REGULATORS

■ Credit unions can be federally or state chartered. 60.4 percent of the 6,906 Cus
were federally chartered and subject to National Credit Union Administration
regulation, accounting for 54.0 percent of the total membership and 53.4 percent of
total assets as of 2013.
■ NCUA is an independent federal agency that charters, supervises, and insures the
nation’s credit unions. The NCUA also provides deposit insurance guarantees of up
to $250,000 for insured state and federal credit unions. They cover 98 percent of all
credit unions deposits.
Industry Performance

■ The credit union industry has grown in asset size in the 1990s and 2000s. Asset
growth from 1999 to 2013 was more than 7.5% annually. CU membership increased
from 77.5 million to over 95.2 million over the 1999-2013 period. Asset growth was
especially pronounced among the largest Cus as their assets increased by almost
20% annually from 1999 through 2013
■ Growth in ROA is not necessarily the primarily goal of Cus. As long as the capital or
equity levels are sufficient to protect a CU against unexpected losses on its credit
portfolio as well as other financial and operational risks, this nonprofit industry has
a primary goal of serving the deposit and lending needs of its members. This
contrast with the emphasis placed on profitability by stockholder-owned commercial
banks and savings institutions.
■ Corporate credit unions did not. Corporate credit unions faced tough business
conditions that strained their financial position. Some corporate credit unions
invested in riskier securities to generate earnings. These are mortgage-related and
asset-backed securities.
■ The NCUA allowed corporate credit unions to invest these higher risk securities. As
the financial crisis hit, corporate credit unions that invested in higher risk securities
started experiencing large losses on them. These corporate credit unions reported
$18 billion in unrealized losses on securities as of November 2008.
■ Between March 31, 2008 and September 30, 2008, local credit unions’ deposits in
corporate credit unions fell by nearly 49 percent, from $47.7 billion to $22.9 billion.
These corporate unions also had accumulated $50 billion in toxic mortgage-backed
securities. The credit union system started to collapse and without action, loses on
these assets would have caused the entire credit industry to break down.
■ The NCUA took several actions to address long-term issues surrounding corporate
credit unions. Capital standards were increased and minimum retained earning
levels were established. Prompt corrective action requirements were also increased.
Investment in s in private label residential mortgage-backed securities and
subordinated securities were prohibited, and concentration limits were set to’
investments.
■ FIVE LARGEST CORPORATE CREDIT UNIONS IN THE UNITED STATES: Constitution
Corporate. Members of United Corporate, Western Corporate, Southwest Corporate,
and U.S Central Corporate – They were declared insolvent.
SIZE, STRUCTURE, AND COMPOSITION
OF INDUSTRY
■ THREE MAJOR TYPES OF FINANCE COMPANIES: Sales Finance Institutions, Personal
Credit Institutions, and Business Credit Institutions
■ Sales finance institutions – specialize in making loans to customers of a specific
retailer and manufacturer.
■ Personal credit institutions – specialize in making installment and other loans to
consumers.
■ Business credit institutions – provide financing to corporations, especially through
equipment leasing and factoring.
■ Captive finance company provides financing for the purchase of products
manufactured by the parent. Captive finance companies serves as an efficient
marketing tool by providing consumer financing to customers of the parent company
immediately at the time of purchase
BALANCE SHEETS AND RECENT
TRENDS
■ Assets – Finance companies provide three basic types of loans: real estate,
consumer, and business. Business and consumer loans also called accounts
receivable are assets held by finance companies.
■ Over the last 40 years, finance companies have replaced consumer and business
loans with increasing amounts of real estate loans and other assets although these
loans have not become dominant, as is the case with many depository institutions.
■ Consumer Loans – it includes motor vehicle and leases and other consumer loans.
Motor vehicle loans and leases are traditionally the major type of consumer loan.
■ Other consumer loans include personal cash loans, mobile home loans, and loans
to purchase other types of consumer goods such as appliances, apparel, general
merchandise, and recreation vehicles.
■ Subprime lender – A finance company that lends to high-risk customers. They
finance company even with a bankruptcy records. Most finance companies that
offer these mortgages charge rates commensurate with the higher risk.
■ Loan shark – subprime lender that charge unfairly exorbitant rates to desperate
subprime borrowers. As high as 30 percent or more per year. These predatory
lenders often target disadvantaged borrowers who are not aware of the risks they
are undertaking with these loans. These lenders often leads to the bankruptcy of
disadvantaged borrowers.
■ Payday lenders – they provide short-term cash advances that are often due when
borrowers receive their next paycheck. The payday lending industry originated from
check cashing outlets in the early 1990s and exploded in the 2000s as demand for
short-term loan rose. The payday loan industry is regulated at the state level.
■ 18 states had effectively banned payday lending. When not explicitly banned, laws
that prohibit payday lending are usually in the form of usury limits. The FDIC still
allows its member banks to participate in payday lending but it did issue guidelines
in March 2005 that are meant to discourage long-term debt cycles by transitioning
to a longer-term loan after six payday loan renewals.
■ Home equity loans – it allows consumer to borrow on a line of credit secured with a
second mortgage on their home. Home equity loans have become very profitable for
finance companies since the Tax Reform Act of 1986 was passed. Also, the bad debt
expense and administrative costs of home equity loans are lower than other finance
company loans and as a result they have become a very attractive product to
finance companies.
■ Securitized mortgage assets – this involves pooling of a group of mortgages with
similar characteristics, the removal of those mortgages from the balance sheet, and
the subsequent sale of cash flows from the mortgage pool to secondary market
investors in return for their purchase of bands. It results to creation of mortgage-
backed securities, which can be traded in secondary mortgage markets.
■ Mortgage servicing – this is a free-related business whereby after the mortgages are
securitized, the flow of mortgage repayments has ti be collected and passed on to
investors in either whole mortgage loan packages or securitization vehicles such as
pass-through securities.
INDUSTRY PERFORMANCE

■ In the early 2000s, the outlook for the finance company industry as a whole was
quite bright. Interest remained near historical lows. Mortgage refinancing grew. Loan
demand among lower- and middle-income consumers were strong.
■ In the mid and late 2000s, problems for industry participants that specialized in
loans to relatively lower-quality customers created large losses in the industry and a
problem for the U.S economy as a whole.
■ This crash in the subprime mortgage market led to serious problem for the U.S and
worldwide economies as a whole.
■ The Federal Reserve defines a finance company as a firm whose primary assets are
loans to individuals and businesses. Finance companies like depository institutions
are financial intermediaries that borrow funds so as to profit on the difference
between the rates paid on borrowed funds and those charged on loans.