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Credit union
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A credit union is a cooperative financial institution that is owned and controlled by its members, and operated for the purpose of promoting thrift, providing credit at reasonable rates, and providing other financial services to its members. Many credit unions exist to further community development or sustainable international development on a local level. Worldwide, credit union systems vary significantly in terms of total system assets and average institution asset size since credit unions exist in a wide range of sizes, ranging from volunteer operations with a handful of members to institutions with several billion dollars in assets and hundreds of thousands of members.
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Encyclopedia
A credit union is a cooperative financial institution that is owned and controlled by its members, and operated for the purpose of promoting thrift, providing credit at reasonable rates, and providing other financial services to its members. Many credit unions exist to further community development or sustainable international development on a local level. Worldwide, credit union systems vary significantly in terms of total system assets and average institution asset size since credit unions exist in a wide range of sizes, ranging from volunteer operations with a handful of members to institutions with several billion dollars in assets and hundreds of thousands of members. Yet credit unions are typically smaller than banks; for example, the average U.S. credit union has $93 million in assets, while the average U.S. bank has $1.53 billion, as of 2007.
The World Council of Credit Unions (WOCCU) defines credit unions as "not-for-profit cooperative institutions." In practice however, legal arrangements vary by jurisdiction. For example in Canada credit unions are regulated as for-profit institutions, and view their mandate as earning a reasonable profit to enhance services to members and ensure stable growth. This difference in viewpoints reflects credit unions' unusual organizational structure, which attempts to solve the principal-agent problem by ensuring that the owners and the users of the institution are the same people. In any case, credit unions generally cannot accept donations and must be able to prosper in a competitive market economy.
Other names
In some places, credit unions are called by other names; for example, in many African countries they are called "savings and credit cooperative organizations" (SACCOs), "to emphasize savings before credit." in Spanish-speaking countries, they are often called cooperativas de ahorro y crédito, but in Mexico they are typically called a caja popular. French terms for "credit union" include caisse populaire and banque populaire. Afghan credit unions are called "Islamic investment and finance cooperatives" (IIFCs) to comply with Islamic lending practices."
Differences from other financial institutions
Credit unions differ from banks and other financial institutions in that the members who have accounts in the credit union are the owners of the credit union and they elect their board of directors in a democratic one-person-one-vote system regardless of the amount of money invested in the credit union.
A credit union's policies governing interest rates and other matters are set by a volunteer Board of Directors elected by and from the membership itself. Credit unions offer many of the same financial services as banks, often using a different terminology; common services include: share accounts (savings accounts), share draft (checking) accounts, credit cards, share term certificates (certificates of deposit), and online banking. Normally, only a member of a credit union may deposit money with the credit union, or borrow money from it. As such, credit unions have historically marketed themselves as providing superior member service and being committed to helping members improve their financial health. In the microfinance context, "[c]redit unions provide a broader range of loan and savings products at a much cheaper cost [to their members] than do most microfinance institutions."
Global dispersion
Based on data from the World Council of Credit Unions, at the end of 2006 there were 46,377 credit unions in 97 countries around the world. Collectively they served 172 million retail members and oversaw US $1.1 trillion in assets. Note that the World Council does not include data from co-operative banks, so that, for example, some nations generally seen as the pioneers of credit unionism, such as Germany, France, Holland and Italy, are not included in their data. The European Association of Co-operative Banks reported 34 million members in those four countries at the end of 2005.
The nations with the most credit union activity are highly diverse. According to the World Council, nations with the greatest number of credit union members included the United States (87 million), India (20 million), Canada (11 million), South Korea (4.7 million), Japan (3.6 million), Mexico (3.6 million), Australia (3.5 million), Kenya (3.3 million), Ireland (3.0 million), Thailand and Brazil (2.6 million each). Countries with the highest percentage of members in the economically active population were Dominica (147% [numbers higher than 100% are possible because the average person is a member of more than one credit union]), Ireland (110%), Barbados (72%), Trinidad & Tobago (57%), Canada (48%), the United States (43%), Benin (27%), Australia (26%), Senegal and Mali (19% each).
History
Modern credit union history dates to 1852, when Franz Hermann Schulze-Delitzsch consolidated the learning from two pilot projects, one in Eilenburg and the other in Delitzsch in Germany into what are generally recognized as the first credit unions in the world. He went on to develop a highly successful urban credit union system.
