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Credit union

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. Credit unions nonetheless remain typically smaller than banks with, for example, the average U.S. credit union having $93 million in assets versus $1.53 billion in assets for the average U.S. bank, 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.

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.

Credit unions are sometimes called by other names depending upon where the credit union is located; for example, credit unions are called "Savings and Credit Cooperative Organizations" ("SACCOs") in many African countries "to emphasize savings before credit. Credit unions are often called "cooperativas de ahorro y crédito" in Spanish-speaking countries, but in Mexico a credit union is typically called a "caja popular. French terms for "credit union" include "caisse populaire and "banque populaire. Afghani credit unions are called "Islamic investment and finance cooperatives" (IIFCs) to comply with Islamic lending practices.

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 Jan. 23rd, 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, the first non-faith-based or community credit union, established for all people in the greater Boston community, Industrial Credit Union, was chartered.

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, the term "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. Credit unions are not charities or similar organizations that rely on donations; to the contrary, credit unions 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) do 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.

Usually it is easier for a person to obtain a credit card or a loan from a credit union of which he is member than from a bank. This is especially true for people who have no credit or whose credit has been hampered. The fact that a credit union makes surplus also helps such people build credit or re-establish it. Credit unions are a good way of securing a credit card in order to build your history.

Corporate credit unions

The majority of credit unions are known as natural-person credit unions, and provide service to individual consumers. Corporate credit unions (also known as central credit unions in Canada) also exist, but instead serve the needs of credit unions with operational support, funds clearing tasks as well as product and service delivery. In effect, they serve as a credit union's credit union. 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 $49.1 billion in assets. The two largest corporate credit unions that serve only natural-person credit unions are Western Corporate Federal Credit Union (WesCorp) in San Dimas, California and Southwest Corporate Federal Credit Union in Plano, Texas.

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 employed 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

In the United Kingdom credit unions are regulated by the FSA (Financial Services Authority). 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.

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.

In the U.K. one of the benefits of joining a credit union is the life insurance CU's provide their members free of charge. Also, if a member were to die then their loan value is wiped out with no further charge to the member's account or their family; further, in many cases their savings with the CU are doubled and passed to the next of kin. As recent history has shown, with the Christmas 'savings club' Farepak going bust in 2006 (very unfortunately un-regulated, and not protected by UK law) and hundreds of Farepak customers losing all their savings, the real alternative of a regulated and protected CU is a able to provide both good savings rates and very affordable loans, in the safe knowledge that all CU customers savings are protected, if the worst happens.

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. (ref: World Council of Credit Unions) They are concentrated in Quebec, where they are known as caisses populaires (people's banks), and in the Western provinces. As of Dec. 31 2006 there were 549 member caisses and 5.8 million retail members in the Caisses Populaires Desjardins federation. According to data from Credit Union Central of Canada on the same date there were 10.8 million retail members controlling CAD $193 billion in assets across all of Canada. Aside from Desjardins, other major Canadian credit unions include Vancity, Coast Capital Savings, and Credit Union Atlantic.

United States

In the United States, 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. All federal credit unions and 95% of state-chartered credit unions have federal deposit insurance (called "share insurance") through the National Credit Union Share Insurance Fund of at least $250,000 per member. This federal 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 National Credit Union Share Insurance Fund had a higher insurance fund capital ratio than the FDIC Bank Insurance Fund. 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 Federal Deposit Insurance Corporation insured more than $4,000 billion 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.

Federal credit unions may apply to the National Credit Union Administration 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. Because of that, credit unions 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/mod-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 National Credit Union Administration, 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.

Membership restrictions

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 'common bond' or 'bond of association'.

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). 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" complaints against credit union management.

If a member voluntarily terminates their membership, they may or may not be eligible to rejoin, depending on the credit union's policies and government regulations.

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). In the United States, 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, and similar procedures are typically used in other countries.

Credit unions and banks in the United States

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 twentieth 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). Additionally, credit union members 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 upon 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 from banks.

Credit Union-to-Bank Conversions

Since 1995, over thirty U.S. 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 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 of 2006.

See also

References

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.

External links

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