Credit Unions Find Whole World Open to Them

Credit unions--mini financial institutions that boast lower-than-average loan interest rates and fees--are coming to Main Street.

After years of being offered mainly through union, company and specific member groups, the National Credit Union Administration has just approved rules that could potentially open credit union membership to millions of households--particularly low-income households--that don’t currently have access.

That’s bad news for banks that have seen their market share significantly eroded by the explosive growth of credit unions and mutual funds in the past several years. But it’s great news for consumers, who can often get checking accounts and personal loans for a fraction of what they’d pay at banks.

It’s worth mentioning that bankers are hotly contesting these changes, as well as earlier measures that have served to broaden credit union membership over time.

“Today, credit unions are easier to join than a Tupperware party,” complained Donald G. Ogilvie, an executive vice president of the American Bankers Assn. in Washington.

The bankers group has sued NCUA in an attempt to force credit unions to adhere more closely to so-called “common bond” rules that barred millions of Americans from access to credit unions in the past. If the bankers are ultimately successful, credit union membership would likely plunge. But no one expects that to happen for many years--if at all.

The common bond requirement of credit union membership is, in fact, at the heart of the bank-versus-credit-union debate. In the past, credit union regulators believed that the federal credit union law, passed in the 1930s, required all members of an individual credit union to be members of the same group. As a result, credit unions typically restricted their membership to the employees of just one company, the staff of a single military base, the members of a particular union or the members of a single association. Now, the NCUA says “the common bond of credit union membership gives members a sense of belonging and ownership and is not meant to limit membership.”

Indeed, the new NCUA rules, which went into effect this month, allow low-income groups of all types to join virtually any willing credit union, whether established or forming. The low-income members do not need to have any common bond with the other members of the established credit union. All they would need to qualify is an income of less than 80% of the average household income in the United States. In 1994, that makes the qualifying income $25,000, according to an NCUA spokeswoman.

Allowing low-income households access to credit unions is pivotal because the cost of basic banking accounts has soared in the past few years for those who don’t have the wherewithal to maintain a minimum balance, says Norman E. D’Amours, chairman of the National Credit Union Administration. Additionally, bank branches are often absent--or rare--in minority and low-income areas.

“One of the main purposes of the change is to facilitate the ability of credit unions to serve low-income communities that have been abandoned or never served at all by banks,” he says. “Historically, credit unions were specifically designed to serve people of modest means.”

Additionally, the new rules will allow credit unions that are in “distress” to have broad latitude to add occupational and associational groups--regardless of income--that would otherwise be barred from their roster. This provision is specifically being added because a number of military credit unions are being threatened by base closures, an NCUA spokeswoman says. These credit unions can presumably be kept alive by catering to groups that will remain in the base area.

What exactly is a credit union and why would anyone want to join one?

Credit unions are nonprofit cooperatives that operate very much like small community banks. While each credit union is somewhat different, most offer both savings and checking accounts and a variety of consumer loans, including auto and credit card loans.

Deposits made in federally chartered credit unions are insured by the NCUA to $100,000. The NCUA is a governmental body, similar to the Federal Deposit Insurance Corp., which backs bank deposits. It is important to note, however, that not all credit unions have NCUA insurance. Roughly 600 state-chartered credit unions, mainly in Illinois, Ohio, Indiana and Puerto Rico, are privately insured. Private deposit insurance does not generally provide the same level of protection.

What makes credit unions attractive is simple. Because they’re nonprofit and their directors are all volunteers, credit unions have lower operating expenses than banks. That means they can--and usually do--undercut banks on rates and fees, while paying somewhat more for deposits.

A survey conducted last March by the Credit Union National Assn., the industry’s Madison, Wis.-based trade group, found that the average monthly checking account service charge amounted to $2.92 at credit unions and $5.93 at banks. About 77% of credit union customers earned interest on their checking balances compared with 51% who earned interest on their bank-based checking accounts, the survey showed.

Credit union loan rates were also decidedly better, according to the survey. The average credit card interest rate was 13.4% at credit unions versus 17.8% at banks. Credit unions were charging an average of 7% for auto loans compared with 7.75% at banks.

Few credit unions offer big-ticket loans, such as mortgages, however. And they rarely offer business loans. The fact is that while credit union membership has soared over the past dozen years, the bulk of the nation’s credit unions are fairly small. And their modest size limits both the size of loans they can approve and the number of services they can economically offer.

That may be at the heart of why bankers are fighting the NCUA’s new membership rules. While small credit unions are not a competitive threat--they simply can’t offer a wide enough array of services to accommodate every consumer credit need--the “Godzilla-sized” credit unions that could be created under the broadened membership rules could.

Individuals who are interested in organizing or joining a credit union may call (800) 358-5710 for more information.