Federal Credit Unions Research Articles

Payday alternative loans: PAL or Foe?

Payday alternative loans (PALs) are small, short-term loans granted by federal credit unions. This paper examines the history of these loans, characteristics of credit unions that grant PALs, and how these loans impact credit risk. Credit unions with a low-income designation offer PALs and make a higher amount and number of PALs in terms of the loan portfolio. Credit unions that offer PALs have lower loan delinquency rates and do not have more one-year forward-looking credit risk. The findings contribute to the broader literature on payday loan alternatives and credit union risk taking.

The impact of payday alternative loans on credit union performance and loan quality

AbstractFederal regulators in 2010 amended lending rules to allow federal credit unions (FCU) to originate short‐term, small‐dollar amount loans, with an annual percentage rate of up to 1000 basis points above the otherwise imposed interest rate ceiling of 18 percent. The purpose of the change in policy was to allow FCUs the ability to provide their members with an alternative to payday loans. We find the decision to originate these higher‐interest loans is primarily influenced by the characteristics of a credit union's environment. Credit unions located in minority neighborhoods and in markets with fewer traditional financial services are more likely to participate in the payday alternative loan program. Participation in the program is shown to improve earnings performance without adversely affecting participants' loan quality. These results suggest credit unions can provide lower‐priced alternatives to payday loans that are beneficial to members and their credit unions.

“Green Shoots” for US Credit Union Securitizations: An Examination of the Related NCUA Safe Harbor

Despite the fact that the National Credit Union Administration (NCUA) finalized (more than 24 months ago) the new required securitization safe harbor rule and other legal requirements to facilitate securitization by federal credit unions (FCUs), an FCU only recently closed the first securitization of a prime auto portfolio. This is rather surprising because banks and other credit providers have widely and actively used securitization as an important means for funding such credit activities and as a tool for active portfolio management to enhance related investment returns. <b>TOPICS:</b>Credit risk management, information providers/credit ratings <b>Key Findings</b> • Banks and other credit providers have widely and actively used securitization as an important means of funding credit activities and as a tool for active portfolio management to enhance related investment returns. • Securitization has not been widely used by federally insured credit unions (FICU) because of NCUA’s authority to disaffirm or repudiate contracts of a failed FICU, which powers apply to the transfer of financial assets in connection with a securitization. • Recognizing the chilling effect this authority has had on securitizations sponsored by FICU, NCUA has issued a safe harbor that defines the conditions for protection for securitization transactions for any transfer of financial assets. • A recent FICU securitization has demonstrated that the safe harbor is opening the door for future FICU securitizations that rely on the safe harbor.

Making Sense of Soft Information: Interpretation Bias and Ex-Post Lending Outcomes

We explore whether behavioral biases impede the effective processing and interpretation of soft information in private lending. Taking advantage of the internal reporting system of a large federal credit union, we delineate three important biases likely to affect the lending process: (1) limited attention (or distraction), (2) task-specific human capital, and (3) common identity. Specifically, we find that using soft information in lending decisions leads to worse loan quality when loan officers are busy or before weekends and around national holidays, when loan officers have earlier sales experience, and when both the officers and borrowers are men. Overall, we provide novel evidence of non-agency-related costs in the use of soft information in lending decisions.

Effective weight-loss using an e-health delivered physical activity and dietary intervention: A federal credit union pilot study

This pilot study investigated the effectiveness of a distance-based e-health program delivered across multiple rural Federal Credit Union worksites that focused on physical activity and dietary education. Program design and implementation were based on the premises of Social Impact Theory (SIT). A sample of fifty-four participants (47 white. 7 black) aged 24 to 58 across different worksite locations completed 10 weeks of e-health delivered physical activity and dietary intervention. Pre to post weight changes were examined as a primary outcome. The findings showed that regardless of worksite location, participants on average reduced their weight by 10.13 lbs if they completed both the exercise and lunch and learn components of the study compared to a decrease of 2.73 lbs for participants who chose not to engage in the exercise related activities. Participant dropout from either group was less than four percent. The results of this study show the beneficial influence of physical activity integration using SIT upon distance programs targeting weight loss. In addition, the high adherence and weight loss success show promise and demonstrates the potential for e-health delivered exercise and lifestyle interventions. Further replication of results via additional randomized controlled trials is needed.

