What’s the deal with credit unions?

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Fed up with banks? You’re hardly alone. Credit unions have grown dramatically in the last 20 years, fueled largely by high fees charged by commercial banks. Low rates for ordinary loans are also a big draw. But for all the growth, not much has been written about credit unions other than the occasional puffy story about how much a consumer can save by ditching their bank. That’s not to say that the growth has gone unnoticed at all – or indeed that it isn’t creating its own problems that need to be addressed.

What is a credit union? They are non-profit coops that essentially function the same as a bank, but rely on members’ equity as their sole source of capital. Depositors are “members” in that they own one share in the credit union as an equal partner of all other depositors. They exist in nearly every country around the world, under different names, but in all cases are required to have some kind of bond between members. Many were founded by unions and other employee groups to pool resources. That was loosened up in 1998 to include residents of a geographical area. They are nonprofits and do not pay taxes, returning profits to their members in annual profit sharing.

Since 1994, their growth in the US has been amazing. Membership is up 44% to 99M and assets topped $1 Trillion for the first time in 2012, a growth rate of 6.2% annually (but still far behind the $13T in commercial banks). They now issue over 17% of credit cards. The total value of mortgages underwritten over the last 20 years has has expanded 66% faster than at commercial banks. But in that time the number of credit unions has been cut in half, down to just under 7,000 nationally. Consolidation has come to define credit unions for some very important reasons.

While there are tremendous advantages to a credit union, they are especially vulnerable to economic downturns. Since they serve a well defined population, their membership is by definition not diverse – a contraction in the company or area they serve hits them hard. Without capital from the outside a terrible pinch always results. The downturn in 2007-2008 was especially hard on credit unions and has fueled the recent consolidation – and aggressive pitch for new members.

I will use my credit union as a good example, in part because I like gushing about them. In 2006 I fled high fees and joined Highgrove Credit Union. That was started in 1947 for workers at the nearby Ford plant, and expanded to invite residents of this portion of St Paul. In 2010 they were not happy about their position and courted a merger with Wings Financial, started in 1937 by airline pilots. They are very helpful and I know the tellers by name – and they offer used car loans for only 2.99% (!!). I’d have been sunk long ago without them.

But the spectacular growth and attraction for people like me has gotten the attention of the American Bankers Association (ABA). A small war has broken out with the ABA asking congress to consider taxing them. The Credit Union National Association (CUNA) has responded with its own plea for members to lobby congress and keep the nonprofit status in place.

The ABA is not the only organization that is watching the growth. Credit unions are regulated by the National Credit Union Administration, which acts as both the FDIC and regulator arm of the federal government. They only have $11B on hand to insure deposits and bail out credit unions that fail, which is a paltry sum given that there are now four credit unions with more than $10B in assets – the largest being the Navy Federal Credit Union, founded to serve sailors and Marines, which now has $54 billion in assets. The largest bank in Oregon is now OnPoint, a credit union with $3B in assets. The mergers are being watched very carefully by the regulators who are getting rather nervous.

CUNA is charging ahead and doing what it can to expand credit unions even further. A bill now in congress would allow them to issue subordinate debt, essentially conventional bonds that would inject more capital into the system through conventional means without being a voting member. Access to that capital would make credit unions full players in the credit and loan markets like any regular bank.

The growth in credit unions should continue at least as long as high fees define commercial banks. Given how flexible and personal they are, credit unions do offer a tremendous advantage for ordinary consumers. Their small size can be dangerous, however, and working around that has made for aggressive growth and consolidation. Could they replace commercial banks? It seems unlikely, but they are a very useful alternative – and are growing much more rapidly.