Dollars for Sale
Michael Walsh knows all about the financial impact of unemployment.
"When I lost my position in 2007, I was unemployed for 10 months," Walsh recalls. "My wife's a registered nurse, so we kept up with our payments as best we could. We couldn't keep up with all of the revolving unsecured credit, though."
In 2008, Walsh became human resources director for Pomegranate Health Systems, a Columbus psychiatric residential treatment facility for adolescents. Still struggling with debt, he and his wife turned to Mark Decello at KEMBA Financial Credit Union.
"Mark said we weren't good candidates for a traditional refinance. But he worked with KEMBA's CEO, Jerry Guy, and they took all of our debt and bundled it into two mortgages. The interest is tax-deductible and we're paying $300 a month less than before. It was nontraditional, but it made more sense than anything else we'd done," Walsh says.
The best part: "We'll have all of our debt paid off in less than four years from now. House, both cars, credit cards."
The Walshes are among many who are turning to credit unions for their borrowing needs. "We understand that bad things happen to good people all the time," says Decello, KEMBA's executive vice president. "We want them to think of us as a full-service financial provider, because we essentially have all of the products that our banking competitors do."
"People are more cognizant of other opportunities for their finances," says Members First Credit Union Treasurer and CEO Greg Kidwell. "Credit unions, including ours, are getting more of those opportunities."
"Every time I read that banks aren't lending, I think, ‘Please come knock on our door,' " says Robert Myles, senior vice president of lending and asset protection at Telhio Credit Union.
With strong balance sheets, credit unions are eager to make loans. Don't make the mistake, though, of thinking they're passing out money like drunken sailors.
"Credit unions are very consistent and not very fancy lenders," says Kidwell. "We think there's something to be said for that. The financial crisis and housing crisis was precipitated by huge lending risks and wild swings."
"Credit unions never took one dollar from the federal government in the bank bailout," says Tom Furrey, president and CEO of Western Credit Union. "We didn't need to, and our lending practices didn't require a course correction. We never offered the risky loans you heard about."
Credit union membership used to be strictly limited, but these days federal and state rules make membership available to just about everyone. But do credit unions really offer their members better financial services, at lower prices, than commercial banks? Should you, as an employer, consider affiliating with a credit union? Here's a look at credit unions from the perspectives of some Central Ohio representatives.
Not Like Banks
Credit unions are not-for-profit cooperatives owned by their customers, also known as members. Profits may be reinvested in the credit union or retuned to members by way of higher deposit interest rates, lower loan rates and lower fees. Commercial banks, by contrast, pay their owners--the stockholders--dividends from their profits.
The National Credit Union Administration (NCUA) regulates federal credit unions. The Ohio Department of Commerce's Division of Financial Institutions oversees state-chartered credit unions. NCUA insures deposits for federal and participating state credit unions through the National Credit Union Share Insurance Fund.
A credit union's charter determines who is eligible for membership. Single-sponsor credit unions serve members from one association or employee group. To serve multiple employers within the same industry, a credit union may choose a trade, industry and profession (TIP) designation--offering membership to, say, employees of all electrical contractors in a region. Multiple-sponsor credit unions serve employees of more than one company through select employee groups (SEGs). The SEGs may represent different types of business. Community credit unions are open to those who live, work, attend school or worship within defined community boundaries.
Federal credit unions must serve either SEGs or a community. State credit unions may serve both.
Once known primarily for offering good interest rates on savings accounts, credit unions now compete aggressively as lenders.
"What impacts our members' monthly budgets the most? Their monthly loan payments. Their rates may be too high, they have the wrong terms or the loan isn't structured properly. Our cooperative business model means we can usually give them a better loan rate and terms," Decello says. KEMBA is Central Ohio's largest credit union with $615 million in assets and more than 60,000 members.
"I can't spend enough money to compete with Chase or PNC," Decello says. "We're focused on explaining cooperatives, seizing opportunities and educating members on how they can benefit by doing more business with us."
Credit union officials say members aren't busting the doors down for car loans, but mortgages are hot. "Our first mortgage growth has been pretty evenly divided between new purchases and refinances. Purchases, though, aren't nearly as strong as they were a few years ago," says Kidwell. Members First has $48 million in assets and serves nearly 7,000 members in Franklin County under a community charter.
At Western, says Furrey, "We're seeing home loan activity both in purchases and refinances, because rates are so low right now." The $63 million, state-chartered credit union serves the west side of Columbus, the west side of the city of Delaware and Plain City.
Columbus resident Jim Grafton, who works for Columbus Building Supply, is among Western's 10,000 members. "Money was tight. We had more going out than coming in," Grafton says. "My wife and I laid out our situation. We've been members for years, so we just asked how we could work it out."
This spring, the Graftons signed for a 10-year first mortgage and a home equity credit line from Western. "We consolidated and went from five payments to two. Our mortgage rate is better, but the credit card rate is really better," Grafton says. "We both feel better now that everything worked out. They were concerned about us and found a way to help us."