Cybersecurity, Data Breaches, and the Economic Loss Doctrine

Data breaches are pervasive and costly. Recent civil data breach cases have centered on the consumer credit card payment chain in the retail industry. An important issue in such cases is whether the economic loss doctrine should bar negligence claims for purely pecuniary losses suffered by a non-negligent party, such as an issuing bank or a federal credit union that must incur costs to reimburse cardholders for fraudulent use of stolen card numbers. The economic loss doctrine should not bar these claims. Large scale data networks, such as the consumer credit card network, often entail significant network externalities. These include externalities relating to market concentration as well as to the weakest link nature of security in these networks. Although the primary players in these networks are tied together in a complex web of contractual relationships, there are significant transaction costs involved with any effort to change or monitor another party’s security measures. Moreover, outside entities such as third party payment processors, which are not in contractual privity with all other parties in the network, have become ubiquitous. Under these circumstances, a negligence rule should help improve cybersecurity hygiene and promote a more robust cyber risk insurance market.

Exception Reports as a Source of Idiosyncratic Information

Firms commonly use exception reports that describe and justify deviations from guidelines to mitigate poor decisions and employee opportunism. This study examines whether exception reports can also be used to help lower-level employees make better-informed decisions. We propose that exception reports can facilitate the sharing and use of local information that is not systematically collected, shared, and codified into rules, routines, or operating procedures (“idiosyncratic information”). Consistent with our expectation, we find that lower-level employees of a large federal credit union use idiosyncratic information in each other’s exception reports to increase lending, and reduce interest rates and loan charge offs. In additional analyses, we find that this occurs because accountability pressure from superiors makes exception reports a particularly credible source of idiosyncratic information and a common understanding of work practices facilitates the interpretation of exception reports.

USF FEDERAL CREDIT UNION

An international association advancing the multidisciplinary study of informing systems. Founded in 1998, the Informing Science Institute (ISI) is a global community of academics shaping the future of informing science.

US Credit Unions: An Empirical Investigation of Size, Age and Growth

Abstract**: An econometric analysis of the growth performance of US credit unions for the period 1992–2001 investigates empirical relationships between size, age and growth. Ceteris paribus larger credit unions grew faster than smaller unions. State credit unions grew faster than federal credit unions, and single bond credit unions grew faster than multiple bond credit unions. The size‐growth gradients were generally steeper for state than for federal credit unions, and for single bond than for multiple bond credit unions. These patterns are attributed to variations in legislation and regulatory treatment. There is some evidence that younger credit unions tended to outgrow older ones. This seems consistent with a life cycle typology of credit union growth and development. There is also evidence of a positive persistence of growth effect. The cross‐sectional variance of growth is inversely related to size, but is largely independent of age.

Membership growth, multiple membership groups and agency control at credit unions

AbstractStarting in 1982, the federal credit union regulator allowed credit unions to add multiple membership groups. The policy was disallowed by the U.S. Supreme Court in 1998, but revalidated by the U.S. Congress later that year. Allowing credit unions to attach multiple membership groups has contributed significantly to rapid growth in the industry. As credit unions add unrelated groups and expand, the prospects for separation between ownership and control increases, creating potential agency control problems. This potential is compounded by the one member, one vote governance structure of credit unions. This research finds empirical evidence that agency problems grow as credit unions add membership groups and members. If a credit union takes on more than one membership group, and as membership increases, management is apparently able to channel residual earnings away from members (in the form of higher net interest margins) toward itself (higher salaries and operating expenses).

