Examples from the US: How credit unions can serve communities in an age of insecurity

Cathie Mahon and Pablo DeFilippi on the opportunities and challenges facing Community Development Credit Unions

This year’s conference of the Association of British Credit Unions (Abcul) welcomed a delegation from the USA’s National Federation of Community Development Credit Unions. Since 1974, the Federation has been promoting financial inclusion by organising, supporting, and investing in these community development credit unions (CDCUs), which specialise in serving populations with limited access to affordable financial services, including low-income wage earners, families, new immigrants, young people and the growing number of Americans seeking financial independence through credit unions. Co-operative News spoke to president/chief executive Cathie Mahon and senior vice president Pablo DeFilippi about the opportunities and challenges facing the sector …

How are current regulatory burdens affecting CDCUs in the US?

Cathie Mahon: Following the financial crisis there was a necessary push to increase consumer protections because so many consumers were victimised by sub-prime and predatory lending practices which brought our economy to its knees. Part of the effort following the financial crisis was to put in place these very strong consumer protections, and create a Consumer Financial Protection Bureau. On the one hand our members do feel over-regulated, on the other hand the consumer protections are not a problem – in fact they make for a more even playing field – they require that other non-regulated financial institutions play by the same rules that we have to play by. So in a lot of ways we as a movement feel that it’s very important that we maintain a strong body that is overseeing consumer protections.

That view is not necessarily shared by all credit unions in America. In some of the more mainstream credit unions they are fighting to push back regulation. We have a different point of view from our mainstream national associations. We have an advocacy platform at the national federation and the way we phrase it, it is about placing our members first. Our financial security is only as strong as the financial security of our members – so if they are being victimised by payday lenders they are going to become a lot more unstable for dealing with us. We actually need a strong regime of consumer protections. It doesn’t mean the Consumer Financial Protection Bureau has always got it right – there was a slew of regulations that they released around mortgage lending and mortgage servicing that was very dense and complex. It took people a lot of time to get through it … at the end of the day it was not as onerous or burdensome as some believed but it did take its toll on many institutions.

But that is not the primary regulatory burden our members are facing – the primary burden is keeping up with compliance around all the other requirements around the Patriot Act, the Bank Secrecy Act, the Anti-Money Laundering Act … all of the details of how you manage an increasingly complex financial services industry.

How does a more unequal society, with more financial hardship, affect operating conditions for credit unions?

CM: I liked the phrase that the Greater Manchester mayor Andy Burnham used in his speech: ‘the epidemic of insecurity’. We certainly feel that epidemic of insecurity. It’s both a challenge and an opportunity for credit unions. The challenge is that for more and more working families, wealth and income gaps are widening. You find that more families are patching together multiple sources of income. It used to be a family making maybe $40,000 or $50,000 a year with one or two fairly stable jobs with benefits, you now have that same family earning $40,000 or $50,000 a year with five or six jobs that are part time, service sector jobs. Where they don’t get full shifts, they may be participating in the gig economy, driving Ubers. When you’re a financial institution, it means the way we measure someone’s ability to repay on loans changes a little bit. We used to say, give us your last two payslips; now we have to say let’s map out all the different sources of income that are coming into the household, and what does that income look like? It’s often seasonal, so you see a lot of ebbs and flows over the year and you really have to think about how to lend to them.

The financial services industry has not necessarily kept up, which has resulted in this huge proliferation of payday lending, They’re fitting in to shortfall moments when people need emergency cash – they’re plugging in with a product that’s very high price that, an the end of the day is not setting people up for success, but is sending them into downward spirals of debt.

Credit unions have a unique role to play because we understand a population which has always been overlooked by the banking industry. That marketplace is growing, that is the future, and a lot of the conventional mainstream institutions are not changing to respond to that. But we as community development credit unions are. I think in a lot of ways it requires a change in our model, but by changing our model it’s creating a huge opportunity for us to be there with the right products and services and the right level of counselling that’s going to help people manage those ebbs and flows.

Do you see CDCUs having a role to play, not just in providing a service for low-income people, but also helping them build a better economy?

CM: I think the credit union movement is central to local co-operative economies. It’s not just about service, it’s not just bringing people in to deliver a product, it’s bringing people in to be shareholders in a financial institution. Every depositor is a member and every member is a shareholder and every shareholder has a vote in the future of that co-operative.

