Community Development Credit Unions in the US

by Caroline Whyte, August 2003

"Development, finally, boils down to every citizen becoming more productive and able to function," says Caryl Stewart, director of the Vermont Development Credit Union, on the credit union's website. The credit union is one of hundreds of Community Development Credit Unions (or CDCUs) in the US, all of which have similar goals and all of which are co-operatively managed. Pat Conaty describes them as "the best examples I know of American Social Enterprises that walk the talk, and battle like Road Runners with their flyweight size for Peace and Justice." They are active in a wide variety of fields, from campaigning against unfair banking practises to enabling small businesses to become more energy-efficient, as well as providing assistance, both financial and otherwise, to low-income households.

Helping communities to take control of their economies

William Myers, the founder and CEO of Alternatives Federal Credit Union in Ithaca, New York, says that the credit union's greatest achievement is that "we have proven that a local community can take control of its financial assets and direct its own development. The "tipping" effect is very strong: Our 3% of the local economy has leveraged the rest of the beast around. "

Myers explains, "Our model of community controlled, capital led development is the 'Credit Path'. By identifying underserved markets (which have a large overlap with poverty) and making products to serve those markets, we build a continuous "path" out of poverty. The community benefits from the increased ownership and stability of households." Clients are encouraged to move from being 'transactors" - using the credit union solely to cash cheques, etc - to becoming savers, loan customers and eventually, owners of homes and small businesses.

The programmes offered by Alternatives include Individual Development Accounts (IDAs), in which savings by low income participants are matched to provide assistance in paying for a home, education or small business, and Community Partnership Lending, described on the website as "a way to partner with non-profits to expand lending to their underserved clients".

One member of Alternatives who has benefited from its programmes is Jasmin Cubero. Myers writes "one look at her credit report, with her list of debts, was enough to get her rejected for even a small loan [from a conventional bank]. Following the advice of friends, she decided to try Alternatives. Ronda Porras, Director of Consumer Lending, saw a young, determined single mom, working two part-time jobs and going to school full time. Ronda saw a way to consolidate some loans, and believed Jasmin would pay back the loan. She approved a small loan, which Jasmin paid off in three months. When Jasmin applied for a car loan, she was approved. "With Ronda's help, I was able to make a plan. I'm comfortable with the payments, and now I have reliable transportation for me and my girls," Jasmin said. "Alternatives gives community members a chance. Ronda saw beyond my credit problems. I think the name says it all. You gave me an opportunity. I feel a sense of accomplishment. My next goal is a house!"

Terrie and Clarance Mayu are also satisfied members of Alternatives. Mayu used her IDA in 1999 to purchase a home with her husband Clarence and their 3 children, Jasmine 15, Julian 10, and Rekee 3. Myers writes, "Since buying their home, Terrie and Clarence have used the IDA to continue their college education. "Because of the IDA program, we've learned how to save to reach our goals. Now we have other savings goals like an emergency fund, vacations, and are looking ahead to our children's educations. I couldn't have pictured myself here 10 years ago when I didn't have any savings, didn't have a vision for the future. I felt stuck in a rut. With the support of the program, we are able to see where we want to be, and now know how to get there."

Counselling plays an important role for loan clients of CDCUs. At Vermont Development Credit Union, another prominent CDCU, fifty percent of potential loan customers are considered to be ineligible for loans when they first apply, but they are given guidance and support to help them get their finances in order. They are encouraged to get rid of bad debt and to track their financial history. Similar approaches are taken at other credit unions.

Vermont Development Credit Union was founded in 1989, and anyone who is involved with a Vermont non-profit or religious organisation is eligible to join. In 2002 the credit union made 1,994 loans totalling $20.8 million. The delinquency rate on loans is only 1.25 to 1.5 percent. Loan funds come partly from members and partly from outside investors, who hold $9 million in federally-protected Certificates of Deposit. One source of funds has been a local bank, which does not consider the credit union to be a rival since the majority of the credit union's clients are low-income.

Around half of the loans provided by the credit union are for mortgages, and there are also home improvement, business and personal capital loans available. An energy saving loan is geared towards helping business owners make their businesses more self-sufficient. Jonathan Connor, a dairy farmer who rents his 500-acre farm from his father, made use of this loan to buy new thermostat-controlled fans with energy-saving motors and energy-saving lighting. The investment paid for itself through reduced utility bills. It had another benefit, too. "In the old days, if you came in the barn in winter it was warm and damp," says Mary Ann. "Now it's cool, and the air is clean. The cows don't get pneumonia. They stay much healthier." (quote from website).