In 1864 Friedrich Wilhelm Raiffeisen founded the first rural credit union in Heddesdorf (now part of Neuwied) in Germany. Although Schulze-Delitzsch can claim chronological precedence, Raiffeisen is often viewed as more important today. Rural communities in Germany faced a far more severe shortage of financial institutions than the cities. They were viewed as unbankable because of very small, seasonal flows of cash and very limited human resources. The organizational methods Raiffeisen refined there, which levered what is today called social capital, have become a hallmark of the global credit union identity.
By the time of Raiffeisen's death in 1888, credit unions had spread to Italy, France, the Netherlands, England and Austria, among other nations. The Raiffeisen name is still used by Raiffeisenbank, the largest banking group in Austria (with subsidiaries throughout Central and Eastern Europe), Rabobank (Netherlands) and similarly-named agricultural credit unions in Germany.
The first credit union in North America, the Caisse Populaire de Lévis in Quebec, Canada, began operations on January 23, 1901 with a ten cent deposit. Founder Alphonse Desjardins, a reporter in the Canadian parliament, was moved to take up his mission in 1897 when he learned of a Montrealer who had been ordered by the court to pay nearly $5,000 in interest on a loan of $150 from a moneylender. Drawing extensively on European precedents, Desjardins developed a unique parish-based model for Quebec: the caisse populaire.
In the United States, St. Mary's Bank Credit Union of Manchester, New Hampshire holds the distinction as the first credit union. Assisted by a personal visit from Desjardins, St. Mary's was founded by French-speaking immigrants to Manchester from Quebec on November 24, 1908. America's Credit Union Museum now occupies the location of the home from which St. Mary's Bank Credit Union first operated.
Pierre Jay, then Massachusetts Commissioner of Banks and Edward Filene, a Bostonian merchant, were central in establishing enabling legislation in Massachusetts in 1909. The Woman's Educational and Industrial Union, credited with many social service initiatives, heard of this cooperative financial model and wrote to DesJardins. He provided them with the data they needed and on November 23, 1910, they created Industrial Credit Union, the first non-faith-based or community credit union, established for all people in the greater Boston community.
Filene also created the Credit Union National Extension Bureau, the forerunner of the Credit Union National Association, which was formed as a confederation of state leagues at a meeting in Estes Park, Colorado in 1934. Attendees at the meeting included Dora Maxwell who would go on to help establish hundreds of credit unions and programs for the poor and Louise McCarren Herring, whose work to form credit unions and ensure their safe operation earned the title of “Mother of Credit Unions” in the United States.
In the same year, Congress passed the Federal Credit Union Act, which permitted credit unions to be organized anywhere in the United States. The legislation allowed credit unions to incorporate under either state or federal law, a system of dual chartering that persists today.
Not-for-profit status and the need for a surplus
In the credit union context, "not-for-profit" should not be confused with "non-profit" charities or similar organizations. Credit unions are "not-for-profit" because they operate to serve their members rather than to maximize profits. But unlike non-profit organizations, credit unions do not rely on donations, and are financial institutions that must turn what is, in economic terms, a small profit (i.e. "surplus") to be able to continue to serve their members. According to WOCCU, a credit union's revenues (from loans and investments) need to exceed its operating expenses and dividends (interest paid on deposits) in order to maintain capital and solvency and "credit unions use excess earnings to offer members more affordable loans, a higher return on savings, lower fees or new products and services." WOCCU's position is deeply rooted in global credit union history. F.W. Raiffeisen, the founder of the global movement, wrote in 1870 that credit unions "are, according to paragraph eleven of the German law of cooperatives, "merchants" as defined by the common code of commerce. They accordingly form a sort of commerical business enterprise of which the owners are the [Credit] Unions' members."
Corporate credit unions
Most credit unions provide service only to individual consumers. By contrast, corporate credit unions (also known as central credit unions in Canada) provide service to credit unions, with operational support, funds clearing tasks, and product and service delivery. The largest corporate credit union in the United States is U.S. Central Credit Union of Lenexa, Kansas, which serves as a central clearing house for corporate credit unions and holds approximately $45.3 billion in assets.