The next level, like in the case of the Lower East Side People’s Federal Credit Union, is where you have a credit union that is becoming a financing engine that is investing in housing co-operatives and helping them be able to upgrade their buildings, grow their capacity, become more energy efficient and deliver upgrades around green building standards. So you have a vehicle by which the credit union can empower other co-operatives. We’ve had a lot of conversations in the city of New York about how credit unions can be vehicles for helping different types of co-ops to grow and build, things like food co-operatives… and worker co-ops in healthcare. If we’re strategic and thoughtful about it we can create those intersections with the credit union and co-op movements. It’s not always easy, we’re in our owns silos sometimes but … we can be a financing entity that builds the co-operative economy.

Pablo DeFilippi

Pablo DeFilippi: Co-ops don’t tend to recognise that we have a commonality, at least not in the US. We’re doing some work now in Puerto Rico, where there’s an opportunity for more integration between the financial co-operatives and the electric co-ops, where you can rethink how we as different sectors in the co-op economy can leverage our respective competencies. Puerto Rico can be a template for us to demonstrate that there is a lot of facilities that can be achieved if we really start thinking in a more strategic manner.

CM: We were there at the beginning of February and did a workshop for the credit unions and one of the things  our conversation revolved around was the possibility of rebuilding using solar. When you fly into Puerto Rico, you can look down and see across huge swaths of blue tarps on homes because so many roofs are gone. In the rebuilding effort, with the terrible loss of electricity that continues, there’s an important role for credit unions to play because if you can make loans to people to be able, as they rebuild, to put in some solar panels and then to be able to power their own homes and plug into national grids. That’s where the conversations with electric co-ops comes in – how do we start using this incredible crisis moment to figure out how to integrate our co-operative movements, but also how to integrate a more resilient economy.

How useful is it to talk to UK credit unions at events like this?

CM: It’s been incredible in the last couple of years to have a delegation coming over from the UK to visit our members and come to our conference, and for us to learn about the work that credit unions in the UK are doing. This is a delightful opportunity to come and participate in this conference. So many of the British credit unions are very aligned not just with the credit union movement but specifially with the community development credit union movement. So many of the British credit unions are very mission driven just like our members are.

And the conversations you’re having about upgrading your technology, to project out and reach greater numbers of potential members … the kinds of challenges that you struggle with are in line with the kind of challenges that we struggle with. You have very different approaches and we’re learning a lot from just hearing problem solving in a different context. You need sometimes to step outside your own context… I’ve noticed a very strong orientation here towards to more ready acceptance for adapting to new technology. I think in our movement people are a little set in their ways and there’s a little more nudging that we need to do.

PD: There is a lot of a lot of similarity between what CDCUs do and what you guys do here. They are so similar. There are learnings that they can take from the US, that we can take from the UK, that are doable. One of the things that we can do is help them to work out a framework that will strengthen their system. In the US we do have a regulatory environment that is a little more supportive for serving low-income customers which you don’t have here … We can be a resource for the UK credit union system to push and hopefully create a framework that will help you guys.

CM: In the US we have the Community Reinvestment Act which puts an obligation on banks to serve their entire footprint, so they can’t pick and choose where they locate branches. What happens often is if a large bank like the Bank of America or JP Morgan Chase can’t adequately serve that area they will make investments in CDCUs that are in those low income communities. They would say we can’t put a branch there but we’ll give you deposits, we’ll give you low-interest subordinated loans. In the case of Lower East Side People’s FCU, a bank was moving out. The community rose up, went to the regulator and said you can’t do this – so the bank turned that branch to community for one dollar. So that CU grew up in a branch that was essentially free and they were able to become a very vibrant and dynamic community financial institution because that bank was obligated to not just pull up sticks.

As a result of that regulatory framework we have some amazing partnerships with big banks. City And Community Development has fostered this exchange. They decided why don’t we do something tangible and open up our ATM network free of charge to credit union members? And so every marketplace where City has a footprint, they have opened up their ATM network so CU members can go to any City ATM and access their money free of charge. It enables us to put out a much larger footprint than we would have and gives them the opportunity to say we’ve done something really powerful. It’s a very easy fix and it does come from that regulatory environment. And the banks enjoy it, its a symbiotic thing.

After the financial crisis there were a huge amount of foreclosures because of bad subprime loans which the banks really didn’t want. A lot of CDCUs stepped up and helped people refinance out of those loans into much safer, sounder credit union loans. It was an opportunity for the banks to get rid of bad debt but also to be supporting credit unions to come in and help those homeowners stay in their homes on better terms. It makes sense for large banks to have a network of on-the-ground financial institutions – at different points of time it presents opportunities and when they are facing challenges we are there to help. It’s a win-win.

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