Credit Unions, Community Development and the “Great Recession” Clifford Rosenthal National Federation of Community Development Credit Unions

What are “CDCUs?” “CDCUs” (Community Development Credit Unions) = credit unions that specialize in serving low- income people CDCUs provide: savings, loans, transactions, financial education CDCUs serve the financially excluded –Cities, rural areas, reservations with no banks –People with small savings –People who need small loans / no or poor credit history –Microenterprises and local small businesses –Cooperatives –Minorities and immigrants –Low-wage workers

CDCUs are part of Two Movements Credit Unions CDFIs CDCUs

CDCUs are the small progressive wing of the U.S. credit union movement

Credit Unions in the U.S. The largest cooperative movement in the U.S. 8,000 credit unions (CUs) 90 million members $800 billion in assets 100 years old Share (deposit) insurance is cooperatively funded Huge “wholesale” CUs

Credit Unions and the CDFI Universe 150 Credit Unions now certified CDFI credit unions serve more individuals than all other CDFI sectors Additional 800+ credit unions are “low-income” and may qualify for CDFI designation Federation co-founded CDFI coalition

About the Federation A certified CDFI Co-founded CDFI Coalition (1990) Capital intermediary since $50 million under management –Investments in 120 CDCUs nationwide –Our capital products: deposits, equity, secondary market for mortgages 200+ member CDCUs, 46 states, 1 million credit union members, $5 billion in assets

The Crisis for Credit Unions: What it isn’t Not a liquidity crunch. Not a crisis of declining funding from foundations, banks, or government. Not a result of bad mortgage portfolio

The Financial Crisis: What it Is “Collateral damage” in weakened local economies –Unemployment  deterioration of consumer credit portfolios –“Underwater” housing market sinks all boats Collapse of “corporate” (wholesale) credit unions  –Deposit insurance increases –Wipe-out of CU investments in corporates Drop in interest rates  lost investment income Consequences: –Drop in net worth, which  regulatory problems –Increase in mergers and liquidations Limited CDFI Fund support in 2009

The Crisis of Credit Union Deposit Insurance Deposit insurance in credit unions is controlled and guaranteed by the government… but it is cooperatively funded, by credit unions. Large “wholesale” credit unions lost $$$billions on investments in mortgage-backed securities. They failed… and their losses cascaded down. Result: all federally insured credit unions must “ante up” to make good the losses of the deposit insurance fund.

How Did CDCUs Fare? Hope amid the ruins in 2008 –Despite all, CUs outperformed banks in CDCUs continued to lend in 2008 – and even increased lending. Increased vulnerability –Growing delinquency in loan portfolios –Decrease in net worth –Increased number of mergers and liquidations

Key indicators: 6/30/09 Average net worth 9.17% –2007: 10.35% 2008: 10.06% From 12/31/08  6/30/09 –Assets up 8.4% (to $4.96 billion) –Membership up by 42,000 people –Loan outstdg: up by 2% Includes increase in r.e., business loans –Delinquent loans up from 3.02% to 3.26% –Charge-offs up from 1.13% to 1.54% see: CDCU Financial Trends, Mid-year 2009

Hope for Resurgence The worst may be over. (?) The Treasury’s new Community Development Capital Initiative –Major infusion of net worth into CDFI/Low- Income Credit Unions ($100 - $200 million in long-term, low-cost secondary capital) CDFI Fund budget and new initiatives

Signs of Hope: CUs Outperformed Banks in 2008 Mortgage Origination CUs: + 17% / Overall U.S: -28% Loans, 2008 CUs: + 6.7% Banks: -.4% CU share of auto market increased to nearly 25% Deposits (up 7%)

Transforming Banking: The Credit Union Case Not-for-profit Strict democratic control and accountability: 1 member, 1 vote. Limited executive compensation Uncompensated board of directors drawn from membership Focus on consumer products Often can provide better rates and access to capital than banks Direct local control over capital Regulated and insured Scalable

Cliff Rosenthal, President/CEO National Federation of Community Development Credit Unions 116 John Street, 33 rd Floor New York, New York / fax: