Credit union difference is more than tax status

RBCU hand

CUNA News Now  © 03/27/2014 – MINNEAPOLIS, Minn. – Minnesota Business Magazine recently ran an article describing the “war” raging between credit unions and banks. The piece also highlighted the key differences between the two types of financial institutions.

While bank representatives were quoted heavily questioning the tax status of credit unions, credit union leaders like Pat Brekken, president of Richfield-Bloomington CU, Richfield, Minn., with $254 million in assets, spent his time explaining how credit unions differ from their banking counterparts–and why members who manage their money with credit unions hold an advantage.

“Banks, I believe, try to maximize profits for their shareholders,” Brekken said in the March 26 article. “Profits of the bank are dispersed to the owners (stockholders) through dividends at year end. Credit unions try to maximize returns to their owners as well, which again are the entire membership, but do it…in the form of lower loan rates, higher savings rates or lower fees. This is how credit unions pay back their member owners.”

Banks hold 91.3% of the market share of deposits in Minnesota, compared with 8.7% at credit unions.

Commercial lending is also dominated by banks because of the regulatory limits with which credit unions must contend. Credit unions are limited to 12.25% of total assets in member business loans and $100,000 unsecured lines of credit to any one business.

Brekken, who has regularly approached state legislators in Minnesota about increasing member business lending limits for credit unions, says one of the best things that could happen for businesses in his state would be to allow credit unions to lend to businesses at a higher rate.

“And credit unions are limited to 15% of capital as the largest amount they are able to lend to any one member, including businesses,” Brekken told Minnesota Business Magazine.

The Credit Union National Association is pushing for the U.S. Congress to raise the member business lending cap to 27.5% of assets, from 12.25%, to allow credit unions to do even more to support the small business lending needs of their communities.

CUNA estimates the MBL cap change would help credit unions lend an additional $13 billion to small businesses in just the first year after the statutory change. The additional money, made available at no expense to taxpayers, would help small businesses create around 140,000 new jobs.

Despite banks’ strong grip on the market in Minnesota, credit unions have made up ground of late, like many states throughout the country. According to Brekken, as people have become “fed up with the bailouts or the high fees and impersonal service of big banks,” awareness of and membership at credit unions has increased.

Richfield-Bloomington, for example, experienced more than 10% net member growth in 2011.

Looking ahead, one key long-term strategy for credit unions centers on financial literacy. The recession demonstrated that many people don’t know how to manage their money effectively.

“This realization reaffirmed credit unions’ commitment to financial literacy, which is something that they’ve been doing for decades,” said Mark Cummins, Minnesota Credit Union Network president/CEO. “In fact credit unions around the state provided more than 110,000 hours of formal and informal financial education to more than 37,600 consumers and members.”