Enlisting Credit UnionsDecember 4, 2008
Credit unions have been a success story in the Unites States. Begun 100 years ago as a movement to provide for the credit needs of individuals of modest means and to promote thrift, they have grown to become a large-scale member of the financial services market. Owned by their members, they hold a privileged position in the world of financial services. Unlike their banking counterparts, credit unions do not pay corporate income tax. They operate as not-for-profits solely for the benefit of their owner-members. In this time of economic uncertainty, credit unions need to do more to help their most vulnerable members.
Credit unions are in a natural position to combat some of the most pressing long-term financial problems facing the people who are standing on the lower rungs of America’s economic ladder. Properly constructed regulatory incentives could spur credit unions to use their privileged position to be more proactive in their efforts to ameliorate those problems, which include:
1. Endemic financial illiteracy. Everyone needs a basic level of financial knowledge to successfully navigate today’s complicated marketplace. Far too few people have such knowledge, and those who seek it typically do so quite late in life. Efforts to increase financial literacy must move beyond sponsoring adult-oriented financial planning seminars (which are attended largely by retirees) and out into America’s high schools. It is there that learning of real consequence and broad social impact can take place. Some proactive credit unions have set up branches inside high schools, using students as employees and accepting limited deposits and withdrawals for the purpose of introducing young people to the basic concepts of compound interest and the time value of money. More credit unions should be engaged in this valuable public service.
2. Payday loans. A culture of dependency on payday loans is a scourge on lower- and lower-middle-
3. The unbanked. Ten million U.S. households do not have any type of bank or credit union account. Short of stuffing dollars underneath their mattresses these individuals quite literally cannot save money. Banks are, understandably, not attracted to segments of the market with limited profit potential and set their account minimums and fees accordingly. Credit unions should allow access to a no-fee checking account for anyone in their membership field that is willing to deposit five dollars. It’s true that these individuals will not help the credit union generate the monies needed to cover their operating expenses; in fact, they can be a drain on resources. But this is exactly the kind of member service that justifies credit unions’ continued tax-exempt status.
4. Mortgages. The mess in this market is self-evident. Credit unions can help by holding more of the mortgages they originate instead of selling them in secondary markets. When problems arise with individual mortgages it is easier to rework terms when the buyer and seller of the mortgage are known to each other. No one wins when a home is foreclosed upon—not the mortgage lender, not the community in which the house is located, and certainly not the person who loses his or her house. Credit unions should construct portfolios that allow them to hold the majority of the mortgages they sell. This will result in greater financial stability within the communities they serve.
Federal and state regulators already have a powerful set of tools at their disposal to help create a marketplace in which credit unions have the incentive to engage in this socially beneficial behavior. Most prominent among these tools is the ability to allow a credit union to expand its field of membership. A successful expansion allows a credit union to benefit from the economies of scale and reduce costs associated with providing services to individual members. It can also help justify more generous compensation packages for senior executives who are now presiding over larger organizations. Many credit unions have sought or currently seek the expansion of their field of membership.
It is entirely at the discretion of state and federal regulators to determine whether increasing the field of membership would be beneficial for a newly expanded credit union community. To determine whether a community would benefit from expansion, benchmarks should be established against which to assess progress in the areas of increasing financial literacy, decreasing reliance on payday loans, reducing the ranks of the unbanked, and increasing credit unions’ holdings of mortgages. We all benefit when credit unions that are vigilant in service to their communities expand. Their creative energies are needed to help steady the perilous financial footing of far too many American families.