Malcolm McDowell Woods

Giving credit where it’s due.

By - Jul 1st, 2009 12:01 am
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In the midst of the current, prolonged economic recession, it is easy to point to imploding businesses and even whole sectors of industry as examples of what NOT to do. Since such a list is-by its very nature-always excessively long, it is also excessively unwieldy and excessively broad. A more interesting, and more finite, approach would be to point to businesses and sectors of industry that provide insightful examples of what TO do. The credit unions seem to provide just such an opportunity.

As a matter of fact, the marketplace turmoil has driven many mortgage brokers to close up shop and big banks-like Bank of America-have pulled the plug on the mortgage lending part of their business. The housing crisis, initially brought about by the subprime debacle that credit unions studiously avoided, remains at the epicenter of the global financial meltdown and US recession.

The good news is that many consumers are turning to credit unions for help. As of the date of publication, all signs point to last year being a record one for credit union mortgage lending. Credit union mortgage portfolios are growing steadily, and though delinquencies are up a bit, those remain low compared to banks and thrifts. Clearly, credit unions have benefited from their ongoing commitment to the fundamentals of lending.

We can see a random sample of the difference if we compare the current national average bank rates with a local credit union, like Brewery Credit Union. While the national average for banks on a three-year CD is 2.09%, Brewery Credit Union here in Milwaukee is currently offering 2.37%. The case is similar for car loans, with the current national average for banks on a 48-month loan hovering around 6.63%; Brewery Credit Union is offering 6.10%.

That is not just an isolated example; rather, it is a reflection of how the community-based idea behind credit unions has helped them move against the current during the economic recession. As Brett Thompson, president of the Wisconsin Credit Union League, said in a recent press release, “Credit unions are safe, members are increasing their deposits, and members are relying on credit unions for loans now more than ever.”

From 2007 to 2008 – a time when other lenders have been bleeding capital, credit unions in and beyond Wisconsin remain healthy. To put some numbers behind that: Wisconsin credit unions saw their net worth increase by $70 million to $1.9 billion. During that same period Wisconsin credit unions’ assets grew $1.6 billion to $18.2 billion, for a growth rate of 9.9%. Loans increased $1.4 billion to $14.7 billion, an increase of 10.5%, and savings increased $1.3 billion to $15.2 billion for a growth rate of 9%.

What are credit unions?

In the mid-1800s, Germany was the first home of credit unions as we know them today. These early German credit unions were organized by Herman Schulze-Delitzsch and Friedrich Raiffeisen. The crop failure and famine of 1846 caused Schulze-Delitzsch to organize a cooperatively-owned mill and bakery which sold bread to its members at a price that was adjusted to provide savings. Schulze-Delitzsch took this cooperative notion to address the needs of credit. In 1850, he organized the first cooperative credit society, known as the “people’s bank.” Raiffeisen’s goal was to provide credit to farmers who needed to purchase livestock, equipment, seeds and other farming supplies.

In 1900, the concept crossed the pond to Quebec, where a court reporter named Alphonse Desjardins organized a credit union to provide relief to the working class. A few years later, he went on to help a group of Franco-American Catholics in nearby New Hampshire organize the first credit union in the United States.

Nowadays, a federal credit union is a nonprofit, cooperative financial institution owned and run by its members. Organized to serve, democratically controlled credit unions provide their members with a safe place to save and borrow at reasonable rates. Members pool their funds to make loans to one another. The volunteer board that runs each credit union is elected by the members.

It is important to point out, however, that the noble ideal of the credit union system is backed up by an insurance plan very similar to the better-known FDIC. In the case of credit unions, there is the National Credit Unions Share Insurance Fund (NCUSIF) for federally insured credit unions, and there is the American Share Insurance, which backs state-chartered credit unions. You can also check the insurance status of a particular credit union by visiting www.ncua.gov/Resources/ShareInsuranceToolkit.aspx

The original ideal to create a system of not-for-profit cooperatives that promote thrift and thwart usury today serves nearly 82 million members with deposits exceeding $520 billion and loans over $355 billion in more than 9,500 federally insured credit unions. (see, for instance: http://www.ncua.gov/About/Default.aspx).

Why are credit unions faring better than banks in the current recession?

At the heart of this performance gap in the current economy is a fundamental difference in the goals of banks versus credit unions. As we have come to realize, much of the damage was caused by investing and speculating in various high-risk real-estate instruments in order to maximize profit for bank shareholders. However, because it is not the goal of credit unions to maximize profit for stockholders, they were not pulled to such a clear trade-off of risk for returns.

While the banks attempt to optimize profit through the charging of bank fees and high interest rates on loans and credit cards, credit unions, in order to keep their not-for-profit tax status are not allowed, by law, to make a profit. That means that when money is made by credit unions, it is returned directly to the members through low interest rates on loans and credit cards and high interest rates on checking accounts, savings accounts, CDs, IRAs, money market accounts, etc. This is the biggest difference between the two.

That is not to say there isn’t an occasional exception, as two corporate credit unions did recently run into trouble and have to be taken over. At the same time, though, these particular entities are a kind of hybrid between a credit union and an investment bank, which works as a focal point for lots of separate franchises. (For more on this topic, visit: http://www.creditunionsonline.com)

Another key element in understanding the difference between credit unions and banks is to see that they begin from a different starting point; and this difference is another reason credit unions are proving less vulnerable. The credit union springs up from within a pre-existing community to start with. That is, a federal credit union is not open to the general public. Instead, it is limited to persons sharing a common bond of occupation, community or association. Examples are employees of corporations, members of associations and residents of a defined area (such as a town or a neighborhood). In order to join a credit union, a potential member must be first eligible under the common bond provisions, and submit a membership application. Upon submittal of the application, and the purchase of at least one share (typically $5), a person becomes a member with full voting rights.

So, from the very beginning, credit unions have existed for more than 150 years to get people together and pool their resources so they could mutually survive catastrophes like crop failures and droughts. Built on the same kind of business model that is seen in other cooperative companies across different industries – focusing on community – it seems fitting if the real reason behind their financial success is being driven by their willingness to focus on something other than their financial success.

–by Erik Richardson

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