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The primary purpose of this Web Site is to help individuals learn about Credit Union work.
The general functions of a Credit Union will be stressed.
Credit Union Benefits and Services
Duties of Officers and Directors
Annual Responsibilities of the Supervisory Committee
The Education and Publicity Committee
To provide innovative, professional and impeccable service to all members. The credit will thrive on providing quality service that is efficient and effective which will save time to improve the manner in which members conduct their credit union business. The first responsibility should be to the members who use the credit union services. In carrying the daily business, a credit union must strive to (i) treat its employees with dignity and care; (ii) follow the philosophy that members help to keep the credit union in business and (iii) be considered as a cornerstone of the community. Through a long-term commitment to this mission, a credit union will provide the optimum service to each and every member.
A credit union is a unique member-driven, self-help financial institution. It is organized by and comprised of members of a particular group or organization, who agree to save their money together and to make loans to each other at reasonable rates of interest.
The members are people of some common bond: working for the same employer; belonging to the same church, labor union, social fraternity, etc.; or living/working in the same community. A credit union's membership is open to all who belong to the group, regardless of race, religion, color or creed.
A credit union is a democratic, not-for-profit financial
cooperative. Each is owned and governed by its members, with
members having a vote in the election of directors and committee
representatives. The international credit union operating principles,
adopted by the World Council of Credit Unions, outlines the basic credit union
philosphical values of cooperation, equality, equity and mutual
self-help.
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The idea of a financial cooperative to benefit its participants originated with Friedrich Raiffeisen 130 years ago in Bavaria, Germany. As mayor of a small town, Raiffeisen organized a cooperative savings institution to permit the people in his district to pool their money and make loans among themselves. The result was that they were able to rise above poverty and improve their lives and futures.
The idea spread throughout Europe and North America, and in 1901, Alphonse Dejardins, started
the first credit union in North America, in Levis, Quebec, Canada.
In 1909, the first U.S. credit union was begun in Manchester, New
Hampshire...one which today continues to meet its members'
financial needs. The passage in 1934 of the Federal Credit Union
Act allowed credit unions to be organized anywhere in the U.S.
Today, there are more than 37,000 credit unions operating through out the world,
with memberships of more than 88 million and assets nearing $420 billion.
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The primary difference between credit unions and other financial institutions is that credit unions are controlled by members, not customers. Each owns a part of the credit union, and has the right and responsibility of ownership. Unlike banks and other financial institutions, credit unions are not-for-profit. They do not report or pay profits to a larger holding company or corporation.
Credit union membership is open to all equally, with each member having one vote in the election of directors and committee members from among themselves. Only credit union members may serve as directors or committee members...and they serve without pay.
Credit union members are identified by the sharing of a common
bond, be it the same employer, church, fraternal organization, or
even working or living in the same community. Even those credit unions chartered specifically for company
sponsors can accept other employee groups for membership. The
employees of an entire company can become members of an existing
credit union without the need to charter or sponsor one
themselves. They immediately receive all the services and
benefits of the credit union they join.
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CREDIT UNION BENEFITS AND SERVICES
Benefits of credit union membership have traditionally been higher interest paid on savings balances and lower interest rates charged on loans. Such benefits are possible because credit unions are non-profit...their "income" is returned to members in the form of higher savings interest or lower loan rates. Banks cannot do this because their income is due to stockholders, the holding company, etc. Bank customers bear the burden of revenue generation; credit union members enjoy the benefits.
Another benefit is credit unions' full-service diversity of products and services. Where once they offered simple savings and loans, today's credit unions provide a comprehensive selection of services.
-Automated teller Machines(ATMs)
-Credit and Debit Cards(VISA)
-Money Orders
-Traveler's Checks
-Home Mortgage Loans, both first and second
-Home Equity Loans
Credit union accounts are fully protected and secure in developed
countries. In the U.S.A., most credit unions insure deposits for
up to $100,000 with an agency of the federal government. Others
provide state-approved private deposit insurance which has no
limit. All are backed by a state and national financial system
with billions of dollars in assets. Unlike other financial
institutions, credit unions do not operate alone...they are a
part of a larger whole. From the local and state levels to
national and international, credit unions work together for the
benefit of all.
