The good news is that the financial health of credit unions is sound. Over the past four years, assets and net worth ratios have increased; delinquency ratios have decreased; and loan-to-share ratios have slowly recovered. Nothwithstanding these positive indicators, I see some storm clouds on the horizon for credit unions. These are not imminent threats, but rather concerns that should be addressed as credit unions develop strategic and business plans for the future. Last year credit unions experienced the slowest membership growth since 1991. In fact, membership growth in each of the past four years has been anemic – at around 2%. The result is that credit unions are almost entirely dependent on existing members for asset growth. This is troubling because jobs are being outsourced; firms are downsizing; and existing members are aging. Inevitably, existing members will either retire and move, or die. Increasing membership should be a top priority for most credit unions. Fortunately, credit unions have greater potential than ever to grow. The challenge is to turn record numbers of potential members into real members. This is the goal of my Partnering and Leadership Successes (PALS) initiative. At free PALS workshops and on the PALS Best Practices Web site, credit union leaders have shared hundreds of initiatives to improve services and attract new members. Panelists have suggested two innovative services that have proven especially successful in reaching consumers who are most in need of affordable financial services – and who are most likely to join a credit union: 1) Small loans – When people need $200 to fix their car so they can get to work, or $300 to cover a medical emergency, they need creditors who make small loans quickly. These people often have nowhere to turn but to predatory lenders that charge triple-digit interest rates and exorbitant fees. Credit unions that make small loans at affordable rates make an enormous difference to members who have urgent needs. These appreciative borrowers become loyal members for life. 2) Risk-based loans – When credit unions offer risk-based lending, it permits them to say "yes" to just about any member regardless of their credit history. And, it enhances safety and soundness by charging higher rates for higher credit risks. At the same time, it extends loan opportunities to potential members who will remember that their credit union made them an affordable loan and put them on the road to a firmer financial future. Because small credit unions are the icon of credit unions to some lawmakers who might otherwise consider taxing credit unions, their survival is important to the entire credit union community. Yet small credit unions face the most difficult challenge in building membership. Most small credit unions simply do not have the staff or technology to offer some of the basic services members want. For example, only 39% of small credit unions offer checking, and only 20% offer first mortgages. The lack of services is the primary reason small credit unions are merged or liquidated almost every business day. But PALS participants have shown that when small credit unions seek outside resources and partner with other organizations, they can offer virtually any services. It is vitally important for small credit unions to partner with organizations such as Fannie Mae, Freddie Mac, the Small Business Administration, and community groups that can help them reach new members. The credit union community, too – leagues, CUSOs, corporates, as well as other credit unions – can play an important role in assuring the future for small credit unions. And they have a stake in doing so. Credit unions' pro-consumer reputation is one of their most valuable assets in protecting their tax exemption. But when credit unions adopt programs that are not in members' best interest, they risk losing this hard-earned reputation. Perhaps the largest potential reputation risks are posed by indirect lending sold through third parties and bounce protection programs. Increasingly credit unions are offering indirect lending, which is an important source of revenue in a low-interest rate environment. But buying indirect loans through a vendor has its risks, and credit unions should be wary. Because of excessive rates and fees, dealer add-ons, unnecessary insurance, and inadequate disclosures which are frequently found in these arrangements, credit unions may find themselves on the defensive from consumer groups, the press, and legislators. Credit unions that offer such programs MUST do their due diligence to ensure that the third party delivers on all promises made during their sales pitch and does not tolerate excessive add-ons. In addition, the credit union should insist that the vendor make available its financials and provide information about its business partners. When marketing bounce protection, credit unions may be accused of exploiting their least creditworthy members. Instead of teaching members to become better consumers, bounce protection generally allows members to behave irresponsibly – by overdrawing their checking accounts or using ATMs to withdraw more cash than they have available. In February, NCUA and other financial regulators jointly published bounce protection guidelines. Credit unions that offer bounce protection are urged to follow these guidelines and ensure that their program is clearly explained to members, does not encourage overdrafts, and does not charge excessive fees. Undertaking indirect lending and bounce protection responsibly is critical to protecting credit unions' long-held pro-consumer reputation. As lawmakers grow concerned that some credit unions are acting like banks, they are asking why credit unions should not be taxed like banks. Many credit unions offer compelling responses. They have helped people break free from the grip of predatory lenders; they have supported small credit unions, which are often the only insured institutions in underserved neighborhoods; they have taught low-income members to budget and save, and helped them purchase their first homes. As long as credit unions stay true to the philosophy of "People Helping People," their tax exemption will be protected. Credit unions are not in imminent danger. They are, however, at a crossroads. Heeding these warning signs, credit unions can position themselves not only to remain healthy, but to grow even stronger in the future.