6 Ways Credit Unions Use CDFI Grants

Twenty-five years in, the Treasury Department program’s roster is dominated by member-owned cooperative financial institutions, who find a precise mission fit.

 
 

Top-Level Takeaways

  • Forty-eight credit unions got $34.5 million of the $202.2 million awarded in the most recent round.
  • The grants underpin payday and pay-here alternatives, small business lending, and growing community partnerships.
  • Trump budget eliminates funding for CDFI grants, a repeat of past two years. Congress rejected both efforts.

Pablo DeFilippi, Senior Vice President of Membership and Network Engagement, Inclusiv

The Community Development Financial Institutions Fund is once again on the chopping block. 

The Trump administration’s budget for 2020 would eliminate funds for the grants, which are used to encourage investment in low- and moderate-income areas deemed underserved and lacking access to traditional financing.

Congress created the CDFI program in 1994 to help generate economic growth and opportunity in distressed communities around the country. President Trump’s 2018 and 2019 budgets also called for no funding for grants, but that was beaten back by lawmakers.

The CDFI Coalition offers an online toolkit for advocating for the fund, and attendees at the CDFI Roundtable on March 11 at the CUNA GAC, coincidentally held moments after the budget proposal was released, were urged to tell their story to lawmakers while Hiking the Hill and beyond.

Benefits Of CDFI Certification

Here are a few of the benefits possible for credit unions that earn CDFI certification:

  • Financial Assistance and Technical Assistance annual awards (up to $2 million and $125,000 respectively).
  • Below-market cost deposits from institutions in the Bank Enterprise Award Program.
  • The CDFI Fund Community Investment Impact System to track and demonstrate impact.
  • The FHLB’s community development and Bureau of Indian Affairs (BIA) loan guarantee programs, the CDFI Bond Guarantee Program, and the New Market Tax Credits (NMTC) program. The latter helps finance large commercial or affordable housing developments in low income communities.
  • The CDFI Capacity Building Initiative for training and consulting in specialized areas such as small business lending, microfinance, and financing healthy foods options.
  • Exemption from the NCUA MBL cap.

The CDFI Fund combines federal dollars with private capital to empower initiatives at financial institutions work to improve social or economic conditions in target markets that typically lack access to traditional financing.

They also must demonstrate that at least 60% of their financial services activities are directed to low-income consumers and financially underserved populations such as African-Americans, Latinos, and Native Americans.

And they must take a market-based approach to all this. 

Sound familiar? A lot of them are credit unions.

In the most recent round of Treasury Department funding, $250 million in CDFI funding was approved. This year, the CDFI Coalition is calling for $300 million. 

Just more than $200 million in grants were actually awarded in 2018, including $34.5 million to 48 credit unions, says Pablo DeFilippi, senior vice president of membership and network engagement at Inclusiv, which serves as the only credit union organization contractor for the CDFI Fund.

Federally insured, low-income credit unions that want to become certified Community Development Financial Institutions can apply to use the NCUA’s streamlined qualification process. The regulator says 50 credit unions so far have been certified this way.

DeFilippi says more than 300 credit unions have been certified and represent about 30% of the CDFI roster — the largest single segment — which also includes regulated institutions such as community development banks and non-regulated entities such as loan and venture capital funds.

Some Tips From The Field

Grant-winning credit unions share these best practices from their CDFI work:

  • Consider outside specialists for the grant applications. They can be time-consuming and complicated, especially to the uninitiated.
  • Create an internal task force from across the credit union to execute the project before, during, and after the grant application if it’s awarded.
  • Ensure you have the systems, people, and expertise in place to manage the risks, especially in potential loan losses.
  • Track the results. Measuring impact and success are important.
  • Share success stories that demonstrate how the credit union helped in life-changing ways. They inspire more.
  • Know you’re making a difference in the lives of people who will be positively affected by your loans and services.

Roughly half of all CDFI credit unions are over $100 million in assets, DeFilippi says. The largest CDFI is Suncoast Credit Union ($9.3B, Tampa, FL).

The CDFI Fund awards financial assistance (FA) and technical assistance (TA) grants of up to $2 million and $125,000 respectively. They provide secondary capital and other capacity building for services that touch on auto, payday, and business lending, financial education and debt counseling, community development, and even disaster recovery.

They also make money. “CDFI credit unions have an ROA comparable and often-times better than mainstream credit unions, despite serving more-challenging markets,” says DeFilippi, whose organization changed its name last year from the National Federation of Community Development Credit Unions.

