a National Credit Union Administration memo obtained by Washington Credit Union Daily under the Freedom of Information Act.

“Bank transactions with credit unions are a small proportion of the overall consolidation occurring in the financial services marketplace,” Kelly Lay, the NCUA’s director of the Office of Examination and Insurance, wrote in a December 14 memo to agency Chairman Todd Harper.

Lay prepared the memo to Harper as part of the agency’s response to a request by House Financial Services Committee Vice Chairman Rep. French Hill, R-Ark. During a November hearing with banking regulators, Hill asked Harper for a report on credit unions purchasing banks. He said he had read a report that credit unions had purchased 16 banks during a recent year. He raised concern that such deals meant that tax-paying banks became tax-exempt credit unions.

In her memo, Lay reported that from 2011 to Sept. 30, 2023, the NCUA had approved 64 purchases of banks by credit unions. Of the 64 bank purchases by credit unions, 54 were made by federally insured, state-chartered credit unions, which have broader authority and flexibility in their field of membership rules. Since 2011, the NCUA and/or a state regulatory agency have denied four credit union purchases of banks and in nine other cases, the credit union involved withdrew its application.

To show that credit union purchases of banks was a small proportion of the total number of transactions, Lay noted that just during the first nine months of 2023 there had been 90 bank-to-bank purchases and 108 credit union-to-credit union mergers. The 64 purchases of banks by credit unions came between 2011 and September 30, 2023.

Banking trade groups have called for congressional hearings on bank purchases by credit unions, contending that credit unions can leverage their tax exemptions to offer better deals to banks than banks are able to offer. However, Lay’s memo says that credit unions are limited in the number and amount of purchases they can make because retained earnings are the only source of capital for credit unions.

Lay wrote that credit unions do not have access to the capital markets to fund aggressive growth. Her memo notes credit unions are subject to restrictions on growth and investment that do not apply to banks.

Lay’s memo also notes that purchases of banks by credit unions are subject to the appropriate credit union and bank regulators. When a credit union purchases a bank, it cannot purchase the bank’s charter. In such cases, the bank’s charter may be terminated. A federal credit union must confirm that the bank customers are within the credit union’s field of membership. Then former bank customers must become full members of the credit union.

In a credit union purchase of a bank, the former bank customers will continue to receive the services of a federally insured financial institution. A major difference of belonging to a credit union, according to Lay, is that credit union members may receive a different level of consumer financial protection than when they used a bank.

Unlike the federal banking agencies, the NCUA does not conduct separate periodic compliance examinations. The agency also does not assign a separate consumer compliance rating to credit unions. “Therefore, the former bank customers that are now credit union members may have less consumer financial protection oversight after the bank-to-credit union transaction,” Lay reported.

Lay indicates that the NCUA has been working steadily to increase its focus on consumer protection, adding that consumer compliance specialists will focus on those issues. She wrote that the NCUA’s 2024 budget contains funding to start developing a consumer compliance exam function for credit unions nearing $10 billion in assets.

Harper has been pushing the NCUA to increase its focus on consumer protection. Until earlier this year, the agency board was controlled by Republican members, who had been skeptical about such a need. With the confirmation of Democratic appointee Tanya Otsuka, Democrats now control the NCUA board. Otsuka has said she agrees with Harper’s focus on consumer protection.