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Credit unions have steadfastly maintained the same basic objectives as when they were originated:
The credit union movement holds no racial, religious or political affiliations or barriers, and is opposed to any form of totalitarianism. Credit union policies are:
Interest Rate: in the abets interests of the credit union and its members, that the interest rate be uniform, with no special rates to favored borrowers.
Life Insurance: most credit unions provide insurance to the member to protect loans and cover life savings of members.
Reserves: credit unions transfer to legal reserves only such amounts as are required by statute, and that contingency reserves be set up when additional reserves are desired.
Investments: in making investments, credit unions give priority to safety and liquidity of funds.
Dividends: dividends be paid in conformity with the philosophy of credit unions as instruments for meeting members' needs and consistent with good business practices, and current rates of return on similar types of savings in the same locality.
Audit and Examinations: the operations and records of the credit union be audited by the supervisory committee of members, and that the records of the credit union be examined regularly by the government authorities.
Protection of Funds: credit unions maintain adequate protection of members' savings through blanket fidelity coverage on a maximum basis on its officers, employees, members with official committees, attorneys at law and other agents with protection against loss through dishonesty, burglary, robbery, larceny, disappearance and unfaithful performance of duty.
Before any institution can be chartered, it must first be assured of support, backing, organization, and the potential for success. Credit unions are no different. For that reason, it is recommended that any group or corporation contemplating the chartering of its own credit union be advised of the following.
1) Experience has shown that any group interested in organizing a credit union should be representative of at least 1000 persons. The group must have a common bond (employment, geographic location, church, etc.) to define its field of membership. Groups having less than 1000 individuals should examine the option of joining a similar group or existing credit union.
2) Meetings should be scheduled and held where group members are invited to discuss the organization of a credit union. Information needed to explain the credit union structure, operations, and benefits can be obtained through the World Council of Credit Unions.
3) Groups wishing to organize a credit union must first receive permission from its sponsoring organization. It must also have a commitment of support to provide office space, payroll deduction or direct deposit of payroll if applicable, and even "seed" or origination capital to help the credit union meet initial expense obligations.
4) There must be a nucleus of people from the group who are willing to be charter signors, from which the original board of directors and committee members will come. These charter signors should be:
5) It is necessary to conduct a written survey among all potential members to determine the degree of support for starting the credit union. This information must be submitted with the charter application.
6) It is necessary to prepare a five year pro forma business plan showing projected growth in membership, assets, savings, loans, expenses, reserves, dividend rates and services to be offered. This also is submitted with the charter application.
7) The charter application papers are comprised of:
8) It may require anywhere between one to six months for the
respective supervisory government agency to issue a charter.
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A director of a credit union is "one who directs". The director is not directed by the treasurer/manager, the supervisory committee or the credit committee. The director leads in setting policy, approving plans and budgets, and assuming responsibility for the health and growth of the credit union.
A director should be sympathetic in understanding the types of problems a typical credit union member faces. The ideal director is honest and conscientious; unselfish, broadminded, fair and yet reasonably aggressive; have a genuine interest in people and their concerns and welfare. Leadership should not be confused with popularity.
Because officers of the credit union are elected by and from the board of directors, thought should be given to a candidate's ability to function effectively as president, treasurer or secretary.
Directors are elected by members at the credit union's annual meeting. The credit union law and the members authorize the board of directors to determine certain operating practices and policies which the members, meeting only annually, cannot determine efficiently or effectively.
The credit union laws and bylaws usually describe the scope of the director's duties and powers as: "The Board of Directors shall have the general direction and control of the affairs of the credit union." Duties assigned to directors include:
The board must hold meetings monthly, and more frequently when (if) necessary. A suggested agenda includes:
The board should also spend time each meeting on the basic purposes of credit union programs; credit union growth and development, and the achievement of its goals.
The board of directors should outline the general plan upon which loans shall be made. The board sets the policy, the credit committee applies the policy to specific decisions. The board must see to it that the credit committee meets often enough to answer members' needs.
As the governing body of the credit union, the board of directors is totally responsible for its operation. The supervisory committee is an auditing committee, whose primary function is to audit the affairs of the credit union. The board of directors makes certain that the supervisory committee functions as outlined in the credit union bylaws and law. If the committee cannot adequately audit the credit union's affairs without help, the board shall call for an outside audit.
The overall task of the board is to "protect and conserve the funds of the members, while also achieving in full the objectives and policies of the credit union." The board of directors which simply administers is fulfilling only part of its duty. It must also see that the credit union grows and prospers. Growth means service, and service is why members belong.
