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TOOLKIT

Community Economic

Development Toolkit

COMMUNITY DEVELOPMENT CREDIT UNIONS

Disclaimer

This fact sheet was produced by the California Community Economic Development Association, in partnership with the Community Action Partnership National Office, as part of the U.S. Department of Health and Human Services, Office of Community Services. The “Community Economic Development” publication series is designed to increase the knowledge of processes for community economic development projects nationwide. The contents of this manual are presented as a matter of information only. Nothing herein should be construed as providing legal, tax, or financial advice. The materials referenced and the opinions expressed in this product do not necessarily reflect the position of the U.S. Department of Health and Human Services, Office of Community Services, and no official endorsements by that agency should be inferred.

Support for the Community Economic Development project and this toolkit is provided by the Department of Health and Human Services Administration for Children and Families, Office of Community Services (OCS), grant award number: 90ET0426/01.

Entire contents copyright © 2012 Community Action Partnership. All rights reserved.

CommunityDevelopmentCreditUnions 1

COMMUNITYDEVELOPMENTCREDITUNIONSUseofthisGuideTheCommunityDevelopmentCreditUnionGuideisintendedforusebycommunitydevelopmentorganizationsforthefollowingpurposes:

1. OrganizationswantingtolearnaboutCreditUnions2. Organizationscreatingalternativelendingandinvestmentprograms3. Organizationsseekingservicesandcapitalfromloanfunds

NOTE:Forpurposesofthisguide,focuswillbeonbusinesslending(tostart,expandorinvestinbusinessdevelopment)andtoalesserdegreeonpersonalloans(home,autooreducationalloans).Thisguideisoneoffiveguidesdiscussingthefollowingcategoriesoflendingandinvestmentactivities:

1. CommunityDevelopmentLoanFunds(CDLFs):ThisbroadcategoryincludesallloanfundsthatarenotCreditUnionsorEquityInvestmentfunds.Theinformationinthissectionincludesthestepsandconsiderationsforstartingaloanfund.

2. MicroloanFunds:Thisisasub­categorytypeofloanthatfundfocusesonsmallerloans,primarilyforstartupfinancing.

3. CreditUnions:Thisisafederal/statedesignationforalendinginstitutionthatmeetscertaincapitalrequirements,operatingguidelinesandmanagementsystems.

4. EquityInvestmentFunds:Fundsthatprovideequityinvestment(versusloans)intocommunitydevelopmentactivities.

5. CommunityDevelopmentFinancialInstitutions(CDFIs):ThisisaFederalUSTreasurydesignationbasedonorganizationalandlendingstandardsthatallowsloanfundsaccesstoUSTreasurygrantsthroughtheCDFIFund(includesmostCDLFs,MicroloanfundsandCreditUnions).

Organizationsinterestedinexpandingaccesstocapitalforunderservedcommunitieshavefocusedonvariousformsofloanandinvestmentfunds.ThisguidewillfocusonCreditUnions.CreditUnionsprovidespecializedformsofcredit,butcanalsocapturelocalsavingsfromindividualsandbusinessentities.Theabilitytokeepcommunityassets(throughdeposits)withinthecommunitymakescreditunionsaveryimportanttoolforcommunitydevelopment.Creditunionsareregulatedandmustmaintaincertaincapitallevelsbittheydohavelowerrequirementthresholdsascomparedtothriftandloansandbanks.Creditunionsofferanexpandedmenuofcreditandbankingservicesforcommunitiesandresidents.

CreditunionsareeligibletobecomecertifiedCommunityDevelopmentFinancialInstitutions.Thisfederalcertificationallowsloanandinvestmentaccessawidermenuofgrantsandprogramsdesignedtobringcapitaltolowincomeandunderservedcommunities.

CommunityDevelopmentFinancialInstitutions(CDFIs)isbecomingthestandardnomenclaturecategorizingallcommunitydevelopmentlendingandinvestmententities(albeitnotallsuchentitieshaveobtainedtheofficialUSTreasurydesignation,mosthaveandwillapplyfortheCDFIdesignationbecauseitrepresentsarecognizableindustrystandard).TheOpportunityFinanceNetworkistheassociationrepresentingalltypesoflendinginstitutionsandhasbroadly

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categorizedalllendinginstitutionsasCDFIsandsubcategorizedlendingandinvestmentinstitutionsasfollows:1

“Aswithmainstreamlenders,avarietyofinstitutionshasemergedtoservethebroadrangeofneedsinemergingdomesticmarkets.Althoughtheyshareacommonvisionofexpandingeconomicopportunityandimprovingthequalityoflifeforlow­incomepeopleandcommunities,thefourCDFIsectors—banks,creditunions,loanfunds,andventurecapital(VC)funds—arecharacterizedbydifferentbusinessmodelsandlegalstructures”:

1. CommunityDevelopmentBanks:Communitydevelopmentbanksprovidecapitaltorebuild

economicallydistressedcommunitiesthroughtargetedlendingandinvesting.Theyarefor­profitcorporationswithcommunityrepresentationontheirboardsofdirectors.Dependingontheirindividualcharter,suchbanksareregulatedbysomecombinationoftheFederalDepositInsuranceCorporation(FDIC),theFederalReserve,theOfficeoftheComptrolleroftheCurrency,theOfficeofThriftSupervision,andstatebankingagencies.TheirdepositsareinsuredbyFDIC.

2. CommunityDevelopmentCreditUnions:Communitydevelopmentcreditunions(CDCUs)promoteownershipofassetsandsavingsandprovideaffordablecreditandretailfinancialservicestolow­incomepeople,oftenwithspecialoutreachtominoritycommunities.Theyarenonprofitfinancialcooperativesownedbytheirmembers.CreditunionsareregulatedbytheNationalCreditUnionAdministration(NCUA),anindependentfederalagency,bystateagencies,orboth.Inmostinstitutions,depositsarealsoinsuredbyNCUA.

3. CommunityDevelopmentLoanFunds:Communitydevelopmentloanfunds(CDLFs)providefinancinganddevelopmentservicestobusinesses,organizations,andindividualsinlow­incomecommunities.Therearefourmaintypesofloanfunds:microenterprise,smallbusiness,housing,andcommunityserviceorganizations.Eachisdefinedbytheclientserved,thoughmanyloanfundsservemorethanonetypeofclientinasingleinstitution.CDLFstendtobenonprofitandgovernedbyboardsofdirectorswithcommunityrepresentation.

4. CommunityDevelopmentVentureCapitalFunds:Communitydevelopmentventurecapital(CDVC)fundsprovideequityanddebt­with­equity­featuresforsmallandmedium­sizedbusinessesindistressedcommunities.Theycanbeeitherfor­profitornonprofitandincludecommunityrepresentation.

Thecompanion“CommunityDevelopmentFinancialInstitutions(CDFI)Guide”alsotouchesonmanyaspectsofloanfundsandshouldalsobereviewed.TheCDFIGuidehoweverisusuallythe“nextstep”forestablishedloanfunds.Wewouldalsorecommendreviewingthe“BusinessTechnicalAssistanceGuide”sincethetwocommunitydevelopmentactivitiesworkhandinhand.Duetorecenteconomicandfinancialturmoil,commerciallendersandinvestorshavetightenedlendingrequirements,resultingina“creditcrunch”wherecreditneedsaregreaterthanresources.Thiseconomiclandscapehasresultedincommercialfinancialinstitutionsrelyingmoreoncommunityloanfundsasthemechanismtobetterservenichemarketneeds.Financialinstitutionsnowinvestandlendmoreaggressivelytofinanciallysoundandstableloanfunds.Loanfundsandcreditunionshavebuiltastrongreputationbyunderstandinglocalcreditnuancesandneedsresultinginsoundlendingandstrongloanportfolios