Credit union leagues and associations
The World Council of Credit Unions is both a trade association for credit unions worldwide and a development agency. WOCCU's mission is to "assist its members and potential members to organize, expand, improve and integrate credit unions and related institutions as effective instruments for the economic and social development of all people."
Credit unions in the United States have traditionally used a state/national trade association relationship that aligns credit unions with state “Credit Union Leagues” followed by national affiliation with the Credit Union National Association (CUNA) of Madison, Wisconsin. Federal credit unions may also be members of the National Association of Federal Credit Unions (NAFCU).
The Credit Union Executives Society (CUES), based in Madison, Wisconsin, provides professional development and resources to thousands of credit union executives and directors worldwide. It partners with world-renowned universities to offer graduate-level executive education specifically for credit union leaders.
The biggest UK credit union trade association is the Association of British Credit Unions Limited, more commonly known as Association of British Credit Unions, ABCUL. Some Scottish credit unions are represented by the much smaller Scottish League of Credit Unions (SLCU) which has headquarters in Glasgow; however the overall majority of credit unions choose the main British Association.
Credit Union Central of Canada is the trade association for Canada's credit unions outside Quebec. The Desjardins Group represents Quebec's credit unions. Structurally, it blends the functions of a trade association and a more European-style cooperative bank.
Credit Unions often form cooperatives among themselves to provide services to members. A Credit Union Service Organization (CUSO) is generally a for-profit subsidiary of one or more credit unions formed for this purpose. For example, CO-OP Financial Services, the largest credit union owned interbank network in the US, provides an ATM network and shared branching services to credit unions. Other examples of cooperatives among credit unions include credit counseling services as well as insurance and investment services.
United Kingdom
Credit Unions are more familiarly known as mutual societies within the United Kingdom.
In the UK, mutual institutions (aka Credit Unions) grew out of the friendly society movement of the 18th century, with the first mutual insurer, Equitable Life, being founded in 1762. The emergence of mutual assurance was linked with the Industrial Revolution and the need to provide for impoverished workers beyond the outmoded Elizabethan Poor Laws, as people congregated in the cities and lived in conditions of squalor and poverty. The historic principle of mutuality relates to this epoch, when sophisticated financial institutions (taken for granted today), simply did not exist.
The only method of improving the quality of ordinary people’s lives was through the development of co-operative and mutual societies, as formalised under the Friendly Societies Act 1819. Mutual institutions thus predated the welfare state and were formed to meet the needs of a burgeoning working class, consisting mainly of rural and immigrant workers. As a practical expression, this communitarian self-help movement allowed small regular individual contributions to be pooled for mutual collective benefit, obtaining the same economies of scope and scale necessary in providing collective insurance and banking products, to mitigate enduring social exclusion. Initially funding was required for housing, consumer durables and emergency insurance provision, at a time when commercial banks were still exclusively commercial lenders, . Building societies were formed as small temporary societies by worker co-operatives, pooling resources to build local houses and subsequently allocating them among members by drawing lots. Once all members were housed, these organisations were typically wound up, although some became permanent societies in an effort to promote wider home ownership, as exemplified by the Leeds Permanent Building Society, see . Surplus funds were then pooled, providing an opportunity for low-income families to earn interest on small deposits, with proceeds typically invested in residential mortgages and liquid government securities.
The traditional intermediation function of mutual societies was to promote thrift among the working classes and thereby provide access to low cost home loans. This ethos has become obscured in the recent battle for customers, and only the very real threat of extinction has occasioned any renewed vigour in proclaiming the original mutuality message. Mutual societies continue to perform vital social functions, often serving on the boards of local community groups, as well as regularly making sizeable local charitable donations. Indeed, the mutual legacy of social benefaction, although quite substantial, risks only being missed by the present generation once such institutions ultimately cease to exist, . With the conversion of most of the larger remaining mutual societies into proprietary companies, the bulk of the UK savings assets will have shifted away from their traditional providers into the mainstream UK financial sector. This change is occurring even as the traditional barriers between banks, building societies and insurance companies are disappearing. The spate of conversions is leading to a polarisation into two camps: the converters and the remaining mutuals.
