January 4, 2021
Introduction to Financial Services: Credit Unions
Background
Permissible Lending Activities
Credit unions are nonprofit financial cooperatives, meaning
By amending the FCU Act several times over the past
that these depository institutions are owned and operated
decades, Congress has expanded the permissible lending
entirely by their members. The concept of the modern credit
activities of credit unions, thus allowing them to evolve into
union stems from small group cooperatives that emerged in
a more sophisticated financial intermediation system.
financially underserved localities (dating as least as far back
Although credit unions and banks provide many similar
as U.S. colonial times ), where residents pooled their funds
types of financial services, credit unions face more statutory
and subsequently provided unsecured small-dollar loans to
restrictions on their lending activities than banks. Some of
members. Following the Great Depression, Congress passed
the restrictions include the following:
the Federal Credit Union Act of 1934 (FCU Act; 48 Stat.
1216) to create a class of federally chartered financial
Credit unions can make loans only to their members, to
cooperative institutions for the purpose of “promoting thrift
other credit unions, and to credit union organizations.
among its members and creating a source of credit for
provident or productive purposes.” Modern retail (natural
Credit unions face a 15% statutory loan interest rate
person) credit unions still hold member deposits, which are
ceiling, with some authority to operate above the cap
referred to as shares; the interest earned by members is
under certain circumstances. The NCUA is allowed to
referred to as dividends; and the shares are used to provide
set a ceiling above the 15% cap for up to an 18-month
low-cost loans to members, to other credit unions, and to
period after consulting with Congress, the U.S.
credit union organizations.
Department of the Treasury, and other federal financial
agencies. The credit union interest rate ceiling is
Credit unions have various distinguishing traits from their
currently set at 18% (extended through September 10,
primary competitors, commercial banks. As member-owned
2021). Credit card loans, for example, are likely to be
cooperatives, federal- or state-chartered credit unions are
offered to a consumer with an interest rate closer to the
based on a common bond, which establishes the
ceiling.
membership eligibility requirements. There are three types
of charters: (1) a single common bond (occupation or
Credit unions generally offer loans with a 15-year
association based); (2) a multiple common bond (more than
statutory maturity limit with some exceptions, such as
one group each having a common bond of occupation or
loans for residential mortgages.
association); and (3) a community-based (geographically
defined) common bond. As nonprofit institutions, credit
Credit unions’ member business loans (MBLs) are
unions are exempt from paying federal income tax at the
limited by statute. The aggregate amount of outstanding
corporate level; individual members are taxed on their
loans, lines of credit, or letters of credit used for an
dividends. (By contrast, commercial banks are for-profit
agricultural purpose or for a commercial, corporate, or
institutions that are owned by equity shareholders. With the
other business investment property or venture to one
exception of some small institutions, most banks pay
member or group of associated members may not
corporate taxes; individual depositors and shareholders pay
exceed 15% of the credit union’s net worth or $100,000,
individual taxes on interest and dividend income,
whichever is greater. Statute also limits an MBL’s
respectively.)
aggregate amount to the lesser of 1.75 times the credit
union’s net worth or 12.25% of the credit union’s total
The National Credit Union Administration (NCUA), an
assets with three exceptions. The exceptions were
independent federal agency, charters and supervises
authorized for credit unions with low-income
national-chartered credit unions for safety and soundness
designations, which are chartered for the purpose of
and insures members’ share deposits. The NCUA collects
making business loans, and with a history of primarily
insurance assessments from member credit unions and then
making such loans. When establishing the statutory cap
places the proceeds in the National Credit Union Share
on MBLs (along with their net worth supervisory
Insurance Fund (NCUSIF) to reimburse a credit union’s
framework, discussed in the next section), Congress
share depositors were it to suffer large losses or become
emphasized concerns for the prudential safety and
insolvent. The NCUA manages the NCUSIF to ensure that
soundness of the credit union system.
the statutory minimum requirement of funds is maintained.
In addition, the NCUA provides lender-of-last-resort
Credit union industry advocates argue that lifting lending
liquidity to solvent credit unions via its Central Liquidity
restrictions to make the system more comparable with the
Facility (CLF) discount window. (The CLF, which is itself
banking system would increase borrowers’ access to credit.
a cooperative capitalized by its member credit unions,
Community or small banks (e.g., banks with $10 billion or
provides loans to its members.)
less in total assets), which often compete directly with
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Introduction to Financial Services: Credit Unions
credit unions, argue that policies such as raising the
regulators (i.e., the Federal Reserve, the Office of the
business lending cap, for example, would allow credit
Comptroller of the Currency, and the Federal Deposit
unions to expand beyond their congressionally mandated
Insurance Corporation) had enhanced their prudential
mission and could pose a threat to financial stability.
capital requirements to increase the U.S. banking system’s
resilience to systemic risk events. Likewise, the NCUA in
Prudential Requirements Following the
2014 proposed increasing, thus strengthening, net worth
Financial Crisis of 2008
buffer requirements, particularly for large credit unions.
