Pixelated Public Policy | Bacon’s Rebellion
by Jim McCarthy
Citizens rely on its government agencies to deliver relevant services and decisions consistent with the welfare of the Commonwealth. It’s not always an easy task, and sometimes the results of these representative institutions are, well, confusing or pixelated.
On August 3, 2022, the State Corporation Commission (SCC) issued a Final order deny the Virginia Credit Union (VACU) authority to expand its scope of membership (FOM) to include members of the Medical Society of Virginia (MSV). The denial followed an initial approval three years earlier by the SCC’s Office of Financial Institutions. This action has been challenged for formal review by a group of seven independent community banks represented by the Virginia Bankers Association (VBA).
The petition for review was a proxy battle as part of a larger national political effort to curb the growth of credit unions. The national campaign alleged that credit unions were “outsizing” their expansion into new FOM areas by taking advantage of their income tax-exempt status as nonprofits to operate in geographic areas that community banks believed to be unique to their charters and purposes under state and federal laws.
A 2012 FDIC white paper examined the status of independent community banks noting a substantial decline in numbers from approximately 11,000 institutions to 7,830 in 1985 due to failures, mergers, and consolidations. The decline occurred at a time when larger and more aggressive commercial banks increased their investments in digital banking technology, for example, online and mobile applications, which decreased the need for traffic to a physical office. Virginia in 2020 had 59 such institutions.
The United States has more than 5,200 federally insured credit unions, including at least 315 with assets of more than $1 billion, according to the National Credit Union Administration. The Commonwealth is home to 116, including two of the largest in the country – the Navy Federal Credit Union ($112 billion in assets, 9 million members) and the Pentagon Federal Credit Union, widely known as PenFed (24, $8 billion in assets, 1.9 million members). The second largest is VACU, Virginia’s largest state-chartered credit union, with $3.7 billion in assets and 300,000 members.
While large commercial banks have thrived by attracting customers with powerful ad campaigns for their digital services, independent community banks and credit unions have continued to compete in local community-focused geographies. The distinction is that credit unions, historically, have been formed with a focus on groups of employees, such as the military, unions, teachers, government officials, etc.
Credit unions do not have customers but define their user participants as members who open accounts with a deposit of shares. Granted, not all of Virginia’s 11.9 million credit union members are resident or Virginians. The VACU website describes and lists membership criteria, including a scope of nine geographic jurisdictions; employees or retirees of any publicly funded college or university or any state agency; or employee or retiree of a county, city or town. The website lists several hundred organizations whose employees and retirees are eligible for membership and available to grandchildren of identified groups and organizations. Membership qualification seems virtually limitless and universal. To make its services more attractive, VACU also offers financial services to companies. Publicly, VBA banks mocked that VACU’s strategy was to recruit a statewide group of ‘highly educated and highly paid’ doctors and other healthcare professionals, taking business away from tax-paying banks with fewer assets than the credit union.
The opportunity to market to MSV’s 10,000 members, who are physicians and physician assistants, was apparently created by someone with deep ties to both organizations. Challenged by the VBA group, the SCC had to determine the merits of the claims under state law.
The statute – §6.2-1328. Broadening of the scope of membership — gives the SCC the responsibility “to encourage the formation of a separately chartered credit union”. Alternatively, if this is not possible, the SCC may authorize expansion of an existing credit union’s FOM unless such affirmative action would reveal “potential harm to another insured credit union or its members”. Tracking the rationale of the agency’s final order against the prohibitions of the law, as well as the nature of the litigants, leads to the pixelated public policy title.
No allegation or evidence has been presented by VBA Banks that VACU’s marketing strategy with MSV competes with or frustrates its plans or activities. VBA cited no “potential harm” to its business; VBA is also not “another insured credit union”. In a deft trick of statutory interpretation, the SCC found that VACU had the onus of demonstrating the feasibility of MSV forming its own credit union by moving the “practicability” test to VACU:
The Commission concludes that VACU failed in its obligation to demonstrate that “the formation of a separate credit union by [MSV] is not practicable or does not meet reasonable standards of safety and soundness before the Commission “may” allow MSV to be included in the scope of VACU membership. (p. 3 and 4, final order)
MSV’s communication to SCC that it had “neither the interest nor the practical ability to form its own credit union to provide the wide range of services currently available from Virginia CU” was overruled in favor of an expert witness presented by the VBA to the contrary. The expert proposed, without merit, that MSV could raise the several million dollars of capital required, in part, by a fundraising campaign involving Virginia hospitals. No rationale was given as to why Commonwealth hospitals might contribute to a fundraising campaign for MSV. This reasoning was supported by a finding that MSV did not conduct a survey to determine fundraising potential or “otherwise demonstrate that they would be unwilling to contribute to a fundraising campaign”. (p. 6, Final Order)
The record is clear that MSV did not seek permission from the SCC to form a credit union and acknowledged “we did not pursue the formation of a credit union and did not ask anyone to do a donation to such an enterprise”. (p. 6) After transferring the burden of demonstrating feasibility to VACU and finding MSV’s failure to undertake the initiative, CSC concluded that VACU’s request to extend its FOM should be denied and that all prospects of the 10,000 MSV members were moot. It is difficult to appreciate how the SCC’s decision encourages MSV to form a separately chartered credit union under the statutory provision “shall encourage the formation of a separately chartered credit union”. If, however, the Commission’s policy intent was to stunt the growth of a particular credit union and restrict its FOM as a threat to the competitive interests of banks, then it has succeeded.
According to VACU, the initial approval by the Board’s office “fully analyzed the specific criteria required by applicable state and federal laws” and approval was granted “primarily because … the MSV could [not] reasonable to establish and operate their own credit union. The polar opposites confirm that the CSC’s own views are somewhat at odds within the agency and with law and public policy.
No clear evidence is revealed in the record to support the fact that the public interest, as stated in the statute, faced “any potential harm” from VACU’s expansion application. The Final Order actually reveals in one final line the exact opposite: “We do not permit MSV to join the VACU membership field.” VACU made the request on behalf of MSV when MSV was clear about its intentions. If there was a winner, it was the VBA avoiding competition for depositors. Pavlovian conditioning seems to be a bad method to encourage economic entities to behave in the market.
Such pixelated public policy engenders little trust among citizens in the exercise of authority in the halls of power. Although the decision could be said to have affected only a few organizations and only 10,000 people, the public interest responsibility is much broader. This decision simply does not smell good.
Jim McCarthy is a former New York lawyer who lives in Virginia.