Credit Union FAQs

When it comes to safety and security, banks and credit unions differ in two major areas: size and capital.

• Size: Credit unions are much smaller than banks overall. In 2008*, the average credit union in the US had $103.7 million; the average size of a commercial bank was $1.74 billion. Overall, credit unions had approximately $825 billion in assets compared to the banks’ almost $12,318 billion in assets that year. In Montana, our credit unions are, on average, much smaller—only 9 of our 57 credit unions had more than $100 million in assets at the end of the year in 2009.
• Capital: Credit unions have a stronger capital base than banks, and the credit union capital-to-asset ratio is increasing. As of year-end 2008, the average capital to assets of federally insured credit unions was 10.9% as compared to 9.45% for banks. Capital in your credit union is at less risk because credit unions only make loans to members—never to foreign countries, or for highly leveraged corporate buyouts.

*The end of the year in 2008 was the most recent date that we could find comparable data for credit unions and banks. We’ll update these as soon as possible.

Credit unions are cooperative financial institutions that exist to serve their members and communities. Because we are member owned, credit unions are not driven to turn a large profit for a select group of stockholders.

This directly affects the way credit unions do business. We can afford to charge lower fees and offer less profitable services, such as small loans. And credit union members benefit through low rates for borrowing, high rates for savings, and (in some cases) a dividend payment at the end of the year.

While our not-for-profit status means that credit unions pay no corporate taxes on earnings, we do pay property and payroll taxes. And credit union members also pay state and federal taxes on any dividend they earn.

The banking industry has always complained that credit unions’ tax exemption provides an unfair competitive advantage. This complaint lacks depth for a number of reasons.

• First, credit unions control a very small percentage of the market share—both nationally and in Montana.
• Second, a large number of banks have changed their charter to Sub-S corporations—financial entities that, like credit unions, pay no corporate income tax.
• Finally, if the advantage were truly so great, it seems other financial institutions would convert to this not-for-profit, cooperative structure. While credit unions do sometimes convert to mutual banks, no conversions to credit unions are on record.

Consumers benefit from the tax exemption whether or not they actually belong to a credit union. Credit unions’ competitive rates along with their dedication to service keep other financial institutions in check. In fact, the Chairman of the American Bankers Association indicated in a 2005 letter that his record-breaking profits would have been even higher had it not been for competition from credit unions’ competitive rates. We are proud that we are able to save both members and non-members money simply by existing in the marketplace.

Without credit unions’ tax exemptions, consumers would also lose access to favorably priced products and services. Credit unions have no legal access to capital markets. We cannot issue stock, sell bonds, or issue commercial paper. Instead, credit union capital can only be built from the surplus left over after expenses are deducted and dividends are paid. Lack of capital access severely limits the capability of credit unions to expand and invest in new products and services. This critical difference is often misunderstood, or simply unknown to critics of the tax-exempt status of credit unions. Taxation would limit the only avenue of capital formation allowed to credit unions and, as a result, limit our ability to serve our members.

When credit unions were introduced in the early 20th century, they effectively met the needs of their members at that time. In the years since, technology has made the world a smaller place, financial services have expanded, and members’ financial needs have increased. Because credit unions have traditionally served occupational groups, most credit union members have always been working people with stable incomes.

The definition of basic financial services has changed since the 1930s. Today’s consumer needs more than passbook savings. When credit unions were first established in this country, most people had low incomes, and most financial institutions—banks included—were smaller and offered limited services. Many financial services were only invented 20 to 30 years ago. Credit unions, like other financial institutions, have broadened in scope to remain competitive, but we remain true to the mission of not-for-profit, cooperative service.

The regulatory structure for credit unions is identical or substantially similar to that of banks. Because of credit union limitations affecting our structure or services, some regulations that apply to banks do not apply to credit unions.

Federal credit unions, as well as federally insured, state chartered credit unions, report their financial data quarterly to the National Credit Union Association. NCUA evaluates the data as a tool to assess the safety and soundness of credit unions. This reporting structure is at least as robust as that required of banks by their regulator.

In Montana, state chartered credit unions are regulated by the state Division of Banking & Financial Institutions.
While bank regulators can approve new kinds of investments for their institutions, strict laws govern credit union investments. A top NCUA official once said, “Frankly, credit unions are getting tired of the regulations heaped on them because of banks’ unethical behavior.”

