Chip Filson
(from Jim Blaine)
Many challenges confront credit union focused news reporting. Publishing daily via social media is hard. Staff is limited. Original stories take time to develop. Amplifying press releases is often an easy solution when faced with daily deadlines.
Credit Union Times and CUToday have developed important reporting niches however. If readers follow these original stories, they can provide insight into events that have consequences for the future of the cooperative system.
Peter Strozniak of Credit Union Times follows court cases about credit unions. On October 4, he reported on the embezzlement at the $3.2 Prairie View FCU: Former CEO Pleads Not Guilty to Embezzlement Charges. Some of the details in his coverage included:
In eight of this ten-year fraud time frame, the credit union reported annual operating losses on its call reports. The credit union was merged in the first quarter of 2022 due to “its poor financial condition.”
The question that jumps out is how could NCUA examiners have continually missed this illegal activity for ten years?
Peter did not go there with this story, but the details certainly raise a core question about NCUA’s supervision of the FCU. It was small, with few employees and only 600 members. The call reports showed losses for most years. What does this case imply about the efficacy of NCUA’s annual examinations?
For most of this year, CU Today has summarized the merger activity posted from NCUA’s web site, Comments on Proposed Mergers.
Their latest reviews showed “CUs seeking to merge in multiple other CUs at once, combo’s in which the merging and acquiring CUs are both losing money, and several examples of credit unions reaching across state lines and even across country for merger partners.”
This reporting which includes the latest data and quotes from the member notices, takes a lot of work. Some examples.
One summary is for AIM Credit Union in Dubuque, IA. It is merging two Keokuk credit unions. Members of both merged credit unions were given identical Notice statements. They will be voting on the same day at the same location, First Christian Church. The two towns are 150 miles or about three hours apart. Was a local merger of the two credit unions considered?
In the merger of two Michigan credit unions, Community Alliance Credit Union ($108 million) with People Driven Credit Union ($355 million), the top three executives can receive a total of $542,000 in severance.
Community reported midyear capital of 8.39% and a loss of $73,000. The members were offered nothing of the over $8 million in capital being transferred. Is this an example of taking the money and running away?
The three-year old Maine Harvest FCU with 56% capital is merging so that “its mission of lending to farms and food producers will be better preserved with a larger credit union that embraces that mission.” Was this option researched at the start? Why not create a partnership, versus merger, with a larger credit union if more services are needed?
The $210 million Emory Alliance Credit Union in Decatur GA is merging with Credit Union 1 whose main office is listed as Rantoul, Il. One wonders why? Were no local options available? Did Emory do any due diligence on behalf of their members, especially of Credit Union 1’s recent initiatives before recommending this out of state takeover?
Finally, the $226 million Parsons FCU in Pasadena, CA is merging with the $1.1 billion Skyla FCU in Charlotte, NC. Parsons has almost 11% capital. Merging with a credit union across the country, especially with very strong instate options, would appear contrary to every common sense notion of member service and value. What is the reason for this “merger” almost 3,000 miles away.
CU Today and Credit Union Times are serving a vital public, cooperative service developing this fact-based reporting.
Both media raise important questions about motivations and fiduciary duty of persons responsible for these events.
This original reporting raises critical questions about the directions of credit unions, the regulator’s oversight and how members’ best interests appear to be so cavalierly and repeatedly disregarded.
Sooner or later the stories behind these events will come out. The political and repetitional consequences will impact every credit union even when excesses may be the work of only a few.
A diligent, informed and questioning press is critical in holding those in positions of responsibility to account. CU Today and Credit Union Times are doing the job of the 4th estate. Are credit union leaders getting the message?
(by Jim Blaine)
George Orwell masterfully described the erosion of values and the rise of exploitation in his classic novel Animal Farm. The book written in 1945 is a satire of the decline in the Russian Revolution from idealism to the overlord State of Stalinism. To Orwell, what the Revolution had become in post-WWII Russia bore little resemblance to the high hopes of 1917.
In case you’ve forgotten the plot; in Animal Farm the slothful, tyrannical human proprietor of Manor Farm is overthrown by his much abused and neglected farm animals. The revolutionary animals quickly come to realize that when united in cooperative effort, they are quite capable of sensibly managing the farm and their own affairs.
Each animal, by nature and design, has different capabilities and unique qualities. Separately they are weak. But, cooperatively, working together; the united effort becomes far greater than the sum of the individual parts. Each animal contributes in full measure, in its own special way, to the overall success of the enterprise.
