Blurring the Lines • Northwest Indiana Business Magazine

Blurring the Lines

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Credit unions offer alternatives to traditional banking.
by Michael Puente

When the great recession hit in 2008 and lasted through much of 2009, securing a loan through a traditional bank became more difficult, with stricter income guidelines and tougher collateral requirements as a way to reduce the risk of loans going unpaid.

That meant some customers were turned away when they tried to secure a loan for a home mortgage, or to start a business or finance a college education or buy an automobile. Couple that with increasing ATM fees, other charges for services and the controversial federal bank bailout, and you've got a frustrated customer base.

Some customers let their money do the talking, saying “adios” to their bank and “hola” to credit unions.

“When we were house shopping this year for our first home, I wanted to finance our mortgage through a credit union if possible. I wanted to do this on principle, mainly. I felt very strongly that I wanted to steer clear of a traditional bank or mortgage company,” says 30-year-old Patrick Rollens of Chicago.

“My parents used credit unions rather than banks while I was growing up. Also, my wife and I both financed our auto loans through credit unions. So we had a little experience understanding how credit unions work and how we can use them.”

Rollens says he actually applied for a mortgage at a major big-name bank in Chicago just to see what would happen.

“Sure enough, it took them a long time to process my application, and the rate they offered wasn't as competitive as what we got from our credit union lender. I seem to remember them taking at least 30 days to get back to me about my prequalification,” says Rollens, a communications and social media professional. “Then months later, after we were already deep into the credit union process, their mortgage reps suddenly started calling and being like ‘Well, are you ready to do this thing or not?' I told them we were going with another provider, and to take me off their list.”

John McKenzie of the Indiana Credit Union League in Indianapolis says the main reason people are looking toward credit unions more than ever is that they are not beholden to stockholders.

“Because credit unions are member-owned not-for-profit credit cooperatives, they do not have a separate group of stockholders that they have to pay dividends to,” McKenzie says. “Credit unions can take the earnings they receive that they don't need for reserves or their operations and return those back to the members through better rates and lower fees.”

In Indiana, there are 2.2 million members of credit unions, with many of those in Northwest and Northern Indiana.

“Philosophically, banks use people to make money and to drive shareholder value. We use it just the opposite. We use money to serve people,” says Paul Marsh, president and CEO at Teachers Credit Union in South Bend. “When you're a credit union member that means you're an owner and we're here to meet your financial needs. We really were founded with the principal: People helping people. It's very simple and it's been a very good model.”

Marsh says credit union membership has been increasing just as customers have grown frustrated with big banks.

“It's probably been one of the worst economic times in our lifetime. That being said, we've increased membership at record paces over the last 20 years. But in the last two years, we've increased membership as more banks have stubbed their toes. We've kept our doors open and continue to lend.”

Marsh says credit unions, however, expect loans to be fulfilled by borrowers but also make sure not to allow customers get in over their heads.

“We're kind of old-fashioned. When we loan money out, we expect it back. We're going to look for capacity to pay and won't take the borrower over their head,” Marsh says. “It's that people-helping-people philosophy.”

Many credit unions have guidelines on who may join a particular credit union. For example, some may require members to live or work in certain geographical area or work at a certain business.

But an interesting aspect is that credit unions don't see other credit unions as competition, says Michael Hussey, CEO at Tech Federal Credit Union in Crown Point. “Each has their own little niche, their own field of membership or own a field that they are good at,” Hussey says.

Like Marsh, Hussey says credit unions work to put the member first. And like banks, credit unions offer loans for commercial ventures.

“Our largest loan is $2.5 million,” says Hussey, whose career started in traditional banking. “Bottom line, we try to offer better rates on loans and shares. Credit unions are member-owned and our entire board of directors are volunteers,” Hussey says.

McKenzie says the reasons credit unions came to be in the early 1900s are still applicable today. “Credit unions formed in the early 1900s because banks were neglecting customers,” McKenzie says.

Since 2008, credit unions in an eight-county area of Northwest and Northern Indiana have increased deposits by 36 percent and increased the number of business loans by 28 percent, McKenzie says.

“Since the economic downturn, we have seen once again when things get more difficult financially for consumers and business owners, credit unions continue to attract more members and more deposits. A lot of other business lenders have pulled back and actually reduced business lending since the economic downturn. A lot more people see credit unions as a better deal and see them as willing to step forward, especially during these more economic difficult times,” says McKenzie.

In an eight-county region of Northern and Northwest Indiana, there are 36 credit unions with a total membership of 545,000, says McKenzie. The 36 credit unions have a combined commercial lending balance of $183 million.

“These are loans to local businesses in the communities where these credit unions are located. Many other business lenders pulled back on lending after the economic downturn and credit unions stepped forward,” McKenzie says.

But John Hall, spokesman for the American Bankers Association in Washington, D.C., states the playing field for credit unions is unfair. Moreover, he says credit unions have grown tremendously since being established in 1934.

“The hallmark of the credit union industry has been stretched beyond recognition. Today, many credit unions have grown into highly profitable, billion-dollar institutions offering a full range of financial services–including insurance and securities brokerage–to just about anyone. Though these institutions look and act like banks, they do not pay taxes or abide by the same rules as banks.”

The National Credit Union Association, Hall says, has steadily adopted policies that have expanded credit union membership beyond the limits prescribed by Congress. “As credit union membership expands, so does the cost to American taxpayers, who underwrite the credit union industry's tax subsidy to the tune of more than $1 billion a year,” Hall says. “ABA has challenged NCUA's policies through comment letters and in court and will continue to make the case that similar institutions ought to be treated similarly.”

Hall also says that the size of the credit union could determine what services it offers and those could be less than at a traditional bank, and it may offer few locations for ATMs.

But credit unions, like Members Advantage Credit Union in Michigan City, are fighting back against banks and even uses the mantra “we are not a bank” to make its case.

“We are not like a bank with their high rates and hidden fees. In fact, that's our new slogan ‘WeRNotABank,” says Members Advantage president and CEO Frank Beachnau. “We're proud of our credit union's ‘People helping People' philosophy. We don't want our members to be bummed about banking anymore.”

Beachnau states everyone is trying to get “more bang for your buck” on products or services. “It shouldn't be any different when choosing which financial institution handles your money,” Beachnau says. “It's easy to get caught up in gimmicks, hidden snares and perks that really don't add up to much. …. We believe in value.”

Judging from filings to the U.S. Department of Treasury, banks are pretty much at war against the credit union industry, challenging credit union attempts to expand business lending and even redefining the definition of a credit union. But according to McKenzie, credit unions will continue to expand in spite of challenges by the banking industry. “We expect to continue credit unions to grow more and more just the way we have seen in the last few years.”


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