1 Opportunity Finance Network, website: www.opportunityfinance.net

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Forsuccessfullendinginstitutions,theCDFIdesignationisveryimportantandallowslendingprogramstogrowdramatically.MostfoundationandcorporategrantsandinvestmentsfromfinancialinstitutionslookfortheCDFIdesignationbeforegrantorinvestmentdiscussionsbegin.Overthelastthreeyears,financialinstitutionshavebeenactivelyseekingsoundCDFIstoinvestin.CDFIshavebeenaverysuccessfulmechanismforfinancialinstitutionstomeetlendingandinvestmentmeasuresrequiredbytheCommunityReinvestmentAct(CRA)andenforcedbybankingregulators.AhighCRAratingisneededifthefinancialinstitutionhasplanstoexpandinthefuture.TheCDFIdesignationisdeterminedthroughacertificationprocessconferredbytheCDFIFundoftheDepartmentofTreasury.Thedesignationisforfinancialinstitutions(andlendingprogramsincludingcommunityloanfunds)andallowsaccesstoTreasuryprogramsandinvestments.NOTE:BecausetheCDFIdesignationissoimportant,itwillbereferredtothroughoutthisguideandwillbesummarizedattheend.The“CommunityDevelopmentFinancialInstitutionsGuide”shouldbereferredtofordetailsontheCDFIFundanditsprograms.Creditunionsplayanintegralroleinsupportofacommunity’seconomicdevelopmentstrategy.Thesefinancialinstitutionscanimportandretaincapitalthroughdepositsandcanre‐circulatecapitalinunderservedmarkets.Thesefundscanbeusedforbusinessfinance(startup,micro,non‐profit,smallandbusinessexpansion),realestatedevelopmentfinance(affordablehousing,commercialandoffice,communityfacilitiesandindustrial)andpersonalfinance(auto,homeorpersonal).Capitalenhanceseconomicstabilitywhilecreatingjobsandopportunitiesforcommunityresidents.Creationofpersonalandcommunityassetsisakeystoneinbuildingandstrengtheningcommunities.Creditunionsalsobringcommunitiesahigherleveloftechnicalexpertiseinbusinessandfinance,increasingthepotentialforsustainedcommunitystabilityandgrowth.Financialinstitutionshavebecomemoreeffectiveinmeetingcustomerdemandsinlowincomeanddisadvantagedcommunitiesthroughchannelscreatedbyloanfunds.Financiallysuccessfulfundsgenerateincometocoverorganizationaloperatingandoverheadexpensesandcanbringadditionalincometosupportothercommunitycreditneeds,suchasbusinesstechnicalassistanceprogramsandexpansionoflendingservices(suchasautoloans,microloans,homeorbusinessloans).Astrongerandfinanciallyviablelendingbusinessenhancestheoverallsuccessandlongevityofyourcommunitydevelopmentorganizationwhilesupportingcommunitycreditneeds.Loanfundsplayaveryimportantroleincommunitydevelopment(revitalizationandstabilization).Theeffectsaresubstantialandinclude:FortheOrganization:

1. Generatesadditionalincomefortheprogram2. Supportsandallowsforthecreationofcomplementaryprograms,servicesandprojects3. Expandsstaffcapacityandcapabilitiesbyattractingandretainingexperienced

professionalsinbusinessfinanceanddevelopmentForthecommunity:

1. Increasesaccesstocapital2. Increasedaccess‐relatedresourcessuchastrainingandtechnicalassistanceintheareasof

financeandbusinessdevelopment3. Createspersonalandcommunityassets

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4. Enhancesthelocaleconomybysupportingimportantsegmentsoftheeconomicinfrastructureincludingbusiness,residentialandindustrialsectors

5. Cancollectdepositsthatwillkeepcapitalre‐circulatingthroughthelocaleconomy.6. Providesneededbankingservicesatgenerallylowercostsascomparedtootherfinancial

institutions(includingbanksandespeciallycheckcashingoutlets).Successfullendingefforts(andancillaryfinancialprograms)resultsineconomicallystrongercommunities,strongerworkforces,moreinformedandcapablebusinessesandtenants,andultimatelyastrongerandmoreinclusiveeconomy.Theaddedabilitytocollectdepositsfromthecommunityhelpstokeepcapitalre‐circulatingwithinthecommunity.

CommunityDevelopmentCreditUnions 5

LendingandInvestmentProgramFeasibilityConcepts:Operatingacreditunionisabusinessandcangenerateincomefororganizationsiftheyareoperatedproperlyandhavetherightlevelofactivity.Keymanagementtermsandconceptsinclude:

1. CostofFunds:Yourloanpoolmayincludevarioussourcesofgrantsandinvestmentfunds.Somewillcomeinatdifferentinterestrates.Theblendedrateistheaveragerateforyourloanpool.Ifyoureceivedallgrantstheratewouldbe“0”butifyoureceivedaninvestmentorloan,theratemightbe2‐5%.

2. InterestRateSpread:Thespreadisthedifferentialbetweencostoffundsandwhattherateofreturnisforyourfunds(averageinterestrateyouarecharging).

3. Breakeven:Thisistheminimumrate(abovethecostoffunds)youneedtochargetocoveryourexpenses.

4. FundExpensesandOverhead:Expensesincludebusinessoperations(loanandportfoliomanagement),businessmanagementandmarketing,officeandstaffcosts.Theseareexpensesthatshouldbepaidfromtheincomederivedfromthe“interestratespread”.Ifyourincomedoesnotcoverexpenses,youwillneedtosecureongoingfundingforoperations.

5. LoanLoss:Thisistheexpectedrateoflossesinbadloans.Allfundshaveprovisionsforloanlossesandthemoreaggressivethefundis(willingtotakemorelendingrisks),thegreaterthelossescouldbe.Successfulfundsestimateloanlosseswellbelow5%(whichatonetimewasastandardcommerciallendinglossexpectation).

6. LoanLossReserve:Loanlossreservesarefundssetasidethatmaybeneededtorepayanyloansorinvestmentsmadetoyourfund.Ifyourfundconsistsofamixofloansinvestmentsandgrants,andaportion(ormajority)ofthebadloanneededtoberepaidtoalenderorinvestor,youwoulddrawthefundsfromaloanlossreserve.Ifoneloanwentbadandyourfundlost$25,000.,youwouldneedtotapintothereservetorepaythelenderorinvestor.Theriskieryourlendingisorifyouhavehadhistoricallyhighloanlosses,youwouldneedahigherloanlossreserve.Highloanlossreservesdonotbenefityourfundsincetheyaredollarsthataresetasideandarenot“working”asoutstandingloansorgeneratinginterestincome.

Infinancialinstitutionsandinlargerfunds,loansinportfolioarerated.Thosewithgreaterriskorinvariousstagesofdistress(latepayments)willhaveahigherpercentagesetasideforpotentialloanlosses.

7. Feasibility:Incomeneedstoexceedexpenses.Thelargerthelendingpool(andleveloffundingyouhaveouttoborrowers)thegreateryourpotentialreturnsare.Similarly,smallersizedfundshaveamoredifficulttimegeneratingincometocoverexpenses.Smallerloanshavegreaterrelativeoperatingcostsbecausehandlingandprocessingcostsforeachtransactionisaboutthesamewhethertheloanisfor$500or$5,000,000.

Start­uporExpansionThefollowingsectionwilldiscussvariousstrategiesandstepsthatshouldbeconsideredifyouareastartuploanfundorifyouareexpandingtogainCDFIdesignation.Wewilllookatthefollowing:

1. Start‐upCreditUnion:A. AsanewfundB. Throughapartnership

2. Existing,slightlyexperiencedloanfund3. Existing,experiencedloanfund

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Start­upCreditUnion:Startingacredituionisverydifficultduetocosts.Fundingisneededforbusinessoperationsandfortheloanfund.Capitalrequirementsmustbemettobecomeacreditunionandthedetailedapplicationprocessusuallyrequiresassistancefromaconsultant.Thefollowingisasuggestedgeneralguidefororganizationsthathaveclearlyidentifiedneedsandstrongsupporttocreateafund.Supportfromyourorganizationandboardiscritical.Thefundshouldbetargetedtoaspecificmarketsegment:microbusinesses,smallbusinesses,affordablehousingorconsumerfinancing.Therearetwopotentialwaysofbecomingacreditunion,onestartingfromscratchandonethroughpartnerships.Strategy1:NewEntity(Ifyourplanscallforthecreationofanewentity).Asignificantamountoffundingandpredevelopmentworkisneededfordevelopingthebusinessplan,marketingandmanagementplansandtoworkthroughtheapprovalprocess

1. FundInitiation:Secureseedfundstoallowforstafforconsultantassistanceforthefollowing:(fundingcouldbelowerifyourstaffhasthetimetoconductthepreliminaryresearch)

A. ConceptPaper:Creationofaonetotwopagesummarythatincludesasummarydescriptionofyourorganization,needs,size,management,andpotentialresourcesavailableforthebusinessandfund.

B. CommunitySupport:Obtainsupportfromentitiesthatrepresentyourtargetmarket

C. PublicandPrivateSectorSupport:Identifysupportfromentitiesthatrepresentsyourtargetmarket

D. Identifypotentialinvestors(otherbanks,foundations,corporationsandindividuals)E. toassistinmeetingcapitalrequirements. F. IdentifypotentialsourcesforpredevelopmentfundsG. Seekgrants(orplantoself‐finance)

2. GO/NOGO:Theinformationresearchedabovewillallowyoutodeveloptheconceptpaper.Thiswillallowyourorganizationtodecideifthecreationofaloanfundmakessenseandisfeasible.Securingpredevelopmentfundswillbeessentialespeciallyifyouaretryingtocreatealargefund.Theconceptpaperwillbethebasisofthebusinessandmarketingplan.

