Category: Cooperative Design

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:

A Credit Union in the Neighborhood:  It Just Makes Sense

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.”

A Personal Connection

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.”

Loyalty and a Credit Union

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.’”

New Credit Unions Much Rarer

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.

CDFI Plus a Credit Union

“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.

Five Years Planning

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.

Social Change with Transformational Deposits

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.

Finding Capital

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.

A Wealthy Donor

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.

A Credit Union in the Neighborhood: “It Just Makes Sense”

“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.”

 

 

In the Gettysburg Address Lincoln summarized the ever-present challenge of keeping alive the spirit of a  revolution’s  original intent.

Dr. Eva Braun’s essay describes Lincoln’s grasp of the declining motivation of later followers in his Gettysburg speech:

From Dr. Braun’s  analysis: Lincoln begins, “Four score and seven years ago.” “Four score,” With its long oh’s, sounds a more mournful, solemn note than could the words “eighty-seven years,” but the choice of the phrase is not only a matter of sound; it also carries a special meaning. It is the language of the Bible, as in Psalm 90:10:

The days of our years are threescore years and ten; and if by reason of strength they be fourscore years, yet is their strength labour and sorrow; for it is soon cut off, and we fly away.

With the psalm in mind the phrase implies: just beyond the memory of anyone now alive, too long ago for living memory.

Now, we know that from youth on Lincoln was concerned with a peculiarly American danger: the death of sound political passion. In his speech on “The Perpetuation of our Political Institutions,” of 1838, Lincoln drew a clear parallel with the early community of Christians, whose danger lay in the fact that the generation of disciples and eye-witnesses had been followed by a second generation which had only heard by word of mouth, by a third which had only read of Christ, and by a fourth which had begun to forget.

So in the American community; the scenes of the revolution, he said, “cannot be so universally known, nor so vividly felt, as they were by the generation just gone to rest.”  The men who had seen the Revolution, who were its “living history” are now gone.

“Beginning to Forget”  A Peculiarly American Habit

Remembering the contributions of earlier credit union founders is vital. Last week Jim Blaine described the legacy of Ralph Swoboda. As CUNA General Counsel and then President, he helped transform the movement through two system-wide challenges: business modernization and deregulation.

While leading NCUA in the early 1980’s, Ed Callahan and Bucky Sebastian in their presentations promoting deregulation would cite the original practice of common bond going back to the early years of state chartering.   They pointed out that some of the first fields of membership were often city-wide.  The intent was to be inclusive, not limiting,  for those who sought a cooperative financial choice.

But this reference to the spirit of the cooperative founders, where purpose surmounted existential challenges, can  dissipate as the “living history” passes on.

We cannot resurrect those who have left the playing field. But we can certainly rekindle passion for member advocacy in all its cooperative possibilities.   And in the process keep the “movement” alive.

The Current Challenge

When a motivated popular movement aligns itself with another cause to promote its  agenda, the hybrid effort can pervert its primary purpose.

An example is the tying of Christian nationalism with white nationalism.  Christianity becomes less about faith and more about political power.

A parallel confluence of activity is occurring in credit unions.  Since the imposition of PCA in 1998 through the Credit Union Membership Access Act, NCUA has increasingly equated credit union oversight  with banking practice.

The latest effort is the imposition of RBC/CCULR completely incorporating the full bank regulation in its rule. This embrace of banking models, a frequent standard cited by Chairman Harper, also includes the promotion of external capital.  It neglects the unique capabilities of cooperative design.

Collaborative institutions include the CLF and NCUSIF, both under NCUA management. CLF’s role is moribund.  As for the NCUSIF, NCUA has converted the insurer into an open-ended funding draw for the agency’s daily operations.

Another example of cooperative diminution is NCUA’s lockdown of the corporate network, especially its services for smaller credit unions.

Credit unions have read the regulatory signals.  “Treat us like banks, and we will follow that industry’s lead.”  Mergers, not collaboration, become a priority growth strategy.  Bank purchases, paying premiums to bank owners with credit union member capital, is promoted as an immediate expansion opportunity. In other words, “If we can’t beat ‘em, let’s just buy ‘em.”

The regulators are silent. As long as credit unions’ financials mirror bank’s, everything is OK.  Mergers, bank purchases and novel (SPAC) growth tactics are just the free market at work. Even when a CEO and Chair transfer $10 million of members’ funds to their control following a merger.

Let me be clear that these are not the actions of the majority of credit unions, but they  dominate the headlines.

Losing Faith

The credit union system’s unique capacities are simplified to  safety and soundness, defined by ROA and net worth with a dollop of growth thrown in.  Purpose becomes dressed as creative public relations campaigns and promotional branding efforts.

An example of this waywardness is VyStar Credit Union.  A member forwarded their most recent assessment of its recent flawed digital channel conversion:

In regards to VyStar, we have decided to move our account to another credit union.

Facebook posts (https://www.facebook.com/VyStarCU) have certainly slowed down.  I do not know if it is due to apathy or is X number of people who have just gone to other financial  institutions.

Login online has greatly improved.  There is little to no wait time.

They updated the mobile app on June 26th.  Many people had difficulty getting on the app, especially the android version.  

Getting a hold of someone in customer service is very difficult at best.  Very long wait times on the phone (in excess of two hours).  You can log into chat, I had almost an hour wait the other day.  While they have now added internal transfers, you still cannot do member to member (linked account) transfers (like to other family members).  You can only transfer funds internally within your savings, checking, MMA, etc.  

You still cannot see any account history prior to 05/13/2020 which was the day they shut down the system they used prior to the current one.  

You no longer get copies of your checks written online as before.  

I see no “Improvements” or new features in the new system whatsoever.  The new bill pay is cumbersome and not user friendly.  I filled in the bill payees into our new credit union with ease, it is almost exactly what  we used to have at VyStar before this poor unsatisfactory installation.  

Lastly, and most disappointingly, is the fact that the CEO has still not addressed the members directly.  I know of no statement to the press since about May 23rd.

I have no idea how many members have left and I am not sure we will ever know.  I hate leaving but, I have lost faith in them.

A Two-Way Street

The fundamental flaw in VyStar’s strategy is not a bungled conversion.  Many conversions have temporary problems.   Rather it is VyStar’s strategy that credit union membership is a one-way street.   Members just transact and are viewed as customers, not owners.  There is no respect for members’ “faith” which is the primary foundation for any credit union’s long-term success.

A two-way street means the owner’s role is understood, honored and continually enhanced.  The primary means  is seeking to expand the multiple ways value is created for members, especially those who have the least or know the least.

A Member Advocate

The credit union model is foremost an advocate for members’ well-being.   That was the original intent.

The vibe at VyStar is all about the institution and its size. This is a sentence from an April 2022 merger announcement before the digital debacle:  VyStar, which has more than 800,000 members and over $12 billion in assets, will remain the 14th-largest credit union in the country by asset size.

When the member relationship is always front and center, the owners return much more than transactions.  They give their loyalty, patience when necessary, and word of mouth endorsements with friends and family.

That was how the credit union movement achieved their current $2.3 trillion position while serving the fourth or fifth generation of members.   Members’ contributions are paid forward to benefit future members.

For the founding members’ spirit of purpose to prevail, it must  be constantly renewed in the words and actions of those leading cooperative charters now.