Credit union or bank? Do the research

122486570Being exempt from federal income tax enables credit unions to offer products at better prices to their members, say officials from both credit unions and banks.

“We are not-for-profit,” said John Worthington, Security Service Federal Credit Union executive vice president and chief communications officer. “We have to make some money to establish capital, but we are not able to raise secondary capital.

“We follow the legal restrictions for nonprofits in general.”

“We’re owned by our members and we’re not-for-profit,” said Doug Schneider, vice president of marketing for Credit Union of Colorado. “We offer lower fees and better pricing on loans and deposits.”

The banking community has a different view.

“Because of the way credit unions are set up, they do not pay federal corporate income tax as banks do,” said Amanda Averch of the Colorado Bankers Association. “Credit unions do not offer more or better services than banks do.”

“The average American family pays more in taxes than the entire $1 trillion credit union industry,” said Jenifer Waller, the CBA’s senior vice president. She said credit unions operate on a subsidy because they don’t pay taxes. “It is important to note that despite a reputation of offering better rates or lower fees compared to banks, credit unions don’t always do so.”

A 2009 study released by the CBA found that banks “outperformed credit unions in serving people of modest means, a main pillar in the traditional mission of credit unions,” Waller said.

Banks are for-profit businesses that give shareholders dividends, Worthington said.

A consumer choosing between a credit union and a bank would look at services offered by both, said Robin Roberts, president of Pikes Peak National Bank in Colorado Springs.

“Most business owners need more of a relationship with their banker, so they want all the services generally in one place. More often, they can find that in a bank than a credit union,” Roberts said.

“We advise that customers should always do their homework when determining where they want to do business to ensure the institution meets the customer’s needs,” Averch said.

Bank boards of directors are typically paid, where credit union boards of directors are typically volunteers, Worthington added.

Bank boards of directors are “leaders of the business community. Their time is valuable and they’re paid,” Worthington said.

Security Service FCU directors are volunteers and are not paid, Worthington said.

Credit unions were chartered in 1934 to serve persons of modest means, according to a document prepared by the Colorado Bankers Association. In return, credit unions are exempt from taxation.

According to the Credit Union National Association, credit unions expect a growth of memberships of around 2.25 percent, or roughly double the growth of the country’s population.

Advantages of a credit union

“Credit unions are a $1 trillion industry with … unjustified advantages,” the CBA document said.

The document cited a federal General Accounting Office report of 2006 that “credit unions lagged behind banks in serving low- and moderate-income households.”

The CBA document said credit unions should be mandated to adhere to that requirement.

Credit unions have morphed into “tax-exempt banks,” the document said. There are two different kinds of credit unions: the typical credit union formed for a certain demographic; and “aggressive and fast-growing credit unions that have large fields of membership, maintain extensive branch networks and offer products virtually identical to community banks while tending to serve higher-income people. They are effectively tax-exempt banks.”

Both banks and credit unions work to serve their clients. In the case of credit unions, it’s the members working to serve their own bottom line; banks work to serve their shareholders, Worthington said.

“Generally, credit unions are more member-friendly, member-centric,” he said. “We may do some things to accommodate a member that a bank may not.”

For example, a credit union may make a loan to a member whose credit score is below a certain level, Worthington said. “We know that person, and we’ll take care of that person,” whereas a bank may not because of policies regarding credit scores.

Community banks function like credit unions, Worthington added, because they tend to be smaller and are more member-centric.

The Security Service Federal Credit Union has 70,000 members in El Paso County. On a national scale, the credit union has 900,000 members served by 69 branches in three states.

Deposits at Security Service totaled $6.7 billion as of July 31, and loans totaled $7.6 billion. The credit union has $8 billion in assets.

“We are the No. 1 auto lender in the state of Colorado,” Worthington said. The Texas-based credit union started expanding into Colorado with purchases of credit unions in Colorado Springs, then on to Pueblo, Denver and Fort Collins.

In contrast, the Credit Union of Colorado has $1.17 billion in assets, $1.02 billion in deposits and $608 million in loans for its 100,000 members statewide.

Lending cap

Congress mandates credit unions cap their member business lending to 12.25 percent of their total assets.

A bill sponsored by U.S. Sen. Mark Udall, D- Colo., in 2012 would have lifted that cap to 27.5 percent of assets.

The CBA document said that increasing the cap “is unneeded and would be ineffective, unwise and damaging, contrary to good fiscal steps, unfair to other taxpayers, unbalanced … expansion of the … cap would be another step in the credit unions’ drift from their mission. Credit unions already have lost the justification for tax exemption.”

Furthermore, not all loans made by credit unions count to the total percentage of assets, the document said.

Also, only the larger credit unions supported this bill, the document alleges.

The bill died.