A new study of credit union conversions to mutual savings banks shows that those credit unions making the switch tend to pay lower rates on savings and charge higher rates on loans than does the average credit union.
"If you're a borrower, you're going to pay higher rates, and if you're a saver you're going to receive lower returns," said Dr. Russ Kashian, assistant professor of economics at the University of Wisconsin-Whitewater, co-author of the study titled, "Credit Union to Mutual Conversions: Do Rates Matter?"
What the study seems to show is a credit union conversion "takes nickels and dimes out of the middle- and lower-class people's pockets," said Kashian.
Release of the study, which was commissioned by the American Association of CU Leagues, comes as the controversy over conversions heats up with the biggest attempted switch yet, that of $1.8 billion DFCU Financial, in Dearborn, Mich. The study will be released formally during CUNA's annual GAC in Washington this week.
Kashian, himself a former credit union executive for two small Ohio credit unions, said the study of 30 converted credit unions tried to show who is benefiting from the conversion of credit unions. The first part of that, he said, is trying to determine how the conversion is affecting the average member/consumer of the converting credit union. The second part, he suggested, would be to determine who is benefiting from the second stage of the process, the conversion of the mutual savings bank to stock ownership.
According to the study, the group of converted credit unions paid lower rates-an average of 30 basis points less- on regular shares (savings) accounts, one-year CDs and money market accounts than the credit union averages for the same types of accounts. There was no major difference for share draft (checking) accounts.
Additional Findings
The converted credit unions also charged higher rates-between 50 basis points and 200 basis points-for 48-month and 60-month car loans and credit card loans than the average credit union. No major differences were detected in pricing for home equity loans and 36-month unsecured loans.
The study concludes that "the financial benefits provided by member-owned, not-for-profit credit unions either disappear or are much diminished when those institutions convert to mutual savings banks, at least on the basis of the interest rates consumers face." There was no indication that consumers benefit from the conversion of their credit union to mutual savings bank.
But the conclusions are not cut-and-dried, he conceded. For one thing, his study does not compare the rates for those same institutions before the conversions with those offered after the conversion. In addition, it's hard to gauge how much of the differential is due to the tax issue, where the converted credit unions have to figure federal income taxes into their pricing.
"You can't test for taxes. In my opinion, that's a large part of it (the differential)," said Kashian.
But Kashian, who has also conducted studies for banking groups, said factors such as the higher salaries paid by banks and the for-profit motivation need to be figured in. "When you move into the realm of banking, salaries go up," said Kashian. "Also, banks have a greater emphasis on the bottom line. A 2% return-on-assets is considered desirable. With credit unions, if you show a 1% return, you're god."
Kashian worked for two credit unions, the last time as chief operating officer of All Employees CU, in Willoughby, Ohio, in the early 1990s, but insists he has no personal interest in the outcome of the study. "Any study that's ever done, I think the public has the right to ask, 'does it pass the smell test?'" he said. "But, I'm an academic. I really have no dog in this fight."
