Todd M. Harper, Chairman of the National Credit Union Administration at Brookings. Abhey Singh Guram, Beloit College, Intern.
At the heart of the discussion was the role of credit unions in serving specific communities, with Harper acknowledging and highlighting the unique and diverse nature of credit union membership. These range from employer-focused credit unions to those with multiple membership common bonds. At the event, a special focus was placed on minority depository institutions (MDIs). These common bond connections (typically based either on employment or community ties) shape the outlook of credit unions. This requires credit unions have flexibility in their approach to lending and membership eligibility. There focus on community-centric banking models highlights the unique role credit unions can play in addressing the special needs of minority entrepreneurs and businesses.
During his address, Harper highlighted a few unique statistics, MDIs may have experienced higher delinquency rates due to their commitment to relationship banking, but they had lower charge-off rates compared to larger institutions. This indicates that their personalised approach to lending, which includes assisting members facing financial challenges, ultimately leads to more favourable outcomes for both the institution and its members. Harper also highlighted credit union's strong return on average assets, which rivals that of many billion-dollar institutions. This shows that credit unions have an ability to compete and thrive in the new financial landscape.
Amid the discussions of community-focused credit unions, concerns were raised about fair lending practices and the need for robust regulatory oversight. Harper called attention to the importance of improving fair lending programs to protect borrowers and to ensure equal access to credit. This emphasis on fairness and transparency underscores the regulatory mandate to uphold consumer protection standards and maintain the integrity of the financial system. This part of the discussion is even more relevant after CNN reported that “The nation’s largest credit union rejected more than half its Black conventional mortgage applicants,” Discrimination is a longstanding issue in the United States (and elsewhere). The Fair Housing Act of 1968 started to address housing finance discrimination. Even the Civil Rights Act of 1964, which banned racial discrimination in some industries, ignored banking, according to Urban Wire.
The conversation delved into the impact of macro economic factors like high-interest rate environments and liquidity constraints. Harper addressed the need for credit unions to proactively manage credit risks, especially in the face of economic uncertainty. This emphasis on risk management reflects the imperative for credit unions to navigate changing market conditions while safeguarding the interests of their members.
The central liquidity facility plays a vital role in providing essential funding during times of crisis. Harper outlined the criteria for credit unions' participation in liquidity facilities, emphasizing the importance of access to multiple sources of liquidity to ensure financial stability. This focus on liquidity management underscores the critical role that regulatory institutions play in safeguarding and maintaining the resilience of the financial system.
The conversation also touched upon the potential impact of artificial intelligence (AI) on credit union operations and on their lending practices. While Harper acknowledged the promise of AI in enhancing efficiency and decision-making, he emphasized the need for transparency and accountability in AI-driven processes. This recognition of the dual nature of AI—offering both opportunities and risks—underscores the importance of responsible innovation in the financial sector. AI has been known to be biased and this bias disproportionately harms communities that are already marginalized and face discrimination.
In conclusion, the discussion provided valuable insights into the challenges and opportunities facing credit unions in today's environment. From community-focused operations to regulatory oversight and technological innovation, credit unions must navigate a complex landscape while upholding the principles of fairness, transparency, and financial stability. As the financial sector continues to evolve, regulatory institutions must remain vigilant, adapting to emerging trends and ensuring the resilience of the credit union system.
In this era of rapid change, the success of credit unions hinges on their ability to navigate the currents of change while staying true to their core mission of serving their members and communities. With efficient oversight and a commitment to sound governance, credit unions can weather the storms ahead and emerge stronger and more resilient than ever before.
Sources:
Brookings Institution. "A conversation with National Credit Union Administration Chairman Todd M. Harper" YouTube video. Uploaded by Brookings Institution, February 6, 2024. https://www.youtube.com/watch?v=yC1BihKeDjY.
Ohlheiser, A.W. "AI automated discrimination. Here’s how to spot it. The next generation of AI comes with a familiar bias problem." Vox, June 14, 2023. https://www.vox.com/technology/23738987/racism-ai-automated-bias-discrimination-algorithm.
Tolan, Casey, Audrey Ash, and Rene Marsh. "The nation’s largest credit union rejected more than half its Black conventional mortgage applicants." CNN, December 14, 2023. https://www.cnn.com/2023/12/14/business/navy-federal-credit-union-black-applicants-invs/index.html.
Zinn, Amalie, Michael Neal, and Vanessa G. Perry. "Building Trust in the Financial System Is Key to Closing the Racial Wealth Gap." Urban Wire. June 15, 2023. https://www.urban.org/urban-wire/building-trust-financial-system-key-closing-racial-wealth-gap