Volume 10; No. 1; Winter 1998
By Sarah Bennett, Community Affairs Intern, Kennedy School of Government,
When you think about local bank partners, itàs likely that non-profit
organizations and local governments come to mind. This is true in most
cases; but lately, some banks have been └pushing the envelope" by choosing
rather unconventional community partners. Consider, for example, the growing
number of productive partnerships between credit unions and banks. The
majority of these partnerships involve a unique type of credit union commonly
known as a community development credit union (CDCU). This article will
present examples of current partnerships, highlight the technical aspects
of CDCUs and explore how banks can benefit from working with CDCUs.
Serving └Unbanked" Communities
In recent months, Citibank California has made substantial investments
in two CDCUs║ the Allen Temple Baptist Church Federal Credit Union in
Oakland and the Comunidades Federal Credit Union in the Pico Union district
of Los Angeles. Why would Citibank California view these CDCUs as partners
rather than competitors? According to Jose Arce, Director of Community
Investment for Citibank California, a CDCU is a completely └different
animal" from a mainstream credit union. Specifically designed to serve
low-income people and communities, CDCUs rarely compete for a bankàs core
consumer market. Instead, CDCUs provide loans and retail financial services
to communities that have traditionally gone └unbanked." CDCU customers
are usually people with savings of a few hundred dollars or less, borrowers
with no or imperfect credit, and local entrepreneurs who need small loans
of a few thousand dollars to jump-start their business.
By partnering with CDCUs, banks not only extend financial services to
underserved communities, but they develop potential new customers. CDCUs
establish themselves in communities where financial services are sparse,
enabling potential bank customers to gain the credit history and banking
experience they need to be traditionally └bankable" in the future.
There are approximately 390 CDCUs in the United States, and they are
chartered by the National Credit Union Administration (NCUA), an independent
federal agency that regulates and insures credit unions. The NCUA designates
a credit union as └low- income" (or a CDCU) if it predominantly serves
members who earn 80 percent or less of the nationàs average median household
Playing by Different Rules
Once designated as └low-income," CDCUs play by different rules than └mainstream"
credit unions. CDCUs can expand their capital base by accepting deposits
from non-members or by receiving equity grants. They also have greater
flexibility in determining their membership than do └mainstream" credit
Recently, CDCUs were granted the authority to obtain subordinated debt
from philanthropic sources and to count the debt as └secondary capital."
This secondary capital is a loan that must be repaid but is subordinated
to all other CDCU debt. Using subordinated debt to strengthen their capital
position, CDCUs seek additional deposits to expand their lending capacity.
Finally, CDCUs are also eligible for low-interest loans, deposits, and
technical assistance from NCUAàs Community Development Revolving Loan
Partnering with a CDCU
Most bank/CDCU partnerships include non-member deposits by banks for
a term of one year or longer, at rates of zero to two percent. Non-member
deposits in an NCUA-designated CDCU are insured by the NCUA for up to
$100,000. On average, CDCUs rely on area banks for nine percent of their
non-member deposits. The other 91 percent come from foundations, other
credit unions, and member deposits.
Banks and CDCUs are continually finding new ways to work together. Donàt
be surprised to find banks financing secondary capital programs to fund
CDCU reserves or providing in-kind assistance such as financial training,
donations, and security assessments.
In addition to working with CDCUs directly, banks can opt to support
CDCUs through the National Federation of Community Development Credit
Unions (NFCDCU). NFCDCU is a 501(c)(3) charitable organization which serves
as a national support organization for CDCUs. With a membership of over
150 CDCUs in 35 states, NFCDCU offers three main capitalization products
to benefit CDCUs:
- a secondary capital program;
- a non-member deposits program; and
- an equity grants program.
NFCDCU also provides CDCUs with technical assistance training and organizing
assistance such as help with fundraising, business planning and applying
for government charters.
Competing for Lending Opportunities?