Telhio, a $434 million credit union serving Franklin County and certain surrounding communities, has resurrected a mortgage product from the past. "Like everyone else, our members have lost a lot of home equity," Myles says. "We saw this need and reintroduced a product that was popular 30 years ago: the FHA Title I loan. It's a second mortgage home improvement loan where members can borrow up to $25,000 without any home equity. It's insured by the federal government, but it's not dependent on the property's equity."
"Banks got away from FHA Title I loans when home equities became popular," Myles says. "In Columbus and even across Ohio, we think Telhio is about the only lender who offers them now, and we do so because it's a product that helps our members in today's environment."
In addition to mortgage products, credit unions are ramping up their revolving credit lending. "Our credit card is a perfect example of our straightforward approach to lending," says Kim Hudson, marketing vice president of Credit Union of Ohio. "We use risk-based pricing based on each member's situation." In other words, someone with a bad credit history will pay a higher rate than someone with a pristine record.
Once the rate is established, the credit union keeps things simple. "Our card has a fixed rate that's the same regardless of the transaction type, such as purchases or balance transfers," Hudson says. "There's no annual fee and a no-penalty APR, meaning that if you're late with a payment we don't increase your interest rate. Our lending philosophy is simple and fair, because we want members to understand their loan terms." With $125 million in assets and nearly $52 million in consumer loan balances, Credit Union of Ohio primarily serves employees of the state of Ohio and Ohio State University.
Credit unions are even competing, in a modest way, with payday lenders. Through StretchPay, offered through Credit Union Outreach Solutions Inc., members of participating credit unions can borrow $250 or $500.
"StretchPay helps with unexpected expenses," says Patrick Harris, media relations director of the Ohio Credit Union League (OCUL), which has partnered with lenders on the program. "Say they need money to fix their car's air conditioner. They borrow the money over a year and then they can draw against it again once it's repaid. It's meant to attract people away from payday lenders and into a product that's more affordable."
Central Ohio credit unions offering StretchPay include Education First, Total Assurance and Western. Others have developed their own similar loan programs.
Rethinking Student Loans
Tucked into the 2010 Patient Protection and Affordable Care Act was a structural shift in federal student loans. Financial institutions, including credit unions, no longer may make federally guaranteed student loans through the Federal Family Education Loan Program. Instead, students and their families must borrow directly from Uncle Sam. The change is expected to save $60 billion in federal loan subsidies over the next decade.
Members First was among the credit unions shut out of the business. "We were a student loan lender-until the health-care law took effect," says Kidwell.
In May 2010, the OCUL introduced a private lending program, Ohio Student Choice, a collaboration among 12 credit unions that are making $150 million available over three years. Participating Central Ohio credit unions are BMI Federal, Education First and KEMBA Financial.
"Ohio Student Choice is very positive for us," says Bill Allender, president of BMI Federal Credit Union. "It fills the gap that exists between the federal student loan amount and the total college financial need. That funding gap is real for many families." The SEG-based credit union has 28,000 members and $360 million in assets. Consumer loans total $200 million.
For now, some credit unions have chosen to back away from student loans. "Western hasn't made the transition to private student loan lending yet," says Furrey.
In 2010, loan balances at Ohio's credit unions totaled $12.44 billion (see "By the Numbers"). That's down slightly from 2009 totals of $12.47 billion, but ahead of 2008's total of $11.85 billion.
"In 2010, we grew our total loans by 6.25 percent. Consumer loans were up 3.65 percent," Kidwell says. "Through March, our delinquency is less than one-half of 1 percent. We haven't experienced any spikes because of the recession or unemployment situation."
"We're seeing growing interest in car loans," Furrey says. "We had our best year for credit cards in 2010, because of the changes the large card issuers made. Many of them repriced their programs and raised their rates. The terms are less favorable to consumers now, and often good cardholders were penalized. Some of those credit card customers found their way to Western."
These days, credit union members generally are prudent borrowers. "Our members are more conscious of their own balance sheets. They're saving a little more and they're paying down debt," says BMI's Allender. "Their borrowing has been tempered by the overall economy. In a sense, that's ironic, because it's a great time to borrow if you're comfortable with your income and debt load. Interest rates are great and money can't get much cheaper."
"In the heyday, consumers got credit at the drop of a hat and didn't give it much thought. Today they're thinking about their debt situation before applying for additional credit," Hudson says.
"We're most definitely seeing a slowdown in consumer borrowing. Members have lost jobs or are uncertain about their employment. That's changed the priorities on Main Street," Furrey says.
"I'll tell you straight up that people aren't borrowing like they were prior to 2008. They're a lot choosier and more pragmatic about what kind of debt they're willing to take on," Kidwell says.
Reluctance to borrow isn't necessarily a bad thing.
"When our members are hurting, we see it," Furrey says. "We applaud their hesitancy in many cases, because we see the ripple effect that too much debt has on a family. If you look at the good that's come out of the current economic situation, consumers have slowed their emotional spending and are pausing before they buy or borrow."
Lisa Hooker is a freelance writer.
Reprinted from the August 2011 issue of Columbus C.E.O. Copyright © Columbus C.E.O.