Credit unions in the United States - AbsoluteAstronomy.com

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 competitive rates, and providing other financial services to its members...

s in the United States

United States

The United States of America is a federal constitutional republic comprising fifty states and a federal district...

served 89 million members as of 2008, comprising 43.7% of the economically active population. U.S. credit unions are not-for-profit, cooperative

Cooperative

A cooperative is a business organization owned and operated by a group of individuals for their mutual benefit...

, tax-exempt organizations.

Credit unions in the United States may either be chartered by the federal government ("federal credit unions") or a state government. 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

National Credit Union Share Insurance Fund

The National Credit Union Share Insurance Fund is administered by the National Credit Union Administration for the purpose of providing deposit insurance to protect deposits of credit union members at insured institutions in the United States. It was created in 1970 shortly after the creation of...

(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

National Credit Union Administration

The National Credit Union Administration is the United States independent federal agency that supervises and charters federal credit unions...

. As of December 2006, the NCUSIF had a higher insurance fund capital ratio than the fund for the Federal Deposit Insurance Corporation

Federal Deposit Insurance Corporation

The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...

(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

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

Interest

Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....

) rates on shares (deposits

Deposit account

A deposit account is a current account, savings account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the...

) 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.

Due to their small size and limited exposure to mortgage securitizations, credit unions have weathered the financial meltdown of 2008 reasonably well. However, two of the biggest corporate credit unions in the United States (U.S. Central Credit Union

U.S. Central Credit Union

U.S. Central Federal Credit Union is the largest corporate credit union in the United States. Unlike consumer driven credit unions , U.S. Central provides its services only to other corporate credit unions, in effect acting as the "corporate credit union's credit union". The organization was...

and Wescorp) with combined assets of more than $57 billion were taken over by the federal government National Credit Union Administration

National Credit Union Administration

The National Credit Union Administration is the United States independent federal agency that supervises and charters federal credit unions...

on March 20, 2009.

Membership restrictions

In the United States, as elsewhere, credit unions were historically formed around a single church, place of work, labor union, or town. Membership was limited to those who were in the field of membership. The Federal Credit Union Act

Federal Credit Union Act

The Federal Credit Union Act is an Act of Congress enacted in 1934. The purpose of the law was to make credit available and promote thrift through a national system of nonprofit, cooperative credit unions...

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

Code of Federal Regulations

The Code of Federal Regulations is the codification of the general and permanent rules and regulations published in the Federal Register by the executive departments and agencies of the Federal Government of the United States.The CFR is published by the Office of the Federal Register, an agency...

during Ronald Reagan's presidency

Domestic policy of the Reagan administration

The Domestic policy of the Ronald Reagan administration was the domestic policy in the United States from 1981 to 1989 under President Ronald Reagan. It retained conservative values economically, beginning with the president's implementation of his supply-side economic policies, dubbed Reaganomics...

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

NCUA v. First National Bank & Trust

NCUA v. First National Bank & Trust, , is a legal case in which the Supreme Court of the United States ruled that banks had prudential standing to challenge regulations that permitted credit unions to enroll unaffilated members.-Background:...

Within five months, both houses of Congress passed a bill signed by President Clinton

Presidency of Bill Clinton

The United States Presidency of Bill Clinton, also known as the Clinton Administration, was the executive branch of the federal government of the United States from January 20, 1993 to January 20, 2001. Clinton was the first Democratic president since Franklin D. Roosevelt to win a second full term...

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, including labor unions, alumni associations, conservation or other advocacy organizations, lodges, churches, or the like; or a particular occupational group, such as 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

Bond of association

The bond of association or common bond is the social connection among the members of credit unions and co-operative banks. Common bonds substitute for collateral in the early stages of financial system development...

.

Credit unions may typically be charter

Charter

A charter is the grant of authority or rights, stating that the granter formally recognizes the prerogative of the recipient to exercise the rights specified...

ed 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

National Credit Union Administration

The National Credit Union Administration is the United States independent federal agency that supervises and charters federal credit unions...

