What You Need to Know: Credit Unions are Different From Banks

Recent regulatory actions make it critical to understand how credit unions — and the system in which they operate — are different from banks.


When reviewing the public discussion of NCUA’s conservatorship of Arrowhead Credit Union ($875.7M, San Bernardino, CA), many reporters, community leaders, and political figures may assume this is merely another “bank” falling prey to economic circumstances beyond its control. They might assume the regulator’s role is to come in and remove the problem, as the FDIC does when a bank fails. Then perhaps another institution will fill the void in the market.  

Nothing could be further from the truth. Equating bank and credit union problem resolution reflects a misunderstanding of why credit unions were chartered by Congress.

For the press and the public to fully understand NCUA’s misjudgments in Arrowhead’s conservatorship, credit union commentators must explain the role of credit unions in our financial system and in our society.

Credit Unions Solve Society’s Problems
Credit unions were chartered by Congress in 1934 in the midst of the Great Depression. Congress gave credit unions tax exempt status so they could provide fair terms on financial products for members and communities where for-profit firms could not, or would not, do business.

The cooperative, member-owned structure has one purpose: improve members’ financial well-being.   There is no better example of credit unions fulfilling this role than during the last two years of the Great Recession (2008-2009). When the country’s primary challenge was to restore a normal flow of credit to every level of the financial system, from Main Street to Wall Street, credit unions stepped up. True to their core purpose, they made record amounts of loans quarter by quarter during those years. Notably, this is the same time period when many for-profit financial institutions, trying to sustain stock prices and shareholder value, pulled back.

Credit Unions Out-Loaned Bank of America
During the 2008-2009 financial crisis, the $800 billion credit union system out-loaned the $2.2 trillion Bank of America institution in every area of common activity: credit cards, auto loans, first mortgages, and consumer loans. Furthermore, credit unions modified the same amount of first mortgages ($5.2 billion) as did Bank of America, even after taking into account Bank of America merging Countrywide’s real estate loans into its own first mortgage portfolio.

Arrowhead is Vital to the Inland Empire
Credit unions fulfilled their social purpose during the Great Recession. Arrowhead, likewise, provided fair terms for financial products and kept credit flowing in California’s Inland Empire, where it conducts business. Its actions during the Great Recession and its recent turnaround speaks to its strength, not its weaknesses.

Four banks in the Inland Empire have failed in the past two years. Arrowhead worked with its members during the recession. It modified 140 loans for $19.9 million as of March 31, 2010, providing borrowers and communities a source of financing when other institutions could not.  

With an 80% loan-to-share ratio, Arrowhead gave its members opportunities to work through their troubles. The institution remained committed to fulfilling its core purpose because that is what credit unions are supposed to do. Arrowhead remains engaged in its community and supportive of its members; it does not add to their uncertainties.

For more than 60 years, Arrowhead has been creating “common wealth” from the service of volunteer directors and years of member participation.  In credit unions, this cooperative financial legacy passes  from one generation of members to the next, not to private shareholders. Creating this institutional capability takes time. Credit unions begin with no capital. They accumulate earnings year after year in a long, slow process of building reserves.  

When extraordinary events lead to losses, credit unions cannot recapitalize — they must earn their way back, month by month, year by year. This is what Arrowhead was doing. (For Callahan’s analysis on Arrowhead’s performance, read Arrowhead Flies Straight in 2010.)

If credit was readily available to all, especially during difficult  times, credit unions would not exist.   Their purpose is to work with members in both good and strained circumstances, to take the long view, and to provide hope when other institutions cannot. Arrowhead has been doing this in the Inland Empire, just ask its members and community leaders. (For more on public reaction, see Press Enterprise’s June 30 article “Credit union uprooted.”)

Closing a credit union destroys the common wealth  – both tangible and intangible – built through years of dedication by its volunteers and members.  That wealth cannot be recovered.

Transform From Members to Subjects
NCUA conserved Arrowhead on the basis of unproven assertions.  The only fact provided by regulator spokespersons in the Arrowhead situation is “107.” That is the number of new examiners the Agency says it has hired, and, of course, it has nothing to do with Arrowhead’s financial trends.

Conservatorship denies the members a say in the future of their financial institution. They are members no longer, but subjects of NCUA. Arrowhead’s interim manger installed by NCUA said it best when a Contra Costa Times reporter pushed her for information about the situation: “NCUA is our Board and they have commented.” (Read the article, Arrowhead’s data was inaccurate, feds say.)

NCUA conserved Arrowhead without giving the credit union’s Board, managers, or members facts about its action. If Arrowhead’s Board is not allowed to resume its leadership role, then its members, the Inland Empire communities, and the credit union system will be the poorer. Moreover, such action allows a regulatory process that lacks due process, let alone a common sense of fairness, to continue without question. Is this what historian Lord Acton meant when he talked about unchecked authority? (For more about the dispute over Arrowhead’s conservatorship, read the LA Times article Regulator’s takeover of Arrowhead Credit Union Raises debate.)

Next Steps: Know and Act
For the 95% of credit unions that are doing well, they might believe this is not an issue that concerns them. After all isn’t that what a regulator does – make problems go away?

However, in this case Arizona Senator John McCain’s recent observation seems especially relevant: “Failure is no more a permanent condition than is success.”

Sooner or later every credit union will have its time of trial and declining trends. Is this the way NCUA should respond to a fluctuation in a credit union’s circumstances? Should regulatory policy be that of making failure a “permanent condition?”

To express your thoughts on Arrowhead’s conservatorship, may we suggest you contact any of the following as you feel appropriate:

  • NCUA Board:
    Chairman Debbie Matz [703.518.6300; dmatz@ncua.gov];
    Board member Michael E. Fryzel [312.332.3737; mfryzel@ncua.gov];
    Board member Gigi Hyland [ghyland@ncua.gov]
  • The Congressional delegates from the communities Arrowhead serves:
    Rep. Jerry Lewis, CA-41st [909.862.6030(CA); 202.225.5861(DC); Email];
    Rep. Gary Miller, CA-42nd [714.257.1142(CA); 949.470.8484(CA); 202.225.3201(DC); Email];
    Rep. Joe Baca, CA-43rd [909.885.2222(CA); 202.225.6161(DC); Email];
    Rep. Ken Calvert, CA-44th [951.784.4300(CA); 949.888.8498(CA); 202.225.1986(DC); Email]
    Rep. Mary Bono Mack, CA-45th [760.320.1076(CA); 951.658.2312(CA); 202.225.5330(DC); Email]
  • California Credit Union League: Interim CEO Dave Chatfield [daveccul@mac.com]



July 5, 2010


  • Looking for a credit union I can

    put my money in ..that is FDIC insured

    and what is the limit they insure.

    I live in Manhattan New York..

    Work on Park Avenue Zip code 10016

    Live on Second Avenue Zip Code 10010

    thanks very much.

    Joan Werner

    joan werner
  • Need to find a Credit Union that is NATIONAL, and not just for Florida. Can you help me? Naturally, it would have to have an office or branch in the state of Florida. Thank you Ann
    Ann H Miller