University of Wisconsin–Madison

Credit Unions

Overview


Credit unions play an important role in consumer banking by offering financial services to 106.9 million members through federally insured credit unions that have over $1 trillion in deposits. Approximately 5% of the credit unions have assets greater than $1 billion, but held 61% of total system assets in 2016, and showed the strongest growth in loans, membership and net worth. Approximately 61% of all credit unions have less than $50 million in assets accounted by 4% of total system assets. This group reported declining loans, membership, and net worth in 2016.

Credit unions, like commercial banks and thrifts, are both Federal and state government chartered. Numbers have declined over the last 5 years, but membership, deposits, and loans have increased. There are currently 3608 federally chartered credit unions (FCUs) and 2177 state chartered credit unions (SCCUs). (National Credit Union Administration).

History


The model for modern credit unions was developed in Germany in the mid-19th century. Influenced by the example and principles of the Rochdale Pioneers in England, these credit cooperative societies spread quickly in Europe. The first credit union in the U.S. opened in 1909, in Manchester, New Hampshire, and by 1920 there were credit unions in New York, North Carolina, and Massachusetts. They provided credit for consumer purchases, and opportunities for savings.

The prosperity of the 1920s created a strong demand for credit, and many states approved statutes permitting the organization of credit unions. Strong leadership led to the development of state credit union leagues, which supported the growth of the emerging industry. By 1929, 32 states had credit union legislation, and 1,100 credit unions had been formed. In 1934, the Federal Credit Union Act was passed, which permitted the formation of federally chartered credit unions in states that did not have a credit union law. This precipitated the formation of thousands of additional credit unions during the 1930s.

Most credit unions were formed in work places, or sponsored by membership organizations or churches. These early credit unions depended on a network of volunteers who served on the board and often ran the credit unions.

As the industry developed, it became more professional and also created strong support institutions. Credit unions formed a self-funded share insurance fund, a mutually owned credit insurance company (Credit Union National Association (CUNA)), and cooperatively owned central banking services (state or regional corporate credit unions and U.S. Central Federal Credit Union). These organizations have supported a significant expansion of consumer services.

Following Federal legislation in 1977, credit unions expanded their services to include share certificates and long-term mortgage lending, making them competitive in the financial sector.themselves to serve as full service financial institutions for their members. Traditionally credit unions were formed with stringent membership criteria based on a “common bond” such as employment, association, religious, or community organization. This is now expanded to include a bond based on a particular geographic area.

Organizational Structure


Like all other financial depository institutions, credit unions take deposits and offer loans to its consumer base. While credit unions resemble banks, they have several distinctive legal differences. They operate on a not-for-profit cooperative basis and have an IRS tax exempt status. Credit unions return earnings to their membership in the form of reduced fee (interest) on loans and increased interest (dividends) on deposits, or they may re-invest earnings into the credit union.

The National Credit Union Administration is an independent federal agency that insures deposits at federally insured credit unions, charters and regulates all federally chartered credit unions, and provides protection to the member-owners of credit unions through regular credit union examinations. Oversight of its operations is provided by a three-member Board of Directors.

NCUA provides individual deposit insurance of up to $250,000 to all federal credit unions, and most of the state-chartered credit unions through the National Credit Union Share Insurance Fund. The Fund is backed by the full faith and credit of the U.S., and is monitored and managed by NCUA.

Besides regular examination of credit union operations, NCUA also has established reporting requirements for Credit Union Service Organizations, or CUSOs, which provide services to credit unions such as back-office human resources and payroll support, loan underwriting, and member services.

The primary purpose of the corporate credit union system is to provide short term liquidity to natural person credit unions. NCUA provides guidance and oversight of this critical role. NCUA has also continued to oversee the Temporary Corporate Credit Union Stabilization Fund, which was set up in response to the failure of five large corporate credit unions during the 2007 financial crisis. NCUA was the first federal financial institutions regulator to recover losses from investments in faulty mortgage-backed securities.

Some credit unions may be designated “low-income credit unions” by the National Credit Union Administration, or, in some instances, a state regulatory agency. This designation allows the credit union to accept non-member deposits and secondary capital in order to better serve its membership and community. Many of these low-income designated credit unions serve narrow fields-of-membership, such as groups of employees.