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 a member with a current credit union membership to remain a member even if s/he would otherwise no longer qualify to be such, such as leaving the company with whom s/he initially gained membership or moving outside the credit union's defined geographic area. However, 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

Whistleblower

A whistleblower is a person who tells the public or someone in authority about alleged dishonest or illegal activities occurring in a government department, a public or private organization, or a company...

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

Redlining

Redlining is the practice of denying, or increasing the cost of services such as banking, insurance, access to jobs, access to health care, or even supermarkets to residents in certain, often racially determined, areas. The term "redlining" was coined in the late 1960s by John McKnight, a...

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

Community Reinvestment Act

The Community Reinvestment Act is a United States federal law designed to encourage commercial banks and savings associations to help meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods...

, the law that forces banks to provide services in low-income areas.

2006 Home Mortgage Disclosure Act

Home Mortgage Disclosure Act

The United States Home Mortgage Disclosure Act was passed in 1975. It requires financial institutions to maintain and annually disclose data about home purchases, home purchase pre-approvals, home improvement, and refinance applications involving 1 to 4 unit and multifamily dwellings...

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

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

Predatory lending

Predatory lending describes unfair, deceptive, or fraudulent practices of some lenders during the loan origination process. While there are no legal definitions in the United States for predatory lending, an audit report on predatory lending from the office of inspector general of the FDIC broadly...

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-$30 to open an account, while major banks sometimes require $50-$100 deposit. The required minimum deposit to join a credit union is called a share and establishes the depositor as a member with full ownership rights.

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. 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 other forms of tax, such as payroll, sales, or property taxes). Credit union members themselves pay income tax

Income tax

An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...

on dividend

Dividend

Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...

s earned through financial participation in the credit union; this is similar to the taxation structure enjoyed by many banks incorporated under Subchapter S

S Corporation

An S corporation, for United States federal income tax purposes, is a corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code....

of Chapter 1 of the Internal Revenue Code

Internal Revenue Code

The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...

.
Given their smaller asset size, credit unions are unable to match the geographical coverage of ATMs and branches that big banks offer their customers. To extend their member service reach, many credit unions participate in shared ATM and branch networks. Shared branching is a cooperative venture whereby members of one credit union can perform basic transactions at no additional cost at any branch owned by other credit unions within the network.

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

Certificate of deposit

A certificate of Deposit is a time deposit, a financial product commonly offered to consumers in the United States by banks, thrift institutions, and credit unions....

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

American Bankers Association

The American Bankers Association is an industry trade group and professional association representing the United States' banking industry...

continues to attempt to weaken credit unions and take back the market share that credit unions currently hold.

"People not profit"

Generally speaking, credit unions see themselves as "nobler" or of "higher moral ground" than banks; they feel that they are "community-oriented", and "serve people, not profit". 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 from banks. Credit union members elect their boards of directors, with each member having equal voting rights. The required minimum deposit to join a credit union is called a share and establishes the depositor as a member with full ownership rights.

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

Mutual savings bank

A mutual savings bank is a financial institution chartered by a central or regional government, without capital stock, that is owned by its members who subscribe to a common fund. From this fund claims, loans, etc., are paid. Profits after deductions are shared between the members...

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 Save Columbia Credit Union, Save First Basin Credit Union, 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 Coalition for Credit Union Charter Options 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 Credit Union Conversions: Ripe for Abuse ... and Reforms, published in the Credit Union Times July 2006.

External links

World Council of Credit Unions trade association for credit unions
Association of Asian Confederations of Credit Unions regional federation representing 21 national federations in Asia with 35 million retail members

The source of this article is wikipedia, the free encyclopedia. The text of this article is licensed under the GFDL.

Membership restrictions

Underserved and low-income areas

Credit unions vs banks

"People not profit"

Credit union-to-bank conversions

Further reading

See also

External links