Determinationofthescope,size,anddirectionofyourloanfundshouldprovideagoodindicationoffeasibility.Sourcesofinitialcapitalaresecuredthroughfoundationandcorporategrantsand,insomeinstances,fromlocalgovernmentprograms,especiallyifthereisatargetedmarketwithtremendousneeds.

Financialinstitutionsoftenprovidecorporategrantstopenetratemarketsbyeffectivelypartneringwithcommunityorganizationsthatrepresentandservethesecommunities.Youmustmakethecase,presentneed,andindicatehowyourorganization’srolewillenhancetheeffort.(SeeDevelopmentTipsattheendoftheGuide)

YourorganizationmustassesshowtheproposedprogramcostswillbenefittheoveralleconomicdevelopmentstrategyofthecommunityandorganizationwhileassessingimpactstoindividualCEDprojectsandprograms.Thecreationofacreditunionofferssubstantialbenefitstothecommunityanditseconomicwellbeing.

3. Pre‐developmentActivities:A. BusinessPlan/MarketAnalysis:Conductamarketanalysisanddevelopabusiness

planforthefund.B. ManagementPlan:

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1.) FundManagement:Includedarethedocumentsthatdefinelendingparameters,lendingguidelines,requirementstheapplicationprocess.

2.) LoanManagement:Includedaretheloanmanagementfunctions(loanapprovalprocess,closing,documentation,andloanmanagement(billing/collections)process).

3.) PortfolioManagement:Guidelinesandstandardsonriskmanagement(loanlosstolerance,reservesandriskratingofloans).

4. Board:CreationoftheBoardofDirectorsisaveryimportantstepthatbuildsthefoundationforasuccessfulcreditunion.

A. Properbalancebetweenmission(helpingimprovedistressedcommunities)andrisk(lendingguidelinesandrequirements)ismaintainedbyboardrepresentation.

B. Fundraising:Fundraisingisacriticalneedforloanfundsandhavingrepresentativesfromentitiesthateitherfunds/investsinloanfundsorareinpeerindustriesthatcansupportcreditunionactivitiesiscritical.

C. Management:Expertiseinlending,businessorlawprovidesthenecessaryinputandoversightoflendingactivitiesandoverallsuccess.

5. LoanCommittee:Theloancommitteeshouldinmanywaysmirrorthebalanceoftheboardofdirectorsbuthavefocusonmanagementissues.Thecommitteemusthavemembersversedinunderstandingofthelendingguidelinesandpoliciesofthecreditunionfund.Experiencedlenderscantypicallyberecruitedfromfinancialinstitutionsthatinvestorlendintothefund.

6. StartUpLendingActivities7. Applicationforcreditunioncertification.

Strategy2:Partnership:Ifthereareothercreditunionsoperatinginyourarea(ornearby),youmaywanttoconsiderpartnershipsthatwillleveragetheirexpertisewithyourunderstandingoflocalneeds.Thisstrategyallowsyoutobuildcapacityandexpertiseandmaintainagoalofcreatingyourownoroperateabranch.Someofthestrategiesinclude:

1. ExpansionofServiceArea:Ifitispossible,ancreditunioncouldexpanditscoverageareatoincludeyourgeography.Youcouldbecomeamarketingarmfortheirproductsandservicesandpossiblyprovidespace,coordinatemeetingsorprovidelanguageservices.Ifthelevelofactivityiswarranted,youmayconsideropening(andoperating)abranch.

2. CreationofaDedicatedFund:Ifthereissignificantinterestandresourcesforcreatingafund,youmaywanttoconsidercreatingoneandhavingtheneighboringcreditunionmanageit.Therearesignificantongoingexpensesforoperationsandall“back‐room”operations(loanservicingandmanagement).Yourorganizationcouldparticipateindevelopingthelendingguidelinesandstandards,orpossiblybeontheloancommitteeforthefund.Thisintermediarystepallowsyoutogainexperiencethatyouwillneedifyoucreateyourownfund.

Thepartnershipstructureisimportantifyouareconsideringoperatingasmallloanfundorprovidesmallerloans.Remember,themanagementandhandlingcostsforasmallloanarethesameasforlargerloans.Inaddition,thelargertheloanpool(andthegreatertheamountoffundedloans)generatesmoreinterestincomeusedforoperationsandmanagement.Forthesesmallerpools,itmayfinanciallywisetohaveanotherinstitutionserviceandmanageyourloanfund.Anotherstrategytoloweringoperatingcostsistopartnerwithotherorganizationsthatcouldhandlemarketing,trainingandtechnicalassistance.

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Existingslightlyexperiencedcreditunion:Ifyourcreditunionhassomeexperienceinlendingorwantstobuildalendingtrackrecord,youcanimmediatelyapplytobecomeaCertifiedDevelopmentEntity(CDE)throughtheUSTreasury’sCDFIFund.AlthoughthedefinitionfocusesonNewMarketsTaxCredits,aCDE’sactivitiesmeetCDFIstandardsandprovideanestablishedcertifiedlendingtrackrecordfororganizations.AsaCDEyouwillbeabletoapplyforCDFIcertificationandaTechnicalAssistanceAward.TheprocesstobecomeaCDEisstraightforwardandrelativelysimple.

AsdefinedontheCDFIwebsite,“aCDEisadomesticcorporationorpartnershipthatisanintermediaryvehiclefortheprovisionofloans,investments,orfinancialcounselinginLow‐IncomeCommunities(LICs).BenefitsofbeingcertifiedasaCDEincludebeingabletoapplytotheCDFIFundtoreceiveaNewMarketsTaxCredit(NMTC)allocationtoofferitsinvestorsinexchangeforequityinvestmentsintheCDEand/oritssubsidiaries;ortoreceiveloansorinvestmentsfromotherCDEsthathavereceivedNMTCallocations.”2

Existingorexperiencedcreditunion:Ifyouarecurrentlyoperatingaloanfund,youshouldconsiderapplyingtotheCDFIFundforcertification.Thecertificationprocessisstraightforward(checkatwww.CDFIfund.gov).Onceyoureceivecertification,youareeligibletoapplyforaTechnicalAssistanceAward(toallowyoutocreatethebusiness,marketingandmanagementplans)foryourCDFI.YoucanalsoapplyforaFinancialAssistanceAwardthatprovidescapitalforyourneworexpandedloanfund.DevelopmentTip:ManageExpenses:Managingyourincomeandexpensesisessentialforyourlongtermsurvival.

1. Partnershipswithotherrelatedlendingentitiesallowyoutoexpandyourmarketandcutdownonyourownexpensesintheareasofmarketing,loanprocessingandloanmanagement.

2. Loanlossesdecreasethesizeofyourloanpoolandloweryourpotentialincome3. Reservesimpactyourbusinesssuccess.Thesearefundssetasidethatdonotgenerate

income.4. Yourlendingguidelinesandapprovalsalsoimpactyoursuccess.Thegreaterrisksyour

fundincurs;thegreaterthepotentiallosses.5. Theexpensesformarketing,processingandmanagingasmallloanarethesameas

expensesforalargerloan.6. Partneringandsharingofloanmanagementandportfoliomanagementfunctionsarean

excellentmeansofmanagingandreducingexpenses.7. Ifyoualreadyhaveloanprocessingandmanagementexperience,youmaywanttomarket

thiscapacityandgenerateadditionalincomebymanagingfundsforpartnerorganizations.

