Credit unions are going great guns -- and the banks are uneasy

There's a boom of interest in credit unions today. This is because you can get more than the ever-popular car loan from a credit union; you can also get a mortgage, a checking account, a money market account, and access to an automatic teller machine. And you no longer have to be an employee of Company X to be a member of the Company X credit union.

Even the American Bankers Association, whose members are feeling a competitive pinch, concedes that credit unions are ``almost going Gangbusters.''

Credit unions weathered the rigors of recession and deregulation and have experienced annual asset growth of around 15 percent during the past three years.

They're diversifying into a broader range of services than ever before, and with liberalization of the ``common bond'' membership policy, more people now find themselves eligible to join credit unions.

The number of involuntary liquidations of credit unions fell from 251 in 1981 to 38 in 1984, largely as a result of more rescues by merger.

Edgar F. Callahan, who stepped down last week as chairman of the board of the National Credit Union Administration, has been given high marks for his role in these developments. (He is being succeeded by former Sen. Roger W. Jepsen [R] of Iowa.)

Mr. Callahan won praise during his tenure for trimming the NCUA's central office staff by 15 percent, even as the number of its field examiners grew by 357. This, in turn, enabled the NCUA to cut the fees it charges federally charted credit unions by more than a third from fiscal 1982 to 1984.

Under Callahan, the National Credit Union Share Insurance Fund, which, like the Federal Deposit Insurance Corporation for banks, insures credit unions, was greatly strengthened.

But success can provoke envy. And the prosperity and expansion of credit unions have drawn attention from those who are itching to change their tax-exempt status -- either to help balance the federal budget, or to ``level the playing field'' of competition among banks, thrifts, and other players in the financial game.

In a recent telephone interview, Mr. Callahan banged the drum for the continued tax-exempt status of credit unions.

Banks make money for their shareholders, and are taxed, on their ``spread'' -- the difference between the interest charged on loans and the interest paid out for deposits. Credit unions have a ``spread,'' too -- only the interest they pay out is called ``dividends'' instead.

Callahan notes, however, that a credit union's spread is not profit or income, but the equity reserve that keeps the union solvent. ``It's a very delicate system.'' Any pressure on that spread could lead to ``destabilization'' and ``massive failures,'' he warns.

``If it's income [for the federal government] they're looking for,'' Callahan says of those who would tax credit unions that ``they should let the credit unions thrive, and pay dividends to their members -- who will then pay taxes on those dividends.''

``Their tax-exempt status is something we've questioned,'' says Fritz Elmendorf, a spokesman at the American Bankers Association. ``These are not necessarily mom-and-pop institutions anymore.'' But Mr. Elmendorf acknowledges that the ABA has ``other fish to fry'' at the moment, as far as tax issues go, and is not currently lobbying for taxes on credit unions.

Credit unions are still the midgets of the financial marketplace. Some 70 percent of all credit unions have assets of less than $2 million. And all the assets of all the credit unions in the country (18,600 in all) total only $120 billion. That's too much to leave in the cookie jar, but not as much as the total assets of the nation's largest banking concern, Citicorp.

Loretta Donaldson, for example, is president and manager of the Carus Chemical Employees Union, 474 members-strong, with $435,000 in assets, in La Salle, Ill. The plant has been on strike for 11 months. ``But we're still solvent,'' says Ms. Donaldson, and hoping to remain so. She runs the credit union out of her farmhouse, some five miles from the plant; she often serves members coffee when they come to see her. The distance from the plant has been an advantage. ``Everyone feels more comfortable, because of the privacy -- no one knows your business.''

Up the ladder in size is St. Joseph's Credit Union, in San Antonio; with $10 million in assets, it is classified as ``large,'' notes Ruby Weinholt, president. Open to any Roman Catholic in Bexar County (San Antonio), St. Joseph's has 5,000 members and offers mortgage loans, individual retirement account, money market deposit accounts, and even a Master Card with the credit union's own name across the top as issuer. An automated tel- ler machine is a priority, Ms. Weinholt says.

You can see why Mr. Elmendorf says, ``Credit unions are competition for banks -- they're growing competition, they've changed, they're offering more and more services . . . the same basic menu of services as a bank.

New service charges, minimum-balance requirements, and other developments may make small-balance customers wonder whether banks are still interested in their business. But Elmendorf insists, ``Banks are as interested as ever in the broad market.''

ABA research shows the proportion of people without checking accounts to have remained more or less the same for 10 or 20 years, Elmendorf says. ``This leads us to conclude that people who have decided not to have a checking account have reasons other than fees for not having one.''

Credit unions, meanwhile, are seen as ``very serious competition'' as they increase their services to customers. He also has trouble with the recent liberalization of the ``common bond'' membership policy -- which has been hitherto the credit unions' best argument for their tax-exempt status.

But that liberalization has been a key to keeping credit unions going through the recent recession.

Credit unions, by law, can provide services only to members. Historically, the ``common bond'' among members of a credit union has been that all work for the same employer.

But a few years ago, as recession deepened, particularly in the smokestack industries whose employers had been such important sponsors of credit unions, the NCUA began to cast about for ways to keep those credit unions afloat.

A little research led Callahan and his staff to the conclusion that federal legislation did not require members of a credit union to have the same employer. Rather, this was a tradition growing out of ``historical accident . . . that became ingrained in the regulatory framework.'' Some of the first notable successes of credit unions during the 1930s came from those sponsored by large institutional employers such as post offices and government agencies.

But in fact, the law allows ``any group coming together'' to form a credit union -- although regulatory authorities can deny a charter to any group deemed ``not viable.''

As a result, smokestack credit unions have opened their doors to the employees of smaller or newer concerns.