Banks and CDCUs donàt usually compete for lending opportunities. In fact,
few banks are interested in making the typical CDCU loan. For example,
the Santa Cruz Community Credit Union (Santa Cruz Community) in Santa
Cruz, California, has $4.7 million in loans to small businesses. The majority
of these loans are small enough ($5,000 to $25,000) that they are of little
interest to larger financial institutions. Similarly, CDCUs rarely compete
with banks for large commercial loans since the NCUA limits a CDCU loan
to a certain percentage of a CDCUàs equity base. Santa Cruz Community
has a loan limit of $402,860 based on its equity base of $2.7 million.
Rather than competing with banks, CDCUs help develop new bank customers.
According to Jim Sudduth, Executive Director of Santa Cruz Community,
new businesses often look to his credit union for small, start-up loans
of a couple of thousand dollars. Once these businesses become stable and
their credit needs grow beyond the Santa Cruz Communityàs loan limit,
they often turn to larger financial institutions for a wider range of
In Phoenix, Arizona, a partnership between Wells Fargo Bank and a CDCU
called Chicanos Por La Causa (CPLC) gives new meaning to the term └cooperative."
Sharing a 4,000-square ft. building that was formerly a Wells Fargo branch,
Wells Fargo and CPLC will provide financial services to the South Phoenix
community beginning in March 1998. CPLC will occupy 3,000-square ft. while
Wells Fargo will operate a mini-branch in the remaining 1,000-square ft.
Will there be competition for customers? └Probably not," says Edmundo
Hidalgo, Vice President and Community Development Officer of Wells Fargo.
└Wells Fargo and CPLC wonàt compete because they serve people with different
needs and backgrounds."
This unique one-stop-shopping arrangement provides consumers with a continuum
of financial services, which underscores how the services of traditional
banks and CDCUs can complement each other. CPLC works with customers who
have limited or no credit, helping them take their first steps towards
accessing capital. Once theyàve developed reliable credit histories, Wells
Fargo offers these customers the more traditional financial services of
CDCUs and the CRA
According to the revised regulation, a bankàs partnership with a CDCU
will receive consideration under the new Community Reinvestment Act (CRA).
Under the CRA Investment Test, regulators will consider investments, grants,
deposits or shares in CDCUs as qualified investments. Similarly, a subordinated
loan to a CDCU may be considered a community development loan under the
Lending Test. Banks providing CDCUs with technical assistance, financial
planning, or credit counseling can expect these activities to be evaluated
under the Service Test.
Beyond the CRA Benefits for banks that partner with CDCUs extend beyond
the CRA. In 1994, Congress enacted the Community Development Financial
Institutions Act which included the Bank Enterprise Awards (BEA) Program.
The BEA program rewards banks that invest in distressed areas. One way
for banks to participate in the BEA program is to invest in a CDCU that
has been certified by the federal government as a Community Development
Financial Institution (CDFI). To become a CDFI, a CDCU must demonstrate
- its primary mission is to promote community development;
- it has a designated target market that is either low-income or has
historically lacked access to credit; and
- it is not an entity of the state or local government.
The majority of CDCUs would qualify as CDFIs, but not all of them have
the resources to complete the extensive CDFI application process. Currently,
approximately 30 percent of CDCUs have applied for and received CDFI designation.
Banks investing in CDFI-certified CDCUs are eligible for BEA cash awards
of up to 15 percent of the value of their investments.
When looking for ways to serve communities that have traditionally gone
└unbanked," it makes sense to consider partnerships with CDCUs. These
partnerships can improve CRA performance and increase access to BEA grants.
They also help financial institutions build bridges into low-income communities
by extending credit to underserved populations and, at the same time,
developing new bank customers. CI
|| If you are interested in learning more about CDCUs,
please contact: Joyce Jackson, Director, NCUAàs Office of Community
Development Credit Unions at (703) 518-6610; Cathie Mahon, Program
Officer, NFCDCU at (212) 809-1850; or, contact CDCUs directly. The
following is a list of 12th District CDCUs.