2 CDFI Fund Website, Op Cit

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COMMUNITYDEVELOPMENTCREDITUNIONS

TheOpportunityFinanceNetworkdefinesCommunitydevelopmentcreditunions(CDCUs):

“CDCUspromoteownershipofassetsandsavingsandprovideaffordablecreditandretailfinancialservicestolow­incomepeople,oftenwithspecialoutreachtominoritycommunities.Theyarenonprofitfinancialcooperativesownedbytheirmembers.CreditunionsareregulatedbytheNationalCreditUnionAdministration(NCUA),anindependentfederalagency,bystateagencies,orboth.Inmostinstitutions,depositsarealsoinsuredbyNCUA.”3

In1995therewereover8,200creditunions,ofwhichover5,000arefederallycharteredandabout3.000arestate‐chartered(federallyinsured).Theremaininginstitutionsarestatecharteredandprivatelyinsured.Todaythereare7,292,withthedecreaseduetothedecliningeconomy.4Theseentitieshaveatotalmembershipofover85millionpeople.84%ofthecreditunionshaveunder$100millioninassetswith12%havingassetsof$100‐$500million.4%haveassetsover$500million.5Sinceitspeakin1969(whentherewerealmost24,000creditunions),thenumberhasdeclinedandannualmergersremainedsteadyat2.5%to3.5%.6Creditunionsoriginallywerelimitedtoadefinedcommunityorgeographicarea;employmentwithinagivencompanyorinstitution;ormembershipinaprofessional,ethnic,religiousorsocialaffiliation.Intheearly1980’s,itbecameevidentthatmembershipincreditunionsdwindledascompaniesmerged,industrieschangedanddemographicsshifted.Asaresult,thedefinitionofmembershipexpandedsignificantlytothechagrinofthrifts,savingandloansandbanks.Thisisespeciallytruesincecreditunionstakedepositsbutaretax‐exemptandexemptfromtheCommunityReinvestmentAct(CRA).Communitydevelopmentcreditunions(CDCUs)aredistinguishedfromallothercreditunionsbyfocusingprimarilyonlow‐incomepeoplewhoworkinlow‐incomeurbanandruralcommunities.ThegoalsofCDCUsaretobringcapitaltocommunitiesinneedbyprovidingaffordableservices(financialcounselingandcheckcashingservices)andbuildingtheassetbaseoflowincomeindividuals,familiesandultimatelythecommunity.NCUAdesignatesalowincomeCDCUifthemajorityofitsmembersearnlessthan80%ofthenationalmedianhouseholdincome.Theterm“communitydevelopment”isaselfdefiningtermthatdescribesitsmission(andactivities)focusingoncommunityimprovement.CharteredbytheNCUAorbystateagenciesthatareresponsibleforcreditunions,thedepositsareinsuredupto$100,000bytheNationalCreditUnionShareInsuranceFund.Mostcreditunionsfocusedlendingonsmallerhomeimprovement,autoandpersonalloans.Thisconservativeapproachenabledmosttoavoidthesub‐primeandcreditcrisis.However,theirfocusonlow

3 Opportunity Finance Network, Op. Cit. 4 Tom, “Credit Unions are Increasing Membership and Deposits” , The MRI Blog, June, 2011, website www.marketratesinsight.com 5 Kolakowshi, Mark, “Credit Unions, Financial Careers” about.com website: www.about.com 6 Wilcox, James and Dopico Louis, “Credit Union Mergers: Efficiencies and Benefits” Federal Reserve Bank SF Economic Letter, September 12, 2011

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incomecommunitieshasmademanysusceptibletonegativeeconomictrends.Mosthaveverymodestoperatingbudgets.CharacteristicsofLowIncomeCreditUnions,CommunityDevelopmentCreditUnionsandtheMembersTheyServe:LICUsand,generally,CDCUstypicallyserveamembershipprimarilycomposedoflow‐incomemembers.Thesecreditunionsfaceuniquechallengesservingmembers.Thechallengesareevenmoreprevalentinsmallcreditunions.Theirmembersmayfaceoneormoreofthefollowingcircumstancesandcharacteristics:7

• Unsteadyemployment(oftentemporaryjobswithlonghours);• Part‐timeemploymentwithmultiplejobsorsidebusinesses;• Unstableresidency(oftenrentorliveinpublicorsubsidizedhousing);• Nohealthinsurance;• Lackofaffordablechildcare;• Receivesupplementalsecurityincomeorsocialsecuritydisabilitybenefits;• Englishasasecondlanguage;• Lowshareaccountbalances;• Needforsmalldollarloans;• Limitedfinancialresources;• Limited,negative,ornocredithistory;and,• Aneedforlabor‐intensiveservices(e.g.moneyorders,financialeducationand/or

counseling,checkcashing).Keyelementsforstartingacreditunioninclude:1. CommonBase:Determinationofthemembership.Canbebasedon:

a. Occupation/Industryb. Associationc. Communityd. Income

2. 3,000members:NCUArequirescreditunionswithfewerthan3,000membersshowevidenceofsupport.Institutionswithfewerthan3,000membersmaynotbeeconomicallyjustified.

3. Capitalization:Determinationofcapitalizationrequiresassessmentofthreebasiccategories:8a. Capital(equity)requirementsCapital(equity)requirements:Creditunionscannot

issuestockandmustraisecapitalthroughretainedearningsandreceiptofgrantsb. Anticipatedoperatingexpenses:Operatingexpensesforanewcreditunioninclude:

i. Members:Howmanywilljoin,howsoonandwhatwilltheiraveragedepositsbeii. Howmuchinterestwillbepaidtodepositorsiii. Whatproductsandserviceswillbeofferedandwhatistheircostinrelationto

incomeiv. Whatoperatingsystemswillbenecessarytoservethemembershipv. Employeepositions,numberandsalariesvi. Location(rent,utilitiesandofficeexpenses)

c. Costsassociatedwithpreparingthecharterapplication,craftinganappropriatebusinessplan,andrelatedprojectionsandexhibits.DocumentationandApplicationexpensesinclude:

7 NCUA, “Low Income Credit Unions” website: www.mycreditunion.gov 8 Hall Associates Consulting, LLC, “How Much Does it Cost to Start a New Credit Union” website: www.hallassociatesllc.com

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i. Businessplanii. Proformafinancialprojectionsiii. OrganizationalBylawsiv. Proposedoperationandgovernancepoliciesandproceduresv. Evidenceofduediligenceinselectingoperatingsystems

4. ApplicationProcess:Iftheinitialapplicationisapproved,NCUAissuesacreditunioncharterandbusinessoperationsshouldbeginwithin60days

CreditUnionStart‐upConsiderations:1. Membership:Theaveragecreditunionhasabout12,475memberswithanaveragedepositof

over$8,900.9Theaveragedepositforlowincomeandcommunitydevelopmentcreditunionsisapproximately33%ofthisaverage.

2. BoardofDirectors:Electedfromthemembership,theboard’sprimaryresponsibilityismanagementandsettingpolicy.Theboardalsodeterminesproductsandservices.

3. Staffusuallyconsistsofonepaidemployee(creditunionmanager).Themanagermustplayseveralroles(thatmayevolveintofulltimepositionsasthecreditunionbecomesmoresuccessful).Theserolesincludefinancialmanager,organizer,teller,loanofficerandmarketingrepresentative.Itisimportantthatthispersonhavesignificantpreviousexperience.Creditunionswithassetsupto$500,000willhave0.6FTEandthosewithassetsgreaterthan$500,000average3.2FTE.

4. BasicServices:Servicesincludebasicbankingservicesandcredittomembers.Membersmakedepositsintosharedraftaccounts(creditunionequivalentofcheckingaccounts)andshareaccounts(savingsaccounts).Loanproductsvaryandarebasedoncommunityneedsandthegoalsandobjectivesofthecreditunion.10

5. Projectsincludeconsumerloans(home/auto),debtconsolidationloansandhomeimprovementloans.Somemayprovidesmallbusinessloans(usuallyunder$50,000).

6. AssetSize:Theaverageassetsizeofacreditunionwas$93millionin2007.Bankassetaveragewas$1.53billion.11Atthesametime,low‐incomecreditunion’saverageassetsizewasjustunder$4.5millionandmostrangedfrom$400,000to$5million.

7. NCUA’sregulationsspecifythatacreditunioncannotreceivemorethan20%ofitsdepositsfromnon‐members,howeverlowincomecreditunionsarenotsubjecttothisregulation.The20%thresholdcanbewaivedforinstitutionsbyaNCUARegionalDirector.

8. ThroughtheirCommunityDevelopmentRevolvingLoanFund,NCUAprovidestechnicalassistancegrants($6,500)tohelplow‐incomecreditunionsprovidefinancialservicestotheirmembersandtomaketheoperationsmoreefficient,.SeeNCUAwebsiteat:www.ncua.gov

9. NCUAprovidesseveralgrantprogramsthatmaychangeyeartoyeardependingonfunding.2011grantprogramsinclude

a. FinancialEducationandFinancialLiteracyInitiativeb. BuildingInternalCapacityInitiativec. PartnershipandOutreachInitiatived. StudentInternshipandJobCreationInitiativese. Staff,OfficialandBoardMemberTrainingInitiative

9 Tom, MRI Blog, Op. Cit 10 Shorebank Advisory Services, “Bank of America CDFI Program, Community Development Credit Unions”, May 1996, pages 6-4 through 6-6 11 “Comparing Credit Unions and Banks” website www.becu.org

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f. VolunteerIncomeTaxAssistanceg. UrgentNeedsGrant

COMMUNITYDEVELOPMENTFINANCIALINSTITUTIONS(CDFIs)

Microlendingprograms,mostCDLFsandcreditunionsareeligibleentitiesundertheCDFIprogram.NOTE:(PleaserefertotheCommunityDevelopmentFinancialInstitution(CDFIs)Guideforspecificdetails).