2. Mutual Ownership and Corporate Governance:
A mutual institution is a specific corporate form owned by its membership, rather than shareholders, through their ongoing relationship with the organisation. Members have certain rights to vote, but largely restricted property rights. Principally these legal interests are not readily transferable, preventing any concentration in ownership. Members are however able to leave the organisation completely, by withdrawing their capital, whereas in listed companies the claim on the original equity subscription is merely transferable, and cannot be retracted. Mutual institutions owe their allegiance to their members, rather than potentially disinterested shareholders, obviating the paramount objective to generate a distributable profit. However, the cost savings, implicit in not having to pay a dividend, need to be carefully considered. This should not imply that mutuals ought to accept any lower rate of return on assets than their comparable shareholder-owned counterparts, unless they are trading on the ignorance of their membership . On the contrary, the capital in a business enterprise still incurs a direct cost that needs to be serviced, whether explicitly to shareholders, or implicitly to members.
One consequence of this ownership structure, however, is that mutual societies can afford to be a little more competitive on loan and deposit rates, with immediate benefits for their clients. The mutual form also allows them to make longer-term decisions with owner-independence, one of the most compelling arguments for the retention of their special status. Independence means not only local control, but moreover the ability to serve the specific interests of the local community. As the interests of stockholders and customers may differ, a proprietary company inevitably has to decide which path to follow, whereas the same question never arises in the case of mutual institutions, because shareholders and customers are synonymous. Both corporate forms separate the ownership and control functions, typically delegating the latter responsibility to an appointed board of managers.
The primary difference is in the level of corporate governance that each configuration affords. One controversial suggestion, see , has been that mutual ownership can be regarded as fuzzy ownership, resulting in poor performance without the efficiency imposed through the discipline of serving dispassionate stockholders. Mutual insurers do not have to keep policyholders individually informed of annual general meetings or send them annual report and accounts, although the convenience of the Internet as an information dissemination tool could be a significant future weapon in combating such shortcomings and related corporate governance issues, according to .
Mutual members are customers first and foremost, and absentee owners - at best - somewhat secondarily. A mutual concern exists purely to provide collective customer services, with any capital tied up in the intermediation process a pure function of it, rather than explicitly subscribed to by outside investors specifically to generate a return, as in proprietary organisations. Conversely, PLCs are joint stock companies that issue shares directly to investors in order to raise funds, the shareholders becoming the ultimate owners of the firm with contractual rights to any subsequent profit streams. The level of corporate governance directly implied in the mutual case, from an exceptionally dispersed ownership structure as a function of diffuse financial consumerism, is correspondingly very low. Academic discussion in this area has centred on the corporate governance issue in relation to mutual building societies, in direct response to the tide of conversions sweeping an otherwise sedate sector of the financial industry.
Their ideas are discussed only in relation to building societies, but are readily applicable to the mutual life assurance sector. Cook et al. argue that mutual societies are the victim of present circumstances and given the right conditions can still flourish, by enhancing returns to members over the longer term. They call for a revolution in the governance of mutuals, akin to the Hampel, Greenbury and Cadbury reforms witnessed in the proprietary sector. They propose ‘electoral colleges’, which would reward activist members and encourage greater supervision of management, or joint committees of directors and members to assist with communication. Their paper contends that mutuals have an important role to play in the diversity of the financial ecosystem, with additional important advantages over shareholder-owned businesses, primarily a potentially lower cost of capital versus PLCs, from the absence of external shareholders.
Controversially however, attributes this lower cost of capital advantage to a combination of loyalty, ignorance and inertia on the part of the membership. The principle of ‘one member, one vote’, the central tenet of the mutual movement, makes it extremely tough for members to exercise supervisory authority over management, facilitating the classic ‘free rider’ problem or more contemporarily speaking, the ‘carpet bagger’ phenomenon. critique the mutual voting system, concluding that for mutuals, the mechanics of ownership meetings, notices and voting procedures are cumbersome and seldom used. Their survey offers some evidence for differences in the patterns of control exercised by legal owners of stock and mutual insurers. Shareholders are more aware of their right to vote, and exercise greater control by being more likely to attend annual meetings and vote for directors.
This agency problem is exacerbated in the mutual case, as there are no large shareholders to put pressure on the board to improve levels of corporate governance. A mutual membership is disparate and, despite the emergence of a few action groups in time of crisis, largely disorganised. Even for diligent members of a mutual society, the opportunity costs involved in monitoring management often outweigh any individual benefits, since the collective membership stands to benefit equally from any personal endeavours. Thus a truism of the proprietary market seems to be that only when ownership is concentrated in large institutional blocks or family holdings, where disproportionate real risk capital is at stake, do these opportunity cost/benefits change to any marked degree.