The cows and chickens provide milk and eggs for food. The sheep provide wool for cloth; the dogs provide protection; and the horses provide strength for plowing. The pigs, who seem to be the brightest, provide direction and management (surprise, surprise!).
Every civilized society, every social movement, every cooperative effort needs and creates a set of guiding principles – a social compact, a credo, a charter which explains shared beliefs and values. The animals of Animal Farm were no different. They carefully crafted rules for their new social order and painted them on the side of a barn for all to see.
Over time, several incidents occurred which seemed to be out of keeping with those original purposes. The pigs were found sleeping in the former owner’s bed; alcohol reappeared at social gatherings of the pigs; an animal who complained about the changing values was killed; and the pigs seemed to be working less and consuming more than their fair share.
When the animals returned to the barn to review their original principles; they found, much to their surprise, that those principles somehow had evolved into something a bit different!
The pigs, however, were always there to explain away questions, concerns and objections. Bad became worse at Animal Farm! Eventually, when the animals returned to the barn, they found a whitewashed wall with just one remaining principle.
“All members are equal, but some members are more equal than others.”
“Isn’t that what we originally revolted against?,” some quietly asked.
So, what’s the point? In the beginning, there were several essential ideas which formed the core values of the credit union movement: one member, one vote; cooperative; non-profit; equal service to each member; consumer advocacy; volunteer leadership; unstandard answers; shared concerns; us not me.
Hey really, what happened…
The email marketing headline read: Is there a merger in your future?
Another suggested the opportunity to protect the CEO’s fate by adding a “change of control” clause to the manager’s contract.
Many credit union leaders and most vendors are selling a vision of the future they want to help implement. The focus is on the future, not the present circumstances.
The more apocalyptic the future predictions, the more urgent the message. These prophets pretend to know the unknowable. But the failure is not in their projections. It is their misunderstanding of the present.
When leaders present their vision, they are making predictions about the future they hope to bring. In fact, prophets do exactly the opposite! They insist the future is highly contingent on the now.
From all the flotsam of events, beliefs and analysis, real prophets have the ability to identify what really matters. Focusing on this is essential for ongoing success.
That’s not predicting the future as much as it’s naming the way human reality works today and tomorrow. The true prophet dares to tell what is essential in the face of marketing hype, rhetorical cliches and the latest innovation that will cause members to leave current institutions behind.
Decades ago I first met Rudy Hanley, the long time CEO of SchoolsFirst FCU in California. He asked how I approached strategy. As I outlined the model and summarized growth options, he stated that the credit union’s primary goal was not growth. It was ensuring the members’ trust. No matter the circumstances or cost, the critical success factor was continuing to place member confidence at the center of every decision.
If member relationships were built on this foundation, he believed growth would naturally follow.
This is not every CEO’s priority. Some believe size guarantees success, the bigger, the stronger and the more resilient. Others put their trust in technology and introducing the most compelling solutions or latest crypto offering. When winning in the open competition of the market seems to slow, others will chase the chimera of buying out or merging competitors.
All these approaches can bring short term success. However member-owned cooperatives were established and succeeded as an alternative because of the unique consumer-member relationship. Emulating the corporate strategies of banks and other commercial firms is following false idols.
There are a host of idolatries at the center of the cooperative system today. Many aspire to the prestige and stature of banking competitors. Making money becomes the number one priority albeit always clothed in the phrase of serving members.
Instead of seeking those who are often victims of current financial choices, credit unions aspire to serve everyone. Speaking truth about why coops exist becomes prophetic because the “powers that be” that benefit from the system, cannot see this simple message.
The challenge of understanding who coops are and how credit unions are unique is especially front and center in leadership transitions.
One CEO who recently oversaw this change in his institution observed these dynamics:
It’s hard for today’s leaders to make their bones when they are up to bat.
Then lazy new leaders simply fall in line with the best practices of the day, currently community banking tactics 101.
New leaders will not see staying the course as the means to their hopeful ends. They have been given the reins for change, not just continued success. They are vested in their peer’s approval not their members, nor history’s standards.
The new actors today are vested in their choices. Logic will not be enough – it’s too nuanced to turn back the belief that change is the catalyst to bigger things.
These are a prophet’s words for the present. Will anyone hear the message? Or will there have to be a cost to chasing idols versus trusted service, the core of Rudy Hanley’s leadership?
Two credit union press releases this week reminded me of the 2012 post below by Jim Blaine.
