The Community Development Credit Union Alternative

An interview with Clifford Rosenthal

Clifford Rosenthal is the executive director of the National Federation of Community Development Credit Unions (NFCDCU), an association of credit unions that serve predominantly low-income communities, two-thirds urban and one-third rural. NFCDCU has more than 200 member institutions across the United States in 40 states, the District of Columbia and Puerto Rico. Its members range in size from less than a million dollars in assets to more than $600 million. NFCDCU was formed in 1974. Some of its credit unions have been in existence since the 1930s.

MM: How does a Community Development Credit Union (CDCU) differ from a regular credit union?

Rosenthal: Primarily by its mission of serving predominantly low-income people. All credit unions in the U.S. are non-profit consumer or member-owned cooperatives, but CDCUs are distinguished by having memberships that are low-income and by having a commitment to serving not just its members but the communities to which they belong. CDCUs also have certain financial powers by virtue of the distinct role that they play in the financial system. These powers in terms of raising outside deposits or other forms of capital are not available to other types of credit unions.

MM: The needs of low-income communities remain large, and access to financial services remains a problem. Why are there not more CDCUs?

Rosenthal: Because running a financial institution in general is not an easy business. Running it with heavy use of volunteers makes it even more difficult.

Financial institution management has become more and more complex. There has also been a rise in expectations. Whereas 30 or 40 years ago a community — especially a minority community with no access to financial services — could be pretty much satisfied with basic savings and loans operated a few hours a week on a volunteer basis, even low-income communities expect more these days in terms of consumer financial services. Managing that all is more difficult and more costly than it’s been in the past.

We’ve made a lot of progress in the last 10 or 15 years in educating the philanthropic community and government of the value and needs of credit unions in low-income communities. Still, the money available to start one up is very limited.

The Federal Community Development Financial Institutions (CDFI) fund, which we worked hard to create, does provide funding and capital, but not to institutions that don’t have their charter yet, so it becomes a kind of vicious cycle. There isn’t a capital requirement the way there would be for a credit union or bank, but in practical terms you have to be economically viable. Since it takes a significant amount of time to build up to that point, it helps if you have the commitments up front when you launch an institution. So the CDFI fund has not been as available as we would have hoped for the means of startup institutions. There are not a tremendous number of funders that provide startup dollars.

CDFI operates under the U.S. Department of the Treasury. In general terms it’s an institution that we and our colleagues in the lending field advocated for and President Clinton pushed hard to create back in 1994. It provides capital in various forms to CDCUs, community development banks, community development loan funds, and micro-enterprise funds.

MM: Why hasn’t there been a bigger push for CDCUs as the cure for predatory lending and related scams?

Rosenthal: Consciousness of predatory lending is a relatively recent phenomenon. This campaign has really scaled up in the past two years. The abuses of predatory lending have accelerated in the 1990s. The number of automobile title lenders and payday lenders increased geometrically. I don’t think anyone was prepared for the magnitude of that expansion. It’s really only in the past couple of years that there’s been much public outcry about these kind of practices.

It’s scarcely surprising that the needs of the least well-off in society do not come to first-tier attention of the powers that be, particularly when the economy seems to be thriving for so many people. So CDCUs are not widely recognized by those who have the resources to change things. That’s starting to change now, and it will continue to change.

We’re on the verge of raising some money to help CDCUs develop products that are specifically geared towards helping people who have suffered from predatory lending. Generally, that’s always been the marketplace of CDCUs, but there hasn’t been a product that has had that written all over it. We and our members are trying to change that.

MM: Is it true that for many communities, particularly low-income urban communities, payday loans exist because there are no alternatives?

Rosenthal: It’s a complex situation. Banks don’t make unsecured small loans. They never did and they’re never going to. You’re never going to be able to walk into a bank and get a $150 unsecured loan until payday, because it wasn’t and isn’t and won’t be profitable for them. Nonetheless, the departure of banks from a lot of communities — the debranching of banks — has diminished access to credit in many areas of the county, including the inner cities.

The most visible alternatives in a lot of cases have been these payday lenders that often, though not always, are tied to check-cashing outlets. Over the last few years they’ve perfected that product — if you can call it that — and expanded it enormously. The convenience is very great for people. If you’ve got a paycheck, you can walk in and walk out with cash in your hands. So they’re a big draw.

People need more financial education. We’re working on that, as are many others.

MM: Some CDCUs get contributions from some of the nation’s biggest banks. What is the association they have with these banks?

Rosenthal: Citibank has been a big supporter of our organization. About five years ago they provided a grant of about $1.25 million that we have largely distributed to our credit unions to build their capital position. Prior to merging with Travelers and becoming Citigroup, among all the big banks Citibank was the most helpful to us in cash terms. Certainly their Community Reinvestment Act (CRA) people had a very enlightened view of the role of CDCUs and tried to help. We have not gone back to them in recent years and asked them for additional money. We’re pretty distressed at what has happened there since The Associates merger.

MM: What would you like the Bush administration to do for CDCUs?

Rosenthal: There are not a lot of CDCU programs out there. The most important one is the Community Development Financial Institutions (CDFI) fund. The Bush Administration requested a cutback in the proposed funding from $125 million down to $68 million. It was a draconian cut for an institution that was just beginning to prove its worth in filling this niche. The House came in at $80 million; the Senate came in at $100 million. Our hope is that the $100 million will prevail. So I think that the first thing that’s necessary is for the Bush Administration to do no harm and to maintain the momentum that the fund had built up over the years, because it is by far the most important source not only for us but for the loan fund and for the community development banks as well.

The other area for CDCUs is the Community Development Revolving Loan Fund under the National Credit Union Administration. That’s more modestly helpful and has gotten some appropriation this year as it has for the last few years. But by no means does it have the impact that the CDFI can have.

Another thing that has concerned us for several years started in 1998, when legislation passed called the Credit Union Membership Access Act (HR 1151). It was a piece of legislation with huge importance, because it reasserted the ability of all types of credit unions to expand their membership rather broadly. The banks had litigated in order to contract the field of membership for credit unions. Unfortunately, in that piece of legislation, the Treasury Department, at the behest of banks, imposed mandatory minimum capital standards on the credit union industry for the first time. That meant that you had to have 7 percent capital-to-assets ratio in order to be considered well capitalized and more or less immune from regulatory pressure. At levels below that, particularly below 6 percent, you were subject to a regulatory regime known as prompt corrective action.

The fruits of that are just beginning to be seen as the regulations implementing it came into being this year. It has placed extreme pressure on fast-growing institutions who can’t grow their capital to keep up with their asset growth, but also on struggling small institutions, including a number of ours. We have institutions that have been in business for decades that may have 3 or 4 percent capital, which three years ago was not perfect, but would not subject you to pressure. Now we see increased pressure on them to shed assets, to cut expenses, to go out of business.

A lot of people would say this all was a concession to the banking industry, which didn’t want credit unions as competitors and so wanted to raise the standards for them. For most credit unions it’s not a big problem, for some it is.

MM: Do you feel the CDCUs are adequately supported by the Credit Union National Association?

Rosenthal: They receive some support. The support is not as great it was some years ago. We enjoy cordial relations with them, but wish they would find a way to increase their support significantly.