Credit Unions

Credit unions are not-for-profit, tax-exempt financial institutions that are cooperatively owned by their depositors. The United States is home to 7,600 credit unions, which collectively hold 10 percent of domestic deposits (here's an industry breakdown) and have more than 90 million members (as of April 2010).

Most of these institutions are very small. Fifty percent have assets below $20 million (only 2 percent of banks are this small), and one-quarter have assets of less than $5 million. On the other end of the spectrum, three credit unions exceed $10 billion in assets, including the largest, Navy Federal, which has $41 billion in assets.

The earliest credit unions emerged in Germany in the 19th century. The first U.S. credit union was launched in 1909, in New Hampshire. By 1929, 32 states had adopted laws authorizing the creation of credit unions and more than 1,000 had formed. In 1934, Congress passed the Federal Credit Union Act, which allowed for federally chartered credit unions. The growth of credit unions accelerated during the Great Depression, as more Americans, forsaken by banks, joined with their neighbors to provide one another basic options for saving and borrowing.

Although credit unions got their start providing small personal loans and savings accounts, many have evolved to offer the same array of consumer services that one would find at a bank, from credit cards to online banking. About one-quarter also make business loans to their members. Federal law, however, limits credit unions to devoting no more than 12.25 percent of their assets to business lending.

As cooperatives, credit unions must return any profits to their members as dividends or reinvest them as capital. Major management decisions, such as the election of a board of directors, are made by the customer-owners on a one-vote-per-member basis.

Almost every American is eligible to join at least one credit union. By law, credit unions must limit their membership to people who share a particular common bond. In the past, that common bond has often been defined as working for the same employer or belonging to the same church or association. But today about one-quarter of credit unions define their members' shared bond geographically, so anyone who lives in a particular neighborhood or city is eligible to join.

Credit unions have lower fees and better interest rates on average than big banks, in part because they do not have to generate a profit for investors.

They also make smarter lending decisions. Despite serving a higher share of low-income and small business borrowers, credit unions have had far fewer loans go bad over the last decade than big banks have (see this graph). That performance gap has been especially stark since the financial crisis. In 2009, giant banks had to write-off 2.7 percent of the total value of their loans. Credit unions and small local banks, meanwhile, sustained loan losses of just 1.2 percent.

Research & Articles:

• Credit Unions Hang Tough, See Surge in Deposits - by Stacy Mitchell, Huffington Post, June 22, 2010 
• Economic Impact of Credit Unions 

• Federal Credit Union Act  — Adopted in 1934 and revised several times since, this law authorizes and regulates federally chartered credit unions. 
• National Credit Union Administration — The federal regulator that oversees credit unions and manages the National Credit Union Share Insurance Fund, which insures deposits at credit unions up to $250,000. 
• Community Development Capital Initiative — Established in 2010, this program makes low-cost capital available to Community Development Financial Institutions (CDFIs). Credit unions that have been certified as CDFIs by the Treasury Department are eligible to apply for the funds. 

• National Federation of Community Development Credit Unions — A coalition of 225 community development credit unions, which provide financial services and investment in low-income communities.
• Credit Union National Association — A national trade association of credit unions.