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1.4.4 Credit Unions

The third major type of depository creditor is the credit union. Credit unions are generally nonprofit cooperatives with membership open to a limited group of people who have some common bond. For example, employees of a single employer, members of a union, or residents of a specific region might be eligible to join a credit union organized for one of these groups. Depositors in a credit union are technically shareholders, and the funds deposited in the credit union are used to provide credit to the credit union’s members.

The first American credit unions were established in New England at the turn of the last century and were based on European and Canadian models.164 Massachusetts passed the first state statute authorizing the charter of credit unions in 1909. By 1930, following a substantial private publicity campaign funded primarily by the Boston merchant Edward A. Filene, credit union statutes modeled on the Massachusetts statute had been adopted in thirty-two states.

In 1934, the Federal Credit Union Act,165 also based in part on the original Massachusetts statute, authorized the federal charter of credit unions, and a dual state and federal credit union system, similar to the dual banking and S&L systems, was established. Federal insurance, through the National Credit Union Share Insurance Fund, was required for deposits in federal credit unions and was made available to qualifying state credit unions. Today, virtually all credit unions are federally insured.

By their nature, credit unions are usually small, consumer-oriented institutions. Because of their nonprofit status and their selective membership standards, credit unions are often able to provide more favorable terms than other institutions on both member deposits and loans. They may also be subject to more exacting regulation. However, some credit unions have grown significantly beyond their consumer-oriented roots with an attendant growth in abuses.166