Area credit unions are weathering the financial crisis — but it’s not yet clear what impact the March failure of two large corporate credit unions will have locally. Consumers making a major purchase these days have choices. If they’re buying a new car, for example, they can A. Pay cash B. Finance through the dealership C. Talk to their personal banker D. Finance through their local credit union.
More and more consumers seem to be choosing that last option.
“We offer services without fees and lower rates,” says Melanie Riedl, marketing manager of the University of Louisiana Federal Credit Union, an organization specific to university employees, faculty, staff and family members. “The challenging economy hasn’t really affected us because we service the university and because Louisiana is doing so well right now.”
Credit unions, not-for-profit cooperative financial institutions that are owned and controlled by their members, actually began in England in 1844 before spreading to Germany six years later. Canada saw its first credit union in 1901, and the U.S. joined the party in 1908. By 1935, 39 states had credit union laws, and, according to the National Credit Union Administration, there were 8,101 federally chartered and insured state-chartered credit unions at the end of 2007.
Despite its comparatively small population, Louisiana ranks ninth in the country with 237 credit unions in operation. According to the National Credit Union Share Insurance Fund, the state’s 237 CUs have 1.1 million customers, loans worth $4.2 billion and assets of almost $7 billion. Of those operating in Louisiana, 33 are headquartered in New Orleans, 28 in Baton Rouge, 19 in Shreveport and 14 in Lafayette.
“We have a lot of segment-based credit unions in our state that are very specific,” says Riedl. “Other states don’t have that.”
The UL credit union, which Riedl says has more than 7,000 members and upwards of $30 million in assets, is the second-largest of its kind locally. The Lafayette Schools Federal Credit Union, the largest, has assets of more than $110.7 million and 12,467 members.
But numbers aren’t the whole story. Many smaller credit unions — and most local organizations are considered small — are performing well.
“We certainly have plenty of money to lend,” said Lawoka Dionne, CEO of First Pioneers, which has less than 5,400 members and $23 million in assets. “We haven’t really had any [economic] downturn, defaulted loans or foreclosures, nothing like that. It’s pretty much been business as usual.”
Because of their small size and limited exposure to mortgage-backed securities, most credit unions have indeed been weathering the financial meltdown pretty well.
But that’s not been the case for two large wholesale credit unions: U.S. Central Federal Credit Union in Lenexa, Kan., and Western Corporate Federal Credit Union in San Dimas, Calif. Both were placed under conservatorship in March “to stabilize the corporate credit union system and resolve balance sheet issues,” according to an a story on CNNMoney.com, which quoted the National Credit Union Administration. The NCUA is a federal agency that regulates, charters and supervises federal credit unions. While the two failed institutions have combined assets of $59 billion, neither serves consumers directly. As corporate credit unions, they service the credit union system and were determined by the NCUA to have had “an unacceptably high concentration of risk.” Because of the two big failures, deposit insurance costs at credit unions across the country are expected to rise. Those deposits are not currently FDIC insured.
The administration’s action comes as no surprise to some in the banking industry. They believe big banks and big credit unions have the some of the same problems caused by too much leveraged exposure to unstable funding sources (deposits), bad loans and devalued investment securities. They believe that local credit unions are like local banks in that they stick to local loans and deposits; therefore, all is still good with that business model for now.
While national statistics indicate a steady drop in the number of credit unions since the turn of the century, Dionne claims there’s a good reason for the trend. “It has to do with mergers — larger companies buying up smaller ones — more than anything else. A lot of people like the way we do business. We’ll run credit checks, but only to settle on what we can loan. We don’t look at a history with other lenders, and we don’t raise our rate because of a late payment or two.
“It’s just very satisfying at the end of the day to know we’ve helped some people when they needed it.”
Banks and credit unions have long been fierce competitors, with banks long battling to restrict credit unions from opening up their memberships, arguing that they have an unfair advantage in the marketplace. For example, credit unions — because of their not-for-profit status — are exempt from federal and state income taxes. They have also successfully lobbied to exempt themselves from the federal government’s Community Reinvestment Act, the law that requires banks to help meet the credit needs of low- and moderate-income neighborhoods in the communities they serve.
Credit union membership at one time was wide open, thanks to a federal regulation passed in 1982 during the Reagan administration. Banks challenged the 1982 regulation as illegal, and the courts agreed in 1998. Despite that successful challenge, credit unions have found numerous ways to grow their membership and today have more members than ever before. People can qualify through their employer, organizational affiliations like churches or social groups, or through a community-chartered credit union.