Moreover, the ownership and voting structure of mutuals is especially unwieldy at times of crisis, as demonstrated by more recent events at Equitable Life. Despite a collective mutual structure, the membership still found it difficult to agree on a ceiling to liabilities relating to contractual guarantees. Indeed the situation at Equitable Life is a very pertinent example, as policyholders with annuity rate guarantees initially appeared to have gained a windfall at the expense of other policyholders who did not enjoy such similar contractual advantages. This is the obverse of mutuality, as without outside shareholders to inject fresh equity capital, as required should things go wrong, there entails a zero-sum game, whereby any winnings necessarily have to come out of the losers' pockets.
3. UK Mutuality - an Endangered Species:
Although mutual financial institutions now appear to be on the endangered species list according to , questions remain as to whether mutuality, as a concept, should be preserved, or suffer extinction as a result of a dispassionate ‘Darwinian’ economic fact. Unlike proprietary firms that provide a transparent return on capital, co-operatives' earnings belong exclusively to their members. These earnings are typically distributed in the form of patronage dividends, which are proportional to a patron's share of the co-operative's business. Any profits generated through the intermediation process, although attributable to members, are often exclusively returned by way of reduced transaction costs, or intermediation margins. Thus, the key to the mutual form resides in the efficiency generated where there is homogeneity of interests among customers, compared to the inefficiency where there is a divergence of such interests, .
Recent institutional changes, reflecting greater diversity in financial service provision, have arguably led to greater heterogeneity of interest among the mutual membership, facilitating the need for change in some cases. Competition among financial service providers has caused additional difficulties. Smaller not-for-profit societies struggle to sustain the marketing expense needed to ensure widespread awareness of their products, whilst retaining sufficient commission-based incentives to galvanise independent financial advisers to consider their offerings. In the absence of a direct sales force, they have traditionally been reliant on referrals from mortgage and insurance brokers. This conduit of business is important to the mutual sector but more so for the assurance sub-sector as the prominent ‘shop window’ effect of the building society on the high street is missing.
The principle of mutuality is also at risk specifically in the life insurance sector, as consumers now increasingly demand to know exactly what is going on within the ‘black-box’ of with-profit funds, whilst simultaneously expressing unwillingness in sharing the risks as well as rewards with fellow policyholders, a point amply highlighted in the Equitable Life case. The sudden interest in demutualisation stems from an ability to place a saleable value on the goodwill of a mutual business, and not just simply on the underlying reserves. This, when combined with corporate and managerial ambition, may fuel customers’ enthusiasm to vote for windfall payments. According to commenting on building societies, “years of poor service, inefficient management and an interest-rate cartel… meant members were only too willing to take the demutualisation shilling – windfalls of more that £1,000 were standard”.
Speculators looking for gains have found carpet bagging building societies a virtually one-way bet in recent years. The downside risk appeared de minimus - a modest sum of money tied into a poor interest rate - coupled with the upside of an uncertain windfall from eventual conversion, potentially only a few years hence. The recent spate of demutualisations has forced the remaining mutuals to reassess their value to members, leading to the introduction of customer loyalty programmes and improved product pricing. However, while the short-term effect may be to increase the mutuals' market share, the unintended consequences are that it may inadvertently encourage further speculation. As many building societies raised the deposits to qualify for membership in reaction to these pressures, Nationwide recognised counter-intuitively that this discouraged the very membership the society was initially formed to promote, and responded instead by forming a charitable foundation to benefit from any windfalls attributable to new members. For building societies, the main driver behind the demutualisation trend has been the pressure to offer a wider range of financial services, rather than the result of carpetbagging per se.
When Abbey National first converted in July 1989, the range of products it had previously been able to offer was legally restricted. Subsequent to Abbey National becoming a bank, the number of building societies nearly halved from 130 to just 68 in 2000. Indeed of the remaining mutual building societies, only one retains truly national coverage, the Nationwide . Building societies have subsequently had to explore other ways to offer more services without converting, as the longer-term commercial relationships enjoyed with their customers has proved an attractive source of intermediary business. Minor building societies, which could not have possibly set up proprietary insurance operations, now offer products as agents for large insurers such as Commercial Union and General Accident (now both part of Aviva Plc, along with Norwich Union), who are committed to helping the smaller building societies compete with the large bancassurers.