ThekeyprogramsincludeCDFICertification,TechnicalAssistance(TA)AwardsandtheFinancialAssistance(FA)Awards.TheseprogramsaredesignedtoenableCDFIstoleverageprivatecapitaltomeetthedemandforaffordablefinancialproductsandservicesineconomicallydistressedcommunities.

ThemissionoftheCommunityDevelopmentFinancialInstitutionsFundisto“expandthecapacityoffinancialinstitutionstoprovidecredit,capitalandfinancialservicestounderservedpopulationsandcommunitiesintheUnitedStates”12TheCDFIFundhasseveralprogramsthatenhancesaccesstocapital.Uponreceivingcertification,CDFI’sareeligibletocompetefortechnicalassistancegrants,capitalgrants,NewMarketsTaxCreditsaswellasothertargetedincentiveprograms.TheCDFIdesignationallowslendingprogramsaccesstocompeteforCDFIresources,buttheseresourcesareinveryhighdemand.Sincethestartoftheprogramin1994,thecompetitivebarhasrisendramaticallyandorganizationsreceivinggrantshavesignificantexperienceinoperatingasuccessfulloanfundorconductinglendingactivities.Therefore,wehighlyrecommendthatorganizationscloselystudytheapplicationguidelinesfoundatwww.cdfifund.gov.

CDFIPROGRAMBENEFITS

TheCDFIcertificationisarequirementthatwillallowyoutoaccessCDFIprogramfunds.Theseprogramsinclude:Note:SourcematerialforthissectionisfromtheCDFIwebsiteat:www.cdfifund.gov.Thewebsiteincludesannualchangesintheprogramorspecialprograms,forexamplethe2011applicationprocessincludedtheHealthyFoodFinancingInitiativethatmade12awardsfor$25million.ThegoalofthisprogramistouseCDFIcapacitytomakeinvestmentsinarangeofhealthfoodprojectsservingfooddesertsincludinggrocerystores,mobilefoodretailers.Farmersmarkets,cooperatives,cornerstores,bodegasorotherfoodrelateditems(includinghealthfoods).

CDFIFinancialAssistanceandTechnicalAssistance:TobeeligibleforanFAaward,aCDFImustbecertifiedbytheCDFIFundbeforeitappliesfortheaward.ProspectiveapplicantsthatarenotyetcertifiedmustsubmitaseparatecertificationapplicationtobeconsideredforFAduringafundinground.

Bothcertifiedandnon‐certifiedCDFIsareeligibletoapplyforTAawards.However,non‐certifiedorganizationsmustbeabletobecomecertifiedwithintwoyearsafterreceivingaTAaward.TheTA

12 Community Development Financial Institutions Fund “CDFI Certification Application”, Department of Treasury, June 2007, pg 4

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awardswillcoverexpensesneededtobuildthecapacityoforganizationstobecomeeligibleforCDFIdesignation.

2011CDFIAwardCategories:1. FinancialAssistance:CertifiedCDFIsmayreceiveawardsintheformofgrants,loans,equity

investments,depositsandinsuredcreditunionshares2. TechnicalAssistance:Non‐certifiedCDFI’smayapplyforTA(notboth)tobuild

organizationalcapacity.Ifyouhavenotbeencertified,TAcouldhelpyougetcertified.Thesefundsdonotrequirematchingfunds.

3. HealthyFoodsFinancingInitiative:AwardstoCDFIstoaddresstheneedforhealthyfoodsintheirmarkets(USDAandHHSsupport)

CDFIApplicationforTechnicalAssistanceAwards:ThisawardsupportsyourorganizationtowardsbuildingsystemsandcapacitytoapplyfortheFinancialAssistanceAwards.CDFIApplicationforFinancialAssistanceAwards:Thisawardisagrantthatcanbeusedtoimproveorganizationalsystemsandasseedcapital(orexpansioncapital)foryourloanfund.Thisisagrantandcanbeusedforyourloanfundat0%interest.SummaryStepstoBecomingaCDFI:TogainCDFIdesignationthestepsarerelativelysimple.Theworkisintheplanningandapplicationprocess.Process:

1. TechnicalAssistancetodevelopingtheorganizationandprogramstructure2. ObtainCommunityDevelopmentEntity(CDE)designation3. Financingparticipation/partnership(strategytogainexperience)4. ApplicationforTechnicalAssistanceAwards5. DevelopingtheCDFIorganizationalandprogramstructure6. ApplyforCDFIstatus7. RequestforCDFIfunding8. Otherinvestmentsandmatches9. Makeloans10. Manageloans

OTHERNOTES:ServiceGaps:OnecriticismofCDFIlendingprogramshasbeenthe“unevenlandscape”thatresultsingapsinservice.MosteffectiveCDFIsoperateinsmallgeographies(communities,citiesandcounties)whilelargerentitiesmightservestatesormulti‐stateareas.Someofthelargerlendinginstitutionsmaybenationalbuttheymaynotserveallcommunitieswiththesamelendingproducts.CommunitiesmightbeservedbyCDFIswithlendingproductsthatdonotmeetlocalneeds.ManyCDFIsserveonlyonesegmentoflendingactivitysuchasbusinesses,realestateorpersonal,whichmaynotmatchwithneededcreditserviceinagivenarea.ThisissuepresentsanopportunityforaCDFItoexpandorforanewCDFItoemerge,especiallyifthereisneedandinterestamongsttheresidentsandconstituencyaffectedbythelackofcapital.

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SOURCESOFFUNDS:

1. Federal,StateandLocal

a. SmallBusinessAdministrationi. MicroloanProgram:Fundstononprofitcommunity‐basedMDOswithloans

cappedat$35,000recentlyincreasedto$50,000pursuanttotheJobsAct.Theaverageloanis$13,000.ForFY2010,$25millionwasallocatedtotheprogram.

ii. ProgramforInvestmentinMicro‐entrepreneurs(PRIME):In2010therewere92grantsmadefroma$8milliondollarpool.Grantsupto$250,000canbeawardedtoMDOstofunddirectassistancetocustomersoffundsortobuildtheMDOsownresourcesorcapabilities.

iii. CommunityAdvantageProgram:TheCommunityAdvantageProgramisathree‐yearpilotprogramthatwillallowMDOsandotherlendersthattargetunderservedpopulationstoaccesstheSBA7(a)program(withloansupto$250,000).

iv. The7(a)LoanProgramincludesfinancialhelpforbusinesses.Thesespecialrequirementsare:loanproceedsmaybeusedtoestablishanewbusinessortoassistintheacquisition,operation,orexpansionofanexistingbusiness.

Forexample,fundsareavailableforloanstobusinessesthathandleexportstoforeigncountries,businessesthatoperateinruralareas,andforotherveryspecificpurposes:

1. SpecialPurposeLoans:BusinessesimpactedbyNorthAmericanFreeTradeAgreement,supportforEmployeeStockOwnershipPlansandpollutioncontrol.

2. ExportLoanPrograms3. RuralBusinessLoans4. AdvantageLoanInitiative:Focusonunderservedcommunities.5. CommunityAdvantageApprovedLenders:Pre‐approvedorganizations.6. Express&PilotPrograms:Streamlinedexpeditedloanproceduresfor

specifictargetborrowers.v. The504LoanProgramprovidesapprovedsmallbusinesseswithlong‐term,

fixed‐ratefinancingusedtoacquirefixedassetsforexpansionormodernization.504loansaremadeavailablethroughCertifiedDevelopmentCompanies(CDCs)whichareSBA'scommunitybasedpartnersforproviding504Loans.504LoansaretypicallystructuredwithSBAproviding40%ofthetotalprojectcosts,aparticipatinglendercoveringupto50%ofthetotalprojectcosts,andtheborrowercontributing10%oftheprojectcosts.Inspecialcircumstances,aborrowermayberequiredtocontributeupto20%ofthetotalprojectcosts

b. DepartmentofTreasury:CDFIFundi. CDFICertification:CertificationProgramforloanfundstobecomeeligibleto

applyforCDFIprogramsii. TechnicalAssistance:GrantsallowcertifiedCDFIsandestablishedentities

seekingtobecomecertifiedtobuildtheircapacitytoprovideaffordablefinancialproductsandservicestolow‐incomecommunitiesandfamilies.Grantsmaybeusedforawiderangeofpurposesincludingequipment,materials,orsupplies;forconsultingorcontractingservices;topaythesalariesandbenefits

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ofcertainpersonnel;and/ortotrainstafforboardmembers.TheCDFIFundmakesawardsofupto$100,000

iii. FinancialAssistance:Awardsofupto$2millionaremadetocertifiedCDFIsundertheFAcomponentoftheCDFIProgram.ACDFImayusetheawardforfinancingcapital,loanlossreserves,capitalreserves,oroperations.FAawardsaremadeintheformofequityinvestments,loans,deposits,orgrants,andtheCDFIisrequiredtomatchitsFAawarddollar‐for‐dollarwithnon‐federalfundsofthesametypeastheawarditself.

iv. OtherPrograms:OtherCDFIFundprogramsinclude:1. BankEnterpriseAward(BEA):Thisprogramprovidesfinancial

incentivestoinstitutionstoexpandinvestmentsinCDFIsandtoincreaselending,investment,andserviceactivitieswithineconomicallydistressedcommunitiesoveraspecifictimeperiod.

