TEMPE, Ariz.-For many of us, the memory of our first loan lingers on like a bad dream that never seems to go away. That was the experience more than 40 years ago for a young man applying for his first car loan deep in Cajun country. He was physically sick a week before the loan interview took place at the Calcasieu Marine National Bank in Lake Charles, Louisiana.
As he walked in the bank, he noted the teller cage and wondered if the bars were there to keep the tellers in or the customers out. And calling it a "teller cage" seemed fitting. The loan officer looked like someone's grandfather who didn't smile during the entire interview. His first question was, "Did I really need a car of that size or that cost?" The banker "made me feel awful and pride kept me from asking my dad to come with me."
Like most clichés, there was a kernel of truth in the phrase "In order to get a loan from a bank, you had to prove that you didn't need the money." Tom Glatt went on to become a successful credit union leader, presenter and is now CEO of the just-chartered Realtors FCU. In one way, Glatt personifies the 100-year timespan of credit unions in the United States: his new credit union has been chartered by workers with a tight common bond, as were many credit unions in the movement's early days-but the new CU will be completely virtual and accessed online.
Glatt, who was previously CEO of the $208-million Continental Federal Credit Union in Tempe, Arizona, still remembers that car loan as "an excruciating and humiliating experience."
The year 2008 marks the 100th anniversary of the founding of the first credit union, then called St. Mary's Cooperative Credit Association and today called St. Mary's Bank. The Manchester, N.H.-based St. Mary's once accepted one-cent deposits, today it has $657 million in assets. One of the major accomplishments of credit unions is that average Americans no longer have to go hat in hand to plead for a bank loan - they have the alternative of their local credit union. This special report examines the major contributions that credit unions made to the United States during the past century.
There are numerous contributions known to most of us: access to affordable credit, fair and competitive pricing and fees, the entrée of financial services to the workplace as well as the development, and financial strengthening of the American middle class.
But there are other contributions that are unheralded, yet equally as significant to this nation's history. Some credit unions have led the way in financial services technology; Stanford Federal Credit Union was the first financial institution in the United States to offer the Internet and home banking to members. This has had the effect of making financial services more transparent and competitive for consumers, in effect, there is no place for bad actors to hide.
Credit unions - in the opinion of many - lacked a glass ceiling where other industries discriminated against women. From the beginning of the movement, women held significant leadership positions as volunteers and executives. Credit unions also offered thousands of women staff jobs and careers paths, as they do today. Yet women also remain relatively under-represented on many credit union association boards of directors (see related story, page 26).
In addition to the financial contributions, credit unions have over the past century provided a social dimension to American society. They have been responsible lenders. During times of speculation, sinking or rising economic times, credit unions have largely managed to keep an even keel.
During the subprime bubble and bust, credit unions, for the most part, avoided bad loans. And during times when credit has been tight - the Depression and the ongoing fiscal crisis - credit unions have maintained adequate liquidity to loan their members while banks are struggling.
"Credit unions have been responsible lenders and good lenders," said Bob Hoel, senior fellow, Filene Research Institute, Madison, Wis.
"They have explained variable rates to members. Credit unions have been reluctant to sell loan products their members can't afford.
"We've had pretty rigid loan policies; that's why we have stayed away from the subprime mess," continued Hoel. "We had a policy at one credit union where I was a member that you can't get a second vacation loan until you pay off your first vacation loan."
Credit Unions Change Retail Financial Services
You haul sixteen tons and whadaya get
Another day older and deeper in debt
Saint Peter don't you call me cause I can't go
I owe my soul to the company store
-Tennessee Ernie Ford
Before credit unions gained wide acceptance during the 1930s and 1940s, banks and other financial institutions were reluctant to lend to low- and middle-income consumers. Bankers focused on commercial accounts and wealthy customers, perceiving low- and middle-income consumers to be unprofitable and unreliable.
The concept of "retail banking" was often foreign in many markets.
As the Tennessee Ernie Ford's song lyrics indicate, many Americans received credit through stores or relatives, said Bob Hoel.
"Banks were reluctant to lend to small borrowers because they were not viewed as good borrowers, good credit risks, or worth the time," he said. "Ordinary folks had less access to credit, much of their credit was provided by grocery stores and liquor stores. Department stores would keep a tab and charge credit, that's how credit would work. Or money lenders and pawnshops would be a source of credit-that wasn't that many years ago."
"Credit unions accelerated the insight that low-income consumers were sufficiently responsible to pay their debts," he said. "Credit unions settled on a formula to charge 1% a month, other lenders - banks and moneylenders - charged 3% a month. Now members could buy furniture and fix up their homes."
Making Credit Affordable
In interviews with industry leaders, a consensus emerges that the significant contribution that credit unions have made to the United States in the last century is affordable credit to low- and middle-income people. This is a contribution that continues today.
