Cash Out: Making Sense Of Last Year's Run On The Banks

Making Sense Of Last Year's Run On The Banks

\ Aug 02, 2012

10 min read

It’s been 10 months since a groundswell of discontent engulfed the country, and Occupy Wall Street and Bank Transfer Day emerged. Public outrage in fall 2011 contributed to behemoths like Bank of America reversing plans to force monthly fees on account holders. But did people really cash out of corporate coffers?

Kristen Christian thinks so. She launched Bank Transfer Day with a Facebook invite to 500 friends. Her Facebook profile has since been revamped, displaying professional headshots and the declaration that “every day is Bank Transfer Day!”

Christian has been able to use the momentum of her event to fashion a new career for herself. She’s a freelance consultant and public speaker for organizations (including credit unions) eager to entice young, tech-savvy folks into their ranks. She says she’s driven by the nonprofit cooperative principles of credit unions—a stark contrast to the bottom-line motives of other financial institutions.

“If they operated like banks and didn’t help communities they way they do, I wouldn’t be advocating for them.”

Christian says stats about how many bank transfers happened mean less to her than personal anecdotes. For instance, the San Francisco Fire Credit Union told her the uptick in memberships created 20 new positions.

She was fed up with the lack of personal service at Bank of America, and the announcement about monthly fees pushed her over the edge. She decided to join a credit union in the town where she grew up, hours away from her home base in L.A.

“The kicker for me was when my mother decided to join the same credit union." Her mother is older and not able to travel easily. The credit union rep asked where her mother lived. When Christian replied that her mom’s home was just on the other side of the freeway, the rep said: Great, we’ll send a branch manager over with a notary. This was before they knew she was responsible for Bank Transfer Day, says Christian. “That’s how they treat ordinary people.”

A nationwide study shows that in October, 610,000 people changed where they invest their money. That’s 11 percent of the 5.6 million people in total who switched banks before 2011 ended.

New Mexico’s numbers are sketchier when it comes to the new ranks of credit unions. Robin Brule, vice president of membership development for the New Mexico Educators Federal Credit Union, says Bank Transfer Day and Occupy Wall Street coincided with a push to increase awareness about their services in rural and underserved areas. So it’s hard to know what actually factored into new membership, she says. “We did see more people coming onto our website or calling to find out more information.”

The Rio Grande Credit Union has more specifics. Dohnia Dorman, vice president of marketing, says when they compared the number of people applying for their basic, free services between 2010 and 2011, “we saw a 42 percent increase.”

Corporate banks appear to shrug off all the ruckus. Wells Fargo reps couldn’t be reached for comment. Colleen Haggerty, Bank of America’s spokesperson, wrote via email that the company has no comment on Bank Transfer Day or other protest activities. “We value our customers and take pride in their loyalty as they continue to grow their personal and business banking needs with us.”

But Haggerty notes that the bank’s deposits in New Mexico add up to $3.8 billion, “which is an increase from the prior year of $3.6 billion.”

Vying for the Little Guy

The history of credit unions begins with people banding together to survive bouts of economic difficulty. The prototype was developed in Europe when a beleaguered group of workers in Britain realized they could combine their resources in a cooperative store. Poor, urban Germans expanded on the concept in 1849 by pooling their money for lending to each other, which helped ward off the 19 th -century versions of predatory payday lenders.

In the U.S., it was the unexpected partnership of a banker and a successful businessman in Massachusetts that helped establish the first state law allowing for credit unions. By 1925, new credit unions laws were in place in 25 states. The onset of the Depression and a desperate need to unfreeze credit for everyday people only kicked the movement into higher gear.

A 2009 report from the Credit Union Association of New Mexico says early credit unions in the state “were small, unsophisticated operations, run out of parish offices or even from the kitchen table at an organizer’s rural ranch home.”

Corporate banks have never been thrilled about credit unions cutting into their customer base. The industry argues that because credit unions have grown to offer increasingly sophisticated, bank-like services, they should be taxed just like for-profits. In terms of PR, there’s really no competition. Big banks have the benefit of serious leverage (and marketing budgets) when it comes to philanthropy and other community investments.

“Bank of America has provided over $2 billion to New Mexico’s low- and moderate-income communities and customers since 2009 in the areas of affordable housing, economic development, small business and consumer lending,” writes Haggerty. And that number includes almost $600 million of lending in underserved areas of the state in 2011 alone, she adds.

