It’s good to be a credit union, but it might be even better to be a CDFI credit union. That’s not only from a mission perspective as a member-owned financial institution but looking at the bottom line, as well.
While it might defy conventional thinking, CDFI credit unions have consistently recorded higher return on average assets and faster growth in assets, membership, shares, deposits, net worth, and total loans, according to the National Federation of Community Development Credit Unions.
That data was included in a report titled “A Business Case for Community Development Finance” presented on Monday during the CDFI Roundtable at CUNA’s annual GAC in the Washington Convention Center in Washington, DC.
The report was prepared by Federation consultant Terry Ratigan and lending risk and liquidity consultant Randy Thompson of TCT Risk Solutions. Based on research among Thompson’s more than 100 credit union clients, they also gave substance to the growing realization among credit unions that A- and B-rated loans don’t perform as well as C-E paper.
The overall ROAA for CDFI credit unions in 2015 was 0.70%, while it was 0.41% for non-CDFIs, the Federation report says, with the largest disparity in the $50 million to $100 million asset class (0.65% to 0.37%, respectively).
There were 123 CDFI credit unions in 2006. There now are 286, Ratigan says. The Federation is interested in growing the ranks more, and so is the NCUA. At a Sunday session, the NCUA’s Office of Small Credit Union Initiatives director talked about streamlining the CDFI certification process.
The report also shows that CDFIs tend to loan much more heavily in the lower credit tiers than non-CDFI credit unions, and that the result overall is positive “credit migration”, borrowers moving up into higher tiers as their payment records build.
Federation president and CEO Cathie Mahon says another takeaway from the research is that credit unions often think that moving into the CDFI space entails adding a whole set of new activities. Instead, the report shows, credit unions that offers products such as credit-builder and payday alternative loans, subprime auto loans, supportive services like financial counseling for first-time homebuyers, and non-conforming mortgages may already be there, especially designated Low Income Credit Unions that serve underserved areas.
Earning CDFI certification carries with it the ability to apply for CDFI grants that can be quite large by credit union standards.
“We would like them to take more advantage of the grant opportunities,” Ratigan says. He points to the most recent round of CDFI funding totaling $180 million with maximum grants of up to $20 million. He says there are credit unions that have gotten approximately $200 million in CDFI grants since the program began in the mid 90s.
“Think about that. This is permanent capital intended as equity that’s then leveraged and compounded. It can really be transformative,” Ratigan says.
Lending to riskier borrowers carries with it the expectation of higher delinquency and charge-off rates. Ratigan and Thompson recognize that and say that the higher rates those loans carry can easily more than make up for the losses. It also fulfills the original credit union mission while not bowing to the competition.
“People can go anywhere if they have good credit, and that makes pricing the key element,” Thompson says. “You don’t stand a chance if you’re not the lowest cost producer. Instead, by serving the lower credit tiers, you can provide value to a segment of the population that currently isn’t served well.”
That’s Chris Wardrip’s experience. The CEO of Financial Health Federal Credit Union ($29.7M, Indianapolis, IN) runs a lending and checking operation that he describes as “high yield with high delinquencies and chargeoffs and very high fee income.” But those rates and fees beat the alternative - payday and other high-rate lenders - by a large margin, while returning profit to the credit union to continue funding those loans to hard-pressed borrowers.
He charges a market-low $28 per overdraft with a $200 limit so as to avoid becoming a payday lender, and about 4% to 15% for used car loans, at an average of about 9% and LTVs of as much as 125%
“That’s what you have to do to serve these members,” Wardrip says. “And we’re almost always saving them a bunch of money.” He says his credit union is LICU-designated and had been a CDFI but gave up that designation after a couple unsuccessful grant applications.
The Federation says there now are more than 300 other credit unions have the data profiles that could make them immediately eligible for certification, such as community development loan products, financial services, and capacity-building services. They’re among the 2,500 or so credit unions that have 100% of their branch operations in CDFI Investment Areas, the Federation adds.
“This report shows that many credit unions really don’t have to develop something totally new and different. They just need to think about how well they’re serving this marketplace now, about how well their operation is aligning with the needs of members and potential members,” Mahon says.