Ron Scott is the president and CEO of Appalachian Community Federal Credit Union in Johnson City. Scott has three decades of experience in the credit union industry.
We asked both to answer the same five questions on the history, health and future of their respective financial institutions.
1.) Briefly explain the history of your industry and how things may have changed (for good and bad) in the modern financial era.
Barrett: The first banks in America appeared in the early 1700s, before we became an independent nation. They provided currency exchange, loans, and notes for money deposited. Since then, banks and the needs of customers have changed dramatically.
But at the core they have remained focused on two main functions: providing people with a safe place to keep their money and providing capital through loans for all kinds of things — from starting a new business to buying a home or car to paying for college.
Simply put, the changes in banking over the years have reflected the changes in our daily lives in general, driven by innovation and technology. Today, consumers can deposit a check by taking a picture of it on your phone and sending it to your bank; they can move money from their savings to checking accounts on their computers. Bank products and services, from IRAs to CDs to home equity loans to retirement planning have exploded from a few to hundreds.
Since the Great Depression of the 1930s, banking has been one of the most highly regulated industries in the country. Many of the regulations have created significant burdens for banks, especially small community banks, and especially those in the wake of the 2008-09 financial crisis.
Banks meanwhile implemented their own internal controls and risk-management practices to provide greater protection for their customers, and Congress has made needed adjustments to some of the regulations that unfairly hurt banks’ ability to make loans. Today, banks serve 313 million customers and insure $12 trillion in deposits, and lending has increased 12 out of the last 15 years.
Scott: As a result of the efforts of Edward Filene, a merchant and philanthropist, and Pierre Jay, the Massachusetts banking commissioner, the Massachusetts Credit Union Act became law on April 15, 1909. The Massachusetts law served as a basis for subsequent state credit union laws and the Federal Credit Union Act, which became law 25 years later.
In 1920, Filene hired Roy Bergengren, a poverty lawyer, to manage the Massachusetts Credit Union Association and to promote the development of credit unions. Within a year, Massachusetts chartered 19 new credit unions.
Encouraged by this success, Filene organized and Bergengren managed a national association — the Credit Union National Extension Bureau — to promote the establishment of credit unions throughout the United States. By 1925, 26 states had enacted laws to charter credit unions. By 1930, 32 states had adopted credit union laws with a total 1,100 credit unions.
In 1934, President Franklin D. Roosevelt signed the Federal Credit Union Act into law, creating a national system to charter and to supervise federal credit unions. The act was designed for several purposes, including broadening the market for U.S. securities, making more credit “for provident purposes” available “to people of small means” and stabilizing the country’s credit structure.
The credit union movement grew steadily in the 1940s and 1950s. By 1960, more than 6 million people were credit union members and the nation had more than 10,000 federal credit unions.
In 1970, the National Credit Union Administration became an independent federal agency. Congress also created the National Credit Union Share Insurance Fund to protect deposits at credit unions.
U.S. credit unions grew tremendously during the 1970s.
In 1998, the Credit Union Membership Access Act (HR1151) passed. This legislation considerably changed the governance of membership eligibility, tightened reserve requirements and corrective actions, and limited business lending activity.
2.) What are your legal and fiduciary responsibilities toward customers?
Barrett: Banks are obligated to protect customers against unclear risks from products or services through appropriate disclosures and ensure that they are aware of the obligations and potential liabilities they enter into when obtaining a loan or purchasing certain financial products.
Banks are also responsible for ensuring the safekeeping of a customer’s account, meaning no unauthorized individuals write checks on the account or otherwise access it.
Scott: As a member-owned, not-for-profit financial cooperative, credit union responsibilities are entirely with our member-owners. Volunteer boards of directors insure financial gains are returned to the membership after adequate capital reserves are met. This may look different at each credit union.
One local credit union returns through “extraordinary dividends.” At ACFCU, we pay for programs that help folks of modest means stair-step upward financially through financial coaching, home purchase programs and support of other non-profits that help this segment of the population.
