Group May Form New Credit Union

April 27, 2008
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LANSING — There’s a community group on the lakeshore that wants to charter a new credit union. If it succeeds, it will mark the first new credit union chartered in Michigan in 22 years.

The last credit union chartered in the state was the former Birch Run Area Credit Union in 1986, noted Jason Moon, spokesman for the state’s Office of Financial and Insurance Regulation.

Michigan Credit Union League staff has met with the group a couple of times to explain the process necessary to establish a credit union. MCUL President Dave Adams said every year his organization gets requests for help in forming new credit unions, but for more than two decades, no group has succeeded in that effort.

The difficulty in forming new credit unions arises from the fact that credit unions are tax exempt: They can’t raise capital by selling stocks and issuing bonds like banks can. A credit union has no stockholders; it’s owned by its member depositors. However, a group of entrepreneurs could come together, pool their capital and form a bank fairly easily, just like they could form any other business, Adams noted.  

“To make a new credit union viable, you probably have to have 2,000 to 3,000 people who want to pool something on the order of $1 million to $2 million to get started, and that’s pretty tough to do.”

Recent changes in the law have allowed existing credit unions to expand their charters quite easily, making the need for new credit unions kind of obsolete, Adams noted. He said the MCUL always encourages new groups to align with existing credit unions, because virtually any credit union these days can serve multiple employee groups, multiple community groups or even multiple geographic regions. That makes it more difficult today to justify forming a new stand-alone credit union. It’s simply more efficient for a group to attach to an existing credit union than to strike out on its own. In addition to their ability to expand their charters, many of Michigan’s 350 credit unions are consolidating.

“That way we end up with credit unions that are strong enough and don’t have to struggle to survive.” Adams remarked. “We have a much stronger credit union system right now as a result of all of that. We’re in an environment where the technology in financial services drives for fewer and fewer players. It’s hard for new institutions to prosper in that environment.”

At this point the MCUL is just waiting to see if this current group is able to get any real momentum behind it. The lakeshore group wants to apply for Low Income Credit Union designation in order to serve disadvantaged and lower income households. In an LICU, the majority of members either make less than 80 percent of the average for all wage earners, or have annual incomes that fall at or below 80 percent of the median household income for the nation. Adams said it’s even more difficult for a low income designated credit union to start up.  

“If you think about it, what they’re trying to do is meet the borrowing needs of primarily low income groups, and to do that you have to have a source of capital to make what often are higher risk loans,” Adams said. “The reason most credit unions can make those types of loans is because they already have an established base and a broad mix of members from different income backgrounds, which is the way any financial institution makes it.”

Some low income credit unions have been able to raise the necessary capital via grants from private foundations, and sometimes they’ve been able to get help from existing credit unions or banks. By design, most credit unions emphasize the middle class but also serve people of modest means, according to Adams. He doesn’t see much distinction between a low-income credit union versus any other credit union. 

A credit union can be chartered with state regulatory agencies or with the federal government. Whatever agency grants the charter determines what regulations the credit union will operate under. For consumers, there’s very little difference between a federal and state chartered credit union, according to the Michigan Department of Labor and Economic Growth.

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