Unlike banks, credit unions are not-for-profits owned by their members. Instead of siphoning earnings up the pipeline to shareholders and CEOs, they can invest them as they see fit. This can take the form of lower interest rates and fees, or member-directed donations to local charities and community groups. Perhaps most crucially, they can respond to local economic conditions and offer loans to people who might not qualify at a big institution.

Brule at New Mexico Educators explains it this way: If a partner organization has been forced make layoffs, her credit union has the flexibility to create special loans and services to ease the burden of any members who lose their jobs.

She also points to their partnership with La Montañita Co-op. The organic grocer decided it was time to increase business with local growers and food producers, but conventional banks wouldn’t lend the money the vendors needed to expand operations.

“We did a unique service program with them called a pledge line,” says Brule. La Montañita took some of its membership fees and used them as collateral. “We were able to provide capital and resources for folks that might not traditionally qualify.” New Mexico Educators had the non-corporate perspective and established relationships to understand the circumstances of everyone involved. The lender could overlook small shortcomings in vendors’ business plans in favor of the guarantee that every applicant already had a contract with La Montañita.

“We really try to provide solutions to challenges in the local economy and what’s happening in the work force,” says Brule.

The Same, Only Different

John Poston and his wife, Jessica Billey, were two of the thousands of people who decided to make the switch from a big bank to a credit union.

“We thought it would be a great idea to move our mortgage over to New Mexico Educators and refinance it and kind of keep the money in the local community,” says Poston.

They closed their Wells Fargo accounts and refinanced their home mortgage. They also noticed in their new loan terms the credit union included rights to sell it to another financial entity. Poston asked their adviser about the fine print.

They were told that in the past, mortgages had been sold in packages as other banks do, but lately it’d been easier for the credit union to service its own mortgages. “In my mind, I thought that meant they kept the mortgages there,” says Poston. “In reality, servicing the mortgage just means managing the payments.”

Before they even had time to make a payment, they got a notice from Fannie Mae, one of two government-backed institutions that help banks and credit unions fund mortgages. Poston says they were disappointed to realize their money ended up with Fannie Mae. Both Fannie Mae and Freddie Mac have come under fire after their federal bailouts of more than $150 billion.

“I know they had the right to do that, and I’m sure that it’s standard,” says Poston. “I don’t think any bank is going to loan thousands of dollars without the option to sell it.”

Dave Jansen, New Mexico Educators’ senior vice president of mortgages, conceded as much. He says it’s simply common-sense lending policy to sell 30-year, fixed-rate mortgages to entities like Fannie and Ginnie Mae because the credit union borrows most of its money from members in the form of shorter-term, lower interest-rate investments.

“It’s probably not a good idea to take a one-year CD and lend that money to another member for 30 years at fixed rate of interest,” says Jansen. “It’s not an acceptable rate of risk,” especially in the hawk-eyes of regulators and examiners who watch for such hazards. They could shut down the credit union if they find too many high-risk transactions. Without Fannie and Ginnie Mae, the credit union would only be able to make 15-year and adjustable rate mortgages. The fact is that most members want the option of 30-year, fixed-rate home loans.

Jansen says people like Poston shouldn’t be worried about these “very typical” lending practices. He’s reassuring; today’s mortgages sales don’t have the same kind of problems that contributed to the disastrous implosion of the housing bubble. “The systemic risk with the mortgage crisis really didn’t have anything to do with Fannie, Freddie and Ginnie getting into 30-year, fixed-rate loans,” he continues. Instead, it was the mortgage industry making risky loans to people with bad credit and low down payments. "The pendulum has swung back from where it was in the mid-2000s, and I do truly believe the loans being made today will perform excellently.”

And what if, for the sake of argument, a majority of members aren’t so convinced? It brings up one of the last key distinctions of credit unions compared with banks: They’re democratically structured. Members have equal ownership, equal votes in board member elections, and they get a say in how their institution is directed. People like Poston and Billey can take their concerns to the leadership of where their money’s managed and have some hope that they’ll get a personalized response.

But the world being the way it is, it’s hard to imagine a majority of people would turn down the ready availability of 30-year, fixed-rate mortgages. And as long as most members want to have their cake and eat it too, they’ll accept that credit unions sell their mortgages in bundled securities, just like corporate banks. Changes to that bigger financial system will require appeals to a much higher power—even higher than Facebook.