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Wisconsin battle could set credit union rules

Banks vs. Credit unionsCredit unions across the country could soon be offering a lot more services and competing directly with banks if a bitter battle in Wisconsin goes their way.

But the banks are lined up against them, fighting to defend what they say is their turf.

In late January or early February, legislation to expand the reach of Wisconsin credit unions will go to the state house. The credit unions argue that they need and deserve to have a broader reach, but the banks say the credit unions are wolves in sheep's clothing trying to sneak in where they are not allowed.

Expanding battle
Both sides say the ruckus may precede similar dustups in other states.

Six states -- Connecticut, Missouri, New Jersey, Oregon, Utah and Virginia -- have already updated laws to give state credit unions the same powers as their more potent federal colleagues. Other states are thinking about it.

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But it is the Wisconsin proposal's intention to not only do the same, but to allow state credit unions to dramatically expand their membership and also set up for-profit subsidiaries that has made it the most heated battleground.

What's getting people hot and bothered is Senate Bill 274, recently introduced by Democratic state Sen. Jon Erpenbach, which would allow Badger State credit unions to not only sign up more members, but do new things like handle individual retirement or benefit accounts, sell brokerage services, and merge or buy other credit unions elsewhere in the country.

"If we let the lifting of restrictions happen here, the other states will follow," says E. David Locke, president of the small McFarland State Bank in suburban Madison, Wis.

Already in Maryland the Task Force to Study Modernization of Credit Union Law is reported to be considering ways state credit unions could compete with the banks and the big federal credit unions that have more leeway in their operations than state credit unions.

The Maryland credit unions want to offer more products and services. Among the issues the task force is considering are allowing them to charge new fees, include unrelated groups in their membership and make loans like their federal colleagues.

Credit unions and commercial banks have been sparring since credit unions were first formed in the United States in 1909. But the tension has been building in recent years with the lifting of tight membership rules for federal credit unions with the Credit Union Membership Act of 1998.

Clash of opinions
"There are many people in my state that can't afford to go to a bank, with their high fees," Erpenbach explains. "This bill is intended to provide a wide array of choices to consumers. This will impact people everywhere. I see it as a national trend, giving consumers more choices than they now have."

But banking-industry representatives disagree, and Locke says the proposed new law would "run contrary to what credit unions were originally created for."

To the Wisconsin Bankers Association, which is bitterly fighting Erpenbach's bill, the changes would be akin to allowing credit unions to offer membership based on the color of one's car or the fact that all members have trees on their street. Utah, a state which has 12 state-chartered credit unions, has a field of membership that the WBA claims "effectively encompasses the entire population of the state."

To Locke, it's a simple problem: "It's about [credit unions] acting like banks without the attending responsibility."

The responsibility to which he's referring is taxes: credit unions are exempt from paying taxes.

"Unfair!" complain bankers like Locke, who says his own bank makes less money and is taxed more than local credit unions. "It's simply ridiculous," he says.

Cherie Umbell, a spokeswoman for the National Credit Union Administration, an independent federal agency that supervises and insures federal credit unions and insures state-chartered credit unions, laughs off the criticism.

"Well, sorry," says Umbell, "but Congress obviously thought credit unions were valuable institutions that deserve different criteria."

Big money, little money
Umbell says "70 percent of credit unions have under $10 million to $15 million in assets." But the Wisconsin Banker's Association claims that in their state alone, credit union assets are $8.2 billion.

"Credit unions are cooperatives owned by members," Umbell says, citing a major difference between credit unions and banks. "They don't own shares and have stock options like boards of directors at banks, who are there just for the profit."

The banks come roaring back, spitting fire.

"Profit!" laughs Locke. "You want to talk about profit? Look at the fancy offices credit unions are building. You should see the extravagant buildings they have in Wisconsin. Look at their high-paid executives. If that's not profit, I don't know what is."

Credit unions return the fire.

"That's not true," says Mark Wolff, senior vice president of communications at the Credit Union National Association, a national trade organization representing over 78 million members. "Despite what bankers might claim, we are not here to enrich an outside group of stockholders like they are. We are not-for-profit financial cooperatives. Also, most of our credit unions are small businesses with volunteer board members and sometimes volunteer workers."

When it comes to buildings, Wolff says, "we are run by our members, so if they felt money was being squandered they would stop it. If a credit union has a fancy building, which is the minority, then it's because the members want it."

Sen. Erpenbach, who is a member of the State Capitol Credit Union, in Madison, jokes, "I haven't seen any banks being run out of little trailers like I have with credit unions."

Locke fires back with a broadside: "It's just laughable. They attract and retain top-notch, high-salaried people with great expertise to join their organizations. Our shareholders mirror their members."

Now it's Umbell's turn to blaze away: "Any organization has to make money to survive," she says. "Large organizations have officers and managers that must be paid. Credit unions return lots of money to their members in lower interest rates. They don't charge 21, 22 percent. We offer mortgage lending for one and one-half percent interest. All credit unions care about is helping people get affordable loans and excellent rates. That's where our profits go. Instead of being afraid of what's happening in Wisconsin, the rest of the country should be hoping it comes to them."

Uprooting history
One of the original jobs of credit unions was to provide "character" loans for people who wouldn't qualify for a commercial bank loan, say their representatives. And, they say a member's desire to repay is considered just as important as their on-paper financial ability to repay.

"It has gotten so far from that," argues Locke, "that it's just downright ridiculous. The independent credit union member is more affluent than the commercial bank customer."

But Wolff counterattacks, arguing, "They're skewing their statistics. Recent studies show just the opposite."

It's also a banker myth that credit unions are lax and basically run free, says Wolff. "We have a very stringent regulatory structure. We can't invest in equities, can't issue stock to raise capital and we have much tighter business restrictions. For example, credit unions can't provide members with business loans for commercial development."

But Locke has a counterattack of his own, and counters, "Yeah, watch the [Wisconsin] bill change that. These new laws will remove all boundaries from credit unions. Their field of membership is the world and their job is making commercial loans. Sounds like a commercial bank to me."

Wolff is ready to join the fray again.

"It's irrelevant if credit unions perform the same services as commercial banks," he says. "They are doing so because their members want that breadth of service."

Meanwhile the legislation gets nearer to a hearing.

And just how different would life be in Wisconsin if it passes? One small credit union has discussed putting ATMs in a local McDonald's.

Robbie Woliver is a freelance writer based in New York
To comment on this story, please e-mail the Bankrate.com editors


-- Posted: Jan. 19, 2000

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