Why Millions of Americans Are Now Tapping Credit Unions for Loans

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When the state-mandated shutdowns started last March, Skyler Fort, a painting contractor in northern Michigan, turned to his local credit union, 4Front Credit Union, for a PPP loan. 

Many Americans sought out loans in the past year, and Fort said he chose the credit union over a bank "based on the more personal feeling relationship." Though he previously had bank relationships, he moved his accounts to the credit union, and in the end, the $55,000 PPP loan helped his business, Fortified Coatings, retain its five full-time employees and keep 14 additional contract workers as business revved up in the summer.  

It's not surprising that many Americans have received loans in the past year given record low interest rates, but research shows that credit unions tend to lend more than commercial banks during times of crisis. That's because their mission is to support Main Street, 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 current pandemic crisis. By comparison, banks have tended to pull back or even reduce lending during crises. 

Between year-end 2019 and Sept. 2020, credit union memberships increased by 3.37 million, or 2.8%, to 125.11 million. Loan portfolios at credit unions rose 6.6% in the 12 months ending Sept. 2020, slightly above last year's annual rate of 6.5%. By comparison, banks saw 4.9% growth in loans. 

Because credit unions are not-for-profit entities, they return earnings to members through lower loan rates than commercial banks, higher deposit rates, and lower and fewer fees. But that doesn't mean that credit unions regularly do more business than banks. During "normal" times, banks tend to lend more.  

"Compared to for-profit institutions, [credit unions] tend to not sort of be as caught up in the boom-bust cycle of ups and downs," said Jordan van Rijn, senior economist for the Credit Union National Association. 

Some similarities from last recession

Before the recession in 2008, 24% of all mortgages from banks were subprime compared to about 3% at credit unions. When the crisis hit, banks pulled back a lot more. Van Rijn said he's seeing a similar pattern playing out now. 

Credit unions and banks are similar in that both offer financial services and are insured. While the Federal Deposit Insurance Corporation insures banks, credit unions are insured by the National Credit Union Administration. The key difference is that banks are for-profit institutions owned by shareholders, whereas credit unions are not-for-profit cooperatives controlled by their members. These differences create different priorities and incentives.  

"During periods of risk and uncertainty, banks tend to pull back a lot more on lending and just get a lot more conservative. But credit unions as part of their mission is just to continue to serve the members," said van Rijn. 

As an example, consider a small credit union with teachers and firefighters among its members. "These folks need you even now more than ever. Credit unions are gonna be more likely to still do those loans, even if they're a little bit riskier," he said. By contrast, a bank is less likely to lend to the same people because it needs to maximize profits and minimize risk for its shareholders, he said.  

"We saw growth on the lending side and on the deposits side, which is counterintuitive amid the crisis and hardship," said Jacquelyn Kearns, chief brand officer at Affinity, a New Jersey-based credit union with 20 branches. Affinity saw strong growth in the mortgage business with record-high originations in the last year, Kearns said. That was due in part to real estate trends in the tri-state area with people moving out of urban rentals to buy homes in the suburbs. Low interest rates also drove many to refinance mortgages. 

Jackson, Mississippi-based Hope Enterprise Corporation, of which Hope Credit Union is a part, saw a huge uptick in loans last year, largely due to demand for PPP loans. The credit union had 2,900 business loans in 2020, up from 50 in 2019. 

A model to serve the community

Credit unions' cooperative model can yield some surprising results during crises. Despite the pandemic and recession, credit union asset quality improved during the year. According to CUNA, the credit union delinquency rate fell to 0.54% in September, while net charge-offs dropped to just 0.47%, down from 0.70% and 0.56%, respectively, in 2019. CUNA attributed the results to stimulus payments, loan growth, and credit unions working with members to modify and defer loans, which avoids delinquencies and charge-offs. 

Credit unions' motives and model make them more likely to pop up in low-income and racially or ethnically diverse areas than banks. More than 75% of credit unions are in ethnically and racially diverse areas compared to 70.5% of banks. Similarly, more than 8% of credit unions are in low-income areas, compared to 5.3% of banks, according to data compiled by CUNA. 

Clark Psalmonds and his wife Sonja were able to get a home mortgage from Hope Credit Union.
Hope Credit Union
Clark Psalmonds and his wife Sonja were able to get a home mortgage from Hope Credit Union.

Clark Psalmonds of Deatsville, Alabama, got a second chance with Hope Credit Union after getting turned down for a home mortgage at several banks. Through Hope's affordable housing program, he qualified for a traditional mortgage that doesn't require a downpayment and can consider non-traditional forms of credit during the underwriting process.

Amid the crisis, credit unions' cooperative model and personal touch is getting a little more favorable attention. 

"Because we're a cooperative and a not-for-profit cooperative, we don't have the same motivation to make money off your misery," said Jim Nussle, president and CEO of CUNA. "If people think that you have their best interests at heart … even in the middle of crisis, people recognize that. I think it creates loyalty and means more people during times of crisis might be more willing to come to a credit union," he said. 

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