PHILADELPHIA — Credit unions play a growing role in providing financial services in low- and moderate-income communities, but their expanding presence has not consistently translated into stronger lending outcomes for those neighborhoods, with CUs making fewer mortgages in low-income markets than banks, according to a new study by the Federal Reserve Bank of Philadelphia.
The research, which examines credit unions operating in the Federal Reserve’s Third District, finds that credit unions have expanded significantly over the past two decades, increasing their share of consumer finance and broadening their activities beyond traditional auto and mortgage lending. The growth has been particularly notable in branch locations, with credit unions maintaining a stronger physical footprint in low- and moderate-income areas than many small bank, according to the study.
That branch presence suggests credit unions are positioned to support financial access in underserved communities, the study said. However, the data show mixed results when it comes to lending outcomes, particularly in the mortgage market.
Fewer Originations Than Banks
According to the analysis, credit unions originated a smaller share of home purchase mortgages in low- and moderate-income neighborhoods than small banks. The study also found that credit unions posted higher mortgage denial rates across income levels, raising questions about whether increased geographic access is translating into broader credit availability for lower-income households.
What the Data Show
The study found credit unions originate a smaller share of home purchase mortgages in low- and moderate-income (LMI) communities than small banks, despite having greater branch presence in those areas. Using HMDA first-lien purchase mortgage data from 2019 to 2023, researchers at the Federal Reserve Bank of Philadelphia reported that in 2023, 17.1% of credit union home purchase mortgage originations were in LMI census tracts, compared with 19.2% for small banks.
The gap was wider when measured by borrower income. In 2023, 19.4% of credit union mortgage originations went to LMI borrowers, compared with 30.5% for small banks, the study found.
According to the Philadelphia Fed, credit unions also posted significantly higher mortgage denial rates, particularly in LMI neighborhoods. In 2023, credit unions denied 26.6% of mortgage applications in LMI tracts, compared with an 8.0% denial rate at small banks. The researchers noted that credit unions’ denial rates were higher than those of small banks across all neighborhood income levels, not just LMI areas.
The study said observable borrower characteristics do not fully explain the disparity. Applicants seeking mortgages from credit unions in LMI tracts generally had slightly higher incomes than those applying to small banks, with a noted exception in 2023, and applied for similar or smaller loan amounts, the study’s authors reported.
The Product Mix
One contributing factor identified in the study was loan product mix. Credit unions were less likely to originate government-insured FHA or VA loans in LMI neighborhoods. In 2023, FHA and VA loans accounted for 11.0% of credit union mortgage originations in LMI tracts, compared with 14.1% at small banks. Among low-income designated credit unions, the FHA and VA share was 4.6%.
Low-income designated credit unions were more active in LMI mortgage lending than other credit unions, but the study found they still served a smaller share of LMI borrowers than small banks.
‘More Complex Picture’
Researchers emphasized that the findings do not suggest credit unions are retreating from underserved communities. Instead, they highlight a more complex picture in which proximity and membership growth do not always align with lending activity, especially for larger, long-term credit products.
The study also notes that credit unions’ cooperative structure and exemption from certain taxes continue to fuel debate over their role in promoting financial inclusion, as policymakers and regulators examine how different types of financial institutions serve low-income consumers.
The Philadelphia Fed said the research is intended to inform ongoing discussions about access to credit and the effectiveness of community-based financial institutions, particularly as credit unions continue to grow in size, scope and influence across regional and national markets.