2. CapitalMagnetFund(CMF):providecompetitivelyawardedgrantstoCDFIsandqualifiednonprofithousingorganizations.CMFawardscanbeusedtofinanceaffordablehousingactivitiesaswellasrelatedeconomicdevelopmentactivitiesandcommunityservicefacilities.Awardeeswillbeabletoutilizefinancingtoolssuchasloanlossreserves,loanfunds,risk‐sharingloans,andloanguaranteestoproduceeligibleactivitieswhoseaggregatecostsareatleasttentimesthesizeoftheawardamount.

3. FinancialEducationandCounseling(FEC):ThroughtheFECPilotProgram,theCDFIFundprovidesgrantstoeligibleorganizationstoenablethemtoprovidearangeoffinancialeducationandcounselingservicestoprospectivehomebuyers

4. NewMarketsTaxCredits:TheNMTCProgramattractsinvestmentcapitaltolow‐incomecommunitiesbypermittingindividualandcorporateinvestorstoreceiveataxcreditagainsttheirFederalincometaxreturn.Thisisinexchangeformakingequityinvestmentsinbusinessesandcommercialprojectsthatcreatesjobsinlowincomecommunities.NOTE:TheNMTCprogramhasbecomeaveryimportanttoolforCommunityEconomicDevelopment.PleasereviewtheseparateGuideonNewMarketsTaxCreditsformoredetails.

5. NativeAmericanCDFIAssistanceProgram(NACA):FocusedprogramsupportingactivitiesforNativeAmericancommunities

6. CertificationforCommunityDevelopmentEntities(CDE):BenefitsofbeingcertifiedasaCDEincludebeingabletoapplytotheCDFIFundtoreceiveaNewMarketsTaxCredit(NMTC)allocation.

c. UnitedStatesDepartmentofAgriculture:i. RuralMicroenterepreneurAssistanceProgram(RMAP):Maximumloan:

$500,000.Lowinterest,20yearloanswith2‐yeardeferralofpayments,tocapitalizearevolvingmicroloanfund.Themicrolendermustestablish&maintaina5%lossreservefromtheirownfunds.Loanproceedsaretobeusedforrelendingasfixedratemicroloans(≤$50,000)toruralmicroentrepreneurs.

ii. RMAPTechnicalAssistanceGrants:($100,000maximumsize)toallowamicrolendertoprovidetechnicalassistancetotheirmicroloanborrowers.Theycanpayadministrativeexpensesofthemicrolender,butnotmorethan10%ofthegrant.MaximumTAgrantawardis≤25%ofmicrolender’sRMAPloanportfolio.

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iii. RMAPEnhancementGrants($25,000maximumsize)toallowamicrolendertoincreaseitscapacitytoserveruralmicroenterprises.EnhancementgrantawardsarenottiedtotheoperationofanestablishedRMAPloanfund.RMAPgrantscannotprovidemorethan75%ofthecostoftheproject.

d. HealthandHumanServices,OfficeofCommunityServices,CommunityEconomicDevelopment:CommunityEconomicDevelopmentGrants:discretionarygrantfundstoCommunityDevelopmentCorporations(CDC)forwell‐planned,financiallyviable,andinnovativeprojectstoenhancejobcreationandbusinessdevelopmentforlow‐incomeindividuals.Upto$800,000isavailableforprojectsthatincluderevolvingloanfunds,realestatedevelopmentandbusinessstartupandexpansion.

e. DepartmentofHousingandUrbanDevelopment:i. CommunityDevelopmentBlockGrants(CDBG):Microloanfundingisaneligible

activityundertheCDBGprogam.UseoffundsisdeterminedbycitizensinputintotheCDBGprocessbytheparticipatingjurisdiction(localorstategovernment).ManyjurisdictionshaveallocatedfundsforMDOsupportandalltypesofsmallbusinessactivities.

ii. CommunityServiceBlockGrants(CSBG):LoanfundsarealsosupportedthoughCSBGfundingthrougheligiblestateandlocaljurisdictions.MostofthelocaljurisdictionsarecommunityactionagenciesoralocalgovernmentaffiliatethatdeterminesuseofCSBGfunds.

2. FoundationsandPrivateSector:a. Grants:Foundationshavebeenastrongsupporterofmicroenterpriselendingand

development.Mostofthesupportisconductedonarelationshipbasis.b. Investments:Toagreatdegree,banksandfinancialinstitutionshavemadeequitytype

investmentsintoloanfunds,primarilyCDFIs.Theyhavealsoactivelyprovideddepositsincreditunions.ProgramRelatedInvestmentshavebeenmadebylargernationalfoundationsinthepastandfocusedonspecificindustrysupport.TheCaliforniaEndowmenthasrecentlymadeasubstantialinvestmentintoafundtosupportthedevelopmentofmarketsin“fooddeserts”aspartofnational“healthyfood”initiatives.ThefundisinpartnershipwiththeNCBBank(previouslyknownastheNationalCoopBank).

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DEVELOPMENTTIPS:

Considerwhatcommunityneedsareanddesignthelendingorinvestmentactivityappropriately.Considerwhatresourcesyouhaveorcanaccesstohelpdeterminesizeandscopeofyourprogram.Somekeydevelopmenttipstorememberinclude:1. Ifyouarestartinganewcreditunion,dotheinitialinvestigativeresearchandconceptpaperto

determineiftheprojectisfeasible.Theconceptpaperwillalsobeyourbasetooltopresenttopotentialfundingandresourcepartnersandbecomesthebasisforyourbusinessplan.Asyougatherdata,yourconceptpapershouldbecontinuallyupdated.Thisinformationwillbecomethebasisofyourbusinessplan.

2. Insteadofstartingyourcreditunion,considerpartnershipstobringtheresourcetoyourcommunityortocreateaspecializedfundthatcanbemanagedbyanexistingcreditunionorloanfund.Thismaybeanintermediarystepforyoutogainexperienceifyoulaterwanttocreateandmanageyourownfund.

3. BecomeaCommunityDevelopmentEntity(CDE)andgetCDFICertification.Thisisespeciallytrueifyourorganizationhasalendingprogram.

4. TheCDFIdesignationonlyallowsyoutoapplyforCDFIFundresources.Theyareverycompetitive.Itisimportanttobuildyourcapacityandtrackrecord.

5. OnceyougetaCDFIdesignationmakesureconventionallendinginstitutionsarepartofyourplanning/developmentprocess.Enlistthemassupporters(onyourboard,advisoryboardorprojectcommittee).Remember,conventionalfinancialmarketshaverealizedtheimportanceandsuccessesofCDFIsandseekCDFIstoplaceinvestments.

6. Yourboardofdirectorsandloancommitteeareveryimportanttothegrowthandsuccessofyourloanfund.

a. Board:CreationoftheBoardofDirectorsisaveryimportantstepthatbuildsthefoundationforasuccessfulloanfund.

i. Properbalancebetweenmission(helpingimprovedistressedcommunities)andrisk(lendingguidelinesandrequirements)ismaintainedbyboardrepresentation.

ii. Fundraising:Fundraisingisacriticalneedforloanfundsandhavingrepresentativesfromentitiesthateitherfunds/investsinloanfundsorareinpeerindustriesthatcansupportloanfundactivitiesiscritical.

iii. Management:Expertiseinlending,businessorlawprovidesthenecessaryinputandoversightoflendingactivitiesandoverallsuccess.

b. LoanCommittee:Theloancommitteeshouldinmanywaysmirrorthebalanceoftheboardofdirectorsbuthavefocusonmanagementissues.Thecommitteemusthavemembersversedinunderstandingofthelendingguidelinesandpoliciesofthefund.Experiencedlenderscantypicallyberecruitedfromfinancialinstitutionsthatinvestorlendintothefund.

