Editor’s Note: This is the fifth and final installment in a series of articles by Paul Thompson, author of “What You Need to Know About Today’s Credit Unions,” that is aimed at new CU employees and volunteers and which offers a background on the history of credit unions.
By Paul Thompson
The 1970s were a turning point in consumer credit. National credit bureaus made it easier for lenders to check the ability of individuals to meet their obligations. New consumer credit products came into existence, most notably credit cards, student loans, adjustable rate mortgages, and sub-prime mortgages. The nation today is awash in consumer credit, with a consequent rise in consumer debt.
Many lenders began "securitizing" their debt assets, starting with mortgages but then extending to a wide variety of other assets ranging from credit card receivables to student loans. These debt packages sold to investors were known collectively as Collateralized Debt Obligations, or CDOs.
Securitization turned out to be a house of cards as higher than expected defaults on sub-prime mortgages cast doubt on all CDOs, which began to tumble in market value. In turn, credit in general froze up, so even the most creditworthy institutions could not borrow. The Great Recession of 2007-08 had begun, and it would take billions of dollars in government bailouts and years for the U.S. and world economy to recover. But while consumers retrenched somewhat during the recession, it became clear that consumer borrowing would bounce back and continue to be the principal driver of the American capitalist system.
The last half-century has seen passage of a number of federal and state laws designed to protect borrowers. These include the Truth in Lending Act and the Equal Credit Opportunity Act. In the wake of the Great Recession, Congress created the Consumer Financial Protection Bureau (CFPB) with the mission of setting up new protections for borrowers.
The question of usury has not gone away. In the 1990s, after lobbying for more relaxed state usury laws, a new set of lenders emerged, including the payday lenders and check cashing outlets. They offer small loans difficult for mainline institutions to make at reasonable rates. Once again, there is an outcry against "predatory lenders" who are said to be parasites upon the poor. Some credit unions are taking up the challenge of offering small loans at rates below those charged by the fringe bankers.
The rise of risk-based lending, in which credit unions charge higher rates of interest on loans to less creditworthy borrowers, is helping them offer credit to members that have low credit scores from the rating agencies. However, there is push-back from credit unionists who believe that members should be treated equally as far as loan rates are concerned.
In summary, consumer credit is now an integral part of the U.S. financial picture, and credit unions have played a role in making it so.
Paul Thompson, CUDE, is a former speechwriter with CUNA. His book, "What You Need to Know About Today's Credit Union," can be found on lulu.com.