X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.

Sarah Snell Cooke’s article, “Difficulties in CU Start-ups Lead to Lack of Interest in New Charters, Economist Says”, in the Aug.24 issue highlighted some of the difficulties in starting new credit unions. I’d like to amplify the picture that her article presented. For more than a decade, many -if not most- of the new credit union charters have been issued to serve low-income communities. While other trade organizations and regulators (other than NCUA) have reduced their attention to this area, the National Federation of CDCUS has been continuously and intensively involved in assisting start-ups since the mid-1980s. Even though assisting pre-chartered groups does not cover our costs, the Federation’s board of directors believes that keeping the vision of community empowerment alive through organizing credit unions is vital to our mission. The Federation wrote a 400-page manual on the subject(available through our Web site, www.cdcu.coop), which we have revised as regulations have changed. We field as many as several hundred organizing inquiries in any given year. I’d like to share with you some of the lessons we’ve learned. Many are called, but few are chosen. We receive as many as 300 inquiries annually from community groups who believe that a CDCU would help revitalize their communities. We try to fully inform prospective organizers of the massive amount of work involved in chartering a new credit union. Our hefty manual persuades many to abandon the idea, or associate with an existing credit union. If after studying the manual, they wish to proceed, we offer our services to assist them. In fact, only a small portion of our initial inquirers take the next steps. Start-up Capital: Raise it, or Else As we inform prospective organizing groups, NCUA regulations nowhere mandate a specific amount of start-up capital a new credit union must have. (In contrast, starting a bank typically requires $5 – $10 million in start-up equity capital.) Rather, credit union regulations require that a prospective credit union must be “economically viable,” as demonstrated in its pro forma financial statements. What does this mean in practice? We advise groups that unless they can raise $250 to $500,000 in start-up grants or donations -not deposits, which have become much more readily obtainable in recent years, but grants and donations – they will likely spend their first few years warding off alligators while they try to drain the swamp. New enterprises, including banks, typically lose money in their first several years. Few, if any, new credit unions can become profitable (unless they are limited-service, volunteer-run operations) in their first two or three years. Like banks, they need a capital cushion to help them survive early operating and credit losses. Surviving PCA When H.R. 1151 was being drafted, the Federation successfully argued for a more lenient Prompt Corrective Action (PCA) standard for small, young credit unions. Nonetheless, PCA has greatly decreased the margin of error for start-up credit unions. A number of these credit unions have faced intense regulatory pressure, far greater than a decade ago. We believe that this environment, shaped by PCA, has directly or indirectly been responsible for the distressingly premature demise of a number of promising new credit unions in recent years. Partnership is Fundamental Just as crucial to a successful start-up as capital is management capability. The Federation has become convinced that start-ups incubated by existing credit unions are the best hope for effectively launching new credit unions. The “gold standard” is the partnership between State Employees’ CU of North Carolina and Latino Community CU in Durham, N.C.: State Employees’, under Jim Blaine’s leadership, provided immensely valuable support to the Latino Community Credit Union, essentially relieving the start-up of most of its back-office operations and leaving the founders free to serve their largely immigrant membership, an area in which they had enormous expertise and capability. Over its first few years, Latino Community CU has grown to serve tens of thousands of members – a rate far beyond that of any low-income start-up institution we know. As the Federation consults with start-up groups, we urge them to consider the State Employees’/Latino Community credit union model. Of course, this assumes that a start-up can find a willing partner credit union – not always an easy task. While the Federation’s lessons for start-ups are laden with caveats, we try to balance the difficulties with the potential rewards. The best-practice start-ups of the last two decades have become spectacularly successful, gathering tens of millions of dollars in deposits and attracting tens of thousands of members in low-income, underserved communities. As we tell groups all the time, in the fields of community economic development and banking alike, there are no better or more powerful models of community financial empowerment than credit unions. Cliff Rosenthal Executive Director National Federation of Community Development CUs New York

Complete your profile to continue reading and get FREE access to CUTimes.com, part of your ALM digital membership.

Your access to unlimited CUTimes.com content isn’t changing.
Once you are an ALM digital member, you’ll receive:

  • Critical CUTimes.com information including comprehensive product and service provider listings via the Marketplace Directory, CU Careers, resources from industry leaders, webcasts, and breaking news, analysis and more with our informative Newsletters.
  • Exclusive discounts on ALM and CU Times events.
  • Access to other award-winning ALM websites including Law.com and GlobeSt.com.

Already have an account?

 

Credit Union Times

Join Credit Union Times

Don’t miss crucial strategic and tactical information necessary to run your institution and better serve your members. Join Credit Union Times now!

  • Free unlimited access to Credit Union Times' trusted and independent team of experts for extensive industry news, conference coverage, people features, statistical analysis, and regulation and technology updates.
  • Exclusive discounts on ALM and Credit Union Times events.
  • Access to other award-winning ALM websites including TreasuryandRisk.com and Law.com.

Already have an account? Sign In Now
Join Credit Union Times
Live Chat

Copyright © 2022 ALM Media Properties, LLC. All Rights Reserved.