While different credit unions have different memberships, credit unions have always served all members fairly and equally. Today, the majority of credit unions in Montana have a community charter, meaning everyone in the geographical community is eligible to join.
The CRA was passed by congress in 1977 to force banks to provide loans, deposits, and other financial products to areas perceived to be not profitable. Banks could generally make loans without geographic constraints, and this led many institutions to make loans only in profitable areas, or outside of the local community where banks received deposits.

The CRA was designed to fix this problem. Credit unions have not been part of the CRA because they have always served their entire membership fairly and equally. Credit unions have never needed a regulation to force us to make a loan to our members—it’s part of the way we always do business.

Credit unions have made “commercial” loans since our inception. These loans have traditionally been low-dollar amounts to member business owners and farmers. Due to regulatory requirements, credit unions are limited in the number of member business loans they can provide. Credit unions have long been working with congress to pass a law that would allow us to improve our ability to serve our own members who have turned to the credit union for their financial service needs.

Bankers know that even with only 6% of the market share, credit unions provide consumers with an alternative that helps keep the banking industry in check. Without credit unions, banks could make greater profits at the expense of consumers, so naturally banks would prefer to see the competition disappear.

The original intent of credit union law in the U.S. did not limit fields of membership. Community charters were rather common. Due to the growing number of credit unions, identifying a specific membership group made it easier to distinguish membership areas, thereby eliminating confusion of a credit union’s intended area.

Credit unions began expanding their fields of membership to serve groups who didn’t have the means or numbers to establish their own credit unions. Diversification of the membership also provides additional safety during economic downturns. If one group is experiencing hard times, the other group can help sustain the credit union.

No. Credit unions are insured by the National Credit Union Share Insurance Fund (NCUSIF).

Unlike the FDIC, the premium-based government corporation that insures banks, the NCUSIF is regulated by the National Credit Union Association (NCUA) and operates more like a cooperative. Each federally insured credit union, including all Montana credit unions, must keep 1% of its insured deposits in the fund. As a credit union grows, so does its contribution to the fund.

Credit unions are ultimately the sole source of dollars for the fund, so if the NCUA determines that the fund is running too low because of claims or potential losses, the agency can require credit unions to pay additional money into the fund to return the fund to solvency.

The uniqueness of the credit union business requires a regulator and examiners who understand what sets us apart in the financial community.

During the recent economic downturn, credit unions continued to lend when other financial institutions refused to extend credit, and far fewer credit unions had to close down. This shows the resiliency and importance of the credit union model. If the NCUA folded and credit unions became regulated by the same agency responsible for banks, they could face pressure to become more like banks in order to survive. In an effort to create efficiencies, regulators would simply start applying one set of rules to two very different businesses.

The decreasing number of credit unions in the U.S. is due to credit union mergers, which have become fairly common. Mergers allow small credit unions to offer more services to members, compensate when a credit union loses its sponsor group or has an otherwise unstable field of membership, and alleviates supervisory and operation concerns by improving the soundness of a credit union.

Also, as noted, the number of credit union members continues to grow. Currently, 87 million Americans, including 381,693 Montanans, are credit union members. That’s more than 1 in 3, and as consumers receive the benefits of belonging to a not-for-profit financial cooperative, that number will continue to rise.

In a financial cooperative, losses caused by one member affect all members, because credit unions are forced to make up costs by raising loan rates and reducing dividend rates. Credit unions have a major advantage over many other financial service providers in that the people who receive loans from their credit union are member owners and, thus, have a greater sense of loyalty to the credit union.

Credit unions also work hard to help members plan for their future financial health—not just their immediate desires. As a result, credit union “write off” or default rates are, on average, lower than that of banks.

If credit unions feel it is necessary, they will also pursue reform of current laws and regulations. This was the case in 2004–2005, when credit unions lobbied for bankruptcy reform. Currently many credit unions are working hard to help their members restructure troubled debt.

Credit unions are directly affected by a variety of legislative issues. These include regulatory changes, changes in employment practices, and, of course, taxation issues. Credit unions also get involved in legislation that provides better financial education or tools for economic empowerment that can improve the communities where credit unions are located. Credit unions support these legislative issues by testifying during hearings, writing lawmakers, and making contributions to candidates’ campaigns.

Because credit unions are affected by laws, rules, and regulations, it is important to support candidates who are willing to listen to credit union issues and work for credit union principles while they are in office. Credit unions need to get involved with the legislative process to make sure our story is told and heard.