Community development financial institution (CDFI) numbers have ripened in recent years, increasing 28% from 2013 to 2014, which may have a positive impact on the overall economy.
According to a new study by the Filene Research Institute, credit unions with this designation are vital to making a significant impression on both social and economic development.
Mark Pinsky, Opportunity Finance Network President & CEO explains how a CDFI credit union can influence and drive the economy. Pinsky’s organization, the Opportunity Finance Network is a national network of high-performing CDFIs that boasts around 15 credit union members.
“Nearly a decade post-recession, many Americans are still walking a financial tightrope,” he explains. “The underbanked and unbanked communities are struggling to pay bills and make credit payments, have little to no savings to make ends meet if they were to experience a sudden drop in income, and have virtually no sustainable retirement savings. Irresponsible and predatory financiers target the underbanked and feed off of their need for immediate cash flow.”
“Community development credit unions are tackling consumer finance issues from all angles,” he continues. “They are using tech innovation, market knowledge and research, new credit and savings products, and strategic partnerships to respond to the threats against unbanked and underbanked communities.”
Pinsky says CDFIs are committed to lending responsibly and affordably in low-income communities. “Consumers benefit significantly from a financial institution that has their best interests at heart, not just the company's bottom line. Certified community development credit unions have access to funding and resources that provide opportunities for growth. In turn, these mission-driven credit unions create opportunities for their communities.”
Becoming CDFI certified allows for some organizational advantages, which assists the credit union with providing further services to underbanked and unbanked community members.
“Becoming a certified CDFI institution allows credit unions to become exempt from the Consumer Financial Protection Bureau's (CFPB) repay requirement and become eligible to apply for funding,” Pinsky says.
“Credit unions with CDFI certification can apply for the CDFI Fund's Financial Assistance and Technical Assistance Program which provides awards of up to $2 million in grant or equity capital a year,” he says. “They also have access to the CDFI Bond Guarantee Program which has guaranteed $525 million in long-term, low-cost capital to date.”
Banks are able to give Bank Enterprise Awards to certified community development credit unions, which allows the credit unions to receive deposits at below market rates, Pinsky adds.
“Since 2014, the number of certified credit unions have increased from 176 to 265 and we expect, and encourage more credit unions to become certified,” he says.
Filene’s recent study found that while the CDFI designation did not increase the credit union’s profitability, credit unions can integrate community development activities to enhance profitability and growth.
Listed in a Credit Union National Association (CUNA) publication, these community development activities include:
Obtaining board support for engaging in community development activities. Successful credit unions adopting this model integrate community development into their long-range business planning, requiring board support (and enthusiasm);
Understanding that community development as a business model is more than simply receiving a designation or certification or even being the recipient of grant funds;
Engaging in community development as a long-term business model;
Enhancing policies using community development best practices, which correlate with higher return on assets; and
Developing products with underwriting and collateral to meet the needs of borrowers and mitigate risk.
Pinsky identifies a few examples of CDFI credit unions making a difference in both the community and members’ lives.
“CDFI credit unions are uniquely positioned to deliver capital where it can have the most impact,” he says. “Through the Wells Fargo NEXT Awards, OFN recently recognized the Lower East Side People’s Federal Credit Union based in New York City and Freedom First Federal Credit Union based in Roanoke, Virginia with multi-million dollar investments to support the expansion of their innovative financial products and services.” Two examples include:
Lower East Side People’s Federal Credit Union ($38 million, New York, NY) is New York's City's largest community development credit union. The credit union offers innovative financial services and products to mostly low-income immigrant communities that otherwise would not have access to affordable, responsible capital. In addition to its branches throughout Manhattan's Lower East Side and Harlem, LESPFCU also runs a full-service mobile bus branch that travels from borough to borough, bringing vital services directly where they are needed.
Freedom First Federal Credit Union ($383 million, Roanoke, VA) is another example of a community development credit union that specializes in providing the specific services its community needs. Roanoke, VA has been particularly hard hit by unemployment. To spur job growth, the credit union partnered with a local trucking school to provide a low-cost loan to students pursuing commercial drivers' licenses.By Gina Ragusa