In San Francisco, Northeast Community Credit Union was founded in 1981 in Chinatown as a community development credit union for the underserved. The organization provides financial services for the unbanked-immigrants, transients and the homeless. Lily Lo is CEO of the $8-million credit union, and during remarks at a conference hosted by the Washington-based National Credit Union Foundation Conference in her hometown, she offered her insights during the meeting, held in October 2008, and themed "Strategies for Reaching out Conference: Low Wealth Members, Immigrants, and Youth in October 2008."
"People will ask why serve the homeless, since they don't have money or income." she said. "But, they do have savings and income. Many live on SSI, which is $661 a month but is not enough for an apartment in most cases. Even the homeless can save; we educate them on the value of maintaining a savings account."
"We have found that many low-income members can save and can develop budgets," said Lo. "We hold financial literacy workshops that teach budgeting, rebuilding credit, debt consolidation, peer counseling, starting up a small business and tax counseling."
One member, Robert Fowler, is handicapped and was formerly homeless, noted Lo. He used check-cashers and signed up for an IDA account at the credit union. He was able to start a vending machine business with the savings from his IDA account and has moved into low-income housing. He now volunteers at Northeast Community Credit Union during tax time and serves on the board of directors.
The chart below shows a comparison between a payday loan from Cashcall and a payday loan alternative from Northeast. Note the total payments of $9,288.17 for a loan of $2,600 from Cashcall as opposed to $3,116.31 from the credit union - a $6,000 difference and substantial savings for members who might otherwise place themselves in perpetual debt.
Billy's Story
Tom Glatt tells the story of meeting Billy M, a ticket agent at Continental Airlines in New Orleans a few years ago. Glatt gave Billy his business card and told him "if there is anything I can do to help, let me know." Billy called him a few weeks later in a panic. He had a sick child and needed a loan for an operation. The bank had turned Billy down for a loan because he has bad credit.
Continental FCU decided to take a chance on Billy and make the loan for the operation. "Billy calls me back and asks how can I ever pay you back?" said Glatt. "I said, 'Just pay the loan back.'"
Billy has been paying the loan back on time, and has e-mailed Glatt each time he makes a payment. He later got a car loan with the credit union and a few years later got a loan to move to Houston.
"Because credit unions take chances on thousands of people like Billy, that nobody else would, some of these people become CEOs of companies or entrepreneurs, and they wouldn't have if it hadn't been for credit unions," said Glatt.
One example was Richard Heins, who later became CEO of CUNA Mutual Group. In 1952 he took a job as assistant professor at UCLA. He and his wife arrived in Los Angeles not just low on money but unprepared prepared for the high prices in the area. His wife was suffering from sciatica and needed a doctor.
"I finally told the university people that we couldn't afford all the expenses," said Heins. "The person I talked to told me the university had a credit union and I should visit it. Since I worked at the university, he knew we were good for it and that we should do whatever needed to be done to get an apartment and treatment for my wife."
"They didn't know me. I didn't have any collateral, but they loaned me the money I needed," he said. "They were like friends. They seemed to care about me as a person. Today, I wonder where I'd be if it weren't for the credit union's help."
One of the most profound effects that credit unions have had on retail financial services in the country has been to act as a governor on prices and fees.
Whenever credit unions are in a market, banks are forced to lower their fees on loans, and even the most usurious payday lenders are obligated to lower their fees and rates when credit unions offer a payday loan alternative. The last century is dotted with anecdotal histories of the governor function, but there also are two studies by respected scholars that add credence to the anecdotes.
William Jackson III, professor of finance and management at University of Alabama, and Filene Fellow, conducted a study of State Employees Credit Union of North Carolina in 2006 to see how much the organization saved members as an alternative to bank fees and rates in one year.
"I found that the credit union saved members $258 million by providing loans at lower rates, by providing deposits at higher rates, by giving low-cost alternatives to payday lenders, providing special programs, and lower cost alternatives to most bank fees," he said. "For 1.3-million members it comes to an annual savings of almost $200 a member."
Could you extrapolate that number across the United States?
"You could. State Employees runs a very efficient ship in a very competitive state," said Jackson. "Across the United States, the savings would probably be close to $100 to $150 a member annually, closer to the lower end."
Robert Feinberg, professor of economics at American University in Washington, D.C., studied the effect of credit union savings on citizens across the United States. He estimated that in 2003 bank customers saved at least $1.73 billion on a total of roughly $500 billion in consumer loans outstanding because of the presence of credit unions.
"Credit unions discipline banks to lower loan rates and raise savings rates," said Feinberg. "Credit unions make local financial institutions more competitive, force downward pressure on loan rates and provide pressure on banks to move deposit rates upward."
Feinberg did point out that this influence has its limits depending on the size of the market.
"Credit unions have more influence on banks in smaller markets," he said. "Realistically, they don't have as much pressure in major markets."
Local Economic Control
One of the benefits that credit unions have brought to the American economy during the past century is keeping local economic control in the community. With the amount of outsourcing, acquisitions of community banks, and job losses this is no small contribution. Credit unions are local decision-makers and among the business leaders in the community.
"Would you rather have decisions made in Raleigh, North Carolina or in Singapore?" asked Jim Blaine, CEO of he $16.4-billin State Employees Credit Union. "If they are made in Singapore, they aren't going to be in the best interests of Raleigh.
"Credit unions leave money in the consumer's pockets and they reinvest in the community," he continued. "They can use that money locally to send kids to school or make other decisions. It's an economic powerhouse."
The roots of credit unions run deep within their community; the first credit union in the U.S., St. Mary's Bank, had a community charter in Manchester, N.H. Many others started with local employers.
"Credit unions contribute to the local economic vesting that every community needs. When local residents act together local economies grow and put down roots," said Randy Karnes, CEO of CU*Answers, a CUSO in Grand Rapids, Mich. "When I travel to the small communities across the Midwest from Michigan to the Dakotas, the most vibrant businesses in the small communities are the ones lucky enough to have a credit union as part of their economy."
"Now that some of the for-profit economic models of credit union competitors are being challenged by the times, for their character, or their commitment and contribution to local economies we have a real opportunity."
"First, we must re-ignite our industry's internal faith in a model built by local people for a principal that needs to be guarded by us all: peer-to-peer business designs," said Karnes. "Second, we must then move ahead with courage and an amplified voice that now is the time for every consumer to join their local community members in working towards financial security through credit union membership."
The Emergence of the SEG
In the early days of the movement many of the credit unions were formed around church and parish groups. Boston department store owner Edward Filene and Roy Bergengren, the attorney whom he hired to become a Johnny Appleseed of credit union development, devised a strategy in the 1920s to form credit unions around employee groups - postal workers, meatpackers, and other work groups. Credit unions drew financial institutions into the workplace, according to George Hofheimer, chief research officer, Filene Research Institute, Madison, Wis.
"By the 1950s, everyday workers were served," he said. "Credit unions pioneered direct deposit and unsecured lending. They drew people out of poverty."
The idea of tying a financial institution to a paycheck close to the employer was an essential innovation, said Ben Rogers, who heads up CU Tomorrow, an initiative of the Filene Research Institute aimed at younger leaders.
"The credit union was right there on site, tying that relationship to other products, making it easier to do loans, automatic deductions, checking accounts and deposit," he said. "Most important, it guaranteed the primary financial institution status."
Organizing around an employer was also a necessity in a time of no credit bureaus. The employment record also served as a part of a set of criteria for a loan. For the first time, loan applicants were judged on their character, often on a loan-by-loan basis by credit committees. If you borrowed from a workplace credit union, you were likely to pay back the debt or face the disapproval of your co-workers.
"The credit union trusted members and based credit on character not collateral," said Dick Ensweiller, CEO, Texas Credit Union League. "People paid their loans and that sent a message to the rest of the financial services industry."
The tiny Police Officers Credit Union, in Sheboygan, Wis. is a good example. The all-volunteer organization with $666,776 in assets and 222 members charged off just two loans in past 30 years; both were due to bankruptcies. According to one member, there have been only a couple of attempts by wayward members to not pay back loans, but they have been "persuaded" by fellow police officers to make good on their loans.
"We weren't just about credit scoring," observed R.C. Robertson, the former CEO of Arizona State Savings & Credit Union who spent more than 40 years in credit unions and who was inducted into the Cooperative Hall of Fame. "We paid attention to a member's employment record and their character. We found it important to look beyond credit scores where possible; find a way to make the loan."
There is evidence that the age of "gotcha" pricing and fees, which banks and other lenders have practiced in their strategy to pump up profits may be fading, at least for some financial institutions. As noted, the governor function of credit unions has been part of the reason. With blogs, Angie's List, e-mail and Twitter we live in an Internet glass house, where consumers are ready to lob rocks at those financial institutions foolish enough to charge unreasonable fees and rates by taking their business elsewhere.
Gotcha Won't Keepya
That's not to say there isn't unbridled greed in the financial markets. It's still there, of course, as the ongoing financial crisis indicates. But, the trend in the future may be to back away from this practice. Ben Rogers notes a revealing insight from American Express CEO Kenneth Chennault, who foretold the demise of "gotcha" pricing.
"I don't believe a company has much of a future if it earns the majority of its revenues when customers make a mistake or don't conform to a rule," he told a Brookings Institution group. "Gotcha pricing is not the way to build a sustainable business model."
It's just too easy to go next door-or better yet, to the next click-to flee the bank that charges unreasonable fees. Nevertheless, banks have been raising fees as their earnings have tumbled, shining a fresh light on credit unions in 2008 that is in many ways similar to that of 1908.
Here's a sampling of some of the fee strategies, as reported by Nov. 12, 2008 in Wall Street Journal: J.P. Morgan Chase & Co., Bank of America, and Wells Fargo have increased fees they charge non customers who use their ATMs to $3 per transactions. In 2007, PNC Bank introduced a processing charge of $3 for customers who use their debit card to get a cash advance at a teller window. Fifth Third Bancorp moved from a flat fee of $33 per item to $25 for the first overdraft, $33 for the second overdraft through the fourth, and $37 for fifth and beyond. WaMu raised its overdraft transfer fee service fees to $12 from $10.
What About A World Without Credit Unions?
Among the questions asked of those interviewed by Credit Union Journal for this report was what the financial services environment would look like today if credit unions hadn't existed. One answer that comes quickly to mind is to take a drive through the inner cities of America and note the abundance of check cashing and payday lending outlets and lack of credit union branches. Despite all the inroads into "serving the underserved," credit unions are still struggling to save a large slice of this market; if anything, the greatest impact on some of those providers have come from state legislatures that learned of lending abuses from credit unions and other consumer groups.
Some credit unions are doing a good job of offering payday loan alternatives and realizing that their members and their employees will continue to patronize payday lenders because they fill a market need. But credit unions are late to this game, they are playing catch-up, observers said.
The most obvious effect of a landscape without credit unions is that there would be less competition and consumers would pay higher rates and fees on everything.
"You wouldn't see people as prosperous as they are today," said Dick Ensweiller. "Without credit unions, many people couldn't afford to buy the basic necessities. Credit unions meant prosperity for the entire country. People can afford to save and borrow and be treated with respect and dignity. Credit unions have helped working men and women and benefited the entire nation."
Credit unions have forced banks to provide interest-bearing checking accounts, noted Dave Chatfield, who during his career served as CEO of the California and Nevada Credit Union Leagues, leader of the Filene Institute, at Alaska USA FCU, and on the NCUA board. "Share draft accounts forced banks to provide NOW accounts," he said. "Banks were good at lending to businesses, but they didn't want to lend to consumers, unless they were very wealthy and risk free. Banks started lending to consumers after decades of neglect."
As credit unions celebrate their 100th Birthday, it must be asked whether they have lost "the-old time religion." Credit unions still refer to themselves as a "movement," a reference to the larger social movement they considered themselves to be a part of. And credit unions still speak of "philosophy," unique among all financial service providers, and the notion of "not for profit, not for charity, but for service."
Today many credit union have expanded to community charters and it's unlikely many credit unions will ever be formed around select employee groups or a single sponsor. Many original sponsor companies have disappeared or shrunk. There are nearly 200 credit unions today with $1 billion in assets; as recently as the 1960s credit unions that had $1 million in assets were considered members of the "Cadillac Club."
Are credit unions losing sight of the "mission" of the movement while emphasizing growth and asset size? Many credit union leaders can quote their own financial ratios, but how many can quote the mission of their own organization? A number of studies of credit union employees have in recent years found that few could articulate what makes their own credit union different from any other provider.
Tom Glatt asked the following question 15 years ago at a planning meeting at a credit union: Do you choose to be the best credit union or the biggest credit union? The answer was unanimous - each participant wanted to be the biggest credit union, not the best.
"We have willingly given up the social movement," said Glatt. "Because size matters, not service. That quest for size matters will make it difficult to survive as a social movement, as an industry for the next 100 years. Growth can't be the focus-service has to be the focus."
The Evolution Of CU Philosophy
Certainly times have changed and credit unions have evolved. The volunteers who ran credit unions through their infancy and the decades that followed have been replaced by professionals, many ex-bankers. At one time, credit unions served mostly company employees who, in turn, took part in the credit and supervisory committees. While volunteers still are prominent within smaller CUs, at larger CUs they operate at the macro-level. "Credit unions like other cooperatives have deferred to professional management in their evolution," said Bob Hoel. "After two or three generations it tends to disappear. The same thing happens at the league and trade association level."
There has been an influx of executives from the banking industry into credit unions, which is a factor for the weakening of the philosophy, according to Dave Chatfield. "Some of these banking executives have embraced the philosophy, others never quite make the trip," he said. "Some of the larger credit unions help smaller credit unions, but not all of them. All of this has the tendency to weaken the philosophy; but the philosophy is still there."
Chatfield's views were echoed repeatedly within the industry. Richard Heins said that "many new leaders are from banks and may tend to treat their credit union like a bank. While they'll bring innovations, they should also be schooled in the history and credit union differences," he said. "It will be a sad day if credit unions become just another financial institution."
