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NCUA Board Member Tanya F. Otsuka’s Statement on the NCUA’s Final Interpretative Ruling and Policy Statement (IRPS) 13-1

February 2024
NCUA Board Member Tanya F. Otsuka’s Statement on the NCUA’s Final Interpretative Ruling and Policy Statement (IRPS) 13-1

As Prepared for Delivery on February 15, 2024

I want to step back and talk about why Congress directed Agencies to preserve and promote MDIs. During the 1980s and early 1990s, the savings and loan crisis dramatically reshaped the banking landscape. Almost 10 percent of banks failed or received government financial assistance. MDIs suffered from the same negative economic events as non-MDI banks, but due to their focus on historically marginalized and redlined communities, they did not have the same resources available to weather the crisis. And during the seven-year period between 1983 and 1989 the number of Black owned banks declined 22%, while the total number of banks in the U.S. declined by only around 10%.

When Congress responded by enacting the Financial Institution Reform, Recovery, and Enforcement Act (FIRREA) of 1989, it recognized that concerted efforts were needed to preserve MDIs because of their important roles serving historically underserved communities and the unique difficulties they face. FIRREA established several important goals, including to preserve the number of MDIs, preserve the minority character in cases of merger or acquisition, encourage the creation of new MDIs, and provide for training, technical assistance, and education programs.

While the savings and loan crisis is behind us, the underlying challenges faced by MDIs are still as relevant today as they were 30 years ago. MDIs also faced similar challenges and higher rates of failure in the 2008 financial crisis. From 2012 to 2021, the number of MDI credit unions dropped 38 percent. Like all credit unions, MDIs’ success and ability to thrive is connected to the economic stability of its community. If the community has fewer resources, less money for their share accounts, their credit union will have less resources, less money for loans, investment, innovation, and training. And, as we know, marginalized communities have fewer resources on average. The Federal Reserve Bank of St. Louis found Black families had about $958,000 less wealth, on average, compared with White families, while Hispanic families had about $1,011,000 less wealth, on average, than White families. Racial and ethnic wealth gaps have changed very little over the past few decades.

There is a lot of work to be done to close the racial wealth gap, but MDIs play an important role. One factor in creating and maintaining wealth is having access to safe, fair, and affordable financial services. Access to credit is what allows people to buy a car to get to work, own a home and build equity, or open a small business.

Yet sadly, racial disparities in lending still exist today across income levels.

  • Data show that non-MDI banks reject Black and Brown borrowers at a rate that is two times that of their White counterparts, even when they have the same credit profile.
  • 1 in 4 Black applicants from families making $100,000 or more a year had their credit applications denied or approved for less in 2022, compared with 10% of White households in the same bracket.
  • For Asian applicants with annual incomes below $50,000, 16.3 percent were denied a mortgage, compared with 11.3 percent of White applicants in that income bracket. This pattern continues across income levels, with high-income Asian applicants being 50 percent more likely to have their mortgage application denied than White applicants.

Capital access also remains a huge challenge for minority-owned small businesses.

  • 60% of Black business owners faced challenges obtaining capital.
  • Over a third of Latino business owners faced the same.
  • Business owners of color are more likely to struggle accessing startup funding, growth funding, and capital with affordable interest rates.
  • Among firms with gross receipts under $500,000, loan denial rates for minority firms were about three times higher, at 42 percent, compared to those of non-minority-owned firms, 16 percent.

A well supported system of MDI credit unions can help address these lending disparities. Black-owned banks approve a higher percentage of loans to Black applicants than other banks. It is likely the same is true for credit unions and I would like to see the NCUA do more research on these issues.

Closing the wealth gap and minimizing lending disparities doesn’t just benefit one group. Citibank conducted a study that found if we didn’t have a racial wealth gap it could have added up to $2.7 trillion in income available for consumption or investment. Even more, the study found that providing fair and equitable lending to Black entrepreneurs could have resulted in the creation of up to $13 trillion in estimated business revenue and potentially created 6.1 million jobs per year.

Providing an environment where MDIs can be successful is crucial to allowing MDI credit unions to support their communities. I appreciate that NCUA has increased staff hours allocated to MDIs under the Small Credit Union and MDI Support Program, adjusted its examination processes to recognize the distinctive business model of MDI credit unions, and hosted an MDI Awareness Month and an MDI Symposium. And I am encouraged that as the Chairman said MDIs continued to perform well and in 2022, MDIs reported $42.2 billion in loans outstanding, an $8 billion increase from the previous year. And I know the Vice Chair has been supportive of the formation of new credit unions – perhaps we will see continue to see interest in forming new MDI credit unions.

I support the revisions to the MDI Policy statement and appreciate the comments submitted during the rulemaking process. Some of the suggestions were outside the scope of the proposal, but I’d like to explore those ideas in other contexts. I have a few questions on some of these suggested changes.

One commenter recommended that data collection for self-certifying that a credit union is an MDI should be consistent across federal programs and encouraged the NCUA to collaborate with Treasury, the CDFI Fund, and other federal agencies to ensure data collection requirements are both consistent and feasible. Is this something we are currently considering?

One more question. How do we elevate and share success stories for other credit unions to learn from or replicate?

Thank you, I have no further questions.

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