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DUTIES OF OFFICERS AND DIRECTORS
Chairman's Duties:
Specific duties of the presiding officer include:
Additional duties assigned the presiding officer are:
Vice Chairman's Duties:
The vice chairman should be familiar with the chairman's duties,
to be able to assume those duties in the event the presiding
officer is unable (through disability) to discharge those duties.
Secretary's Duties:
The secretary takes and prepares the minutes of all meetings of
members and the Board of Directors; prepares notices of all
meetings of members in the manner prescribed by the bylaws, and
handles such credit union correspondence as directed by the
Board.
Treasurer's Duties:
The treasurer shall be general manager of the credit union, and
serves as custodian of funds, securities, books of account and
all other valuable papers of the credit union. The treasurer
shall keep (or cause to be kept) a separate set of books of
entry, containing in detail the financial transactions of the
credit union, and shall sign all drafts and notes drawn by the
credit union. A treasurer shall furnish a surety bond for such
amount as the director may prescribe and the Supervisory Agency
approve. Also, he/she shall make and render such reports to the
Supervisory Agency as required by law or requested by the
Supervisory Agency.
Emphasis might be placed on the treasurer preparing interesting and comprehensive reports understood by the least initiated of the membership.
Additionally, all credit union officers are responsible for:
The credit committee may be elected by the members or appointed by the board of directors. The committee normally consists of three or five members.
Qualifications: The members of this committee should be typical, both financially and socially, of the membership they serve.
Duties: The committee acts on each application for a loan made by a member of the credit union, and to make certain the credit service is made readily available to its members. The committee holds such meetings as credit union business requires, and not less frequently than once a month.
Powers: The powers of the credit committee are limited first by the credit union law, which prohibits certain types of loans; second by some laws as to the term of the loan. In some cases, the board of directors may place additional limits on the credit committee. Each application should be considered on its individual merits.
Members of this committee choose from their number a chairman and a secretary. The secretary prepares and maintains full and correct records of all actions taken by the committee. The offices of the chairman and the secretary may be held by the same person.
Credit Manager/Loan Officer
Simplified procedure and faster loan service are advantages that may be enjoyed by the
appointment of a loan officer or credit manager. He/she is
responsible directly to the credit committee and can only act
within given limits, as set down by the credit committee. Loans
approved by the loan officer or credit manager are reported to
the credit committee and are included as part of the credit
committee report.
Loan Purposes
Laws and bylaws provide that loans may be made for provident and productive purposes, which have been
interpreted to mean any loan which would benefit the borrower.
The credit committee should be liberal in its interpretation of
the law in this respect.
Security
The credit committee inquires of each loan applicant
as to the character and financial condition and his/her
collateral, if any, to confirm the applicant's ability to fully
repay the loan obligation. The primary security for every credit
union loan is the known character of the borrower. Credit union
laws generally require additional security on loans exceeding a
specified amount. The credit committee shall determine the
security, if any, required for each loan, its adequacy, and the
terms upon which it shall be repaid. Security generally offered
are share assignments, co-makers, and security agreements on
personal property.
Loan Limits
Often the top secured limit may not exceed a percentage of loan assets (5%), or may be set at a particular
($100,000 per member based on quality of collateral and ability
to repay.) Lending the full amount is not a wise business
practice. Members who pay part of the cost out of his or her
own pocket have an incentive to repay.
Maturity Limits
Maturity limits are important not only for secured loans but also for other loan types. For example, a loan
for a vacation or other annual expense should have a maturity of
less than one year.
Availability
Loan policies are not for the exclusive use of the credit committee/loan officer. Copies of loan policy statements
should also be made available to members. Clearly defined
policies will insure consistent treatment of members and will
reduce the amount of time spent on each loan application.
Credit Evaluation
Credit union must evaluate members seeking loans based on their applications and other resources. The five factors
or "C's" of credit evaluation are:
Character
Character relates to the applicant's basic honesty and reliability, as well as the importance the applicant attaches to
repaying debts. In the early years of credit unions, character
was the primary and sometimes the only security for granting a
loan. Schulze-Delitzsch, an early advocate of cooperative credit
in the 1800s, stated that loans should be based on the character
of the person borrowing.
