Credit union
A not-for-profit financial cooperative owned by its members rather than outside investors. Because it need not earn a profit for shareholders, it can often offer better loan and savings rates than a bank.
Key Takeaways
- A credit union is a financial cooperative owned and controlled by its members rather than by outside investors.
- Washington law describes a credit union as a cooperative society organized as a nonprofit corporation to promote thrift among its members and create a source of credit for them at fair and reasonable rates of interest.
- A credit union may make secured and unsecured loans to its members (RCW 31.12.426), so a buyer joins the cooperative before borrowing from it.
- Accounts at a federally insured credit union are covered by the National Credit Union Administration's share insurance fund, at least $250,000 per member, per credit union, for each ownership category.
What It Means
A credit union is a financial cooperative that its customers own. The people who keep money there are members, not just account holders, and they elect the board that runs the institution. There are no outside shareholders waiting for a dividend, so earnings that a bank would pay to investors go back into the cooperative as better rates, lower fees, or reserves.
That ownership structure is the whole difference. A Commercial Bank answers to investors who put up capital and expect a return on it. A credit union answers to the members who deposit, borrow, and vote. Both take deposits, both make home loans, and both can foreclose on a borrower who stops paying.
In real estate, credit unions matter because they are ordinary home lenders working in the Primary Market. A member applies, the credit union underwrites and funds the loan, and it may keep that loan in its own portfolio or sell it like any other lender. Deposits at a federally insured credit union are protected by the National Credit Union Administration's share insurance fund rather than by the FDIC.
How It Works in Washington
Washington charters and supervises its own credit unions under chapter 31.12 RCW, the Washington State Credit Union Act. RCW 31.12.015 sets out what one is: a cooperative society organized under the chapter as a nonprofit corporation for the purposes of promoting thrift among its members and creating a source of credit for them at fair and reasonable rates of interest. The same section names the director of financial institutions as the state's credit union regulatory authority, whose purpose is to protect members' financial interests and the integrity of credit unions as cooperative institutions, so the Department Of Financial Institutions is the agency behind a state-chartered credit union. State-chartered commercial banks sit under a different act, Title 30A RCW.
Membership is not a formality. RCW 31.12.426 authorizes a credit union to make secured and unsecured loans to its members under policies its board establishes, which is why a buyer joins first and applies second.
The lending itself looks like everyone else's. A credit union home loan in Washington is secured by a Deed Of Trust under chapter 61.24 RCW, and RCW 61.24.020 makes that deed of trust subject to all laws relating to mortgages on real property and enforceable by trustee's sale.
Example
The Ramirez family is buying a house in Vancouver, Washington for $410,000 with 10 percent down. They have two quotes for the $369,000 loan they need: one from a commercial bank and one from a state-chartered credit union that Elena Ramirez joined years ago through her employer. The credit union's rate comes in an eighth of a percentage point lower, which on a $369,000 balance is roughly $460 less interest in the first year.
They bring $41,000 to closing, sign a promissory note for $369,000, and grant a deed of trust that records in Clark County. The credit union keeps the loan in its own portfolio and services it, so the Ramirez family pays the same institution that made the loan. Their listing broker did nothing more than suggest they get a second quote, and that suggestion is what saved them the $460.
Common Mistakes and Exam Traps
- Member ownership is the reason a credit union can price loans and savings differently, not a government subsidy. Exam answers that describe a federal handout are wrong.
- Credit unions lend in the primary market. Being member-owned does not turn a credit union into a secondary market buyer like Fannie Mae or Freddie Mac.
- Credit union accounts are insured by the National Credit Union Administration's share insurance fund, not by the FDIC. The FDIC covers banks.
- Nonprofit does not mean free or lenient. A credit union charges interest, imposes fees, and forecloses under the same Washington deed of trust rules any lender uses.
Where you'll learn this
Frequently Asked Questions
What is the difference between a credit union and a bank?
Ownership. A credit union is a cooperative owned by the members who bank there, while a commercial bank is owned by investors who expect a return on their capital. In Washington, state-chartered credit unions operate under chapter 31.12 RCW and state-chartered commercial banks under Title 30A RCW, both supervised by the Department of Financial Institutions.
Does a buyer have to join before a credit union will make the loan?
Yes. RCW 31.12.426 authorizes a credit union to make secured and unsecured loans to its members, so a buyer joins first and then applies. Each credit union sets its own membership rules, and eligibility often runs through an employer, a community, or a family member who already belongs.
Is money in a credit union as safe as money in a bank?
Both carry federal deposit protection, from different funds. A federally insured credit union is covered by the National Credit Union Administration's share insurance fund for at least $250,000 per member, per credit union, for each ownership category, which parallels the FDIC coverage a bank depositor gets.