The first was the announcement that five Minnesota credit unions had loaned $31 million to Opal Holdings, a New York real estate developer and investment firm, to purchase a 17 story office tower in Bloomington, MN. “The financing included two senior secured notes on equal footing issued in June: One for $22.1 million at 5.1% for 36 years and the other for $8.1 million at 5.32% for 40 years.”
The second from Summit Credit Union stating it had completed the purchase of the $837 million Commerce State Bank “in the largest credit union acquisition of a bank in the state’s history.”
“Twilight Zone” (by Jim Blaine)
 |
Nobody said it better than Golden Earring. No, this is not the golden earring you fearfully imagine sprouting some day from your teenager’s nose or navel. It’s the late ‘70s rock group and the song is “Twilight Zone”. The question: “Steppin’ out into the twilight zone. Entering the Madhouse, fears that have grown. What will become of the moon, and stars? Where am I to go, now that I’ve gone too far?”… The answer: “You will come to know, when the bullet hits the bone! Yes, you will come to know, when the bullet hits the bone!”
 |
| The Heartland….
The Amana Colonies, 26,000 acres of picturesque Iowa farmland, sheltering seven immaculate villages, are up Highway 151 about 100 miles east of Des Moines. This is the Midwest, the Heartland. The place where the Deere and the antelope play. A warp in time through which, you may, perhaps, be able to catch a glimpse of the future – the future of the credit union movement. |
The Amanas were settled in 1855 by the Society of True Inspirationists. The sect was formed in Germany; adopted a communal structure; and had unique, idealistic, and firmly held beliefs – sound vaguely familiar? The communities were self-sufficient and prospered richly.
All things were shared. Products, such as woolens, handmade furniture, meats and wines, were sold to the outside world. A sterling reputation was built upon high standards of craftsmanship and a close attention to detail. The “Amana” name – remember that refrigerator? – became synonymous with quality and value – sound vaguely familiar?
 |
| “Why don’t you download this app…” |
The Amanas appeared to be the true Utopia, the new Eden. But trouble, eventually, always comes to Eden. At first, the Inspirationists called it “The Reorganization”, then “The Change”, and finally, “The Great Change”. It started as a murmur, became a grumble, heightened to an argument, and ended in 1932 as a split.
Eighty years of success forced onto the scaffold of change by a diminished intensity of beliefs, a cooling of religious fervor, a forgetfulness of original purpose and vision – sound vaguely familiar?
Their world, however, did not come to an end in 1932. The Amana Colonies continued on. The communal structure was abandoned; the religious and the secular were separated. Homes and personal property were divided; stock was issued in the businesses and agricultural interests.
 |
| “… destination unknown.” |
“Steppin’ out into the twilight zone. Falling down a spiral, destination unknown. What will become of the moon and the stars. Where am I to go, now that I’ve gone too far?
…You will come to know, when the bullet hits the bone. Yes, you will come to know when the bullet hits the bone.”
A timeless observation from Ed Callahan:
The disturbing word banded about this year so far is “comparability.” It came up in President Bush’s plan for solving the S&L mess-to make the NCUSIF’s accounting comparable to those other funds. . .
Comparability is also echoed in the phrase, “bank envy” the desire of some credit union people to enjoy more of the powers of banks. . .This comparability stems from a kind of inferiority complex. Those that embrace the notion that by becoming more comparable, we are somehow elevating ourselves. In fact, the opposite is true. . .
Credit unions are different. They were set up to be different and should remain different. They are different because we put the emphasis on the people we serve. Our strength is we help people.
Callahan Report, July 1989
Mark Twain Was Right: If Voting Mattered, They Wouldn’t Let Us Do It. There’s only one way to make your voice heard and it isn’t by protesting.
*************************
James Clear: “Every system is perfectly designed to get the results it gets. If you want better results, focus on your systems.”
******************************
When the coop’s democratic owner advantage is not used, it goes away. Co-ops become indistinguishable from banks. Members are just another name for customers. And leadership progressively presumes its judgments and choices are the primary basis for all decisions–even those ending the charter’s independent existence.
When democratic practices are habitually circumvented, they are difficult to restore. Without regular succession processes, the ability to find new leaders, or even generate interest in leadership is squelched. And at any moment, the sirens of self-interest can appear, canceling the credit union’s future for all members.