7. ManageExpenses:Managingyourincomeandexpensesisessentialforyourlongtermsurvival.a. Partnershipswithotherrelatedlendingentitiesallowyoutoexpandyourmarketand

cutdownonyourownexpensesintheareasofmarketing,loanprocessingandloanmanagement.

b. Loanlossesdecreasethesizeofyourloanpoolandloweryourpotentialincomec. Reservesimpactyourbusinesssuccess.Thesearefundssetasidethatdonotgenerate

income.

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d. Yourlendingguidelinesandapprovalsalsoimpactyoursuccess…thegreaterrisksyourfundincurs;thegreaterthepotentialisforlosses.

e. Theexpensesformarketing,processingandmanagingasmallloanarethesameasexpensesforalargerloan.

f. Partneringandsharingofloanmanagementandportfoliomanagementfunctionsareanexcellentmeansofmanagingandreducingexpenses.

g. Ifyoualreadyhaveloanprocessingandmanagementexperience,youmaywanttomarketthiscapacityandgenerateadditionalincomebymanagingfundsforpartnerorganizations.

8. AdditionalCapital:TheCDFIFinancialAssistanceAwardisagrantthatcanstartyourlendingprogram,butyoushouldlookatitasanopportunitytolocateadditionalmatchingfundstoexpandyourloanpool.

Itisimportanttodeterminewhointhemarketplace,hasinterestinsupportingyourlendingactivities.

Yourboard,advisoryboard,orprojectcommitteeshouldhavememberswhorepresentfinancialinstitutions,localbusinessesandcorporations,andlocalgovernmentandcommunityleaders.Theycanbecomeyourspokesperson(s)andcanconvenemeetingswiththeirpeerstomarketinterestinyourfund.

Engagementanddiscussionswiththebankingregulators;FederalDepositInsuranceCorporation(FDIC),OfficeoftheComptrollerofCurrency(OCC)andFederalReserveBank(FRB)regardingyourfundareaveryimportantactivity.Theseinstitutionscanbeanimportantresourceforknowingwhomightbeinterestedinsupportinglendingactivitiesorareinterestedinyourcommunity.Theyarealsogreatresourcesforconveningmeetingswithfinancialleaderstogenerateinterestinyourfund.

9. CreditUnions:TheapplicationprocessforcreditunioncertificationbytheNationalCreditUnionAdministrationorbydesignatedstateauthoritiesisextensiveandrequiresasignificantamountofpre‐developmentexpensesforthebusiness,marketing,managementandoperationplans.Thebusinessesfinancepro‐formawillrequiresignificantdetailsthatincludefundmanagementincomeandexpenseprojections.Additionally,significantstartupcapitalisneededforoperationsandequity.

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FinalNote:

Communitydevelopmentloanfundscanspecializeinitsmarketandservices.Becomingaloanfundisnoteasyandrequiresastrongcommitmentfromtheorganizationandthemembersofthedevelopmentteam.WithexperiencethenaturalprogressionistogainCDFIcertificationandaccessitsmanyresources.Withthisaddedcapacity,organizationscanbecomeequityinvestorsorcanexpandtheirservicestotheentirecommunitybycreatingacreditunion.Thegoalcanbeaccomplishedwiththesupportofthecommunity,localgovernmentandinterestedfinancialinstitutions.Itismostimportanttohavestaffdedicatedtotheprojectandiftheydonothavetheexpertise,locateresourcestosupportandguidetheeffort.Thisdocumentisintendedtobeaguidethatoutlinessomeofthekeyissuesandidentifiespossiblesolutionsandsteps.Itisnotintendedtobeyoursourcesinceeveryprojecthasitsownissues,concernsandpeculiaritiesanditsownuniquesolutions.Thedocumentisnotintendedtoencourageanyorganizationintoprojectdevelopmentbutonlytolayoutsomeofthekeystepsandissuesoncethedecisionismadetoproceed.

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APPENDIXA­FORMOREINFORMATION:ResourcesWebsites:

OpportunityFinanceNetwork:(www.ofn.org)“OpportunityFinanceNetwork(OFN)isanationalnetworkofcommunitydevelopmentfinancialinstitutions(CDFIs)investinginopportunitiesthatbenefitlow‐income,low‐wealth,andotherdisadvantagedcommunitiesacrossAmerica.

OFNMembersareperformance‐oriented,responsibleinvestorsthatfinancecommunitybusinesses,sparkingjobgrowthintheareasthatneeditmost,anddeliveringbothsoundfinancialreturnsandrealchangesforpeopleandcommunities.

OurNetworkhasoriginatedmorethan$23.2billioninfinancinginurban,rural,andNativecommunitiesthrough2009.Withcumulativenetcharge‐offratesoflessthan1.4%,wehavedemonstratedourabilitytolendprudentlyandproductivelyinunconventionalmarketsoftenoverlookedbyconventionalfinancialinstitutions.”

CoalitionofCommunityDevelopmentFinancialInstitutions(CDFICoalition):(www.CDFI.org)“Formedin1992asanad‐hocpolicydevelopmentandadvocacyinitiative,theCoalitionofCommunityDevelopmentFinancialInstitutions(CDFICoalition)istheleadnationalorganizationintheUnitedStatespromotingtheworkofcommunitydevelopmentfinancialinstitutions(CDFIs).Throughitsmemberorganizations,theCoalitionrepresentsCDFIsworkinginall50statesandtheDistrictofColumbia.ThisnationalnetworkofCDFIsincludescommunitydevelopmentloanfunds,communitydevelopmentbanks,communitydevelopmentcreditunions,microenterpriselenders,communitydevelopmentcorporationsandcommunitydevelopmentventurecapitalfunds.TheCDFICoalitioncoordinatesindustrywideinitiativestoincreasetheavailabilityofcapital,creditandfinancialservicestolow‐incomecommunitiesacrossthenation.”

CommunityDevelopmentFinancialInstitutionsFund:(www.cdfifund.gov)“Throughmonetaryawardsandtheallocationoftaxcredits,theCDFIFundhelpspromoteaccesstocapitalandlocaleconomicgrowthinurbanandrurallow‐incomecommunitiesacrossthenation.

Throughitsvariousprograms,theCDFIFundenableslocallybasedorganizationstofurthergoalssuchas:economicdevelopment(jobcreation,businessdevelopment,andcommercialrealestatedevelopment);affordablehousing(housingdevelopmentandhomeownership);andcommunitydevelopmentfinancialservices(provisionofbasicbankingservicestounderservedcommunitiesandfinancialliteracytraining).

NationalCommunityReinvestmentFund(CRF,USA):(www.crfusa.com):“CommunityReinvestmentFund,USA(CRF)helpschangethelivesofpeoplelivingineconomicallydistressedcommunitiesacrossthecountry.Wesupplycapitaltolocalcommunitydevelopmentlenderssotheycanmeetgoalslikethese:

• Growsmallbusinesses• Increaseaffordablehousing• Createandpreservejobs• Buildchildcarecenters• Developcommunityfacilities

Atthesametime,weenablefinancialinstitutions,socially‐motivatedinvestors,andaccreditedindividualstoreachtheirsocialinvestmentgoals.

