Credit Unions, Not Federally Chartered

SIC 6062

Industry report:

This industry classification includes cooperative thrift and loan associations (accepting deposits) organized under other than a Federal charter to finance credit needs of their members.

A credit union is a collective, cooperative financial institution created by its members for the benefit of these members. These members share a bond of employment or affiliation, which the credit union is designed to serve. Although membership and assets grew significantly during the 1980s and 1990s, the number of state-chartered credit unions declined, due primarily to industry consolidation via mergers and acquisitions. In 1980, there were 4,900 state-chartered credit unions but only approximately 12.3 million members and assets of $20.9 billion. Thus, over the same period, while the number of state-chartered credit unions fell by over 25 percent, membership nearly tripled and assets grew over tenfold. By June 2010 there were 2,949 state-chartered credit unions in the United States, which represented 39 percent of all credit unions in the country, according to the National Association of State Credit Union Supervisors (NASCUS). Credit unions served approximately 90 million Americans, but, with total assets of about $882.7 billion, they made up just a small piece of the national banking system, which was dominated by commercial banks. Credit union loans to consumers were mainly in the home mortgage, auto, and credit card sectors.

Credit unions are owned by their members. Typically, these institutions collect the savings of their members and make loans to members from these accumulated savings. Unlike other financial institutions, such as commercial banks, credit unions are nonprofit organizations that focus on serving their members. The primary objective of a credit union is not profit maximization, as no individual can claim any residual profit. Instead, credit unions attempt to maximize the economic and social interest of its members. The formation of credit unions was encouraged by a broad cooperative movement in the early years of the industrial revolution.

Membership in a credit union is limited to individuals or groups who are members of the organization (employer, association, residence, etc.) specified in the charter. These credit union membership criteria are collectively known as the common bond provision. An individual who is qualified under these provisions may submit an application and, if approved, becomes a member with voting rights similar to those of a shareholder in a public corporation.

The common bond provisions of credit unions have a number of operational benefits. These include lower information costs, lower collective loan default risk, operating subsidies, and mitigation of the borrower verses saver conflict. It was argued, however, that the deregulation that took place in the late 1980s would erode some of these benefits. Indeed, in February 1997, the U.S. Supreme Court agreed to hear a case that tested whether credit unions could serve multioccupational memberships without violating common bond requirements. The attempt by some credit unions to broaden their membership base beyond a single occupation stems from a search for greater liquidity in an increasingly competitive financial marketplace.

State credit unions are chartered under the state's credit union provision. In general, these laws are similar to the federal law, premised on the Federal Credit Union Act. The federal act was largely based on the preceding state provisions.

Because state-chartered credit unions are governed by the individual states within which they reside, ongoing legislative and regulatory issues vary from state to state. For example, in 2004, Utah legislators made an unsuccessful attempt to impose a state tax on state-chartered credit union, whereas in New York, industry advocates promoted a legislative proposal to repeal an 8.25 percent tax on state-chartered credit unions, which would save the industry millions. In the mid-2000s, both Ohio and Florida loosened restrictions on the states' credit unions and added to their ability to expand services and membership.

Through the 2000s, credit unions continued to experience competition from commercial banks that offered a broad range of services and had added traditional credit union incentives, such as free checking. Storefront lenders, such as payday loan, pawn, and check-cashing services, were also rapidly making inroads into the short-term loan market, traditionally held by credit unions.

During the mid-2000s, the credit union industry produced positive results based on a revived economy and historic low interest rates, which fueled the demand for first mortgage loans. However, the subprime mortgage crisis that began in 2007 brought growth in the financial services industry to a grinding halt. Basically, the thousands of adjustable rate mortgages that had been granted to Americans earlier in the decade started to be reset at higher rates, thus raising mortgage payments. A decline in housing prices in 2007 made refinancing more difficult, and the number of foreclosures skyrocketed. In 2008, there were a record 2.8 million foreclosures filed, up 21 percent from 2008 and 120 percent from 2007. Unfortunately, 2009 was no better: CNN reported that foreclosures hit another record in the third quarter, when 1 in every 136 U.S. homes was in foreclosure. Figures from the Credit Union National Association (CUNA) showed that first-mortgage delinquency rates at credit unions rose from 1.7 percent to 2.24 percent for fiscal year 2010 ending June 30.

The U.S. government attempted to stop the downward spiral by passing several legislative measures. First was the Emergency Economic Stabilization Act of 2008, which the Insurance Information Institute called "a $700 billion rescue plan for the U.S. financial services industry." Another attempt to promote economic recovery came in 2009 from the U.S. Treasury Department with the implementation of the Financial Stability Plan. Finally, in 2010 Congress approved the Dodd-Frank Wall Street Reform and Consumer Protection Act, which comprised a massive overhaul of financial services regulation. According to a press release by the NASCUS, "only some of the provisions [of the Dodd-Frank Act] impact state regulators and the credit union system." Some of these were related to heightened consumer protection measures, deposit insurance requirements, and mortgage origination standards, among others.

Credit unions, by nature, tend to be small. In 2006, more than 85 percent of all credit unions held assets of $50 million or less, and the top 20 percent of credit unions held more than 85 percent of the industry's assets. According to the 2010 Financial Services Factbook, State Employees' Credit Union was the largest state-chartered natural person credit union in the United States, with assets of $21 billion. The second largest was BECU (Washington), with assets of $8.8 billion, followed by Golden 1 Credit Union (California) with $7.8 billion. Rounding out the top five were Alliant Credit Union (Illinois) with $7.2 billion in assets and Star One Credit Union with $5.1 billion.

Mortgages continued to account for the largest share of credit union loans. In 2010, 41.3 percent of all state credit union loans were for first mortgages, according to the NASCUS. Auto loans accounted for 29.3 percent of all loans, followed by other real estate with 15.2 percent and other loans with 5.7 percent.

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News and information about Credit Unions, Not Federally Chartered

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