Democracy matters until it doesn’t. The good news is that this is a fundamental flaw that every credit union has in its own power to fix. (CUSO Magazine)
************************
From Mike Mercer:
‘The extent to which cooperation is the norm depends on the extent to which the behavior is nurtured by the institutions of a society.’ In a time when power is concentrated in the hands of individuals with lots of capital or those with the keys to redistribution of wealth, it is hard to imagine that decentralized cooperation will organically be embraced from within the citadels of existing power. Rather, the cluttered path to a more civil economy will have to be cleared by those who lead democratically structured organizations that have already been formed to foster cooperative behavior.
The notes below are from three CEO’s monthly staff updates to all employees. All report excellent financial results with above plan loan growth and strong earnings. The comments illustrate these credit union leader’s efforts to reinforce their distinctive cultures.
Thank you to all the people who expressed their gratitude with an email, a handwritten note or a thank you in the hallway. The management team was thrilled to do this for all our Partner-employees and the myCU experts. Though I want to make sure I remind you that every dollar we paid out in the stimulus check (and every other dollar WPCU spends) comes from the members – and that is why it’s so essential to take better care of members than anyone else does.
CREDIT UNION RECOGNITION: I am excited to share that WPCU has once again been named one of the healthiest employers in Ohio by Healthiest Employers®. Since 2009, Healthiest Employers has been the leading recognition program for employer wellness. Healthiest Employers has over 10,000 employers from all 50 states, including 72% of the Fortune 100.
********************************
Ms. Member came into the credit union to speak with a mortgage loan officer about how she could consolidate her debt to make ends meet each month. Ms. Member stated that she is 79 years old and still has 23 years left on her mortgage. Due to the economy, she is unable to make ends meet each month. She got very emotional and told me there are times when she eats very little to make sure all bills are paid. I told her I would take good care of her and look at all her options.
She told me she wanted to consolidate all debts, if possible, into one monthly payment. We added up all debt payments totaling $1879. She only receives $3000 total a month between social Security and retirement. After reviewing all the products Ms. Member settled on the low-cost 15yr fixed. I was able to shave eight years off her mortgage and put $970 back into her pocket each month. Not to mention we closed her loan the last day of the month therefore, she was able to skip September. So that’s an additional $909 (the new mortgage) in her pocket. I told her to go enjoy a steak dinner with her grandson, who she talked about every time we met.
Partnering with local nonprofits.
The WEOKIE Foundation is proud to be partnering with two new local nonprofit organizations. One organization called NorthCare works with the community to recover from mental illness, substance use, and trauma. They have 400 awesome employees in multiple facilities and have asked our team to assist their employees with their finances by providing education, tools, and 1:1 counseling. We kicked off the program the last week of August with a presentation to their staff and have many other future events planned.
Another group that we are working with is ReMerge, a local nonprofit offering a second chance to women battling trauma, poverty, and incarceration. We’ll be working to assist these women as they rebuild their lives in regards to their finances.
We have many exciting things planned for both nonprofit groups and look forward to helping our community with some practical tools to improve their financial lives. Both of these nonprofits are doing amazing work in our community. The Foundation is honored to be assisting with more than just monetary donations.
Connecting with a 90Year Old Former NCUA Mentor.
Kim and I were able to travel to Palm Springs last week to celebrate the 90th Birthday of a long-time mentor and friend Hap Blaisdell. Hap was an early mentor to me and is recognized as the “father” of the Student Credit Union movement while serving as Executive Assistant to then NCUA Vice Chair Elizabeth Burkhart. Hap eventually became my “first hire” as the Executive Director of the Campus Credit Union Council (CCUC) when I served as its chair. Hap has been “uncle Hap” to thousands of young credit union leaders over the years. The occasion also facilitated a new friendship for Kim and I with Georgetown Student Credit Union Alumni Peter and his wife Agnes.
See Harry Blaisdell’s role 1986 in this blog on student-run credit unions in a New York Times story.
***************************************
It was a little hot Sunday but there were clear skies as about half the Day Air team and their families came out to Day Air Ballpark for the Associate Appreciation event. The Credit Union is once again having a “best year ever” so there’s a lot to recognize and appreciate. A good time was had by all, especially by the little ones. Thank you to everyone on the team for living the mission and making a difference in the lives of our members each and every day.
Member Feedback on the Net Promoter scores of 1 through 10.
A Member note.
“When i came in to open my personal and business accounts I had a problem with my tax# and Palisha Boyd was great she was patient with me and she navigated me through the process to get my tax# straight. I was so grateful that’s what I would tell anyone who I refer to dayair. Something else I love about dayair is that you have a relationship with re-entry people trying to get their lives back after incarceration.”
Keeping in touch with state legislators.