The struggle against predatory lending in the US

CDCUs have not only helped individuals to improve their finances, and thereby their entire lives. They have campaigned for broader changes in the ways that credit and loan financing are dealt with by society.

According to the Eric Stein, vice president of North Carolina's Self-Help Credit Union, "the most important lending issue today is no longer the denial of credit but the terms of credit". The Self-Help Credit Union has a strong history of public policy advocacy, including a successful campaign against predatory lending practices - ie, lending practices carried out by banks and other loan institutions, some of them mainstream and well-known, which may be technically legal but which nonetheless have the effect of further undermining low-income customers, and even whole neighbourhoods, by stripping them of assets. Some examples of predatory lending are:

- charging excessive fees, which are often "worked into" the closing of the deal and thus hidden from the loan customer. These fees can be charged more than once if the loan customer refinances the loan, and they are often pressured to do so. North Carolina research has shown that one in ten customers who had obtained 0% first mortgages through Habitat for Humanity by means of their own and volunteers' sweat equity had their loans "flipped" into high interest ones by predatory lenders. This is particularly egregious as it uses a decent programme as a wedge to take advantage of vulnerable people.

- charging rates that go beyond the actual risk involved in making the loan. This often happens because the loan agents receive kickbacks according to the interest rate they persuade their customers to pay, thus providing an incentive to charge as high a rate as possible.

- excessive foreclosures, brought about partly because the loan customer is put under a great deal of financial strain by the practices described above. The foreclosures have a negative effect on the entire community the house is located in because the increase in boarded-up houses brings down the value of surrounding houses and encourages crime.

All of these practices have been shown to effect African Americans disproportionately, although all low-income customers are potential targets. The Self-Help Credit Union estimates that US borrowers lose $9.1 billion annually to predatory lending practices. Obviously, everyone, regardless of their income, can be vulnerable to this sort of practice, but it hits low-income people far harder than others since they often lack health insurance and do not have the funds to maintain their home or vehicle properly. People who are living close to the edge are much more likely to be wiped out by these practices.

The Self-Help Credit Union has managed to fight back effectively against this type of practice in North Carolina by forming the Coalition for Responsible Lending (CRL). CRL is an organization representing over three million North Carolinians in eighty organizations, as well as the CEOs of 120 financial institutions. In 1999, CRL spearheaded an effort that resulted in the overwhelming passage of the NC predatory mortgage law."The bill was supported by associations representing the state's large banks, community banks, mortgage bankers, credit unions, mortgage brokers and Realtors, as well as AARP, the NAACP, and consumer and community development and housing groups. CRL now is working to strengthen broker licensing in North Carolina, assist initiatives in other states, and help develop effective federal regulatory and legislative solutions."(from CRL website).

As John Caskey, a professor of economics at Swarthmore College, pointed out in his keynote address at Alternatives in May 2002, predatory lending is really just a form of swindling. Legislation is extremely helpful but can't solve the whole problem, as the swindlers are constantly looking for loopholes and other ingenious ways to fool people into accepting their loans. Clearly, an important cause of the problem is that low-income people tend to be less aware of the options available to them, and that they may have a choice beyond what is being offered by the swindlers. So here again, counselling and education are very important.

The big picture: the National Federation of Community Development Credit Unions

The CDCUs mentioned above are all members of, and receive assistance from, the National Federation of Community Development Credit Unions, an umbrella organisation based in New York. It was founded in 1974, and operates with a staff of 20 and a budget of $2.5 million. Its member CDCUs are located all over the US in forty states, with the densest concentrations in the Northeast and Southeast. Two thirds of them are urban, and the remaining third are rural or reservation-based.

The federation's history is naturally closely linked with the history of CDCUs in the US, and shows the importance of obtaining funding from many sources rather than just one or two. It was run solely by volunteers for its first few years. Under the Carter administration it managed to acquire some funding, but had to contend with the administration's desire to control the development of the movement, for example by selecting which credit unions qualified as being CDCUs. Under Reagan, funding was completely stopped and the federation's budget plummeted from $500,000 annually to $5,000. Once again it had to be run by volunteers, with Clifford Rosenthal maintaining a part-time, skeleton operation from his home. Membership had shrunk to less than 60 credit unions.