Nationwide, now the largest remaining UK building society successfully defeated another pro-conversion vote at its July 2001 AGM, despite initially rejecting the motion proposed by Andrew Muir on technical grounds, see Mackintosh (2001a). In the previous year, members of the Bradford and Bingley, the UK’s third largest building society, had overwhelmingly voted to convert into a Plc, by 62%, when called to consider demutualisation. To combat these deleterious effects, the Nationwide has positioned itself as the consumers’ champion on a range of banking issues – most significantly in its stance against the imposition of across the board cash machine charges for customers using existing Automatic Teller Machine (ATM) infrastructure – estimated to have saved customers in the order of £270 million per annum in aggregate. Furthermore the Nationwide has highlighted that the new banks are already depriving customers, with restricted access to over the counter services and the creeping closure of uneconomic branches.
In the United Kingdom credit unions were regulated by the FSA (Financial Services Authority) since July 2002. UK credit unions are classified under two types: type 1 are the smaller CUs while type 2 are larger. From November 2006 many type 2 CUs began offering their members debit card accounts which enabled CU members to obtain funds from any Link ATM. UK credit unions do not offer cheques as these are generally being phased out in UK financial transactions.
As of October 2008 the Financial Services Compensation Scheme guaranteed the first 50,000 pounds of each saver's deposits in credit unions, in line with the guarantee for UK banks and building societies.
Credit unions in the UK now offer a wide range of services to their members; from direct debits to payroll deductions, from being able to send standing orders from their accounts to paying members bills to providing cheaper insurance facilities.
Life insurance is usually included with membership (subject to pre-existing medical conditions and other exclusions). Death benefits vary between unions, but commonly include lump sum payments, writing off of outstanding loans and doubling of savings.
Credit unions offer savers considerably more protection than commercial 'savings clubs', as was demonstrated by the 2006 collapse of the Christmas hamper club Farepak.
Currently there is a government financial initiative mainly being operated by credit unions to bring financial services to the economically disadvantaged members of society. One aim is to significantly reduce the influence of door step lenders (and illegal "loan sharks") where a £300 loan over 30 weeks may involve paying back around £450; a credit union loan would typically require paying back around £325.
Canada
Canada has the highest per-capita use of credit unions in North America, with more than a third of the population enrolled in one. They are concentrated in Quebec, where they are known as caisses populaires (people's banks), and in the Western provinces.
As of December 31, 2007, the Caisses Populaires Desjardins federated 536 member caisses with CAD$ 144 billion in assets and 5.8 million retail members, making it the sixth largest financial institution in Canada.
Credit Union Central of Canada federates most credit unions in the English-speaking provinces. As of late 2008, the 10 affiliated systems operated 444 credit unions controlling CAD $111 billion in assets from 5.1 million retail members. Other major Canadian credit unions include Vancity, Coast Capital Savings and Credit Union Atlantic.
United States
In the United States, as of 2005 credit unions have 86 million members, which is 43.47% of the economically active population. U.S. credit unions are not-for-profit, cooperative, tax-exempt organizations.
U.S. credit unions can be chartered by either the federal government ("federal credit unions") or by a state. The states of Delaware, South Dakota, and Wyoming do not regulate credit unions at the state level; in those states, a credit union must obtain a federal charter to operate. All federal credit unions and 95% of state-chartered credit unions have "share insurance" (deposit insurance) of at least $250,000 per member through the National Credit Union Share Insurance Fund (NCUSIF). This deposit insurance is backed by the full faith and credit of the United States government and is administered by the National Credit Union Administration. As of December 2006, the NCUSIF had a higher insurance fund capital ratio than the fund for the Federal Deposit Insurance Corporation (FDIC). U.S. credit unions also typically have higher equity capital ratios than U.S. banks.
As of the end of 2007, the National Credit Union Share Insurance Fund insured more than $560 billion in deposits at 8,101 not-for-profit cooperative US credit unions. For comparison, the FDIC insured more than $4 trillion in deposits at 8,560 banks and thrift institutions. The NCUA and the FDIC are both independent federal agencies backed by the full faith and credit of the US government.