Capacity
Capacity reflects a borrower's ability to repay the debt out of current earnings and future earnings. The focus is
on the amount and reliability of the applicant's income. The
amount of debt that the applicant currently owes is also
considered to determine if he or she has already reached or
exceeded the debt capacity.
Collateral
Collateral refers to the item or items (automobiles, boats, furniture, etc. ) that could be used as security for the
debt. An item of tangible value is pledged to be sold or
liquidated to repay the unpaid balance of the loan in the event
of a default by the borrower. The following items should be
considered when accepting collateral:
Conditions of Circumstance
Conditions refer to the general economic situation. During a recession or a period of tight
money, a credit union may be unable to make the same type and
magnitude of loans that are made during better economic times.
Capital
Capital is the difference between what is owned (assets) and what is owed (liabilities). Capital measures a
person's net worth to determine if enough items of value have
been accumulated to support his or her debts. Determining the
applicant's net worth is not always necessary. But it is a good
practice, especially in the granting of real estate loans.
Credit Analysis
Evaluating a person's credit worthiness can be a difficult task because many of the decision factors are
subjective in nature. Character is all-important in determining
whether the consumer is worthy of credit. Capacity and
collateral determine the limit of credit to be granted. A
member's capacity is measured by the ability to pay from income
or, in some cases, from capital. Credit unions should help their
members obtain the benefits of low-cost credit and at the same
time avoid problems that come from over-indebtedness.
Current Outstanding Obligations
The amount a credit applicant owes and the fixed current obligations that must be met have an
important bearing on whether the capacity to meet additional
credit obligations exists. This factor is particularly important
when an applicant is applying for credit that requires payment of
a definite amount each month, as in installment credit.
Payment Records
The best criterion for measuring a credit applicant's character and capacity is his or her past record in
paying bills. A record of prompt payment of several accounts
over a number of years makes it more likely that an applicant
will continue to meet his or her credit obligations promptly.
The credit profile is a tool that allows a loan officer or committee member to evaluate a loan application quickly and objectively. Such a profile allows the loan officer to distinguish those applications that are routine from those that require further investigation or need committee approval. The profit quickly isolates the strong and weak areas in an application. The balance of time can then be spent in evaluating the real problem areas.
Each credit union should develop its own credit profile based on evaluation conducted every six months to a year by the committee, and loan officers.
The Debt Ratio
The debt ratio states the percentage of short-term installment debt for each dollar of net income.
Debt Ratio = Total Monthly Short-Term Debt/Net Monthly Income
Credit unions can also consider the "total debt ratio." The same formula is used but all debts are considered. Applications with debt ratios under 30 percent are considered safe and are usually approved immediately. Debt ratios over 30 percent are tagged as marginal and require detailed evaluation.
The debt ratio can be used in financial counseling. An applicant can be shown how he or she compares when a loan is rejected. A low debt ratio can be a goal to work toward so that each applicant is evaluated in the same manner.
Loan Monitoring
Loan monitoring begins immediately after loan approval. It is an ongoing system of reviewing members'
repayment patterns. With loan monitoring, the credit union can
identify developing problems and take action before they grow.
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Function: The supervisory committee is primarily an auditing committee. Its duty is to audit the books and examine the affairs of the credit union at frequent intervals to be certain it is operating in accordance with the laws and bylaws.
Elections: Appointed by the board of directors, the supervisory committee usually consists of three members. They choose from among themselves a chairman and a secretary. The secretary shall prepare, maintain and have custody of full and correct records of all actions taken by the committee. The offices of the chairman and the secretary may be held by the same person.
Responsibility: The supervisory committee's first obligation is to the credit union members, since it acts in the interest of the members and not the board. In fact, the committee may suspend directors for sufficient cause.
Powers: If during its examination of the affairs of the credit union the supervisory committee finds the credit union operation in violation of its bylaws or the credit union law, it has the power to suspend any officer, committee member or members of the board of directors. In case the supervisory committee does suspend a credit union official, it is necessary to call a special meeting of the members within seven days of this action. The members may then decide whether to uphold the action of the supervisory committee and remove the official permanently or reinstate the official.
Duties: Make an examination of the credit union's affairs, including an audit of the credit union's books, and a report to be submitted to the members at the annual meeting. Cause members' passbooks and accounts to be verified with the records of the treasurer on a regular basis. Evaluate the general operation of the credit union and the performance of other elected officers.
