Credit Unions Seize Low-Income Outreach Opportunities
The long, difficult economic recovery from the Great Recession is leading more credit unions to return to their roots of serving the underserved. All financial institutions, it seems, are in constant competition to attract the shrinking ranks of the middle class and the growing upper middle class, making it even more difficult for many small and midsize credit unions to compete against the “convenience factor” of big and super-regional banks.
Because most financial institutions are essentially ignoring the low- to moderate-income consumer market, credit unions are seeing opportunities for growth. Experts explained why and how they are expanding their outreach to members and prospective members with low to moderate means through new products and services by leveraging grants, community partnerships and secondary capital.
It's no accident that more than one-third of credit unions now have a low-income designation.
“In the past few years, we’ve seen an increase in the number of low-income designated credit unions,” Cathi Kim, associate director of the Community Development Investment Program at the National Federation of Community Development Credit Unions in New York City, said.
In years past, Kim said the average asset size of a low-income designated credit union was nearly $3 million. Today, low-income designated credit unions can average in asset size from about $200 million to $7 billion.
About 80 credit unions use the National Federation of Community Development Credit Unions’ secondary capital product, commonly known as subordinated debt, one of the first national secondary capital loan programs in the nation.
“Credit unions that have recently received a low-income designation are strategically building out their community development and business plans to more effectively serve people of modest means,” Kim said.
For example, large asset credit unions such as the $7.8 billion Suncoast Credit union in Tampa, Fla., is using the Federation's secondary capital product to expand affordable housing in the Sunshine state, where homeless rates and home prices are rising. More than 67% of Suncoast's members live in low-income designated areas.
Suncoast's first-time homebuyer mortgage product features expanded underwriting criteria, which allow for a lower credit score, higher LTV ratios and the use of alternative credit history. The credit union also does not require mortgage insurance.
Smaller-asset-size cooperatives such as the $103 million Point West Credit Union have tapped the Federation's secondary capital to support financial services and inclusion initiatives for local immigrant communities. The Portland, Ore.-based credit union has also used its secondary capital to fund affordable non-prime auto loan products.
Although organizations such as the Pew Research Center projects the U.S. immigration population will continue to climb, it is uncertain how the policies of President-elect Donald Trump will change legal immigration in the long run. For now, however, credit unions are reaching out to the growing markets of documented immigrants.
The Seattle metro area is one of the fastest growing immigrant regions in the nation, with more than 631,000 immigrants living in the metropolitan area. Since 1990, its immigrant population has grown by 285%, according to the National Immigration Forum. Today, one in five Seattle residents was born in a foreign nation.
More than 22,000 legal permanent residents in Seattle are eligible to naturalize, but more than half of them are low income.
The problem is that many of them do not naturalize because they can't afford the individual $680 application fee, according to the Seattle Office of Immigrant and Refugee Affairs. The OIRA assists immigrants with the naturalization process.
Recalling how his family struggled while living in poverty after emigrating from Peru when he was only four, Richard Romero, president/CEO of the $704 million Seattle Metropolitan Credit Union, understood the financial challenges of low-income immigrants. He became a U.S. citizen more than 25 years ago.
“On the surface, it doesn't sound like a whole lot of money, but when you have a family of two, three or four, then you are talking upwards of close to $3,000,” Romero said.
So Seattle Metro partnered with the OFRA to provide the financial resources for low-income immigrants.
The credit union is one of the few financial institutions in the area that is offering citizenship loans for individuals and families with no application fee, no income verification requirements and a no-interest, fee-based option.
“I have to imagine that a financial institution that provides someone to become a U.S. citizen by lending them money, as opposed to not being able to get the money or by getting abused by a payday lender or a check cashing place to get the money, that we’re building loyalty with a group of people,” Romero explained.
For the $457 million Frankenmuth Credit Union, things are going to get busy over the next three years.
The Frankenmuth, Mich.-based credit union will be rolling out initiatives in 2017 to reach low- to moderate-income consumers who want to own a home while also providing them with financial education to help them address the challenges of managing money. FCU also plans to partner with community organizations and offer loans to entrepreneurs to reduce fresh food deserts that disproportionally affect people of modest means.
These initiatives enabled FCU to win $3.4 million in grant funds from the Community Development Financial Institution fund, which is administered through the U.S. Treasury.
In addition to FCU, more than 20 other credit unions in 17 states received $33.6 million in CDFI grants that will be used to reach members and prospective members with low- to moderate-income levels by allowing them to offer small dollar loans for minority consumers, affordable used car loans and small business loans for affordable housing developers.
FCU received the largest grant amount and was the only credit union in the nation to benefit from the CDFI's Healthy Foods Financing Initiative, which provides loan money to entrepreneurs or existing businesses, allowing them to bring fresh foods to low- to moderate-income markets.
Greg Dietrich, FCU's marketing and community development coordinator, noted what helped the credit union secure these grants were its established partnerships with community organizations that can help improve the success of the credit union's new mortgage and business products. These community organizations are willing to provide their services for free, Dietrich said, because it helps them secure additional state or federal grant funding.
About $1.4 million in grant funds will support nearly $20 million of FCU's lending capital over the next three years and launch a new product called MIhome, which will offer affordable housing for credit-challenged Michigan families.
According to FCU, the new mortgage product will offer unprecedented flexibility, including up to 110% LTV, and will waive the borrower's requirement for private mortgage insurance.
Frankenmuth is located between Saginaw and Flint. FCU serves more than 35,000 members, and operates 16 branches and four student branches throughout its region, where low- to moderate-income families live in suburban and rural communities, and work in the manufacturing, retail and services industries.
The Frankenmuth area was hit hard by the Great Recession. Through its research, FCU found 55% of homeowners in 2010 had delinquent mortgages because they lost a job, while 21% blamed delinquent mortgages on their overextended credit. In 2015, only 38% of homeowners blamed mortgage delinquency on the loss of a job while 21% of homeowners continued to blame overextended credit for mortgage delinquency.
“What that is telling us is that people are working and earning an income, but it's just that they’re still overextended on their credit,” Dietrich said. “That's the market we think this [MIhome mortgage product] will fit well with.”
To qualify for the MIhome mortgage, consumers will be required to go through pre-purchasing financial counseling offered at no cost from GreenPath Financial Wellness, a non-profit organization originally opened by the Michigan Credit Union League as a budgeting and financial education service.
“We know that financial counseling works because it can reduce delinquencies for first-time homebuyers by 29%,” Dietrich said. “Let's be honest, we hope to see an increase in our membership and deposits. We also hope to see an increase in promoting financial literacy because I think if people understand their finances better, the more likely they are to use our products. Then, finally, we want to show that value-oriented partnerships can foster effective economic development.”
FCU also plans to tap a partnership with a small business development center at a local college to launch its MIGrow product, a revolving loan fund that will provide financing for entrepreneurs and/or existing businesses to open farmers markets or grocery stores in so-called food deserts. The United States Department of Agriculture designated the 59 food desert census tract investment area, which includes five counties that FCU serves.
The credit union is investing $20 million of its own funds along with the $2 million CDFI grant to support the MIGrow product. The loans will offer low, fixed rates from 1% APR with an LTV of 100% and very flexible underwriting criteria.
“There are swaths of areas where people have no access to fresh food,” Dietrich explained. “That means low-income people who don't have a car or access to public transportation may live five miles away or more from a grocery store. Places like the city of Saginaw and the city of Flint are seeing grocery stores leave those markets, which leaves those people without access to fresh foods.”
The creation of new jobs is expected to be another benefit for the region if the MIGrow product succeeds.