United States credit unions typically pay higher dividend (interest) rates on shares (deposits) and charge lower interest on loans than banks. Credit unions therefore often have a higher cost of assets (i.e. interest expense as a percentage of average assets) than commercial banks, with aggregate U.S. credit union cost of assets being higher than the aggregate U.S. bank cost of assets in eight of the thirteen years between 1995 and 2007. Credit union revenues (from loans and investments) do, however, need to exceed operating expenses and dividends (interest paid on deposits) in order to maintain capital and solvency.
Membership restrictions
In the United States, as elsewhere, credit unions were formed around a single church, place of work, or town. Membership was limited to those who were in the field of membership. The Federal Credit Union Act of 1934 limited membership to "groups having a common bond of occupation or association, or to groups within a well-defined neighborhood, community or rural district."
A 1982 federal regulation during Ronald Reagan's presidency allowed many credit unions to grow their memberships and expand into multiple states. Credit union membership reached 71 million members by 1997, more than double the number of members in 1991. This expansion prompted banks to challenge the 1982 regulation as illegal, a challenge upheld in a 1998 U.S. Supreme Court decision, NCUA v. First National Bank & Trust Within five months, both houses of Congress passed a bill signed by President Clinton to overturn the Court's decision.
As of 2003, U.S. governmental regulatory agencies require that credit unions restrict their membership to defined segments of the population, such as people who live, work, worship, or attend school in a well-defined geographic area; employees of specific companies or trades; members of specific non-profit groups (alumni associations, conservation or other advocacy organizations, lodges, churches, or the like); or a particular occupational group (teachers, doctors, etc.). In the U.S., this is referred to as a credit union's "field of membership." Internationally it is referred to as the bond of association.
Credit unions may typically be chartered to serve a specific employee or associational group or groups (often called a Select Employee Group or "SEG Charter"), all members of a trade, industry, or profession (a "TIP Charter"), or have a "Community Charter" (typically a field of membership of anyone who lives, works, goes to school, or attends religious services in a particular city, county, or counties). When a credit union converts to a Community Charter from a SEG Charter or TIP Charter, it can continue to serve its existing members as well as anyone who lives, works, worships, or attends school within its new geographical field of membership, but cannot admit new members from its former SEG(s) or TIP (unless the group in question is located within "the new community credit union's boundaries"). Similarly, a credit union that converts to a TIP or SEG charter from a different charter type can no longer admit new members from its old field of membership.
Typically, members' families – such as immediate family or household members – can also join the credit union. In the United States, the National Credit Union Administration or a state regulator – depending upon whether or not the credit union is chartered by the federal government or by a state – decides whether or not to approve or deny proposed field of membership expansions or charter conversions to other credit union charters.
Mergers of smaller credit unions with disparate membership bases often result in a credit union with a wide variety of ways to qualify to join; thus, a credit union may have a much broader "field of membership" than that credit union's name would imply. Credit unions generally follow the principle of "once a member, always a member," which allows current credit union membership to continue even if the individual would no longer qualify to be a member (such as having changed professions or moved outside the area).
Many credit unions reserve the right of expulsion against a member who causes a financial loss. Some credit unions also have expelled members, including elected Board and Supervisory Committee volunteers, for making whistleblower complaints against credit union management.
Underserved and low-income areas
Federal credit unions may apply to the NCUA for Low-Income Credit Union or LICU status. To qualify for LICU status, the majority of the credit union's membership meet specific requirements in order to be considered "low-income". This LICU status allows the credit unions to benefit from certain NCUA programs to enhance its capacity to serve underserved populations who may otherwise lack access to credit or other financial services. In addition, some state regulators also provide for similar low-income designations.
Unlike banks, which were caught redlining underserved areas in the 1970s, credit unions are not subject to federal "community reinvestment" requirements, essentially because credit unions, by their nature and mission of "people helping people," already meet the financial needs of a broad spectrum of people that fall within their fields of membership, and play an active role in community development and growth. Credit unions, with the support of Republicans have successfully lobbied to exempt themselves from the (U.S. federal) Community Reinvestment Act, the law that forces banks to provide services in low-income areas.