Multiple common bond credit unions and the allocation of benefits

Credit unions are cooperatively owned financial institutions, where input suppliers (savers) are also the consumers of the outputs (borrowers). A key issue is the allocation of benefits between savers and borrowers. Additionally, credit unions can add unrelated groups to their membership. If the orientation of unrelated groups differs from the core group, the allocation of benefits could be altered. Empirical evidence suggests that both single and multiple bond federal credit unions are saver oriented. Single bond credit unions have a stronger saver orientation than multiple bond credit unions. The study provides mixed evidence on the existence of a clientele effect.

Deposit insurance and risk-taking behavior in the credit union industry

This paper examines the relationship between deposit insurance and risk-taking behavior within the credit union industry. Time series tests employing industry average financial ratios for federal and state credit unions did not support the increased risk-taking hypothesis. Although federal credit union capital declined immediately following the adoption of deposit insurance, this was most likely the result of reduced capital requirements, not deposit insurance. Liquidity and loan delinquency ratios had a negative time trend coefficient, implying a decline in risk-taking behavior during the post-insurance period. Cross-sectional test results employing Iowa state-chartered credit union data indicated that insured credit unions were better capitalized and more liquid than their uninsured counterparts. Overall there was no evidence that the adoption of deposit insurance increased the risk-taking behavior of credit unions.

The Economic Impact of the Federal Credit Union Usury Ceiling

ABSTRACTThis study measures the impact of the Federal credit union usury ceiling on consumer credit availability and loan rates. When binding, the ceiling keeps loan rates low, but it reduces credit union lending. There is also evidence that a binding loan rate ceiling affects the competitiveness of credit unions in the market for deposits. Although the Federal Credit Union Act specifically mandates federally chartered credit unions to be a source of low cost consumer credit and to promote thriftiness, it is not at all clear that the intent of the Act is served by a binding usury ceiling.

Credit Union Structure, Growth and Regulatory Problems

At year end 1979, there were 12,738 Federal and 4,769 state chartered federally insured credit unions in the United States. Their assets were $36.5 billion and $18.5 billion, respectively. The industry was the fastest growing of all financial intermediaries during the early to mid-1970s. Factors contributing to a growth rate of 18 percent from 1970 to 1978 were the absence of Regulation Q restrictions on CU dividend rates, tax exempt status of CUs, the advent of share insurance in 1970 and the impact of sponsor subsidies. However, during 1979, federal credit union savings grew by only 2.4%, which was more than 85% lower than in the preceding year and was the slowest annual growth rate on record. Indeed, since 1977, federal credit unions have gone from the fastest growing to the second slowest growing type of depository institution. The reason for the changes in credit unions will be discussed after this section which provides background information on the structure of the industry. That structure has, historically led to a reduction in risk. The basic components of that structure are common bond and sponsorship.' Common Bond Credit unions are unique financial depository institutions in that they are consumer cooperatives and are limited to serving the market for consumer credit and savings. Generally, these institutions cannot do business with the general public due to charter limitations based on serving a membership that is characterized by a common bond. The common bond is based on occupation, association or residence. The only exceptions are generally found under state law and apply to state chartered institutions. The common bond restriction on credit union membership is assumed to reduce the cost of gathering credit information, reducing bad debt losses and manifests * National Credit Union Administration. The views expressed herein are those of the authors and do not necessarily reflect those of the National Credit Union Administration. ' An extensive review of the history of credit unions and the institutional structure is found in

Opportunities for Geographical Research on the Role of the Negro in the Southern Economy