Meeting the needs of low- and moderate-income consumers as well as financially underserved communities is not only a market opportunity, it’s a mandate, DeFilippi says.

“These are all demographics that can be served in a way that’s both responsible and sustainable,” the Inclusiv SVP says. “Bluntly put, mission without margin is simply altruism, and margin without mission makes us no different than predatory lenders.”

Here’s how six credit unions of diverse size and membership are using their CDFI designation and grants in ways they chose to fit their purpose and mission:

HopeSouth’s CDFI Grants Build Lending And Leadership

Faye Crocker, CEO, HopeSouth Federal Credit Union

HopeSouth Federal Credit Union ($20.1M, Abbeville, SC, based in a small town in rural western South Carolina near the Savannah River, has applied for three CDFI grants and received two since earning its certification in 2013. 

CEO Faye Crocker, who’s been with the credit union for 30 years, has used the grants to hire an additional loan officer and bolster loan loss reserves to support increased risk-based lending in the community, which has seen its fortunes rise and fall with the textile and agriculture industries.

HopeSouth, then known as Greater Abbeville FCU, grew auto lending by $2 million, or 39.8%, personal emergency loans by $1.3 million, or 74.3%, and membership by 831, or 32.2%, from 2013 to 2016.

HopeSouth also has consistently been more profitable than most credit unions, including posting an ROA of 1.55% in the fourth quarter of 2018, compared with 0.54% for the average $20 million-$50 million credit union and 0.92% for all credit unions nationally.

Now, the 3,529-member financial cooperative is planning for its future, using a 2018 Leadership Development grant to pay for consulting help on a leadership development and succession plan.

“These steps are very important to making sure HopeSouth remains relevant and available to our low-income, underserved market,” Crocker says.

One Detroit Uses CDFI Grants To Drive Refis, Attract Deposits 

Hank Hubbard, CEO, One Detroit Credit Union

One Detroit Credit Union ($36.7M, Detroit, MI) has received $6.8 million in CDFI grants since first applying (unsuccessfully) in the 2008 round, says CEO Hank Hubbard. The financial assistance grants have been primarily used for capacity building rather than specific programs, providing the capital and loan loss allowances for such programs as the community development credit union’s Refi My Ride initiative.

“We cut rates in half from other lenders and help people get out of predatory loans,” Hubbard says. The loans go to borrowers with average credit scores of 599 and can go up to 140% loan-to-value, “which is unheard of otherwise,” Hubbard says. He says the loans have saved members more than $3.2 million in interest so far.

Click here to see the Refi My Ride marketing poster from One Detroit Credit Union. CDFI grant funds help One Detroit with reserves needed to offer its Refi My Ride loan.

The CDFI certification also has given One Detroit credibility with municipalities and other CDFI bank and loan funds to partner in programs that provide zero percent home improvement loans to help rebuild the Motor City, Hubbard says.

“The grants basically give us the confidence to take on more risk than me otherwise do,” says Hubbard, who took over what was then Communicating Arts Credit Union in 1991. And it’s not just been loans. “We opened a branch in a very low-income part of our city, knowing the grant funds were there if we needed them,” Hubbard says.

Trailhead Eyes Community, Business Development With CDFI Boost

Jim McCarthy, President and CEO, Trailhead Federal Credit Union

Trailhead Federal Credit Union ($118.6M, Portland, OR) is one-for-one in CDFI grant bids, and is using the $1.2 million it got in 2016 for a three-year effort aimed at community and small business development.

Some of the money will go to loan loss reserves, retained earnings, and administrative costs, while the rest, says president and CEO Jim McCarthy, will address this dual focus: helping meet the needs of underserved businesses and entrepreneurs in their Portland FOM, and for a debt consolidation program that will help underserved community members reduce their debt and meet short-term credit needs.

Grant money also can be used to help pay for the process itself, and McCarthy recommends using third-party experts so the credit union can focus on the end result and leave the required research and business plan, data collection and interpretation to the experts.

“We learned that, for a credit union of our size, working with outside specialists experienced with CDFI grant applications allowed us continue to focus on our daily operations while being able to submit a winning application,” McCarthy says.

Guardians Builds Service Partnerships, Lending With CDFI Funds

Heather Landstrom, Community Development Manager, Guardians Credit Union

Guardians Credit Union ($165.5M, West Palm Beach, FL) also got the first grant it applied for, just under $1.5 million after earning CDFI certification in 2016. 