I met with State Rep Andrea White last week. She left very impressed with all that Day Air is doing in the areas of home ownership affordability, financial literacy, and supporting the local economy. She was receptive to and will likely support several bills endorsed by credit unions, including county recorder modernization and residential PACE loans. She was interested in the history behind the public funds issue (credit unions are prohibited from accepting public funds in Ohio) and requested information that led other states to move in favor, which will be provided to her.
Supply Chain Issues.
The HVAC system in the suite level of Day Air Ballpark is operating at 50% capacity and replacement units aren’t available for 30 weeks due to supply chain issues.
In every new administration and most assuredly following economic or other national crisis (Covid, natural disasters), the need to review governmental and agency responsiveness is raised. Are changes needed?
Whether prompted by political priorities or performance shortcomings, this is how existing policies are reassessed.
Another motivator is when market competition carries over to the political arena . Firms call out their rival’s more favorable regulatory or tax status in their lobbying messaging.
In last week’s posts listed below, I noted the current absence of a policy framework at NCUA for the cooperative system. I believe this leaves the system vulnerable to priorities set by others or to purely personal agendas.
Last week the Director of the Federal Housing Finance Agency (FHFA) announced a review of the FHLB system. FHFA, created in 2008, is the successor to the five person FHLB board. This single administrator oversees the eleven FHLB’s and the conserved Fannie Mae and Freddie Mac.
The assessment of the 90-year old FHLB’s $ 1 trillion assets is to determine if its modern day activities fully match its original mission of supporting mortgage lending.
FHFA Director Thompson’s purpose is to ensure the banks “remain positioned to meet the needs of today and tomorrow.” One outside observer noted: “The home-loan banks lack a well-articulated contemporary purpose.”
Similar to credit unions, the FHLB cooperatives are exempt from corporate federal, state, and local taxation, except for local real estate tax. For individuals, all FHLB bonds are also exempt from state and local taxes.
A month earlier on July 27, columnist David Bauman wrote how the GAO was urging the OMB to study tax expenditures, a budget category that includes the credit union tax exemption. Are numerous tax exempt organizations still fulfilling their mission?
Bauman points out the Treasury Department estimated the credit union tax immunity will cost the federal government $25.3 billion between 2022 and 2031. This issue he wrote is “part of an ongoing battle between the banking and credit union industries.”
From 1981 through 1985, the credit union system was part of four national studies directed by the Regan administration. These were in response to record high inflation, unprecedented interest rates, disintermediation, financial innovation and growing concerns with institutional solvency. For example, the Penn Square Bank’s 1982 failure was the largest FDIC liquidation post WW II.
In addition to the normal inter-agency or industry councils such as the FFIEC, NASCUS and multiple studies such as CUNA’s CapitalizationCommission, NCUA’s Chair was directly assigned to these four government-wide assessments.
NCUA Chairman Callahan was one of five federal depository regulators. Chaired by Treasury Secretary Regan, all banks and S&L’s were given until June 1987 to end all federal controls on deposits.
NCUA chose not to follow the banking group’s timetable, eliminating all regulations in one new rule in May 1982. The decision effectively gave credit unions a five-year head start in the new market-facing era for financial intermediaries.
On April 15, 1983, NCUA forwarded its 71-page, five-chapter study containing four policy recommendations. This study became the foundation for the NCUSIF’s financial redesign approved by Congress in The Deficit Reduction Act signed by the President on July 18, 1984,
In Chairman Callahan’s forwarding letter to the study he noted: “For credit unions there are very clear answers to the issues raised by Congress. This is because credit unions . . .have actual experience with the options and alternatives suggested. . .Our responses are based on historical facts and current operational realities rather than academic theories or untried options. The credit union experience with insurance has been substantially different from the other agencies and our recommendations accordingly reflect this unique heritage.”
The focus was waste and inefficiency in the US Federal government. Its head, businessman J. Peter Grace, asked the members of that commission to “Be bold and work like tireless bloodhounds, don’t leave any stone unturned in your search to root out inefficiency.”
The Grace Commission Report was presented to Congress in January 1984. The Report included this observation: “NCUA Chairman Callahan is a role model for government agency executives. In one year NCUA reduced Agency staff 15% and its budget, 2.5%, while maintaining their commitment to preserving the safety and soundness of the credit union industry.” (NCUA 1983 Annual Report, page 3).
