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Alternative Lending - How Do Credit Unions Differ From Banks?

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Why consider credit unions for home mortgages?

Credit unions are conservative financial lending institutions organized and formed by a group of people who have something in common, such as similar employment (teachers), association (members of a power co-operative), or area of residence. Credit unions are membership organizations whose members pool their savings to create a fund to use for car loans and home loans at reasonable interest rates.

Credit unions focus their lending to their local communities and supporting local businesses. Due to their conservative lending criteria, credit unions overall did not experience the high foreclosure rates that for profit financial institutions suffered. Even the credit unions' subprime portfolios stood up well in the recent mortgage meltdown.

Credit unions are also chartered to provide other banking or financial services, such as checking accounts, deposit of federal tax payments, ATMs and safe deposit boxes to its members. A historic directive of credit unions is to promote savings and financially educate its members to help them improve their personal financial well-being.

In the early 20th century, credit unions were begun to provide alternative financial services to the working Americans who were largely unable to utilize the bank's financial services. Prior to the advent of credit unions, working Americans were largely forced to get any needed financing from unregulated money lenders who charged exorbitant interest rates (also known as "loan sharks").

Credit Union Differences From Traditional Financing Institutions:

Financial Institution Comparison
Type:
Credit Unions
Other Financial Institutions
Structure:
Not-for-profit cooperatives
For profit institutions
Ownership:
Members
Outside Stockholders
Operation/Control:
Volunteer Board
Paid Board
Loan Limitation:
$1 loaned per $1 deposit
$10 loaned per $1 deposit
Use of Funds:
Members' funds create dividends for members
Depositors funds create dividends for shareholders

Who Supervises Federally Chartered and State Chartered Credit Unions?

Federal credit unions receive their charters from the National Credit Union Administration (NCUA). The NCUA also supervises, regulates and monitors all federal credit unions. Federally chartered credit unions began with the passage of the Federal Credit Union Act of 1934 to further insure that all Americans have fair and equal access to financial services.

Federal credit unions are under federal guidelines and are not regulated by state legislatures. They are under all the federal laws such as RESPA, Fair Credit Reporting Act, and the Truth in Lending Act. Since federal credit unions operate under federal laws and guidelines they can conduct business in any state, unlike state-chartered credit unions, which can only conduct business within their own state.

State chartered credit unions abide by the federal statutes, but also may have state laws or regulations that govern their operation and oversight.

Are Deposits at Credit Unions Insured Like Deposits at Banks?

The deposits of members of federal credit unions and most state-chartered credit unions are insured through the National Credit Union Share Insurance Fund (NCUSIF). The NCUSIF is a federal insurance fund backed by the full faith and credit of the federal government. Unlike the Federal Deposit Insurance Corporation (FDIC) that was formed to insure banks, the NCUSIF was instituted without appropriating taxpayer money. Credit Union share accounts (similar to bank deposits) are insured to the same amount, $100,000 per account, that bank deposits are. Retirement accounts have additional coverage to $250,000.

The NCUSIF is also the government body that steps in to run financially troubled credit unions to avoid their liquidation.

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