At that point the federation decided to pursue an idea that had first been considered at the time of its launch - to try and raise money from private, "social investors" such as foundations and religious organisations. In 1983 it was able to raise operating grants from two large foundations, and thus became able once more to support a small staff. A revolving loan fund which had been established under Carter was still in operation, although the interest rates had been raised from 2% to 7.5% by the Reagan administration.

In the mid-eighties, the federation helped with establishing a new CDCU in New York which replaced a conventional bank, and also expanded the range of programmes provided by credit unions in the area to include job training and small-business lending. The Reagan administration showed some interest in the federation's "self-help" philosophy, and although it didn't provide any funding, its interest did spark more private-sector attention. Funding began to come in from large foundations and by 1986 there was almost a million dollars under management. For the first time, banks began to recognise the value of CDCUs and to provide support. However, numerous regulatory obstacles were put up by the government, and by the early nineties there was also an unhelpful trend towards mergers to form larger credit unions.

The federation worked with other credit union organisations to strengthen the movement, and formed networks of similar CUs such as faith-based unions and youth-oriented unions. It also became involved with Americorps VISTA programmes, which provided volunteers to help with projects, including the establishment of Ithaca Hours.

Throughout the nineties, membership of NFCDCU expanded and demands for technical assistance with CDCUs grew. The federation published a manual for organising CDCUs, and established a three-year training programme in credit union management and community development. After the Rodney King riots in Los Angeles, the federal government began to show more sympathy towards the idea of CDCUs, and with the election of Clinton the climate became friendlier again. The federal government under Clinton provided a $3.25 million grant from the Community Development Financial Institution (CDFI) fund. This fund's establishment was influenced by ideas that NFCDCU had developed in the mid-eighties, and the example of institutions such as Chicago's South Shore Bank. Regulations were changed to make it easier to establish CDCUs, although some new obstacles were also put in place: for example, credit unions now have to conform to mandatory capital standards.

In a December 2002 e-mail, Rosenthal described some of the recent challenges that NDCFCU has had to face: "the increasing consolidation of the credit union industry -- the trend toward fewer, larger institutions. The increased regulatory burden, which is hard on credit unions generally, and disproportionately hard on the smallest ones. The rising expectations of members, even in low-income communities, who want a high level of service that is difficult for small institutions to provide. The increasing complexity and cost of technology. The widespread lack of concern -- and even hostility -- in the U.S. for the problems of low-income and poor people. Succession issues, as the generation of the 60s and before heads toward retirement; the spirit of volunteerism and social activism is perhaps much diminished since our prime. " In addition to these problems, the Bush administration is now pressuring Congress to severely cut back on the CDFI Fund.

Rosenthal writes about future plans, "we will continue to work to assure that CDCUs are well capitalized, that they have access to advanced technology and can reap the economies of automation even if not those of scale; we will aggressively pursue partnerships with larger credit unions of the "mainstream," to try to piggyback on their considerable capacity. We want to continue to work with other emerging credit union movements around the world." One beneficiary is a new CDCU in Birmingham, England, that is being established in 2003. In addition to its work with UK credit unions, NDCFCU has also had some exchange with credit unions in the former Soviet Union, but Rosenthal says that "they're much less advanced at this time".

Ironically, downturns in the mainstream economy are not necessarily a problem for CDCUs, at least in the short term: in contrast to other lending institutions, these credit unions stand to gain clients during economic hard times. As Myers explains about Alternatives, "We're an entrepreneurial organization. We serve underserved markets. An economic downturn means that there is more market share available to us." In fact, his credit unions' main challenge has nothing to do with the economy. "As a federally regulated and insured financial institution, our challenge is convincing our government overseers that our unusual model is not a risk to their insurance fund."

There has clearly been a great deal of creativity involved in the survival and growth of CDCUs in the US. Myers and his colleagues are now wondering how to best replicate their model. "Branches? Franchise? A 'How To' kit?"

Alternatives Federal Credit Union, 125 North Fulton Street, Ithaca, NY 14850, tel +1 607 273 4611, fax +1 607 273 6391.

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