Determine that bond premiums have been paid and that sufficient coverage has been purchased. Examine all investments and securities held by the credit union to make certain that these are legally proper for the credit union and that title rests in the credit union. If the credit union has invested in negotiable securities, they should be kept in a place accessible only when the treasurer and one other person authorized to sign checks are both present.
The supervisory committee does not set policies or make decisions; this is the responsibility of the Board of Directors. The supervisory committee, however, should be certain that the policies are in conformity with the law and bylaws.
Relationship with Treasurer: The supervisory committee is the
treasurer's best friend. If it finds the credit union in good
order, it so reports. If it finds a discrepancy, it helps the
treasurer correct the error. The well-functioning supervisory
committee shares the burden of responsibility for the members'
funds. No treasurer should carry that responsibility alone.
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ANNUAL RESPONSIBILITIES OF THE SUPERVISORY COMMITTEE
1. Physically examine the teller cash, vault cash, and other cash funds. Also inspect investments on hand and prove that actual amounts on hand agree with the credit union's records. 2. Request direct confirmation of bank accounts, investments held by others, and members' account balances. 3. Inspect member loan files to ensure that the staff is processing them in accordance with credit union policies. Review the system in the credit union to determine the nature of and compliance with internal control procedures. Review expenditures of the credit union to determine if they are legitimate. 4. Document all bank reconciliations of credit union accounts to determine the accuracy of the general ledger balance. Also reconcile the totals of the member loan and share accounts to the general ledger accounts to determine the accuracy of the account balances. 5. Recalculate the expected interest income from loans and investments and the expected interest paid on member deposits to determine if the amounts recorded in the credit union records are reasonable. Go to top of page
THE EDUCATION AND PUBLICITY COMMITTEE
The objective of the education/publicity committee is to offer more services to more people. To achieve this, effective communication must be set up and maintained, to ensure that all people in the field of service understand the values and benefits of the credit union.
Determine goals and objectives:
Assume that almost all people eligible for credit union membership can profit by belonging to
it and using its services. How many of these people you can
actually enroll depends in part upon your communications strategy
and your ability to finance an effective education program. In groups not too large or widely scattered, a credit
union can expect to enroll from 90 to 95 percent of all wage-earning adults.
In terms of the amount of service needed, the average family has installment debt (the kind the credit union is supposed to supply) in an amount equal to about 20% the family's take home pay.
It is this debt load, borrowed for the most part from high rate credit sources, that the credit union was organized to carry. To do so, goals and objectives for share investments have to be set, to get funds to lend. This share capital must be adequate to supply, at any given time, the need of the people for loans.
Organize the Effort:
The job of building the credit union is the responsibility of the Board of Directors. The board can appoint
an educational committee, either from among its members or from
persons not elected to office. Some member of the board should
certainly be on the committee as liaison to the board. The
committee should consist of people who are reasonable well
informed about credit union facts.
Appraise the Credit Union's Services:
People will use the credit union service only if it is worth using. The education committee
should satisfy itself that the lending policy is liberal, that
there are no arbitrary limits on the acceptance of share capital,
that members' private affairs are held in strictest confidence,
that doing business with the credit union is pleasant and
convenient, that dividends are adequate, that the interests of
the borrowers are paramount, etc.
The education committee can apply a simple formula: Does the credit union offer its members more than the competition does, and more attractively? If it doesn't, it will be difficult to "sell".
Plan Your Program:
Long-range results follow from long-range plans. Use membership drives and publicity, but only in support
of long-range, comprehensive plans to increase membership, member
use of services, and credit union growth.
A steady flow of information to educate members of existing service benefits and values is necessary. Use whatever vehicles best suit your credit union's needs.
Finance the Effort:
Successful credit unions--those that have built themselves up to a maximum level of service to their
member--frequently spend 5% of their gross income in the effort
each year. The money for member education comes from income
produced by service. If service is given, there is adequate
income. New or small credit unions can get themselves off to a
running start simply by the personal effort of the board and
committee members. When income is available for education/publicity, a percentage of that income should be
budgeted for those purposes.
Measure Your Gains:
The monthly financial statement tells the story of increase in members, loans, shares and income. The
board, the committees and the members take pride in its success.
Therefore, success should be publicized, charted and used as the
basis of further promotion.
Of course, no credit union is asked to "do it all alone". There
are valuable support groups and associations to which credit
unions can turn, both on the national and international levels.
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