3 tips to protect credit union deposits

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Think your credit union can’t fail? Think again.

Though seen as the sleepy backwater of banking, credit unions do sometimes fail. Like banks, they may hand out bad loans, suffer mismanagement or make speculative investments.

In the financial crisis of 2009, 28 credit unions failed compared to 140 banks, and that was when the credit union industry was staring down the barrel of a “significant crisis,” says Debbie Matz, chairwoman of the National Credit Union Administration, which regulates credit unions.

On average, 10 to 20 credit unions fail every year, Matz says. Bankrate will give you some tips on holding your money in a credit union account, with an eye toward protecting it if the institution fails.

Not just small credit unions fail

Since January 2012, 19 credit unions have failed in 12 states. Many are in small towns, such as the United Catholic Credit Union in Temperance, Mich., or Saguache County Credit Union in Moffat, Colo.

But some big ones fail, too. Take Telesis Community Credit Union in Chatsworth, Calif. Last spring, the NCUA shuttered the $301 million credit union after several commercial real estate loans soured. Regulators later sold Telesis to a bigger, healthier player, Premier America Credit Union.

Telesis is a typical example of what happens to a failed credit union. “Regulators do a good job taking distressed credit unions and merging them into healthier ones,” says Keith Leggett, a senior economist of the American Bankers Association. “Many are merged before they actually fail.”

Better than a bank?

Credit unions failures usually can be traced to bad loans, investing in collateralized debt obligations or even sometimes embezzlement, Leggett says.

Still, credit unions are healthier these days. The NCUA has stepped up its examinations, and money has poured into credit union coffers as depositors leave banks, increasing by $41 billion in 2011, according to Weiss Ratings in Jupiter, Fla.

Also, credit unions have less risk on their balance sheets, says Glenn Christensen, managing director of the consultancy CEO Advisory Group in Seattle. “Numbers across the board have improved,” he says.

Tom Glatt, a Wilmington, N.C.-based credit union consultant, says you should be concerned about the financial stability of your credit union. Your pocketbook and your peace of mind may hang in the balance.

Avoid privately insured credit unions

Some 98 percent of all credit unions are insured, Leggett says. However, 140 credit unions are privately insured by American Share Insurance since nine states allow it, he says. This insurer handles resolutions much like the NCUA — by finding healthy merger partners.

However, American Share insures only a small pool of credit unions — and that pool isn’t as diversified, Leggett says. This makes it harder to find healthy merger partners for a failed institution holding this insurance. That’s one reason why federal insurance is superior, he says. The backing of federal government is another.

Holding a credit union account

Here are three pointers on keeping your money in a credit union.

Look for warning signs of troubled credit unions. Such institutions may pay lower deposit rates or offer poor service. “Strong credit unions usually offer lower loan rates and higher deposit rates,” Christensen says.

Fortunately, credit unions are more transparent than banks, Christensen says. They hold annual meetings that are open to members. Credit unions also issue annual reports and post financial statements every month.

To research your credit union’s financial health, head to the NCUA website or to Bankrate.com’s Safe & Sound page.

Keep your deposits below insured limits. Be warned that NCUA insurance only covers up to $250,000 per deposit, Leggett says. So, you’ll want to monitor your deposits. Going above federally insured limits may make it hard to get your entire deposit repaid if the credit union fails.

Take the federally insured New London Security Federal Credit Union, which was founded in 1936 and had more than $12.7 million in assets. Yet, it failed in 2008. Its investment adviser, who allegedly mismanaged funds, committed suicide after the credit union closed, leaping from an 11th-story window.

A sizable chunk of the credit union’s deposits weren’t covered by insurance because they exceeded federal limits. “It took big depositors a long time to recoup their funds,” Leggett says.

No one ever lost money on insured credit union deposits that are less than $250,000 per account, Glatt says. Make sure you understand which funds aren’t insured.

Have an action plan for a credit union failure. If your credit union does go belly up, wait three months before deciding whether to switch to another institution, Glatt says. It can take 30 days to three months just to find a taker for a failed credit union. Once that happens, its members are notified.

“You’ll get lots of information,” Glatt says. “Deposit terms are usually honored through maturity.” However, variable interest rates may be changed to higher or lower rates.

The new credit union is likely to do things differently, with new policies and procedures. “Eventually, you’ll be treated like a customer,” he says. That’s when you decide whether to stay or go.

First, ask some questions. Does the new credit union have branches? Do the products match what you’re looking for? Are your banking needs being met?

And always take a look at the survivability of the new credit union, Glatt says.

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