Credit unions

• Origins


• Government Deregulation

Definition: Cooperative financial establishments under the control of their membership
Significance: Initially designed to provide credit to needy households, credit unions gradually became more like banks, representing a viable alternative to banks for consumers seeking a community-based financial establishment.
Credit unions were created as a means of dealing with the credit problems of low-income families, particularly industrial workers. Each institution formed around a cohesive social group, such as employees of the same businesses, members of churches, members of trade unions, or members of fraternal organizations. The cooperative principle emphasized that members were committing their savings to create a pool of loan funds for people whomthey already knew. The implicit social pressure made borrowers more likely to repay. Putting money into the credit union involved acquiring shares, although they very much resembled deposits. For many years their chief business was extending personal loans to members. Group cohesiveness helped keep down credit risks and transactions costs. Credit unions were and remain not-for-profit organizations.

Origins

Credit unions originated inWestern Europe during the late nineteenth century. The idea spread to Canada and from there to New Hampshire, where the St. Mary’s Bank Credit Union was formed in November, 1908. Massachusetts adopted enabling legislation in 1909. Edward Filene, a prominent retailer and philanthropist, was an influential promoter. He recognized that many low-income persons were victimized by loan sharks. State “usury” laws prohibiting high interest rates on loans caused banks and other reputable lenders to avoid the personal loan market, where credit risks were high and loans typically very small.
Initially, the credit union movement spread slowly—there were only 190 in 1921. Employers encouraged credit unions in the workplace, giving them office space and management advice. By 1931, there were 1,244 credit unions, but their total assets were only $34 million, so the average size was less than $30,000. However, the Great Depression of the 1930’s brought many new members, fleeing the disastrous problems among banks and other deposit institutions. Congress adopted in 1934 the Federal Credit Union Act, which authorized federal charters for credit unions, giving some assurance of regulatory oversight (but not deposit insurance), and opening the entire country to credit union organization. Credit unions were exempt from the federal corporate income tax—a condition that has infuriated the banking industry. When tax rates went skyhigh during the 1930’s, tax exemption became attractive to many entrepreneurs who could achieve high salaries and favorable borrowing opportunities through organizing credit unions.
The number of credit unions grew rapidly from two thousand in 1934 to more than nine thousand by 1941. The numbers actually declined during World War II and passed ten thousand only in 1950, at which point they had about $1 billion of total assets— so average assets were still less than $100,000 per institution.
After 1950, market interest rates moved steadily higher, but regulations prevented banks and other deposit institutions from matching the increases. Credit unions were able to pay higher rates, and steadily increased market share. By 1970, there were nearly twenty-four thousand credit unions. Their assets had risen to about $16 billion. This was still only about 10 percent as large as the savings and loan industry. In 1970, Congress created the National Credit Union Administration (NCUA) to charter and regulate federal credit unions. A National Credit Union Share Insurance Fund was created to insure federal credit unions. The new insurance covered 22 million credit union members. Many state-chartered credit unions chose not to take federal insurance, and by 1981, sixteen states had created their own share-insurance programs.

Government Deregulation

Credit unions shared in the changes brought about by deregulation in and after 1980. In particular, they were able to offer the equivalent of interestbearing checking accounts and to make mortgage loans. In 1982, the NCUA allowed individual credit unions to expand their membership to include multiple unrelated employer groups. A Supreme Court decision in 1998 invalidated this latitude, but Congress responded in the same year by passing the Credit Union Membership Access Act, which permitted broad membership.
Credit unions shared in the adverse developments affecting other deposit institutions after 1980. The state share-insurance programs were overwhelmed, and virtually all surviving credit unions migrated into the federal insurance program. By the new millennium, credit unions had become much more like banks in terms of services provided, but served primarily households rather than business customers. In addition to the range of deposit and loan services, they were providing automatic teller machines (ATMs), credit cards, and online banking. Many had become big businesses— there were more than one hundred with more than $1 billion of assets apiece. Some large credit unions provided operational services to other credit unions. Some credit unions converted into commercial banks, a process criticized for giving windfall benefits to top management to the detriment of ordinary members. In 2004, there were about sixteen thousand credit unions with about $655 billion of assets. Most tried to maintain a user-friendly style and to promote good financial management by their members.

Further Reading
Fountain, Wendell V. The Credit UnionWorld: Theory, Process, Practice—Cases and Applications. Bloomington, Ind.: AuthorHouse, 2007. Examines all aspects of credit unions, from history to their future, covering topics such as governance and marketing.
Mishkin, Fredric S., and Stanley G. Eakins. Financial Markets and Institutions. 6th ed. Boston: Pearson Prentice Hall, 2009. Basic work on the financial world and its institutions, contains a chapter on savings and loan associations and credit unions.
Moody, J. Carroll, and Gilbert Fite. The Credit Union Movement: Origins and Development, 1850-1970. Lincoln: University of Nebraska Press, 1971. This scholarly study emphasizes the idealistic motivation of many credit union developers.
Pugh, Olin S., and F. Jerry Ingram. Credit Unions: A Movement Becomes an Industry. Reston,Va.: Reston, 1984. Rich in detail on the transition from philanthropy to business.
Wilcox, James. “Credit Union Conversions: Ripe for Abuse . . . and Reforms,” Credit Union Times, July, 2006. This newsletter provides a good view of current credit union conditions. The article documents criticisms of conversions to banks.
See also: Farm Credit Administration.