OPPORTUNITIES FOR GEOGRAPHICAL RESEARCH ON THE ROLE OF THE NEGRO IN THE SOUTHERN ECONOMY Irene J. Nelson* The geographical frame of reference has considerable utility in social planning. Through the ecological approach, the geographer tries to show how man interacts with his environment. This tradition persists in geography in spite of efforts to downgrade it. (1) With national attention focusing on environmental quality, geographers may be expected to revive this tradition. Central place studies with their emphasis on arrangement, movement, and networks have also provided a fruitful approach to planning. Berry (2) and others (3) have explored some of these avenues. There is no better example of the use of geography in planning than in retail site location. Kane has reviewed the successful work of Applebaum and Cohen in supermarket location analysis. (4) Unfortunately, planning for rural development has received scant attention from geographers. Yet many urban problems originate in the rural areas from which erstwhile city residents migrated. One reason for this scant application of geographic skill to rural planning is that planners for the agricultural sector are only dimly aware of the contribution that geographers can make. Three programs are discussed below to illustrate how the geographer did assist, or might have assisted, in planning in an essentially rural area—Tuskegee, Alabama. The three programs are: (1) the South East Alabama Self Help Association, (2) the Seasonally Employed Agricultural Workers Program, and (3) the Model Cities Program. Attention is focused on Macon County and Tuskegee, its largest town and county seat. Population for the county in 1970 was 24,000. about one-half of whom lived in Tuskegee. The rural nonfarm population outnumbered the rural farm population more than three to one. Some 80 percent of the population was black. The degree of political control by blacks is probably greater than that for blacks in any other county in the United States. (5) The county is beset with many problems, among which are: the underutilization of its labor supply, a weak educational system, and nonprofitable uses of its natural resources. The South East Alabama Self Help Association is the first case used to exemplify the role geographers may have played in the rural planning process. Farmers in Macon County, like their counterparts in the rest of the nation, are faced with the dilemma of increasing their scale of operation with greater capital input or being eliminated as effective *Dr. Nelson is a research social scientist with the U. S. Forest Service. This paper is a modified- version of one presented before she became associated with the U. S. Forest Service. The paper was accepted for publication in July 1971. 146Southeastern Geographer competitors in the agricultural sector. Some authorities believe that cooperatives may be a way out of this dilemma. (6) The role of cooperatives in agriculture is increasing. In 1966-67, over one-fourth of the value of net farm business transactions was derived from cooperatives. (7) At the same time there were 61 cooperatives in Alabama alone with net business transactions valued at some $92 million according to this same source. The Southeast Alabama Self Help Association was organized in 1968 and operated under a grant of one-half million dollars from the Office of Economic Opportunity (OEO). The major accomplishment of SEASHA has been the creation of a federal credit union and the ¡nidation of a feeder pig project. The feeder pig program started out with 24 farmers who were assisted by specialists in building farrowing houses and other required installations. In addition, the farmers were outfitted with sows and boars of specified pedigree. Regular services of a veterinarian and animal scientist were available to all the producers. The expenses for all these services were borne by the farmer directly or through a loan from the credit union of the cooperative. It is easy to visualize the kind of professional service a geographer may have rendered in the planning of a feeder pig project. First, the market needed to be identified, if indeed there was one. Once identified, its location, size, and seasonality had to be measured. There was then the question of how transportation facilities could be used to regulate product flow and reduce inventories...

THE SAVING-INVESTMENT PROCESS IN A THEORY OF FINANCE*

THIS STUDY ANALYZES the saving-investment process in a theory of finance. In so doing, it leans heavily on the writings of Gurley and Shaw, Hicks, Keynes, and Lavington. The saving-investment process is shown to be affected by various costs of financeboth real and monetary. Finance costs are generally ignored-either implicitly or explicitly-in neoclassical macroeconomic models. A macroeconomic model of the saving-investment process incorporating finance costs is presented. The finance costs facing savers and investors are shown to include both transaction costs and the costs of bearing risk. The nature of each of these costs, together with ways in which they may be minimized, is examined for both savers and investors. Innovations in finance are shown to reduce the finance costs facing savers and investors. Hence, financial innovations affect the levels of both saving and investment. Two types of financial innovations are distinguished: innovations in direct finance and innovations in indirect finance, or financial intermediation. Evidence concerning the development of finance in the United States is set forth. Special emphasis is placed on the growth of financial intermediaries and of two factors affecting their rate of growth-namely, the introduction of new types of financial intermediaries and the enhancement of the efficiency of certain existing ones. The growth of financial intermediaries is studied in terms of both national aggregates and intermediary, types. The assets of all financial intermediaries have grown significantly during the past one and one-half centuries, both in absolute terms and in relation to total, or national, assets. The rate of growth is shown to have slackened during the post-World War II period. Several hypotheses which could account for this decline in the intermediaries'. rate of growth are considered. Study of the individual types of financial intermediaries reveals a relative decline of commercial banks' assets. The nature of this decline is discussed in detail. Examination of organizational innovations in financial intermediation reveals that the most profitable types of financial intermediaries were the first to be established. These types have succeeded in avoiding obsolescence over nearly two centuries. Examination of the operational efficiency of certain existing intermediaries-mutual savings banks, member savings and loan associations, federal credit unions, and insured commercial banks-is beset by a number of problems: the brevity of the period for which data are available, conceptual problems in the calculation of the relevant data, and the imperfect disaggregation of the data. Despite these problems, the evidence does suggest that the operational efficiency of mutual savings banks, member savings and loan associations, and federal credit unions has been enhanced. Of these intermediaries, the enhancement of efficiency appears to have been greatest for the member savings and loan associations.