Heather Landstrom, the South Florida credit union’s community development manager, says most of that funding is for loans aimed at freeing members from payday lenders and buy here/pay here auto lots. But not all.

“One of the more creative and effective things we’ve done is partner with 211 of Palm Beaches and Treasure Coast,” Landstrom says. That’s a 24-hour help line for crisis intervention, suicide prevention, and referrals to community services. 

“We conduct ongoing training with their call center staff so they can identify financial distress as an unspoken component of many other types of calls,” Landstrom says. Those callers can then be referred to Guardians for financial counseling, education, and alternatives to predatory lenders.

The funding also helps pay for Guardian’s KnowMore seminar series that’s presented monthly at the main branch and in the branches that serve the Low Income Target Markets specified in its CDFI Fund grant.

Along with deepening relationships with other community services providers, Landstrom says, the credit union can point to quantifiable results from the three-year CDFI grant. She says Guardian’s on track to achieve its goal of helping 2,000 people avoid payday lenders and 900 avoid pay-here lots, while averaging 32 referrals a month from the 211 line, 12 financial counseling appointments per month, and nine seminars in branches, SEGs, and the greater community.

“You’re probably already doing community development within your field of membership and community. It’s just who we are as credit unions,” Landstrom says. “Take advantage of certification and do even more.”

You’re probably already doing community development within your field of membership and community. It’s just who we are as credit unions. Take advantage of certification and do even more.

Heather Landstrom, Community Development Manager, Guardians Credit Union

Nutmeg State Uses CDFI Grants To Leverage Latino Lending 

John Holt, President and CEO, Nutmeg State Financial Credit Union

Nutmeg State Financial Credit Union ($452.4M, Rocky Hill, CT) is using CDFI grants to target a very specific target: Connecticut’s burgeoning Latino population. 

Nutmeg president and CEO John Holt says the credit union’s service area includes three counties that are from 27% to 43% Hispanic, including the estimated 11,000 people who arrived in the wake of Hurricane Maria in September 2017, helping to give Connecticut the highest percentage of Puerto Ricans among any state.

The CDFI funding is helping support the credit union’s Working Wheels auto lending and its community outreach programs that focus on financial literacy. Partners include the Institute for Catholic Families, Giving Angels, and the Institute for Hispanic Families.

“Nearly all the people these organizations serve are low income and do not have access to reliable banking services,” Holt says. “We do monthly on-site visits to help educate and to open accounts.”

Holt said a key to CDFI success is having specific, objective goals. He says Nutmeg State has three:

  • Decreasing reliance on alternative financial services.
  • Providing reliable and affordable transportation for the workforce.
  • Improving community financial literacy with education.

More On Nutmeg State:

Community First Uses CDFI  Funding To Boost Blue Collar Work

Greg Hanshaw, President and CEO, Community 1st Credit Union

Community 1st Credit Union ($638.2M, Ottumwa, IA) chose a very specific target for its first CDFI grant: blue collar workers with an average annual income of $30,000 to $40,000. Taking the cue from best practices shared by other Inclusiv-affiliated credit unions, the Iowa cooperative created the C1st Cash Loan in early 2018 and by year’s end had made 392 of them for a total of $156,625. 

“This is a perfect loan for our low-income members, because now they have better options when they need cash for emergency situations,” says president and CEO Greg Hanshaw. “At the same time, they can build their credit score.”

Click here to see the marketing collateral and staff teaching points that Community 1st uses to support its short-term loan offering. These briefing points and print, online, and radio ads are used by Community 1st to support its short-term C1st Cash Loan program.

Hanshaw says 15% of the $596,500 grant was spent on marketing, the Everfi financial education tool, and consulting fees. The rest went into loan loss reserves for the payday lending alternative loans. Only one had gone into delinquency by early 2019, Hanshaw says.

“For us, being able to focus on the underserved is who we are. We’re people helping people. Receiving the grant helped us provide more resources to our local communities,” Hanshaw says.

Don’t Flip Your LID

Most CDFI credit unions are also low income designated (LID) by the NCUA, but that’s not a requirement for certification. LICUs (low income credit unions) do typically automatically meet two of the seven CDFI tests: primary mission of promoting community development and maintain accountability to target market.

More on LID and the NCUA here

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