Credit Unions: Tough Foe for Banks

Tax-free status helps these financial institutions provide low-fee banking to 44 million customers - and counting

ANTON LOCHER, a college student studying law enforcement in the metropolitan Detroit area, says you can't beat his bank when it comes to services and competitive fees. The catch is that his "bank" is not a bank at all. Since November 1995, Mr. Locher has been a member of the Warren Schools Credit Union, located in Center Line, Mich.

Locher was looking for a low-cost loan to buy a new truck. He checked with local commercial banks and auto-finance companies. The lowest rates, he says, were offered by the Warren Schools Credit Union, which he was able to join. As it turned out, he didn't buy the truck. But he has stayed with the credit union, for its variety of services and competitive costs.

Locher is certainly not alone in finding satisfaction in joining a credit union.

In the United States, there are more than 70 million credit union members, up from 44 million in 1980. In the same period, assets in the nation's 12,201 credit unions have risen more than fourfold, from $69 billion in 1980 to $318 billion today.

Yet millions of people remain unaware of credit unions, or their low cost of service compared with banks. Consumers seeking lower fees "should consider banking at a credit union," says Stephen Brobeck, executive director of the Consumer Federation of America (CFA), a consumer group based in Washington.

In late February, the CFA and the Credit Union National Association (CUNA), a trade group, held a joint press conference in Washington to announce research findings based on 1995 data showing that credit unions charge lower service fees than do commercial banks (see chart). And often credit unions waive fees altogether. On "economy checking" accounts, for example, a majority of banks charge services fees. Only a minority of credit unions do; and their fees are lower.

On regular checking accounts, credit union fees average three-fifths of the bank fees ($3.59 vs. $5.97 per month.)

On interest-bearing checking accounts, credit union fees tend to be three-fifths of bank fees ($4.43 vs. $7.43 per month.

Moreover, less than half of all credit unions charge fees when monthly minimums are not met. Almost all banks do.

Again, credit union fees, according to the CFA and CUNA tend to be lower for services such as credit cards, cashier's checks, money orders, certified checks, and research time. (Banks do tend, however, to offer more automated-teller-machine services - and, in some cases - lower ATM charges.)

Banks file lawsuits

Little wonder then, that banks are fighting back against credit unions. For years now, banks have sought to deprive credit unions of their exemption from federal corporate income taxes.

Credit unions have been able to carry the tax-exempt status because they are not-for-profit institutions serving "members."

Many banks, especially smaller and mid-level banks that must compete with credit unions in small towns, argue that the not-for-profit designation is "bunk," that credit unions, for all practical matters, are banks. One would be hard-pressed to deny that they seem like banks. Still, Congress and federal regulatory agencies have gone along with the distinction; the tax-exempt status has weathered the test of time.

Some banks are pressing a new line of attack. In about 10 states they have challenged decisions by state or federal agencies allowing credit unions to expand their fields of membership - that is, allowing in new members not linked to the specific trade of the credit union.

Traditionally, credit unions could recruit members only from specific trades or groups of people. Thus, the largest credit union in the US is the Navy Federal Credit Union, which, not surprisingly, serves people associated somehow with the Navy. Other examples:

A credit union in New York serves musicians and actors; a Houston credit union serves homosexuals. In many communities, including Warren, Mich., there are credit unions for individuals linked to school systems.

In recent years, credit unions have sought to branch out beyond their traditional affiliation boundaries.

Efforts to prevent credit unions from expanding membership ranks have largely failed, although a case involving a credit union in North Carolina is now before a federal appeals panel and, some legal experts say it could potentially reach the US Supreme Court.

In this case, the American Bankers Association and four North Carolina banks have challenged the right of the AT&T Family Federal Credit Union to take in small employee groups not linked to the telephone industry. An appellate decision is expected this spring.

Whatever happens in that case, the bottom line is that, for now at least, credit unions continue to expand membership rosters, thus wooing away customers from banks and savings and loan associations (S&Ls).

Federally insured

Credit unions were originally set up as cooperatives for members. Since they didn't have "shareholders," as do banks, they could take any profits and use them to hold down loan costs or to offset service charges. Yet deposits are federally insured up to $100,000, like deposits at banks or S&Ls.

The insurance agency is the National Credit Union Insurance Association (NCUIA). If you join a credit union, be sure it is a member of NCUIA.

If your company is not a member of a credit union, but you would like to join one, you can call CUNA at 1-800-358-5710. The association will put you in touch with your state credit union association, which will see if it can find a local credit union for which you might qualify.

Many credit unions will let you sign up with a very small deposit, often $25 or less. The average size of a credit union savings account is $1,819.

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