COST OF PROVIDING CONSUMER CREDIT: A STUDY OF FOUR MAJOR TYPES OF FINANCIAL INSTITUTIONS*

* This is a study by the National Bureau of Economic Research and has been approved for publication by its board of directors. It will be reprinted in the National Bureau's series of Occasional Papers. Prepared for presentation at the annual meetings of the American Finance Association, December 28, 1961, this paper is part of a broad consumer finance research project at the National Bureau of Economic Research under the general direction of Robert P. Shay. The other aspects of consumer credit covered in the project include finance rates, state legislation, sources of funds, and the consumer use of credit. I am particularly indebted to John M. Chapman, of Columbia University, and to Geoffrey H. Moore and Robert P. Shay, of the National Bureau, for their help and counsel. Other members of the National Bureau staff who reviewed earlier drafts and made thoughtful suggestions are Reuben Kessel, Anna J. Schwartz, and F. Thomas Juster. Robert W. Johnson, of Michigan State University, contributed helpful comments. Members of the Advisory Committee of the Consumer Credit Study who assisted in the planning and revision of earlier drafts of this report are Paul W. McCracken (chairman), Dorothy S. Brady, John M. Chapman, George Dimmler, Mona Dingle, Bertrand Fox, Raymond W. Goldsmith, Robert E. Lewis, Roger F. Murray, George W. Omacht, Roland I. Robinson, Sidney E. Rolfe, Herbert Stein, Van Buren Thorne, Jr., Leroy A. Weller, and William L. Wilson. Special acknowledgment is due the financial institutions which contributed data to the study. Particular mention should be made of the help given by William S. Germer and H. F. Wright, Jr., of the First Pennsylvania Bank and Trust Company; Ernst A. Dauer, of Household Finance Corporation; M. R. Neifeld and Charles A. Loeffler, of Beneficial Management Corporation; R. F. Murphy, of General Motors Acceptance Corporation; and George F. Dimmler, of C.I.T. Financial Corporation. Roland M. Gardner and other staff members of the Bureau of Federal Credit Unions advised on the use of the credit-union data. Statistical and accounting assistance was capably given by Florence Liang, of the National Bureau, and V. N. Vora, of the University of Pennsylvania. Christine Culbert, of the National Bureau editorial staff, provided editorial assistance. This report is part of a broad study of consumer credit being conducted by the National Bureau of Economic Research, made possible by research grants from four finance companies: Associates Investment Company, C.I.T. Financial Corporation, General Motors Acceptance Corporation, and Pacific Finance Corporation. In addition, the author is indebted to the Wharton School of Finance and Commerce of the University of Pennsylvania for permission to use part of the time and facilities made available through a chair in consumer credit given to the University by the Family Finance Corporation. These institutions are, of course, not to be held responsible for any of the statements made or views expressed herein.