A final report was issued in November 1984. The Group’s recommendations were summarized by John Shad, Chairman of the SEC, in a later speech. He closed saying:
The lines of demarcation between the financial service industries have eroded. These activities should be regulated, and permitted to compete, according to their functions, rather than outmoded industry classifications.
NCUA and the independent cooperative system were not mentioned in the Group’s regulatory recommendations.
NCUA and credit unions thrived in this transformative period of rapid financial change and increased scrutiny by completing the institutional, regulatory and policy foundations for a separate, unique and sound cooperative system.
Without a clearly stated understanding of credit union’s role, every government study above could have drawn credit unions into their macro policy recommendations.
Instead NCUA demonstrated its ability to develop, document and implement how the deregulated cooperative system was successfully meeting its public purpose role serving members.
The cooperative system’s soundness was based of the values of self-help, self funding, and democratic volunteer leadership. The “moral hazard” concern from FDIC/FSLIC insurance of private financial ownership was absent in cooperative’s creation of “common wealth.”
Today the ability to articulate this purpose is missing. Regulations, especially the recently imposed RBC/CCULR were defended as being virtually identical to bank capital requirements. New charters are rarely issued raising the question of credit union relevance today. Whole bank purchases are routinely approved by NCUA even though this use of member savings would seem contrary to why a cooperative system was created.
Absent an awareness of cooperative history and precedents, policy pronouncements or priorities of board members may just seem like comfortable generalities.
In Harper’ July 2022 investiture address, he reflected on his year and half tenure as Chairman:
In achieving each of these things (regulatory activities), we have followed a philosophy that should guide all financial services regulators. Specifically, we were fair and forward looking; innovative, inclusive, and independent; risk focused and ready to act when needed; and engaged appropriately with stakeholders to develop effective regulation and efficient supervision. This philosophy will continue to drive our actions in the years ahead.
Is this the regulatory understanding that credit union cooperatives are seeking?
Sooner or later credit union’s special identity will be challenged by some governmental or political process.
The cooperative system navigated the multiple reviews from 1981-1985 because NCUA and credit unions earned a reputation for trust, expertise, mutual respect, shared purpose and performance. This achievement was recognized by the industry and throughout the executive and legislative branches of both state and federal government.
NCUA Chairman Callahan in the Agency’s 1984 Annual Report observed: The only threat to credit unions is the bureaucratic tendency to treat them, for convenience sake, the same as banks and savings and loans. This is a mistake, for they are made of a different fabric. It is a fabric woven tightly by thousands of volunteers, sponsoring companies, credit union organizations and NCUA-all working together. (page 3)
Should the movement aspire for anything less in this time?
Rare bird sightings are often front-page local news. Such was the lead story on July 5, 2022 in Rockland, MI: Rare Eurasian bird spotted in Michigan, first sighting in US:
A Michigan birdwatcher made a once-in-a-lifetime discovery this weekend when he spotted a bird known as a common redshank in a marsh near Detroit, a few thousand miles from the bird’s usual home.
Equally rare among the financial species is discovering a new credit union charter. The local news headline says it all: Somebody Actually Started a New Credit Union. Here’s How They Did it.
This was the second sighting of a new credit union charter this year. NCUA’s press announcement described the event as an example of credit union’s purpose: Supporting underserved communities and providing capital for community development is at the core of the credit union mission.
Few in the credit union movement are actively trying to spot new charters. CU*Answers and its CUSO challenge is one multi-year institutional effort. Two individuals have been public in their pursuit of this rare activity: Denise Wymore and NCUA Vice Chair Kyle Hauptman.
Because this event is so unusual, the joy, passion and hope embodied in a new credit union today are often overlooked.
Many persons’ deep desire to create something new to serve one’s community is a defining characteristic of American enterprise.
Entrepreneurs are central for a market economy, especially for new credit union charters that begin with limited financial capital.
On this Labor Day eve, I am reprinting this August 30 story as I believe it describes the dynamic human spirit new charters bring to the movement. Enjoy this description of Community First Fund FCU’s creation by OSCAR PERRY ABELLO:
Leo Rodriguez knew all he needed was $10,000 in startup capital to open his own hair salon, something he’d dreamt about doing since he was four years old and saw a poster of legendary hair stylist Vidal Sassoon. Twenty-nine years and countless clients later, he is more excited than ever to invest back into the only institution that believed enough in him to make that loan.
The year was 1993. Rodriguez had already spent the previous several years studying cosmetology and hair styling in New York City and London. He returned to his home city of Lancaster, Pennsylvania, where he landed a job working at a new downtown hair salon founded by local legend Paula Severino Standish. After a wildly successful year, gaining his own influential clientele, he knew it was finally time for him to go out on his own.
He just needed that $10,000. But none of the banks he went to around town were interested in loaning him the money.
“I wasn’t looking to, like, renovate a building, I just needed a couple chairs, just to get started,” Rodriguez says. “There were a lot of banks that just didn’t want to give you any money. It was very hard to start a business. Also being a minority, that was difficult.”
But as fate would have it, one day Rodriguez was catching up with his childhood friend, Daniel Betancourt, who had recently left his job in commercial banking to join a new loan fund created by another local legend, a Black civic leader named James Hyson. Now called Community First Fund, it invests in Black, Hispanic, immigrant and other entrepreneurs whom traditional financial institutions weren’t interested in serving.
Not only did Community First Fund give Rodriguez his first $10,000 loan, it also taught him the ins and outs of running a business, creating a business plan, proper accounting, and profit and loss statements. He soon repaid that $10,000 and borrowed another $35,000, then $50,000. Every time he needed to expand or renovate or move his salon to a different location, he went back to Community First Fund. During his prime — he’s 63 now and expects to semi-retire in a few years — Rodriguez had 10 stylists working in his downtown Lancaster hair salon.
“I probably borrowed over three or four hundred thousand dollars from them in total over 30 years,” Rodriguez says. “They’ve never turned me down. They were always, always there for me.”
Earlier this year, Community First Fund opened a traditional financial institution, a credit union. Why? Because after serving entrepreneurs like Rodriguez for 30 years, the fund found that the families and communities around those entrepreneurs either weren’t getting access to banking and affordable credit elsewhere or would prefer access to banking and affordable credit from a name and face they’ve come to trust.
Rodriguez was one of the first members of the new Community First Fund Credit Union. He’s moving all his personal and business accounts over.
“I’m into loyalty, man. I’m into taking care of people. it’s what I do,” Rodriguez says. “When Dan was telling me they were gonna open up this credit union, I’m like, ‘Oh, Jesus, thank God.’”
Starting up a new credit union is much rarer than it used to be. Prior to 1970, it was typical for federal regulators to charter 600-700 new credit unions every year. But since then, for multiple reasons, the number of new credit unions chartered every year began a long, slow decline. The new Community First Fund Credit Union was one of only four chartered in 2021. That’s as many new credit unions chartered over the previous five years combined. With so few new credit unions starting up, and scores closing or merging with others every year, the total number of active credit unions has declined from a high of 12,977 in 1970 to just 4,872 today.
The new Community First Fund Credit Union is also an even rarer example of something else. It’s modeled partly after Hope Credit Union, based in Jackson, Mississippi — which itself is really a replication of a model for banking that was birthed either on the South Side of Chicago or Manhattan’s Lower East Side, depending on who you ask. The model explicitly combines deposits from inside the community with deposits brought in from outside the community that might otherwise be deposited in bigger banks like those on Wall Street.
“The very fact that a new credit union is chartering is something noteworthy,” says Clifford Rosenthal, who helped establish Lower East side People’s Federal Credit Union in 1986. “And it’s especially significant in the CDFI world that this loan fund has used its resources to establish a credit union, which in the optimal scenario will operate side by side with the loan fund and hopefully achieve some real synergies.”
CDFI stands for “community development financial institution,” a U.S. Treasury designation for loan funds, credit unions, banks and venture capital funds that have a primary mission of serving low-to-moderate income, historically marginalized communities. Rosenthal helped craft the legislation passed in 1994 that created the CDFI designation as well as the CDFI Fund, an arm of the U.S. Treasury that provides grants, tax credits and other forms of support for CDFIs across the country. Community First Fund is a CDFI loan fund, and after it gets up and running, the new credit union can also seek its own separate CDFI certification.
Based on his own experience helping to start a credit union to serve a neighborhood other financial institutions were leaving behind at the time, Rosenthal expected that the new CDFI Fund would provide assistance to other groups starting either new credit unions or banks — regulated, depository institutions. But that isn’t how things turned out. Most of the CDFI Fund’s support has gone to loan funds like Community First Fund. And, with assistance from the CDFI Fund, some of those loan funds have grown very large, with assets in the billion dollar range.
“Some of the loan funds clearly have the capacity to launch a depository institution if they choose, but none of them have until now,” Rosenthal says.