An established goal in NCUA’s 2018-2022 Strategic Plan
The proposal, however, has been revised and delayed.
includes ensuring a safe and sound credit union system. In
general, credit unions (and banks) must maintain buffers to
In 2015, NCUA revised its 2014 proposed rule that had
absorb losses associated with loan defaults. A buffer is
defined a complex credit union as one with at least $50
defined as the difference between assets (e.g., loans, bonds)
million in assets. The amended definition increased the
and liabilities. A buffer can be used to absorb losses
threshold to having at least $100 million in assets. The
associated with loan defaults. (Banks maintain capital
NCUA also finalized a new risk-based capital rule for
buffers; credit unions maintain net worth buffers. Although
complex credit unions, which was designed to be more
capital and net worth buffers are analogous concepts, the
consistent with the capital adequacy requirements
terminology differences are because bank capital consists of
commonly applied to banks.
both retained earnings and equity stock shares. Credit
unions, however, do not issue equity stock shares, thus their
In 2019, the NCUA issued a final rule that delayed the
net worth consists primarily of retained earnings. Despite
effective date of the 2015 final rule. The NCUA also
these particulars, capital and net worth have been used
amended the complex credit union’s definition by
interchangeably when referring to prudential buffer
increasing the asset threshold level from $100 million to
requirements.) The credit union and banking systems
$500 million. The NCUA wanted more time to consider
generally compute their buffer requirements differently.
the feasibility of adopting a capital framework for the
Even within each system, buffer computations differ by the
credit union system that would be similar to the
overall asset size of each depository institution, the wide
community bank leverage ratio framework. Under this
variation in the types of loans predominately held in
framework, banks with less than $10 billion in average
portfolios, and associated credit risks linked to their
total consolidated assets may elect to maintain a
borrowers. Consequently, determining whether credit
leverage ratio of greater than 9% to satisfy both the risk-
unions and banks hold comparable buffer amounts is
based and leverage capital requirements to be well-
difficult given the variety of factors at play.
capitalized. This final rule would make the risk-based
capital requirements effective on January 1, 2022.
Corporate credit unions provide retail credit unions with
liquidity, investment, and clearing services, thus reducing
Despite the delays in adopting enhanced prudential
the costs that smaller credit unions would bear individually
requirements, the NCUA implemented final rules and
to perform various financial transactions for members. In
subsequently released proposed rules that would expand
2008, corporate credit unions—facing increasing liquidity
lending activities and increase financial transactions
pressures after a significant portion of their mortgage-
volumes (economies of scale) and potential revenues for the
related assets lost value following a deterioration of the
credit union system. For example, the NCUA has revised
underlying real estate collateral—were downgraded below
certain terms (e.g., local community, rural district,
investment grade. By 2010, five financially distressed
underserved area, multiple common-bond credit union) to
corporate credit unions, which are cooperatively owned by
broaden access to federal credit unions. NCUA also
their federally insured retail credit unions members, could
implemented certain provisions from P.L. 115-174, such as
not maintain their buffers and threatened NCUSIF’s
the amendment to the statutory MBL definition to exclude
solvency. At that time, the five corporates represented
nonowner-occupied real estate (e.g., rental property) loans
approximately 70% of the entire corporate system’s assets,
from counting toward the aggregate MBL cap. The pace of
98.6% of the credit union system’s investment losses, and
prudential requirements, however, arguably should rise
were liquidated by the NCUA. Rather than deplete the
concurrently with lending activities to reduce timing gaps
NCUSIF, Congress in May 2009 established a Temporary
that would allow default risk exposures to rise at a faster
Corporate Credit Union Stabilization Fund (TCCUSF) to
pace than net worth buffer levels.
manage the losses from the corporates. The TCCUSF
borrowed from Treasury to help cover losses. The NCUA
CRS Resources
also raised share deposit assessments on all federally
CRS Report R46360, The Credit Union System:
insured credit unions to repay Treasury. After collecting
Developments in Lending and Prudential Risk
sufficient funds from credit unions and recovering various
Management, by Darryl E. Getter
debts and obligations that had been owed to the corporates,
the TCCUSF was able to close officially on October 1,
CRS In Focus IF11048, Introduction to Bank Regulation:
2017.
Credit Unions and Community Banks: A Comparison, by
Darryl E. Getter
The credit union system, along with numerous financial
entities, experienced distress after a sharp rise in the
Darryl E. Getter, Specialist in Financial Economics
percentage of seriously delinquent mortgage loans in the
United States in 2008. By 2013, the federal bank prudential
IF11713
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Introduction to Financial Services: Credit Unions
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