I truly believe that the soul of the credit union movement, which is its philosophy, is still alive and well, but over the past several years it has suffered from serious and identifiable erosion. I want to share some of the things I learned during my career that helped me define credit union philosophy and see where we are going.
When I gave up my job as a high school teacher of business subjects in 1956 to join the staff of Dallas Teachers Credit Union and begin a credit union career that spanned a period of 40 years, it was my good fortune to learn about the credit union movement from H. B. Yates and Jack Mitchell, two credit union leaders who were often referred to as pioneers of the movement. I also read everything I could find about credit unions and their history, and had a chance to become acquainted with and learn from a number of other credit union leaders who made major contributions on both state and national levels.
All of these leaders credit the Great Depression of the 1930s as being a driving force in the rapid growth in the number and size of credit unions following World War II because of the desire of credit union volunteers to improve the lives of their members. I could relate to that motivation since I was old enough beginning about 1935, to remember the hardships that the people in the rural area where I grew up were suffering. However, it should be noted that the motivation throughout the history of credit unions from their beginning over 150 years ago was to assist members in improving their economic welfare by providing badly needed low-cost loans and a place to save.
As credit unions matured following the Great Depression, the existing foundation of credit union philosophy was strengthened by the leadership of that era. A good example was spelled out clearly in the logo for the movement at that time, which pictured a little man holding an umbrella over him with the words "Credit Union" printed on its side. Above the umbrella among falling rain were the words "Hard Times," "Sickness," and "Financial Distress." An early slogan was, "Not for Charity, not for Profit, but for Service." The slogan "People Helping People," which is in use today, also describes what credit unions are about.
Roy F. Bergengren, famous for his efforts in the passage of laws in individual states to authorize the formation of credit unions and ultimately for leadership in the passage of the Federal Credit Union Act in 1934 was quoted as saying, "The real job of a credit union is to prove in modest measure, the practicality of the brotherhood of man."
Credit unions have always sought to do everything possible to assist members to help themselves to live better lives and attain a higher standard of living for their families. Their social value has always been recognized and justifies exemption from federal income tax. This is the basis of credit unions making up the "credit union movement" rather than being referred to as the "credit union industry." Credit unions help make up the financial services industry, but do not make up a standalone industry.
The principles, culture, and core values that determine how credit unions as a group operate to serve their members on a national basis exemplifies the credit union philosophy. Clearly understood and accepted standards provide valuable guidance for use by leaders of individual credit unions as operating practices and policies are formulated to fulfill goals set by vision and mission statements. When these standards and practices are weakened or abandoned then the soul of the credit union movement is eroded. The unbelievable development of technology and telecommunication, a very long list of new services and delivery systems, and more appropriate laws and regulations should not and must not alter the practice of philosophy as I have described it.
Serious erosion of the credit union philosophy can be related to the following situations or practices.
(a) Clearly some of the worst damage has occurred because of the attempts of a surprising number of CEOs and directors to change their credit union's charters to bank charters. Members of some credit unions who simply failed to understand what they were giving up have allowed the capital of their credit unions, which they owned, to become the capital for the formation of a bank. Greed on a grand scale seems to have driven this scheme, which has made it possible for credit union CEOs, senior staff, and directors to reap huge financial gains in many cases. This practice clearly violates everything credit unions have stood for and must be stopped. Fortunately, in a few cases credit union members have united to oppose such efforts with success. Also, a number of credit union leaders are uniting to be sure that members fully understand what they stand to lose if they allow a charter change to occur and new regulations now mandate more detailed disclosure statements.
(b) Erosion of a different type has occurred because of the building of excessive reserves by some credit unions. Excessive reserving hurts credit union members because they are deprived of larger dividends on various share deposits, are charged higher rates for loans, and are usually charged higher fees while the excessive reserves are being built. The principles of a financial cooperative mandate that after required reserves are set aside to meet state and federal regulatory requirements and other safety and soundness requirements, all income should be returned to members.
Over recent years many credit unions have built reserves that substantially exceed reasonable requirements with some capital ratios ranging from 10-30% or more. Since the NCUA deems a capital ratio of 7% adequate for credit unions to be considered well capitalized, a strong case can be made that capital ratios that range from seven and one-half to nine percent are quite adequate for almost all credit unions.
The practice of excessive reserving deprives members of some of the benefits of a financial cooperative and thus may jeopardize the federal income tax exemption that has been of great help to credit unions as they have successfully helped millions of members achieve economic security. The practice of excessive reserving also makes the credit union less competitive with other financial institutions while the excessive reserves are being built.
(c) Credit union principles have also been eroded by a few credit unions that have sold credit card portfolios to banks, which then are able to increase interest rates and a long list of fees to outrageous levels. Such sales may result in a one-time windfall monetary gain for a credit union, but can be damaging over time to the members because of the added cost they face. If a credit union wishes to be the primary financial institution for its members it must offer them a broad array of financial services that they need and use on an ongoing basis (d) Another practice that has evolved in some credit unions is the charging of exorbitant fees when share drafts written by members are returned because of insufficient funds. Fees that range from $20 to up to $30 per item are excessive and therefore detrimental to those members who might carelessly fail to make a timely deposit or track the outstanding balance of their accounts. There has always been common agreement among credit union leaders that it is appropriate to charge reasonable fees to cover the cost of handling the returned items, cover possible losses, and help deter the practice. These fees should not reach the level where they become a major source of revenue. I hope that credit union leaders everywhere will carefully review all fees being assessed their members to be sure that none are excessive. The availability and promotion of overdraft protection programs and member education can help members avoid returned share draft fees. There are other practices that could lead to similar erosion if not carefully monitored: o The use of credit scores for loan approval without enforced safeguards or review processes that look beyond the scores could result in loan requests being declined unnecessarily. o Risk-based lending if not carefully controlled could result in loans being classified in a higher risk category without justification, thus unfairly assigning higher interest rates.
o Indirect lending without careful oversight has the potential of deteriorating the credit union's relationship with its members. Loans may be lost to auto dealer related financing if agreements are not honored.
It is my hope that the leaders of both national and state credit union trade associations will take a careful look at the damage that has already occurred and seek ways to reverse the trend. But most of all, I hope the directors and senior staff members of individual credit unions will review policies and practices for their credit unions to determine whether changes are needed to uphold the philosophy of the entire credit union movement.