Why millions of Americans are now turning to credit unions for loans

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When state-demanded closed works began last March, Skyler Fort, a painting contractor in northern Michigan, applied to its local 4Front Credit Union for a PPP loan.

Many Americans sought loans in the past year, and Forth said he chose a credit union over a bank “based on more personal feelings.” Although he previously had a relationship with a bank, he transferred his accounts to a credit union, and in the end, a $ 55,000 loan helped his Fortified Coatings business retain five full-time employees and 14 additional contract workers as the business grew. summer.

Unsurprisingly, many Americans received loans in the past year at record low interest rates, but research shows that credit unions tend to lend more than commercial banks during the crisis. This is because their mission is to support Main Street, the labor unions and the local communities they serve. According to industry trade group Credit Union National Association, or CUNA, credit unions continued to lend and even increased lending during the Great Recession and the current pandemic crisis. By comparison, banks tended to cut back or even cut back on lending during crises.

From the end of 2019 to September 2020, the number of credit union members increased by 3.37 million, or 2.8%, to 125.11 million. Credit unions’ loan portfolios grew 6.6% in the 12 months ended September 2020, slightly above the 6.5% year-over-year. For comparison, the banks’ loan growth was 4.9%.

Since credit unions are non-profit organizations, they return profits to members through lower lending rates than commercial banks, higher deposit rates and lower and lower commissions. But this does not mean that credit unions regularly do more business than banks. During “normal” times, banks tend to lend more.

“Compared to commercial organizations, [credit unions] tend to be less involved in the boom and bust cycle, “said Jordan van Rijn, senior economist at the National Association of Credit Unions.

Some similarities to the past recession

Before the 2008 recession, 24% of all mortgages issued by banks were subprime, compared with about 3% in credit unions. When the crisis hit, banks retreated much more. Van Rijn said that now he sees a similar picture.

Credit unions and banks are similar in that they offer financial services and are insured. While the FDIC insures banks, credit unions are insured by the National Credit Union Authority. The main difference is that banks are commercial institutions owned by shareholders, while credit unions are non-profit cooperatives controlled by their members. These differences create different priorities and incentives.

“In times of risk and uncertainty, banks tend to move away from lending much more and become much more conservative. But credit unions, as part of their mission, are simply to continue serving their members, ”said van Rijn.

As an example, consider a small credit union that includes teachers and firefighters. “These people need you even now more than ever. The likelihood that credit unions will continue to make these loans, even if they are slightly more risky, will be higher than ever. In contrast, a bank is less likely to lend to the same people because it needs to maximize profits and minimize risks to its shareholders, he said.

“We have seen growth in lending and deposits that defies common sense in the midst of the crisis and difficulties,” said Jacqueline Kearns, chief brand officer for Affinity, a 20-branch credit union based in New Jersey. According to Kearns, Affinity has seen significant growth in its mortgage business, with a record high lending rate over the past year. This is in part due to real estate trends in the Tri-State area, with people moving out of city rent to buy homes in the suburbs. Low interest rates have also forced many to refinance their mortgages.

In Jackson, Mississippi, the Hope Enterprise Corporation, of which Hope Credit Union is a part, saw tremendous lending growth in the past year, largely driven by demand for PPP loans. The credit union issued 2,900 business loans in 2020, up from 50 in 2019.

A model for serving the community

The cooperative model of credit unions can produce amazing results in times of crisis. Despite the pandemic and recession, the asset quality of credit unions improved during the year. Credit union delinquency rates fell to 0.54% in September, while net write-offs fell to 0.47%, down from 0.70% and 0.56%, respectively, in 2019, according to CUNA. CUNA attributed the results to incentive payments and credit growth, as well as credit unions working with members to modify and defer loans to avoid late payments and write-offs.

Credit union motives and patterns are more likely to occur in regions with low income and racial or ethnic diversity than in banks. More than 75% of credit unions belong to different ethnic and racial groups, compared with 70.5% of banks. Likewise, over 8% of credit unions are in low-income regions, compared with 5.3% of banks, according to data compiled by CUNA.

Clark Psalmonds and his wife Sonya were able to obtain a mortgage from the Hope Credit Union.

Credit Union of Hope

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