DATE: Thursday, September 25, 1997          TAG: 9709250331

SECTION: BUSINESS                PAGE: D1   EDITION: FINAL 

SOURCE: BY TOM SHEAN, STAFF WRITER 

                                            LENGTH:   69 lines

STUDY SHOWS CREDIT UNIONS ISSUING MORE HOME LOANS

Virginia's credit unions have provided a steadily rising share of home loans in the state, while the share of residential loans from banks and savings institutions has fallen during the past decade, a new study of bank and credit-union growth in Virginia has determined.

The study, commissioned by the Virginia Bankers Association, found that in 1985 credit unions made fewer than 1 percent of Virginia's home loans. But by 1995, their share had surpassed 17 percent.

During the same period, the percentage of home loans made by banks and thrifts slipped from 99 percent to less than 83 percent, according to a draft copy.

The report, compiled by two professors at Virginia Commonwealth University in Richmond, is likely to become fresh ammunition in the battle between banks and credit unions over eligibility for credit-union membership.

At the state and federal levels, banks have argued that the rules for credit-union membership have been interpreted so liberally that some credit unions are serving a much broader population than the law intended. Credit unions have enjoyed an advantage because they are exempt from taxes, the Virginia Bankers Association and other banking groups complain.

The Supreme Court is scheduled to hear arguments on Oct. 6 for cases involving eligibility for credit-union membership.

Meanwhile, the Virginia Bankers Association has petitioned the State Corporation Commission to limit the ability of state-chartered credit unions to expand their fields of membership. Virginia's state-chartered credit unions are regulated by the SCC, while credit unions with federal charters come under the jurisdiction of the National Credit Union Administration.

The rising share of home loans provided by Virginia's credit unions is evidence of the inroads that larger credit unions have made in the financial-services arena, authors Neil B. Murphy, a VCU finance professor, and Dennis M. O'Toole, a VCU economics professor, report.

In 1985, Virginia had 347 credit unions, and four of these had at least $250 million in deposits each. Together, the four held slightly more than half of all credit-union deposits in the state, the study said.

``By 1996, the largest category of Virginia credit unions had grown to nine institutions and 74 percent of the total deposits,'' the authors determined.

Credit unions, which trace their roots back to 19th century Germany, are nonprofit, member-owned cooperatives. Because they have been supported by the armed forces and by large industrial employers, credit unions have an especially large presence here.

Several of these organizations still serve the employees of a single company or members of one fraternal organization or church parish. However, others have expanded rapidly by bringing unrelated groups into their fields of membership and offering a broad array of bank-like services.

Among the 278 credit unions operating in Virginia, 99 have multiple groups of members, according to the Murphy and O'Toole study.

The Virginia Credit Union League and credit-union officers have argued that less restrictive membership rules have been necessary because many companies have too few employees to support their own credit unions.

What's clear is that their tax-exempt status has enabled credit unions to offer higher interest rates for deposits and charge lower rates for loans. The authors of the bankers' association study estimated that the spread between their cost of funds and the rates they charge for loans was almost a half-percentage point greater than the interest-rate spread for banks.

Had Virginia's credit unions paid taxes in 1995 at the 32 percent average rate that banks paid, federal and state agencies would have collected $67.8 million, the study said. Having to pay taxes would likely reduce the spread between the credit unions' cost of funds and what they earned from their loans.

Credit unions argue that they deserve their tax-exempt status because they concentrate on providing low-cost services instead of generating a higher return on investment for shareholders, as banks do.

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