3.) Is your industry operating on a level playing field with your competitors? Are you treated the same when it comes to local, state federal regulations?
Barrett: In a word, no.
Much of the unfair competition comes from credit unions, especially in East Tennessee, and there are many nonbank financial companies that avoid the strict regulations and consumer protection measures that banks must deal with.
It’s important for the public to understand the history of credit unions. They were created in 1934, at the height of the Depression, to provide financial services to underserved populations and areas. Initially, they were set up for people with common bonds, such as teachers or coal miners who lived in specific areas. They were granted tax-exempt status to set up these credit cooperatives, and they really did not compete against banks.
That’s not the case today. The large, diversified credit unions have strayed from their traditional mission and compete head-on with thousands of community banks that are much smaller.
Many credit unions have grown into highly profitable, billion-dollar institutions offering a full range of financial services—including insurance and securities brokerage — to just about anyone. These institutions look and act like banks, yet they do not pay taxes or abide by the same rules as banks. The average American family pays more in taxes than the entire $1 trillion credit union industry.
That’s why the banking industry continues to fight against the effort of credit unions to expand their scope and increase their unfair advantage over small community banks.
Scott: Credit unions operate within the framework of the Federal Credit Union Act under the regulatory guidance of NCUA and the Tennessee Department of Institutions. As not-for-profit 501c1 organizations under the IRS code, credit unions are tax exempt. Because of this, there are greater restrictions on credit unions as compared to other financial institutions.
As an example, federally chartered credit unions such as ACFCU are not permitted to own rental property. Investments are more restrictive and used for liquidity needs only. Business lending has a cap by regulation. Moreover, not everyone can join a credit union. In short, the credit union model is razor sharp focused on serving the financial needs of those who join the organization as member-owners.
The result of these restrictions is that roughly one-third of the 6 million citizens in Tennessee are members of credit unions.
4.) What role does your industry play in local economic development?
Barrett: Tennesseans turn to their local bankers during milestone events. Banks are with you from your first car loan, to when you buy a home, to saving for your kids’ college, and planning your retirement. Based on estimates from the FDIC, Tennessee banks serve more than 5.7 million customers
Tennessee’s banks help our communities in the Volunteer State flourish. Small business owners have counted on banks for $5.5 billion in loans they need to succeed. Based on figures from 2016, banks provided consumers more than 72,000 home loans.
Scott: The industry plays an important part of any local economy simply being a financial cooperative. This means deposits and profits are directly reinvested locally in local member-owners.
Locally, ACFCU has taken a leadership role in advancing regionalism. In 2016-17, ACFCU participated in creating the Northeast Tennessee Regional Economic Partnership and effectively combining the three counties of the Johnson City MSA for the purpose of united efforts in economic development. This was just the first step toward bringing all counties together with one voice.
5.) Is there something that is holding your industry back from it reaching its full potential?
Barrett: Red tape. Far too long banks have been hampered by the ever-increasing federal regulations that raised compliance costs, reduced local credit availability, and played an important role in the decline of new bank formation and consolidation within our industry, increasing systemic risk while reducing consumer choice.
The recent passing of the landmark Economic Growth, Regulatory Relief and Consumer Protection Act (S. 2155) will help rejuvenate communities. It offers targeted, common-sense fixes to ill-fitting financial rules that have limited the ability of banks to serve their customers and help strengthen their communities. This new law will go a long way toward allowing banks to get back to the basics of lending.
And while there’s still more we must do to make sure that financial regulations don’t produce unintended consequences, this new law is a step in the right direction. Finally, it will be easier for banks to get back to relationship banking and focus on the needs of our customers rather than the mounds of regulatory paperwork.
Scott: Not unlike other financial institutions, increasing regulatory burden often makes it challenging for credit unions. Credit unions understand and expect a certain amount of regulations. However, the growing number of rules that apply to all institutions takes us away from focusing on doing impactful things.