Credit Unions Give Banks a Run for Their Money

No longer are credit unions simply mom-and-pop operations.

Increasingly they are becoming full-service financial providers with product portfolios that can compete with banks. And more people have access to their services: many now serve communities rather than specific company employees.

As customers became more demanding, many credit unions began to offer expanded mortgage lending and credit-card services. Within the next couple of years, many plan to move into services such as student loans, international money-transfers and branded prepaid cards, according to a recent survey.

Increased sophistication means that members will "be able to use credit unions to meet all their financial needs," says Christine Barry, research director at Aite Group, a financial-services industry research group. Aite conducted a survey of 101 credit unions with more than $100 million in assets.

Credit unions are somewhat of a financial services safe haven in today's volatile consumer loan market. They avoided much of the sub-prime debacle by not offering the types of exotic loans and teaser rates that were widely available at the time.

Unlike banks, which are responsible to their stockholders, credit unions are ultimately responsible only to their members, who collectively own the financial institutions.

Expanding services seem to be bringing more people into the fold. Due to consolidation, the number of credit unions is shrinking. But membership in federal and federally charted state credit unions has grown by more than 15% to 86.9 million members since 2000, according to the National Credit Union Administration. And assets have increased even more rapidly: Between year-end 1999 and year-end 2006 credit union assets grew 73%.

Chief among credit unions expanding services are mortgage loans, according to the Aite Group survey. Of the credit unions who currently offer mortgage loans, 91% say they are seeing greater overall volume growth in mortgage lending than any other type of consumer loans.

Still, credit unions, like traditional banks, are being more cautious with their loans as a result of the crisis that developed in the era of easy lending in recent years, says Bill Hampel, chief economist at the Credit Union National Association.

Even so, in some cases mortgage-lending programs are helping credit unions expand. Bethpage Federal Credit Union says it is expanding its membership by offering a Home Loan Payment Relief Mortgage. The Long Island-based credit union began offering the loan to homebuyers who make less than 120% of the median income in their area in 2005.

The loan -- which targets first time homebuyers with good credit -- is offered at a below-market rate, and the down payment may be as low as 3% of the value of the loan.

Credit unions have also expanded their credit-card offerings: credit-card loan flows, which were negative in 2002, grew steadily over five years until they reached 12.2% in June 2007, according to the Credit Union National Association's midyear report.

Access to credit union issued credit cards is good news for consumers, says Linda Sherry, director of national priorities at Consumer Action.

"You should be able to expect fairer terms from your credit union because [it] is owned by its membership, not a profit making entity," Sherry says. Not all credit union credit-card contracts contain arbitration clauses, for instance, which leaves members free to settle disputes through the court system, rather in front of someone who works for a private group often chosen by the bank.

But consumers still need to be wary, since some credit union credit cards are issued by banks.

Many credit unions are developing innovative products to attract customers.

Fairfax County Federal Credit Union, for instance, developed the Gen Y Extreme Checking Account -- offering, among other perks, a free rewards debit card and six free foreign ATM transactions -- and promoted it through a YouTube video contest.

The program has been successful, says Matthew Kaudy, chief marketing officer of Fairfax County Federal Credit Union. The Gen Y Extreme Checking Account has increased new monthly accounts by 12%.

Likewise, Bethpage is expanding its services. It now offers wire transfers and volunteer income tax services primarily targeted at Long Island's underserved Latino market. And it's expanding by about four branches a year -- reaching about 10,000 additional members annually.

Consumers still need to meet membership requirements, of course, to take advantage of credit unions' services. But though credit unions must restrict their membership to receive preferential tax treatment, 1998 legislation generally broadened credit unions ability to expand their membership base, though in 2006 the legislation began to be interpreted more restrictively.

Fairfax County Federal Credit Union opened in 1958 to serve Fairfax County government employees. Over the years it has loosened its requirements so that today, it says, "If you live, work, worship, attend school or volunteer in Fairfax County you are eligible to open an account with Fairfax County Federal Credit Union. Additionally, if you are a Fairfax County retiree or family member of one of the groups listed you too may join!"