How Correspondent Services May Help to Combat Barriers to Member Services?
The Consumer Financial Protection Bureau (CFPB) released two separate reports on June 21st documenting access issues and consumer finance issues in the southern states of the United States. The CFPB writes that the purpose of these Data Spotlights is “to identify gaps in branch presence and bank account access, and capital access such as mortgage lending and small business lending.” The following states are included and represented as the southern region: Alabama, Arkansas, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, and Tennessee. The first report highlights banking and credit access in the south. The second report focuses on consumer finance issues in rural southern communities. This compliance blog will discuss the report outlining banking and credit access issues in the southern region of the United States and how a federal credit union may open access to member services.
One of the leading causes of a decrease in banking access is the closure of brick-and-mortar branches. According to the report, this issue is more apparent in the southern region than any other region in the United States with the southern region having fewer branches per resident than other regions in the United States. The report highlights the connection between physical branch locations and the access to services such as tellers and ATMs. Even if there are branches within communities, the CFPB found that these branches are sometimes located on highways and in cities, making it harder for people to reach these points of service.
Compounding the issue of banking access is the barrier to establishing a bank account. The report raises concerns that barriers to establishing a bank account may also have residual consequences in access to credit. The report also lists insufficient funds to meet minimum balance requirements, distrust in financial institutions, privacy issues, and fees as other factors for why segments of the population do not have access to services.
Access to Credit
The CFPB reviewed 2021 Home Mortgage Disclosure Act (HMDA) data to examine mortgage origination within the region. Based on this data, the CFPB found several interesting points. 61 percent of loans are made by organizations (non-depositories) which are not banks or credit unions, with large banks coming in second. On the other hand, credit unions and the other depositories originated only 35 percent of loans in the 2021 data used for this analysis. Credit unions represent the largest share of “rural loans to minority-borrowers and low-to-moderate income neighborhoods, and just 12 percent of their rural home purchase loans in the region are government-backed.” Credit unions though do sell the fewest shares of their loans to the secondary market. The report also discusses small business lending and disparities relating to access to capital.
The next question is how can credit unions provide broader access to their member services. NCUA’s Rules and Regulations outlines how credit unions may use their incidental powers to combat barriers to member services and credit. A credit union may provide correspondent services to other credit unions as a part of a federal credit union’s incidental powers. Section 721.3(c) defines correspondent services as
services you provide to other credit unions including foreign credit unions that you are authorized to perform for your members or as part of your operation. These services may include loan processing, loan servicing, member check cashing services, disbursing share withdrawals and loan proceeds, cashing and selling money orders, performing internal audits, and automated teller machine deposit services.
NCUA Legal Opinion Letter 95-0805 maintains credit unions may have contractual agreements between each other to “aid” in providing services to their members. A credit union is permitted to offer services to another federal credit union that the corresponding credit union offers to its own members or as part of its operation. An example of correspondent services is shared branching which is generally a contractual relationship between credit unions.
In another example, credit unions may contract its lending department to another credit union under correspondent services. 12 CFR 721.3(c) permits a credit union under a credit union’s incidental powers to provide services to other credit unions.
These services may include loan processing, loan servicing, member check cashing services, disbursing share withdrawals and loan proceeds, cashing and selling money orders, performing internal audits, and automated teller machine deposit services.
However, loan origination is noticeably absent from the services a credit union may offer. NCUA Legal Opinion Letter 95-0805 maintains "[t]he originating credit union remains responsible for approving the mortgages processed by your credit union. Accordingly, the FCU may assist the smaller credit union process its mortgage loans." NCUA Legal Opinion Letter 09-1021 reiterates that processing and servicing mortgage loans are acceptable when the loan is funded and would close in the funding credit union’s name. A credit union, theoretically, may want to use the correspondent services of another federal credit union to supplement or augment a credit union’s existing services.
If a credit union is interested in learning more about correspondent services to expand member services, please do not hesitate to contact NAFCU’s compliance team at Compliance@nafcu.org