The big credit union crunch
With new services and wider reach, they're drawing fire from the banks
The burgers in buttered buns at the two Culver's restaurants in Eau Claire, Wis., may be yummy, but the borrowing practices of the eateries' owner, Bob Parsons, leave a sour taste in the mouths of many bankers. When he has needed money for equipment and other expenses, Parsons has gone to one of the city's nonprofit member-owned credit unions, borrowing about $1.5 million over the past 10 years. "The rates are better than at banks, and the credit union people were very willing to work with us," he says. To bankers, however, this is an example of expansion-hungry credit unions parlaying their tax-exempt status to undercut banks. Bankers are in the midst of trying to rally congressional and regulatory support to stop them.
Critics complain that the credit unions' push into commercial loans and other financial services warps their historic mission of facilitating small personal loans and savings among a limited group of affiliated members. Offered to many of today's 84 million members are credit cards, mortgages, home equity loans, business lending, checking accounts, use of global ATM networks, and even access to mutual funds, insurance, and other financial services--not to mention low-cost auto and personal loans and federally insured savings accounts that typically pay more than at banks.
Big is better. Forget that tiny credit union in the corner of a plant or office. It still exists, but big, diverse institutions now dominate. Deposits at the largest can top $1 billion, and even at smaller ones membership may be open to almost anyone. Three Rivers Federal Credit Union in Fort Wayne, Ind., for example, won approval from regulators this year to accept as members anyone living, working, worshiping, volunteering, or attending school in the area's seven counties. "The larger the membership, the more stable we can be, and the more services we can provide," says President Jeff Meyer.
Credit union officials say such fast-spreading community charters are vital for survival. Three Rivers, for example, was formed in 1935 to serve local International Harvester workers. But as Harvester curtailed operations, Three Rivers began to recruit members at an array of employers. "Had we not done so, we would no longer be in existence," says Meyer.
Even credit unions that haven't suffered a setback are broadening. Membership in CorePlus Federal Credit Union in Norwich, Conn., begun almost 70 years ago with 27 teachers, has grown to 18,500, including teachers from several districts, hospital workers, and telephone employees. Now, with a new community charter, President Warren Scholl says CorePlus will no longer have to turn away other potential members.
Credit unions still account for only 6.3 percent of overall banking industry assets and fewer than 3 percent of credit cards, 2 percent of home mortgages, and 18 percent of auto loans, according to consultant Callahan & Associates. Only about 2 percent of loans are to businesses, and these average a modest $120,000, say credit union officials. Even though credit unions have grown, banks have grown faster, says Callahan President Chip Filson.
And growth can be elusive. Clients at the New World Federal Credit Union in Lafayette, Calif., fell from almost 4,000 to about 1,400 following the shutdown of Carnation Milk facilities it serviced. It now has a community charter to sign up members from five towns, but it is struggling. "We don't have money to advertise much, so nobody knows we are here," says President Pat Wagner.
Still, banks--especially small community banks competing head-to-head--have made it a top priority to persuade legislators and regulators to rein in the credit unions. "The credit unions creating competition for me are a lot bigger than I am," says Robert Gorsuch, president and CEO of the $114 million Oak Bank in Fitchburg, Wis.
The trend toward bigness especially concerns bankers. While the number of credit unions has shrunk to about 9,500--down 60 percent from 1970--overall assets and deposits have risen 35-fold. Three quarters of those assets are held by the 1,148 unions with assets over $100 million apiece. Since credit unions don't pay federal income tax, "that certainly gives them a leg up," says Gorsuch.
Credit unions counter that they don't make a profit and thus there is nothing to tax. "A bank's motive is to make a profit that can be sent off to shareholders," says Dan Mica, president of the Credit Union National Association. "A credit union has no shareholders; it's just the credit union and its members." Bankers respond that credit union funds left over after expenses are like profit and provide capital for growth and operations.
A philosophical divide intensifies the quarrel. Banks adhere to the capitalistic idea of satisfying customers and investors. Credit unions, which trace their U.S. birth to 1909 in New Hampshire, promote a cooperative idea of people who are pooling their money to lend to one another. Even a giant like the Navy Federal Credit Union--with $22.1 billion in assets and 2.4 million members--has an all-volunteer board of directors. A point of pride is the range of people served--40 percent of the 1.3 million no-fee checking accounts at Navy Federal end the month with a balance of $100 or less.
The clincher for many clients is dollars and cents, says Greg McBride, an analyst at Bankrate.com. "Credit unions typically pay higher rates on deposits and charge lower rates on loans" (table, Page 56).
Bank shots. Leading the charge for a "level playing field" is a coalition formed this summer by the American Bankers Association, Independent Community Bankers of America, and America's Community Bankers. "Congress never intended for huge credit unions to exist with virtually no restrictions on their membership and an ability to provide virtually all types of service," says Dale Leighty, chairman of First National Bank of Las Animas, Colo., and of the Independent Community Bankers. "They are no longer just meeting unmet needs."
In addition to curtailing the credit unions' tax exemption, bankers hope to block wider authority for business loans and participation in Small Business Administration programs, reverse or slow community charters, and add more regulation. It may be a tough fight. Credit unions, whose overall finances are healthy according to federal overseers, can often muster consumer and political support while portraying bankers as "motivated by greed." In one twist, credit union leaders are telling small bankers that they should be more fearful of megabanks. And credit union economist Bill Hampel argues that new services reflect the new products at all financial outlets. "There weren't credit cards and home equity loans when credit unions started."
Some change, perhaps a limited tax coupled with expanded power to raise capital for growth, may come. But Craig Mellenthien, president of Western Division Credit Union near Buffalo, sees the cooperative fellowship of credit unions as still a strong plus. Says Scholl of CorePlus: "We're just a friendly bunch of people." Maybe so, unless there's a banker in the room.
Earn more, pay less
With no taxes or stockholders to pay, big credit unions can pay higher returns on deposits and charge lower rates on loans.
Interest paid
on deposits Credit Unions Banks
Checking accounts 0.39 pct. 0.14 pct.
Money market accounts 1.02 pct. 0.32 pct.
1-year CD 2.15 pct. 1.48 pct.
5-year CD 4.23 pct. 3.38 pct.
Interest charged
on loans Credit Unions Banks
New-car loan 5.26 pct. 7.23 pct.
Home equity loan 4.38 pct. 4.73 pct.
Variable rate
credit card 10.21 pct. 12.60 pct.
Personal loan 12.39 pct. 14.43 pct.
Note: Averages at 50 large credit unions and 50 large banks.
Source: Bankrate.com
This story appears in the September 27, 2004 print edition of U.S. News & World Report.