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On the Hot Seat

Small businesses increasingly turn to credit unions

Daniel F. Egan Jr., president of the Massachusetts Credit Union League Inc. Daniel F. Egan Jr., president of the Massachusetts Credit Union League Inc. (Pat Greenhouse/Globe Staff)
By Todd Wallack
Globe Staff / February 28, 2010

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While banks have frequently made front-page headlines during the financial crisis and economic downturn, credit unions have generally flown under the radar. To check in on the industry, Globe reporter Todd Wallack recently sat down with Daniel F. Egan Jr., president of the Massachusetts Credit Union League Inc., which represents credit unions across the state.

What is a credit union?

A credit union is a cooperative financial institution. Interestingly enough, the first charter for a credit union was established by the Massachusetts Legislature in 1909. The system was set up as a parallel banking system. So the consumer would always have the option of having this nonprofit alternative.

How are they different from banks?

In a cooperative bank, you vote according to how much money you have in the bank. In a credit union, everyone who has a share has one vote. It’s true democratic control. [And in a bank], directors are paid. In a credit union, they are volunteers.

You’ve said credit unions generally offer better rates than banks. Why?

Credit unions don’t pay their directors, and banks do. They are not dominated by any particular depositor. The single point of focus is what is best for that member, not what is most profitable for the institution.

Are there restrictions on what types of loans credit unions can offer?

They can do just about any type of lending for consumers that is available anywhere else. The big problem now is on the business side. We’re seeing a big increase in the number of people who are approaching credit unions for small business loans, and there’s an arbitrary cap on business lending for credit unions. It’s 12.25 percent of assets. It was put into place in a federal law in 1998.

Have many credit unions reached the limit?

Right now, in Massachusetts, one of the larger ones is close to the cap, and the others are staying away from the cap by cutting back on the loans they are offering. So, they are doing either Small Business Association guaranteed loans, which don’t count toward the cap, or they are doing only a limited number of loans. It’s presenting a barrier to credit unions.

If you listen to a small business person, they’ll tell you if they are looking for a loan of less than $500,000, most banks don’t want to talk to them. So you wind up with a lot of people coming to credit unions for loans. The average business loan for credit unions in this state is $254,000.

Banks say credit unions have an unfair advantage because they are exempt from income taxes.

Both Congress and the state Legislature have recognized us as deserving a nonprofit, nonincome tax status because of the services we provide to a broad range of people. Fact is, although we’ve made the offer many times, we’ve never had a bank convert to a credit union. And there’s probably no better time, when the benefit of that structure became evident - when you look at the turmoil in the economy, the bank failures, as well as the general distrust of the large banks and the need for credit. When all of these things went on, and all the pundits on TV said there was no more credit available, credit unions were lending.

Aren’t many credit unions limited to serving employees of certain companies?

In Massachusetts, there were never those restrictions. The statute says that field of membership can be anything - it could be geographical, it could be association, it could be anything. The idea of membership in a credit union being employer-based came in 1934 with the federal law. They thought the easiest way to organize credit unions was around employer groups. That transitioned on the federal level in the 1980s into an option for either multiple company credit unions, so several companies’ employees could join, or they could convert to a community-based credit union, where they could serve a given area.

How hard have credit unions been hurt by the downturn?

The adverse effects on credit unions was really . . . collateral damage. There were investments in corporate credit unions - bankers’ banks for credit unions - in which some of their investments in mortgage-based securities turned out to be bad. And the losses trickled down to credit unions, because credit unions had to pay through their insurance fund the losses that occurred at the higher level of investment. The retail credit unions had no investments in any mortgage-based securities, because by federal law, they couldn’t.

How many credit unions are there in Massachusetts?

Two-hundred-nineteen credit unions with $27 billion in assets and 2.5 million members.

What are the biggest credit unions in the state?

Digital Federal Credit Union, which is just under $4 billion in assets. HarborOne Credit Union, which is about $1.8 billion in Brockton. Greylock Federal Credit Union in Pittsfield, which is about $1.2 billion in assets. Those would be the top three.

But some credit unions have failed. [ 28 credit unions failed nationwide last year, compared with 140 banks.]

Some credit unions have, but the failures were based on mortgage loan portfolios in those states you would guess - Florida, Nevada, California, Arizona.

How did you get involved in credit unions?

When I was in law school, my wife was teaching and we needed a car. So we got a car loan from the Malden Teachers Federal Credit Union. I had no income and hers was very small, and I was amazed they gave me the loan. So, I thought this has got to be a great place that would give me a loan. So after I got out of law school, a friend of mine said they needed an attorney at this trade association for credit unions. And I said I’d always wanted to be involved in credit unions. And that’s how it started. I was the general counsel to the association in the early 1980s, and my predecessor had a heart attack, so I become president in 1984. I also serve as president of the New Hampshire and Rhode Island credit union leagues.