2006 Home Mortgage Disclosure Act data shows that U.S. credit unions approved 69% of low- and moderate-income borrowers' mortgage applications that they received, versus a 47% low/moderate-income borrower approval rate for other U.S. mortgage lenders, and also that U.S. credit unions approved 62% of minority members' mortgage applications, versus a 51% minority approval rate for other U.S. mortgage lenders. The 2006 Home Mortgage Disclosure Act data also shows that 25.2% of all U.S. credit union mortgage originations were mortgages for low- or moderate-income borrowers, versus a 20.6% low- or moderate-income borrower mortgage origination percentage for other U.S. mortgage lenders. The NCUA, however, has long discouraged U.S. credit unions from giving members loans that they may not be able to afford to repay and has forbidden other types of predatory lending and abusive credit practices. Federal credit unions are also forbidden from charging prepayment penalties on loans.
Credit unions vs banks
Establishing an account at a credit union usually requires a smaller deposit than that of a bank; credit unions usually require $5.00-$30.00 to open an account, while major banks sometimes require $50.00-100.00 deposit.
Tension has always existed between member-owned cooperative credit unions and for-profit banks in the US. When credit unions were first organizing in the United States in the early 20th century, the banking industry was opposed, remaining so ever since. Despite the fact that credit unions continue to hold a very small share of the financial services market, banks and bank trade associations consistently put anti-credit union legislation at the top of their agendas.
Due to their status as not-for-profit, member-owned financial institutions with no source of secondary investment capital, credit unions in the United States are exempt from federal and state income taxes (but, not from employment or property taxes). Credit union members themselves pay income tax on dividends earned through financial participation in the credit union; this is similar to the taxation structure enjoyed by many banks incorporated under Subchapter S of Chapter 1 of the Internal Revenue Code.
Bank holding companies and their affiliates aggressively compete to provide services to credit unions through their ATM networks, corporate checking accounts, and certificate of deposit programs. In 2007, the American Bankers Association barred credit union employees from attending ABA-sponsored educational seminars. This includes online classes that require registration. Based on the pretext that the ABA only wants to serve its members, the American Bankers Association continues to attempt to weaken credit unions and take back the 6% market share that credit unions currently hold.
Credit unions maintain that no matter their size or field of membership, the fact that they are owned by their members and not shareholders makes them fundamentally different than banks.
Credit union-to-bank conversions
Since 1995, over 30 US credit unions have converted from credit union charters to bank charters. These conversions are generally initiated by a credit union's leadership team, rather than from the rank-and-file membership, and have created sharp controversy within the credit union industry. Some have questioned whether these conversions are in the best interests of the credit union members, and have compared them to the mutual savings bank conversion raids of the 1980s.
Like the mutual savings raids, credit union conversions have been very lucrative for executives and directors of converting credit unions. CU Financial, a consulting firm that helps credit union management execute these conversions, has explained in marketing materials that if a credit union with $50 million in capital converts to a stock bank, under certain conditions a payoff in the “$1.2 million range for each director is not out of the question," while executives might also expect additional stock compensation that "could lead to a $10 million plus ownership stake for a capable CEO".
Members of at least six credit unions have organized to oppose their management's conversion proposals, objecting that this insider enrichment comes at the detriment of credit union members. They point out that while insiders have made windfall profits, most members have lost their ownership stake without compensation, and face worse rates and fees after the conversion. Comparisons of interest rates show that credit unions that have converted to banks now charge their members more for loans, and pay less for savings. Member groups have included , , and DFCU Owners United.
The National Center for Member Trust is a consumer protection non-profit "formed to support the member-owners of credit unions that are attempting to convert to banks."
The is an advocacy group for converting credit unions. UC Berkeley Professor of Financial Institutions James Wilcox is an expert who has released a number of studies on the issue. His findings are summarized in , published in the July 2006.
Further reading
- Ian MacPherson. Hands Around the Globe: A History of the International Credit Union Movement and the Role and Development of the World Council of Credit Unions, Inc. Horsdal & Schubart Publishers Ltd, 1999.
- F.W. Raiffeisen. The Credit Unions. Trans. by Konrad Engelmann. The Raiffeisen Printing and Publishing Company, Neuwid on the Rhine, Germany, 1970.
External links
- trade association for credit unions
- regional federation representing 21 national federations in Asia with 35 million retail members
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