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CRFoperatestheleadingnationalsecondarymarketforcommunityandeconomicdevelopmentloans—amarketCRFpioneered.Wepurchaseeconomicdevelopmentandaffordablehousingloansfromcommunitydevelopmentlenders.Wethenpoolthemintoasset‐backeddebtsecuritiesandNewMarketsTaxCredit(NMTC)investmentfunds,whichweprivatelyplacewithinstitutionalinvestors”NationalCreditUnionAdministration(NCUA):(www.ncua.org)“NCUAistheUnitedStatesindependentfederalagencythatsupervisesandchartersfederalcreditunions.NCUAalsoinsuressavingsinfederalandmoststate‐charteredcreditunionsacrossthecountrythroughtheNationalCreditUnionShareInsuranceFund(NCUSIF),afederalfundbackedbythefullfaithandcreditoftheUnitedStatesgovernment.”NCUAprovidesuptodateinformationoncreditunionsandreportstoassistallcreditunionsinstartupandoperations.FORMOREINFORMATION:OrganizationalExamplesValleyEconomicDevelopmentCorporation/PacoimaDevelopmentFederalCreditUnion(webwww.vedc.organdwww.pacoimadcu.org)"Tocreateandsustainjobsandbusinessesinourcommunitiesbyprovidinghigh‐qualityeconomicdevelopmentservices.VEDChasconsistentlyprovidedservicestosmallandmediumsizedbusinessowners,entrepreneursandmembersofthecommunitiesitserves.VEDChasgrowntobecomethelargestnon‐profitbusinessdevelopmentcorporationinthemetropolitanLosAngelesarea.”Itoperatesandfacilitatesseveralprograms&projectssuchas

• SBAWomen’sBusinessCenter• SanFernandoValleyFinancialDevelopmentCorporation• PacoimaDevelopmentFederalCreditUnion• LosAngelesBusinessSourceCenter

“VEDCknewthatthePacoimamarketwasunderservedinfinancialservices.TherewereonlytwobanksinPacoimatoservice90,000localresidents.Therefore,VEDCbecameinterestedincreatingitsownbank.Inlate2000,VEDCandLosAngelesUrbanFundersconductedafeasibilitystudyforcreatingacommunitydevelopmentbankinPacoima.Thefindingswerepublishedin"AssessingNeedforaCommunityDevelopmentBankinPacoima"inOctoberof2000.ThestudyprovideddetailsaboutthedemographicsofPacoimaresidentsanditsbusinesscommunity,aswellasanoutlineofacommunitydevelopmentbankstrategy.In2001,VEDCretainedShorebankAdvisoryServices(SAS)tocontinuethisfeasibilitystudywork.Afteritssitevisit,SASpresentedseveraldifferentoptionsforVEDCtoconsider:createadenovo(start‐up)communitydevelopmentbank;engageinapartnershipwithalargecommercialbanktobringabankpresenceintoPacoima;createabankconsortiumtoraisecapitalforareabusinesses,

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and/orcharteracreditunion.Basedupontheseoptions,VEDCsupportedtheestablishmentofonlythesecondcommercialbankinPacoimain50years,aWellsFargoBankBranch.VEDC,then,proceededwiththecharteringofaCreditUniononafederallevelthatwouldservetheseunderservedcommunitiesandutilizetheprovisionsoftheFederalCreditUnionActanditsregulationsthatpermitafederalcharteredcredituniontobedesignatedaslowincome.”

B.O.N.D.CommunityDevelopmentFCU(Atlanta,GA):

(See:http://www.bondcu.com/site/bond/AboutBONDCFCU.asp)

Concurrently,theBassOrganizationforNeighborhoodDevelopment(B.O.N.D.)wasorganizedtohelpfivein‐townneighborhoodstakebacktheircommunity.TheseneighborhoodswereLittle5Points,InmanPark(Atlanta’sfirstsuburbbuiltaftertheCivilWar,withsomeofGeorgia’smostbeautifulVictorianandantebellum‐stylemansions),Poncey‐Highlands,CandlerPark,andLakeClaire.Alltheseneighborhoodswereconsideredlow‐incomecommunities,consistingmainlyofmulti‐familyrentaldwellings.

Thecommunitybelievedthatonlythroughpropertyownershipwouldtheaverageindividualwieldanypowerandescapepoverty.Onlythroughbuyinghomes,residinginthem,andfightingforthemcouldthepeoplebeempoweredandtheroadconstructionstopped.Everyoneshouldhavebeengiventheopportunitytoownahome,butdueto“red‐lining,”therewasnosuchopportunityfortheresidentsofthisarea.

Financialinstitutionslocatedinandaroundtheseneighborhoodswouldgladlytakedeposits,butwouldnotreinvestbackintothecommunity.Afinancialinstitutionwasnecessarytofollowthephilosophyofthelocalpeople,toreinvestbackintothecommunity,andtoprovideservicesandfinancialcounselingtoimprove“theplightoftheresidents.”

Afteralongtwo‐yearstrugglewiththeNationalCreditUnionAdministration(NCUA),thiswasreluctanttocharteracreditunionwiththeexpressedintenttoproviderealestatelending.TheMCCthenprovidedtheinitialfundingof$2,500tostart‐upthecredituniononashoestringbudget.

Dividendswerecommencedatafullquarterpercentovertheclosestcompetitor,C&SBank,anddepositsbegantogrow.Butbythefourthquarterofthefirstyearofoperation,therewerenotenoughfundsinreservestopaydividends.Thiswasthepointwherethecreditunionproveditselftothecommunity!Theboarddevisedaplanforincreasingreservesinordertopaythedividendsastheyhadbeendeclared.Theywouldtaketheavailablefundsinreserves,borrowaresident’slargetruck,andpickpeachesonafarmsouthofAtlanta.TheplanwastobringthesepeachesbacktoAtlantaandbysellingthemonthestreet,raisethe$210neededtopaydividends.

B.O.N.D.CommunityFCUrequestedandreceivedlow‐incomestatus.Bytheendof1974,thecredituniondepositsof$101,390andhadbooked162loanstotalingover$165,000,mostofwhichwererealestate.Thecreditunionexperiencedgreatcapitalgrowthandlowloanloss.ThistrendcausedNCUAsomeconcern.Theyfeltthatwewerenotchargingoffenoughloansandourdelinquencyratewastoosmall.ThisisstillatrendtodayatB.O.N.D.CommunityFCUandcontinuestocauseNCUA

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concernevenaftersomanyyears.NCUAonceagaintriedtoconvincetheBoardofdirectorstotakegreatercreditrisks.TheBoardonceagainremindedNCUAthatourprimarypurposewasandistoassurehomeownershipasabaseforourcommunity.

Overtheyears,ourfieldofmembershiphasexpanded.Thefirstoftheseexpansionswaswhenmembershipwasopenedtopeopleworkingatthebusinesseslocatedwithinthecommunityboundaries.Thischangesignificantlyexpandedtheneighborhood’suseofthecreditunion.Ouraveragesharedepositgrew55%overthenextthreeyears.

Thecreditunionaddednewneighborhoodstoouroriginalgroup.Currently,B.O.N.D.CommunityFCUservesover5,000members,andasofDecember2008,assetsexceeded$34milliondollars.B.O.N.D.CommunityFCUhasloanedover$143milliondollarstoresidentswhohaverenovatedhundredsofin‐townhomes.

In2010,thecreditunionobtaineditsCDFIcertification,addingsubstantialresourcesandfundingtoincreaseitslendingactivities.

ElPasoCreditUnionAffordableHousing,LLC(ElPaso,TX)

(see:http://epcuah.com/history.htm)

TheElPasoAffordableHousingCreditUnionServiceOrganization(CUSO)wasformedin2001by8ElPasocreditunions;GECU,FirstLightFCU,WestTexasCU,ElPasoAreaTeachersFCU,OneSourceFCU,ElPasoEmployeesFCU,MountainStarFCU,andGoldenKeyFCUasacreditunioninitiativetoimprovetheeconomic,socialwellbeing,andthequalityoflife,ofmembersinthecommunitythroughfinancialliteracy,savingsandprovidingaccesstolowcostcapital.ElPasoAHCUSOservicesinclude:financialeducation,housingcounseling,creditcounseling,foreclosurepreventionassistance,pre‐andpost‐homeownershipeducation,andinformationonpredatorylenderpractices,andthroughitssisterorganization,ElPasoCreditUnionAffordableHousing,LLC,providesaccessiblelow‐costprogrammortgageloans,inpartnershipwiththeHousingAuthority,HUD,ElPasoEmpowermentZone,theCityofElPaso,andothers.AHCUSOworkscloselywithothercreditunionstodeveloplowcostfinancialproductsthatwillprovidelowtomoderateincomefamilieswithoptionstohigh‐costorpredatoryloansandwireremittancesandareaccessibletofinanciallyunderservedmarkets.

TheAHCUSOtargetmarketisapproximately90%LatinoandistheverylowtomoderateincomefamilieswithintheCountyofElPaso,Texas,whichincludestheCityofElPaso,CityofSocorro,HorizonCity,CityofAnthony,Fabens,Tornillo,SanElizarioandoutlyingColonias.Theseareunincorporatedsettlementsthatlackbasicwaterandsewersystems,pavedroads,safeandsanitaryhousing.Texashasthelargestnumberofcoloniasandthegreatestcoloniapopulation,whichispredominantlyHispanic.Oftheproximately1,500coloniasintheU.Ssideoftheborder,97percentareinTexas(Sharp,1998).Ourcommunityishometoapproximately140,000peoplelivingin78colonias(ProfilesofColonias,THDCA1998).Mostfamilieslivinginthecoloniasdonothaveeasyaccesstoanyfinancialinstitutionsortraditionalfinancialservices,oraccesstolowcostcapitalforhomeloansorconsumerloans.