Saturday, August 22, 2009

government regulation of loans, investment , and dividends

Credit unions, like commercial banks, are heavily regulated in the services they are permitted to offer, the rates charged for credit, and dividends paid on deposits. Under current federal regulations, these institutions are permitted to make unsecured loans, including credit-card loans, not exceeding 5 years to maturity or secured loans out to 30 years. However, the interest rates on these loans cannot exceed 21 present annually on the unpaid balance. loans to officers and directors of the credit union cannot exceed $2.500 without approval of each association‘s board of directors.
association‘s permissible investments are limited to a list prescribed by either state or federal regulations. In the main, credit unions are permitted to acquire U.S. government securities; make loans to other credit unions not exceeding 25 percent of their capital and surplus; hold savings deposits at savings and loan associations, mutual savings banks, and federally insured credit unions; and purchase selected federal agency securities. Credit unions rely heavily on U.S. government securities and savings deposits in other financial institutions to provide liquidity in order to meet deposit withdraws and accommodate member credit needs.
credit unions pay dividends to their members, who are technically owners rather than credits of the association. These dividend payments may be paid only if sufficient revenues are available after all expenses are met. The maximum annual dividend payable by an association is 7 present. Credit unions are labeled nonprofit associations doing business only with their owners and therefore are classified as tax-exempt mutual organizations. To qualify for tax exemption, however, all earnings except those flowing to equity reserves must be paid out to members.

No comments: