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1 1 (January 13, 2022)

handle is hein.crs/govegfs0001 and id is 1 raw text is: Congress&onaI Research Servt informing Ih Iegislaive dIbate soc 1914 Updated January 13, 2022 Introduction to Financial Services: Credit Unions Background Credit unions are nonprofit financial cooperatives, meaning that these depository institutions are owned and operated entirely by their members. The concept of the modern credit union stems from small group cooperatives that emerged in financially underserved localities (dating as least as far back as U.S. colonial times) where residents pooled their funds and subsequently provided unsecured small-dollar loans to members. Following the Great Depression, Congress passed the Federal Credit Union Act of 1934 (FCU Act; 48 Stat. 1216) to create a class of federally chartered financial cooperative institutions for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes. Modern retail (natural person) credit unions still hold member deposits, which are referred to as shares; the interest earned by members is referred to as dividends; and the shares are used to provide low-cost loans to members, other credit unions, and credit union organizations. Credit unions have various distinguishing traits from their primary competitors, commercial banks. As member-owned cooperatives, federal- or state-chartered credit unions are based on a common bond, which establishes the membership eligibility requirements. There are three types of charters: (1) a single common bond (occupation or association based), (2) a multiple common bond (more than one group each having a common bond of occupation or association), and (3) a community-based (geographically defined) common bond. As nonprofit institutions, credit unions are exempt from paying federal income tax at the corporate level. Individual members are taxed on their dividends. (By contrast, commercial banks are for-profit institutions that are owned by equity shareholders. With the exception of some small institutions, most banks pay corporate taxes. Individual depositors and shareholders pay individual taxes on interest and dividend income, respectively.) The National Credit Union Administration (NCUA), an independent federal agency, charters and supervises national-chartered credit unions for safety and soundness and insures members' share deposits. The NCUA collects insurance assessments from member credit unions and then places the proceeds in the National Credit Union Share Insurance Fund (NCUSIF) to reimburse a credit union's share depositors were it to suffer large losses or become insolvent. The NCUA manages the NCUSIF to ensure that the statutory minimum requirement of funds is maintained. In addition, the NCUA provides lender-of-last-resort liquidity to solvent credit unions via its Central Liquidity Facility discount window. (This facility, which is itself a cooperative capitalized by its member credit unions, provides loans to its members.) Perrissibie Lending Activitkes By amending the FCU Act several times over the past decades, Congress has expanded the permissible lending activities of credit unions, thus allowing them to evolve into a more sophisticated financial intermediation system. Although credit unions and banks provide many similar types of financial services, credit unions face more statutory restrictions on their lending activities relative to banks. Some of the restrictions include the following: * Credit unions can make loans only to their members, to other credit unions, and to credit union organizations. * Credit unions face a 15% statutory loan interest rate ceiling, with some authority to operate above the cap under certain circumstances. The NCUA is allowed to set a ceiling above the 15% cap for up to an 18-month period after consulting with Congress, the U.S. Department of the Treasury, and other federal financial agencies. The credit union interest rate ceiling is currently set at 18% (extended through September 10, 2021). Credit card loans, for example, are likely to be offered to a consumer with an interest rate closer to the ceiling. * Credit unions generally offer loans with a 15-year statutory maturity limit with some exceptions, such as loans for residential mortgages. * Credit unions' member business loans (MBLs) are limited by statute. The aggregate amount of outstanding loans, lines of credit, or letters of credit used for an agricultural purpose or for a commercial, corporate, or other business investment property or venture to one member or group of associated members may not exceed 15% of the credit union's net worth or $100,000, whichever is greater. Statute also limits an MBL's aggregate amount to the lesser of 1.75 times the credit union's net worth or 12.25% of the credit union's total assets with three exceptions. The exceptions were authorized for credit unions with low-income designations, which are chartered for the purpose of making business loans, and with a history of primarily making such loans. When establishing the statutory cap on MBLs (along with their net worth supervisory framework, discussed in the next section), Congress emphasized concerns for the prudential safety and soundness of the credit union system. Credit union industry advocates argue that lifting lending restrictions to make the system more comparable with the banking system would increase borrowers' access to credit. Community or small banks (e.g., banks with $10 billion or less in total assets), which often compete directly with

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