Flood Waters Are Rising. Will Credit Unions Come To The Rescue?

The latest unemployment numbers are a stark reminder of the serious economic crisis that threatens credit union balance sheets as well as the country’s economy. Relief efforts have propped things up, and experts say the economy should recover quickly if there aren’t more shocks, but if we don’t address the gaping hole between what Americans owe and what they’ve been able to pay during the past year, more shocks are coming.

On his first day in office, President Biden signed an executive order extending the federal moratorium on evictions through the end of March. But the moratorium can’t be extended forever. Unless a better solution is found first, tens of millions of credit union members will be at risk of losing their homes. Credit unions need to be prepared.

Unfortunately, purpose, mission, and history apart, credit unions are not well-positioned to help. Cooperatives are not charities. Management and board members must protect capital and the other interests of the membership as a whole. And since the deal with the devil that is H.R. 1151, credit unions are subject to Prompt Corrective Action without the ability to raise new capital. Regardless of intent, desire, or crisis situation, their ability to assume and manage risk is limited.

If history is a guide, the greatest pain will be felt by those who already face the greatest challenges, but the cost won’t be paid by this group alone.

At the same time, Gallup research shows credit union members are suffering more from the pandemic than most other Americans. Trends suggest this differential will grow because the crisis has taken on a K shape. Things are improving for most upper income Americans, while the suffering of those of small and modest means, those bearing the brunt of the crisis, will increase when economic relief and the eviction moratorium end.

Credit unions need to be part of the solution. Their mission, along with political pressure from banks and consumer advocates, makes it imperative. As an industry, we need to come together and start thinking through options. Our ideas don’t have to be perfect, but they must recognize that people who have never missed a payment are facing economic ruin at the hands of a virus that is completely beyond their control. That’s not right.

One thing we can do now is frame the issue in simple terms on which I hope everyone can agree. For example:

1. This situation is unique. In unique situations, regular rules rarely work as intended and often make things worse. We need tools designed specifically to address this crisis.
2. Advocates of all stripes will be tempted to hijack emergency rule-making in the service of long-term goals. This can stall progress for months. No matter how good the long-term goals might be, we must work together to stay focused on THIS problem.
3. Perspectives vary greatly across the country on the pandemic, on its impact on physical and economic health, and on appropriate responses. We need to focus on our points of agreement to address this crisis together and worry about placing blame later.
4. There is no perfect solution. Every option will be expensive, every option will attract bad actors who will abuse the process, and every option will involve moral hazard. None of this justifies not acting.

Most people with a history of good credit before the pandemic will recover economically and honor their debt obligations moving forward. But for many Americans, it will be like saddling them with a huge payday loan if they also have to pay a year’s worth of past due balances, late fees, and compounding, punitive interest. Most will never be able to catch up.

If history is a guide, the greatest pain will be felt by those who face the greatest challenges, but the cost won’t be paid by this group alone. The Great Depression and the Great Recession showed us that when the direct impact is concentrated on the poorest Americans, economic recovery is slow and uncertain for everyone.

Today’s situation is like a catastrophic flood. When water is rising rapidly, people with boats voluntarily rescue those who are stuck on roofs. No one stops to check the victims wealth, race, employment status, credit rating, or even the degree to which they might be responsible for their own situation. Instead, everyone focuses on saving lives.

Credit unions have boats. The question is whether we can chart a course to use those boats effectively. Will we get stuck in the bankers paradigm, applying punitive rules to protect capital and calm frightened examiners? Or, can we blaze a different path that recognizes and builds on the unique strengths of member-owned cooperatives?

We all share the health impacts of the pandemic. If credit unions can come together to advocate for sharing the economic pain as well, it will not only be fairer but also cheaper for credit union members and our entire economy. It will show what differentiates financial cooperatives from for-profit banks and secure credit unions relevance in the American financial system. And, it’s the right thing to do.