Over the past few weeks, community development credit unions have been in the spotlight as potential catalysts for reigniting the burnt out small business market.
The mood at the National Federation of Community Development Credit Unions is cautiously optimistic. The association's president/CEO, Cliff Rosenthal, recently hopped on the D.C. metro to ride "out to the sticks" to the Metropolitan Archives, a Washington storage facility with documents stacked nearly 30 feet high. The building was bought with the help of a loan from the SBA.
It was here that President Barack Obama, SBA Administrator Karen Mills and Treasury Secretary Tim Geithner met to share their goal of making capital even more affordable to the community development financial institutions that focus on providing credit to America's small businesses in hard-hit rural and urban areas. (See related story, p. 37).
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The government's investment in CDFI credit unions will be in the form of subordinated debt that will count as secondary capital, or regulatory net worth, for low-income credit unions. The proposed rate is 2% for the first eight years, Rosenthal said. To participate, credit unions must have both CDFI certification and low-income designation by the NCUA. Low-income credit unions currently have the authority to accept secondary capital.
"This is not grant money. For credit unions, its equity investments," Rosenthal emphasized. "All of the details have not been worked out. The administration [and others] is still working things through, which is important."
Business lending still remains a nonprimary activity for most CDFI credit unions, Rosenthal said, adding he hopes the secondary capital initiative will not only boost loans to small business but expand all types of lending.
"That's an area that's still fuzzy," Rosenthal said. "Our hope is that this capital will bulk up the balance sheets of our credit unions."
There are nearly 150 credit unions that are certified CDFIs, and the great majority of those are federation members, Rosenthal said. He anticipates that many more credit unions will seek certification now bolstered by an expected expedited review process from the Treasury Department's CDFI Fund. Since its founding in 1994, the fund has invested nearly $1 billion in CDFIs. In addition to credit unions, banks loan funds and venture capital funds can fall in the community development financial institution category.
The federation said the Obama administration has provided "tremendous momentum and support" to the CDFI movement, more than doubling its appropriation request for the CDFI Fund and providing an additional $100 million in American Recovery and Reinvestment Act stimulus funding earlier this year. As a result, the federation said it is adamant in its resolve to expand credit union participation in the CDFI program. Rosenthal said since the announcement came from the president, there's some weight behind the secondary capital measure.
"We've been told that nothing is set in stone yet. But the fact that the president announced it shows some commitment."
In addition to Rosenthal, other credit union leaders at the President's gathering at the storage facility were Bill Bynum, president/CEO of Hope Community Credit Union/Enterprise Corp. of the Delta and chairman of the Community Development Financial Institutions Advisory Board of the U.S. Treasury Department. CUNA President/CEO Dan Mica and NAFCU President/CEO Fred Becker.
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