Cost of Providing Consumer Credit: A Study of Four Major Types of Financial Institutions

* This is a study by the National Bureau of Economic Research and has been approved for publication by its board of directors. It will be reprinted in the National Bureau's series of Occasional Papers. Prepared for presentation at the annual meetings of the American Finance Association, December 28, 1961, this paper is part of a broad consumer finance research project at the National Bureau of Economic Research under the general direction of Robert P. Shay. The other aspects of consumer credit covered in the project include finance rates, state legislation, sources of funds, and the consumer use of credit. I am particularly indebted to John M. Chapman, of Columbia University, and to Geoffrey H. Moore and Robert P. Shay, of the National Bureau, for their help and counsel. Other members of the National Bureau staff who reviewed earlier drafts and made thoughtful suggestions are Reuben Kessel, Anna J. Schwartz, and F. Thomas Juster. Robert W. Johnson, of Michigan State University, contributed helpful comments. Members of the Advisory Committee of the Consumer Credit Study who assisted in the planning and revision of earlier drafts of this report are Paul W. McCracken (chairman), Dorothy S. Brady, John M. Chapman, George Dimmler, Mona Dingle, Bertrand Fox, Raymond W. Goldsmith, Robert E. Lewis, Roger F. Murray, George W. Omacht, Roland I. Robinson, Sidney E. Rolfe, Herbert Stein, Van Buren Thorne, Jr., Leroy A. Weller, and William L. Wilson. Special acknowledgment is due the financial institutions which contributed data to the study. Particular mention should be made of the help given by William S. Germer and H. F. Wright, Jr., of the First Pennsylvania Bank and Trust Company; Ernst A. Dauer, of Household Finance Corporation; M. R. Neifeld and Charles A. Loeffler, of Beneficial Management Corporation; R. F. Murphy, of General Motors Acceptance Corporation; and George F. Dimmler, of C.I.T. Financial Corporation. Roland M. Gardner and other staff members of the Bureau of Federal Credit Unions advised on the use of the credit-union data. Statistical and accounting assistance was capably given by Florence Liang, of the National Bureau, and V. N. Vora, of the University of Pennsylvania. Christine Culbert, of the National Bureau editorial staff, provided editorial assistance. This report is part of a broad study of consumer credit being conducted by the National Bureau of Economic Research, made possible by research grants from four finance companies: Associates Investment Company, C.I.T. Financial Corporation, General Motors Acceptance Corporation, and Pacific Finance Corporation. In addition, the author is indebted to the Wharton School of Finance and Commerce of the University of Pennsylvania for permission to use part of the time and facilities made available through a chair in consumer credit given to the University by the Family Finance Corporation. These institutions are, of course, not to be held responsible for any of the statements made or views expressed herein.

Federal Credit Unions in the United States: An Analysis

Federal Credit Unions in the United States: An Analysis

FEDERAL CREDIT UNIONS IN THE UNITED STATES AN ANALYSIS*

CREDIT UNIONS IN THE United States have yet to celebrate their fiftieth birthday. Nevertheless, they have shown rapid growth in the last two decades and have attracted the attention of the banking community, which has become aware of the phenomenal growth of these societies and tends to view them as competitors no longer meriting special subsidy in the way of absorption by others of part of their expenses and exemption from federal income taxes. The present study seeks to trace the development of credit unions, to analyze their current operations, and to assess their place in the financial system. What do they do, and why have they grown so rapidly recently? Since no comprehensive nation-wide data are available, but only earlier studies of the situation in several states, the data used in the detailed analysis relate to federal credit unions, whose origin is as recent as 1934. The analysis of credit unions followed in the present study is centered upon their operations as reflected in balance-sheet and income data. It therefore employs techniques that resemble those of the National Bureau of Economic Research in their studies dealing with financial institutions which extended cash instalment loans to consumers, namely, industrial banking companies, personal finance companies, and personal loan departments of commercial banks, each published in 1940. It may be noted that the fourth principal lenderthe credit union-which represented in 1953 a $2 billion industry, was not included in the series. A credit union is one of a variety of types of specialized financial institutions. Its distinctive features are (1) its co-operative structure, with ownership and democratic control vested in a membership composed of individuals with some pre-existing bond of unity-in practice, chiefly occupation-and (2) its function of providing small loans for provident purposes to its members at rates limited by statute, while encouraging thrift and educating its members in the wise management of their own financial affairs. It originated as an