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A Credit Union Bailout: What Does It Mean For Consumers?

(photo: iStockphoto)

In case you haven’t heard, three credit unions got into a bit of trouble last week. Well, not “a bit,” really. They had to be bailed out by the National Credit Union Administration, which is to credit unions what the Federal Deposit Insurance Corporation, or FDIC, is to banks.

Credit unions have been “rediscovered” by consumers lately, with their lack of “gotcha” fees and product features and historically sturdier lending standards that helped them survive the crisis that many banks didn’t. So we won’t be surprised to hear that the statement above alarms you and you probably have questions. Below, we’ve attempted to answer those most likely to be top-of-mind right now.

I heard the credit unions had to be bailed out on Friday. What actually happened?

The National Credit Union Administration (NCUA), a federal agency, seized the nation’s three largest wholesale credit unions (also known as “corporate” or “central” credit unions): Members United, Southwest Corporate, and Constitution Corporate. This is on top of two even larger ones they seized in 2009.

If I’m a member of one of those credit unions, am I going to lose my money?

No, because you’re not a member of one of the failed credit unions. Average Janes and Joes can’t be members of wholesale credit unions. It’s not like Costco.

Then what does a wholesale credit union do?

“They are basically a credit union for the credit unions,” says Greg McBride, a senior analyst at Bankrate. Credit unions, some of which are really tiny, rely on wholesale credit unions for clerical services like check-cashing, ATM networks, and also to borrow and lend money on a short-term basis. Every consumer credit union is a member of a corporate credit union.

Okay, I’m a credit union member, and my credit union is a member of one of these failed wholesale credit unions. Is my money safe?

Yes. Credit union deposits are backed by the NCUA in exactly the same way as bank deposits are backed by the FDIC. That means individual accounts are insured up to $250,000 and joint accounts up to $500,000. But that’s not even relevant here, since it was only corporate credit unions that failed.

I’ve never heard of the NCUA. Is it just as good as the FDIC?

Yes. Full faith and credit of the US government, and all that.

Can a retail credit union fail?

Yes. According to the NCUA, 66 retail credit unions have failed since January 2008. Nobody lost any insured deposits.

I’m still confused. Do I need to worry about this at all?

“You really don’t need to worry about this,” says McBride.

How did the wholesale credit unions get in trouble?

Same way everyone else did: they invested in mortgage derivatives.

Is this yet another a bailout?

It depends how you define “bailout.” No taxpayer money is being used to rescue the wholesale credit unions.

Then where’s the money coming from?

From the credit unions themselves, which pay into the NCUA insurance fund, just like banks pay in to the FDIC fund.

So if I’m a credit union member, I’m ultimately on the hook for this?

Yes. “How can anyone deny that the costs won’t get passed on?” says Jeffry Pilcher, a former credit union industry consultant who now publishes The Financial Brand.

Greg McBride is not so sure. “Could this have an impact on consumers? Well, yeah, it could. But we’ve got to knock over a few dominoes between here and there.” If retail credit unions have to pay for wholesale credit union screwups, the costs will eventually be reflected in their fees and interest rates.

But fees and interest rates change all the time for many reasons, and it’s hard to point the finger at any one factor, especially in the midst of continuing turmoil in the financial system.

Should I forget this whole credit union thing and go back to a bank?

“At the end of the day, from a consumer’s perspective, you’re still going to be better off with a credit union,” says Pilcher. That’s because credit unions are nonprofit and treated favorably by the IRS; they’re still going to be the easiest places to find good interest rates and free checking. They’re also a handy source for small business loans, credit cards, and insurance.

That’s a lot of services. Are credit unions becoming more like banks?

Yes. “Credit unions today are different from 15 or 20 years ago,” says McBride. “They have a vast product lineup that looks a lot more like a bank and can differ sharply from what many people have conjured up in their minds about a credit union.”

This makes a lot of people nervous, including Pilcher. “What they’ve done, bit by bit, is get rid of their feel-good membership and add more product. They’re blurring the customer’s perception: what’s the difference between a bank and a credit union?”

Even the credit union’s lobbying arm, CUNA, frequently refers to the “credit union movement,” as if customers are marching on Washington waving DOWN WITH BANKS picket signs.

McBride has no problem with credit unions expanding their services into areas formerly dominated by banks. “In terms of expanding their product and service offerings, that’s likely to continue, and that’s a favorable development for consumers, particularly at a time of continuing consolidation in the banking industry.”

If there’s nothing to worry about, why is everybody freaking out about this?

Because people think of credit unions as lovable and cuddly, and the idea of a credit union bailout makes customers jittery and bankers—who are no fans of credit unions and their tax-exempt status—giddy.