Recently, credit cooperatives can be seen in almost any city in America – they offer a good interest on deposits and guarantee the safety of funds. However, in practice, everything is not so good, and every year thousands of customers of bankrupt cooperatives seek justice in the courts. Is it worth investing your money in a cooperative and what are the risks?
What is a credit cooperative?
Despite the fact that the cooperative form of organization now seems somewhat outdated, credit consumer cooperatives (CCPs) exist, and exist successfully. Currently, the corresponding register of the Bank of America contains information on 1603 existing credit consumer cooperatives , and their turnover is measured in billions of dollars.
This legal form has some features of the Soviet mutual assistance cash desks, which some employees “replenished”, while other employees could “borrow” a certain amount of money.
Now credit consumer cooperatives are positioning themselves as an alternative to classic banks . According to the law, a credit consumer cooperative is defined as:
voluntary association of individuals and (or) legal entities on the basis of membership and on a territorial, professional and (or) other principle in order to meet the financial needs of members of a credit cooperative (shareholders).
As you can see, the main idea of a credit cooperative is to collect a certain amount of contributions from members of the cooperative, and then issue this amount in the form of loans. In ideal form, this is a group of shareholders, where both “depositors” and “borrowers” know each other, and the cooperative’s activities are transparent. The reality is different, and the work of cooperatives is more like banks and microfinance organizations.
In General Terms, the Usual PDA Operation Scheme is as Follows:
- registration of a cooperative – at least 5 participants are required, it is also necessary to choose an SRO and join it;
- Those who want to invest in a cooperative must join it and pay a certain fee (there are minimum amounts). After that, the shareholder contributes funds and becomes a “saver”;
- the cooperative uses the money received to issue loans. The borrower also joins the cooperative and becomes its shareholder. After checking the documents he is given a loan;
- after the agreed period, the borrower repays the loan with interest , and at the end of the year the amount of income and expenses is calculated. If there is profit, it is distributed among the participants. Losses are also repaid by them.
The Activities of the CCP Have its Limitations:
- the loan amount cannot be more than 10% of the cooperative’s capital , which is essential only for small cooperatives;
- by decision of the SRO, which includes the cooperative, a certain amount is deducted to the compensation fund , which is used to pay participants bankrupt cooperatives;
- the savings of shareholders are accepted at a percentage not higher than 1.8 of the key rate of the Bank of America;
- to make changes to the documents you need to collect a general meeting of shareholders.
It is important that the goal of creating and functioning the CPC cannot be profit, this is clear from the cooperative’s working scheme. In practice, CCPs are created to generate income.
Separately, agricultural credit consumer cooperatives operate in the American legal field. The scheme of their work is approximately the same as that of conventional PDAs, but the goal is to develop agriculture, and agricultural producers can be participants.
How American credit cooperatives work in practice
A credit cooperative is formally an analogue of a mutual assistance fund, but not all cooperatives work this way. On the streets of American cities every year there are more and more offices of credit cooperatives. They attract people with an offer to invest at a high interest rate or to get a loan on favorable terms.
The entry conditions for “savings” are now almost the same for all legal cooperatives – this is an interest rate of 13.95% per annum (since this is the highest possible percentage at a key rate of 7.75% per annum).
The minimum amount of savings made is different – it can be 25,000 dollars , or maybe 100,000 dollars . The terms of “investment” are from 3 to 36 months, the conditions also differ – there are options for paying interest once a month or once a year, there is capitalization (joining the main amount).
As for loans, the interest rate on them is 20-40% per annum, which is lower than that of microfinance organizations, but more than that of banks. To minimize the risks, CCPs usually more thoroughly check borrowers, demanding to provide a lot of documents.
The amount of loans can be different, some cooperatives are oriented to microfinance and offer loans “up to salary” of several thousand dollars. TD Bank Routing Number Others have a minimum amount of 100,000 dollars.
Loans are issued both without collateral and against collateral of movable and immovable property. This is not a full-fledged mortgage, since KPC is not a bank. However, individual cooperatives secured by real estate provide loans up to 80% of the value of the collateral.
KPC can place the savings of its shareholders not only in loans, options for buying government bonds , a bank deposit or placing funds in other special cooperatives are still available . The first 2 options are unlikely to be widely used – neither bonds, nor a bank deposit will provide such a return that the cooperative would go to zero.
This and much more leads to a higher level of risk for the CCP than for banks.
Problems of Credit Cooperatives
Over the past few years, a wave of bankruptcies in credit cooperatives has taken place in America. Many “depositors” received almost nothing, although their contributions were insured.
Most of the complaints about cooperatives occurred in the period until 2009, after which the law on credit cooperation was issued. This has reduced the number of complaints, but there are still many bankruptcies of cooperatives.
As of right now, in a special register of the Bank of America there is information on such a number of cooperatives:
Unfortunately, the current legislation is imperfect, and among formally operating cooperatives, many have already stopped paying and closed offices.
Most often, the process goes like this:
- for various reasons, the cooperative begins to delay interest payments and the return of the main amounts of savings to its customers. They are promised that payments will soon be resumed, “fed breakfast”;
- in parallel with this, formally operating cooperatives that already have problems can work calmly and accept funds from new customers . Previous customers still do not receive their money or receive any parts from them;
- then, as a rule, the cooperative closes its offices . “Investors” come for their money, but they see an empty enclosed space. As a rule, the head office still continues to work. This is explained by the fact that the cooperative “moves to a new office.” After some time, contact phones are disconnected;
- after that, negative reviews from the cooperative appear on social networks and forums . However, the CCP is still listed in the registry as valid;
- shareholders turn to law enforcement agencies (which are usually powerless here) or to lawyers, the bankruptcy process starts;
- the cooperative is expelled from the SRO , and then the case is in court. After someone filed a lawsuit, a meeting of the arbitration court takes place, at which the bankruptcy procedure begins and a liquidator is appointed.
As you can see, the termination of payments usually does not occur at one time, the process stretches in time.
Separately, it is worth mentioning the “deposit” insurance . The cooperatives themselves claim that customers are insured, not for 1.4 million dollars as in banks, but for the entire amount deposited.
However, few of the shareholders carefully read the terms of the insurance contract. Most often, the insurer is a small insurance company or even an OVS (a mutual insurance company, an analogue of a cooperative).
The terms of the contract are designed so that the insured event is the recognition of the cooperative as bankrupt during the term of the “deposit” agreement. However, this period is usually 3-6-9 months, and due to bureaucracy, court decisions on the recognition of bankruptcy can be expected for years.
Therefore, it becomes almost impossible to receive payments from an insurance company.
Another option for compensation is the formation of an SRO compensation fund. There, all incoming cooperatives must deduct at least 0.2% of the amount of assets annually. If any KPC goes bankrupt, payments to its “depositors” cannot exceed 5% of this fund. It is easy to calculate that this is not enough for all “deceived investors”.
Recommendations to Participants of Credit Cooperatives
The first and main recommendation, taking into account all the problems, is not to participate in the CCP and not give your savings to them . Their only advantage is a higher interest rate than in banks. However, with a deposit amount of up to 1.4 million dollars, it is possible to place a deposit in any bank without problems – even if it is declared insolvent, the DIA compensates the entire amount.