Ailing CDCUs Stir Debate Over Future Viability
Ever since last fall, the industry debate over the propriety of the public campaigns of small, deeply troubled inner-city credit unions to raise capital among other CUs and the citizenry has generated lively and sometimes strident rhetoric.
Joined by their backers, the ailing CUs themselves–many faith-based and reliant on foundation grants–maintain they are waging media campaigns to keep the doors open well before an NCUA liquidation or merger. In their view, they can survive and their services are vital in the community.
And they contend their financial bind is not entirely of their own doing.
But the critics, many online, argue the CUs, particularly those with $1 million in assets or less, are not viable in the long run, have performed poorly, have made risky loans and are undeserving of further capital funding.
"I don’t dispute it is a very sad story, but this is a very difficult economic period for these credit unions working very hard to serve their low-income members. And besides, isn’t this what the people helping people message is all about?" asked Joy Cousminer, president/CEO of the $15 million Bethex FCU of New York and one of the crusaders in the national drive to protect ailing CDCUs.
Echoing Cousminer, Clifford Rosenthal, president/CEO of the National Federation of Community Development Credit Unions, said he finds the criticism of the campaigns, particularly two involving the $6.7 million Mission SF FCU of San Francisco and the $3.6 million Toledo Urban CU, unfair and jarring.
"Several decades ago, especially before there was share insurance, veterans of the credit union movement tell me that there was a greater sense of solidarity, that credit unions often helped each other out," observed Rosenthal, arguing that in the past such a request by the ailing CUs would not have been so unusual.
The fact is, he said, these CUs are located in communities experiencing horrendous problems of unemployment, foreclosure and the shredding of social safety nets. The damage to these CUs left to serve residents "has been severe, leaving some in a desperate situation."
"Add to this the collapse of the corporate system," said Rosenthal. He maintained that while all CUs pay the price, "it falls disproportionately hard on low-income credit unions, which on average have thinner capital cushions than others that serve more prosperous communities."
These CDCUs "feel a sense of frustration and outrage. The corporate catastrophe was not of their doing, they believe. They are paying the price for the bad judgments and misbehavior of the larger players in the credit union movement."
But Charles Bruen, president/CEO of the $826 million First Entertainment CU of Hollywood, Calif., and who runs a daily blog, contends that many of the CUs below $1 million should be looking for merger partners and should not be extending real estate loans.
"There is too much concentration risk," maintained Bruen. He added that industry and public donations directed to CUs like Mission and Toledo Urban are "going down a black hole." These CUs have already proved by their poor performance that they are unable to make safe loans, he said.
They shouldn’t be requesting more money to do more of the same, declared Bruen. "These credit unions might be better served by simply making grants to those in need rather than funding loans that won’t be repaid."
Apart from that view, there is the problem of image when a CU like Mission or Toledo Urban describes its poor financial condition in the press, raising potential public alarm about the safety and soundness of other CUs in the market.
However, Paul Mercer, president/CEO of the Ohio Credit Union League and a supporter of Toledo Urban in its financial recovery, told Credit Union Times this has not been an issue in northwest Ohio where the credit unions are healthy.
While Toledo Urban’s low-key capital drive has not been a problem, in California some CEOs have criticized the Mission SF fundraising efforts carried out in the media.
But one vocal California supporter, Barry Jolette, president/CEO of the $595 million San Mateo CU and chair of the World Council of Credit Unions, said his CU seeks "to assist those small credit unions where we know the history and management and where we feel we can make a difference." But contributions to ailing CUs is an individual decision, he said.
On a point challenged by Bruen, Jolette also argues that state leagues can also extend a helping hand, but it is up to each individual CU to manage its own affairs.
Diana Dykstra, president/CEO of the California/Nevada Credit Union League, said her trade group has not been directly involved in efforts of Mission to chart its destiny. But the trade group, she said, "is aware of many credit unions that have considered innovative solutions to best serve members during today’s difficult economic times."
In Ohio, Suzette Cowell, treasurer and CEO of Toledo Urban, said she welcomes the help she has already received from the Ohio League. "We are planning another meeting next week when we hope to make some announcements."
Last month Cowell was quoted in a Toledo Blade newspaper article that no donation was too small to aid the CU, which she said has seen its reserves decline as more people became delinquent on their loans.
But Bruen, in an online posting last week, again questioned the lending practices of the ailing CDCUs. "Toledo Urban has a delinquency ratio of nearly 10%, and their provision account is a very low 26%," noted Bruen.
Also looking at Toledo Urban, consultant Thomas A. Glatt Jr., head of his own North Carolina firm, Glatt Consulting LLC, agrees with Bruen that the Ohio CU has extended too many loans beyond its circumstances. "And this seems to be the opposite of economic empowerment."
"The expense and efficiency ratios for this credit union are way off peer, suggesting inefficient business practices and too much overhead given the size and resources of the credit union," said Glatt, adding, "Again, a situation in contrast to the profitable and financially sound expectations defined in its mission."
"The real question for me is whether the strategy of seeking donations to prop up the capital position of the credit union is the right one," said Glatt. "If I am a board member of this credit union, I have to ask myself what the member-owners deserve, and what is in their best interests. The mission is a good one, but this credit union isn't executing it, so alternatives must be defined and evaluated in the context of the mission."
Cousminer of Bethex in New York acknowledged she has been working hard through her own ad hoc CU-aid organization, "We Save," for months to write letters and organize the fundraising for CUs like Toledo Urban. Two other ailing CUs on the list of conducting public or private campaigns are St. James AME FCU in Newark, N.J., and Renaissance Community Development CU of Somerset, N.J.
"I see nothing wrong with calling for help and asking for donations," concluded Cousminer. "Hasn’t NCUA done the same?"