Betancourt, now the CEO of Community First Fund and its credit union, says he started mulling over the idea maybe around five years ago. Clients of Community First Fund would occasionally ask if the loan fund could maybe help them or their families out with a home mortgage, or a used car loan, or alternatives to payday loans. Maybe they had tried getting those loans elsewhere and couldn’t, maybe they just wanted to deal with an institution they already knew and came to trust. At the time, Community First Fund had no way to help with those situations directly, it could only refer those requests to others.
Betancourt says he also started reading books like Lisa Servon’s “The Unbanking of America,” which gave him even more food for thought. Community First Fund also partnered with Lancaster’s Franklin & Marshall College to do a study of underbanked populations in Lancaster County.
More recent findings affirm what Betancourt was starting to grapple with. A study released last week from the Joint Economic Committee Democrats in Congress found Black and Hispanic Americans are more than twice as likely as white Americans to be unbanked or underbanked. Similarly, families at the bottom of the income distribution are more than six times as likely as families at the top of the distribution to be among the unbanked or underbanked. In 2021, 46% of Black Americans and 37% of Hispanic Americans reported that they had been denied credit or were approved for less credit than requested, compared to less than 25% of white Americans. Evidence shows that while new financial technologies show less bias than face-to-face lenders, they fail to eliminate discrimination.
The year 2020 ended up becoming the moment that provided the fuel for Betancourt’s credit union fire. Between the racial disparities laid bare by the COVID-19 pandemic, and the racial reckoning sparked by George Floyd, Breonna Taylor and other Black people killed at the hands of police, individuals and corporations were looking for something to do in response. One of the options that emerged was moving money into Black banks and credit unions.
Hope Credit Union received a $10 million deposit from Netflix and another $10 million deposit from PayPal, on the way to raising $100 million in deposits from corporations and philanthropy. CEO Bill Bynum started telling corporations his credit union actually didn’t need any more, but he could refer them to others like Betancourt who were looking to secure such big dollar corporate deposits — which Bynum started calling “transformational deposits.” They aren’t donations. These are part of the large pots of money that all corporations keep around on their balance sheets as part of managing their finances, but historically they’ve left those deposits in big banks or short-term Wall Street investments.
But Betancourt needed more than just transformational deposits to charter a new credit union. Federal regulators require depository institutions to set aside a small portion of cash as a cushion against potential losses. For banks the minimum is $1 set aside for every $11 in assets, for credit unions it’s $1 set aside for every $16 in assets. New banks typically raise that initial small portion of cash from their shareholders. New credit unions can’t do that. So Community First Fund instead launched a capital campaign, in the traditional sense of a nonprofit or church group capital campaign in which donors are asked to make multi-year pledges.
For every corporation that called about making a transformational deposit, Betancourt also approached them about making a multi-year pledge as part of Community First Fund Credit Union’s capital campaign. And of course Community First Fund went around to its long list of previous donors to see who else might be interested in contributing to the capital campaign. A pledge of $500,000 could be spread out over five years, as $100,000 a year in retained earnings for the credit union to set aside as part of its regulatory requirements.
Community First Fund might have needed more time were it not for MacKenzie Scott’s surprise $10 million donation to the nonprofit, $2 million of which it plowed into the capital campaign for the new credit union. Thanks to the capital campaign pledges, stretched out over as many as five years, the new credit union projects it will have positive net income starting from year one. That’s unusual for any new depository institution, most of which anticipate negative net income during the first few years of getting up and running.
With its target customer base, letters of intent for transformational deposits and capital campaign pledge letters, not to mention its decades of experience making 5,592 small business loans and counting, Community First Fund submitted all of that as part of its charter application to the National Credit Union Administration in December 2020. The agency approved the application in just six months — lightning speed by normal chartering standards.
Since then, Community First Fund converted its headquarters into its first credit union branch, serving the Lancaster metropolitan area’s 550,000 residents. The credit union eventually plans to open six total branches and also leverage online and mobile banking to serve Community First Fund’s entire footprint, which now includes Philadelphia and crosses state lines into Delaware and parts of New Jersey.
The loan fund will continue to do what it has been doing, providing loans to underserved business owners, 71% of whom so far have been people of color. But now it has an affiliated credit union as a way to meet those requests for home mortgages, auto loans, emergency loans and other personal loan requests from its existing borrowers and their networks.
“I’m so happy that they got the new credit union,” Rodriguez says. “It’s almost like the old way, you know, where you had a bank in the neighborhood and it knew everybody in the neighborhood and you knew the bank was there to help you. I believe every client that they ever had will open up an account there. It just makes sense.”