Unlike big banks, credit unions have come out OK

It could have been a lot worse. Many big banks got caught in the mortgage crisis of 2008. Credit unions, it seemed, had weathered the storm.

But then came reports that credit unions, too, needed a bailout - by some $28.3 billion. What's going on?

The answer lies in understanding the difference between credit unions and banks, and between corporate credit unions - the institutions that needed the bailout - and your friendly neighborhood consumer credit union - the ones that will have to help with that bailout.

By George C. Ford

When people hear the words “credit union,” many think it's a bank by another name. But the fact is credit unions and banks are decidedly different, and even not all credit unions are alike.

Banks are for-profit corporations owned by private investors and governed by a board of directors chosen by the stockholders. Anyone can be a customer of a bank, assuming they meet the requirements in terms of creditworthiness and minimum deposit.

Consumer credit unions, sometimes called “natural person'' credit unions by regulators, are not-for-profit financial cooperatives owned by their members and governed by a board of directors elected by the members. Usually there is a common bond among the members, such as belonging to the same organization or living in the same geographic area.

Credit unions accept deposits from their members and use them to make short-term loans. Deposits are regarded as shares, and all earnings of the credit union are paid out as dividends to members.

Federal credit union deposits and a majority of state-chartered credit union deposits are insured up to $250,000 per account by the National Credit Union Share Insurance Fund, operated and managed by the National Credit Union Administration. The NCUSIF is very similar to the Federal Deposit Insurance Corp., which insures bank deposits.

Trouble at another level

Within the past two years, another form of credit union has been making news that affects the finances of consumer credit unions - corporate credit unions.

Corporate credit unions might best be described as “wholesale” credit unions that provide services to consumer credit unions. Corporate credit unions provide short-term and long-term investments, check clearing, Automated Clearing House, electronic funds transfers and ATM transaction services and networks.

Five of the nation's corporate credit unions failed in 2009 and 2010 after buying about $50 billion of mortgage-backed securities as investments that lost a substantial amount of their value when many of the mortgage holders defaulted.

Western Corporate Federal Credit Union and U.S. Central Federal Credit Union failed in 2009, and Members United Corporate Federal Credit Union, Southwest Corporate Federal Credit Union and Constitution Corporate Federal Credit Union failed last year.

After bailing out the corporate credit unions and selling the remaining securities for $28.3 billion in proceeds on the open market, the NCUA notified consumer credit unions that they would have to invest a percentage of their assets over the next 10 years to cover a portion of the $8.44 billion needed to shore up the corporate credit union system.

The NCUA was able to cover all but $2.94 million by drawing $5.5 billion from the agency's $6 billion borrowing authority. The credit unions requested that the NCUA develop a prepayment plan to even out the assessments needed for the Corporate Credit Union Stabilization Fund.

The plan envisioned pre-payments of at least $500 million by July 31 to reduce the assessments for each year. But the prepayment pledges fell short by more than $100 million.

The NCUA has indicated it will proceed with the original plan of involuntary assessments.

The assessments are in addition to each credit union's annual National Credit Union Share Insurance Fund premium.

Jim Niederhauser, vice president of the Iowa Credit Union League, said the Corporate Credit Union Stabilization Fund  assessments have not affected credit union growth.

“Iowa credit unions enjoyed 11.5 percent deposit growth and 8.5 percent loan growth over the 12 months that ended March 31,” Niederhauser said. “No one's excited about having to deal with this assessment over what is looking like a 10-year plan, but Iowa's credit unions have already factored that into their balance sheets.

“It's almost like a cost of doing business.”

The NCUA has sued JP Morgan Securities LLC, Goldman Sachs and RBS Securities Inc. seeking to recover about $2 billion  lost on the mortgage-backed securities. The lawsuits accuse the banks of misrepresenting the health of the securities and the risks associated with the investments.

The NCUA says as many as 10 lawsuits may be filed.