(November 1, 2010 - New York, NY) As the primary technical advisor to the vast majority of the 111 credit unions that applied for secondary capital loans through Treasury's Community Development Capital Initiative (CDCI), the Federation categorically rejects the hypothesis, advanced by Assistant Professor Linus Wilson in a newly released paper, that political influence determined CDCI investments in credit unions.
Through our work as third-party advisors and advocates -- for successful and unsuccessful credit unions applicants alike -- we developed critical information that was omitted from Wilson's analysis and does not support his conclusions. For example, Wilson's entire analysis is based on the erroneous assertion that "Roughly a quarter of the eligible credit unions, 48 out of 189" were selected to receive CDCI funds. But both the numerator and the denominator in this fundamental equation are incorrect:
- Wilson states that "Forty-eight of the eligible credit unions were selected to receive TARP funds." In fact, we know that at least 72 credit unions received final approval for CDCI secondary capital loans, and at least 24 of these credit unions declined to accept the investment.
- Wilson defines "eligible" credit unions as follows: "There were 189 credit unions in the CDFI program at the start of September 2010. Only CDFI certified credit unions were eligible for the TARP's Community Development Capital Initiative (CDCI)." This is incorrect on two fronts: credit unions were eligible for CDCI only if they were both CDFI certified and had an official Low Income Credit Union (LICU) designation from NCUA. The list of 189 credit unions considered "eligible" in Wilson's analysis included credit unions that were not eligible for CDCI because they were not LICUs. Wilson's analysis also considered a number of "eligible" credit unions that no longer exist, but have not yet been purged from the CDFI Fund certification list. At the launch of the CDCI program, we counted 135 credit unions that were eligible for the program, holding both CDFI certification and LICU designations. This number grew to 153 by the end of September 2010, and while this remains far short of the 189 considered eligible in Wilson's analysis, it ignores a more significant fact: according to NCUA, only 111 of these fully eligible credit unions actually applied for CDCI loans.
These two points alone destroy the foundation of Wilson's argument. Instead of political influence having "driven the selection" of 48 credit unions out of 189 eligible institutions, we see that at least 72 credit unions qualified and were approved for loans out of 111 eligible applicants.
But the serious problems with Wilson's paper do not end there. Wilson admits that he does "not know the identity of credit unions that applied for TARP funds." This is not a small matter, since he lacks a control group that could be used to test his hypothesis that CDCI investment decisions were "driven" by political considerations, particularly by the location of a credit union in a district represented by a member of the House Financial Services Committee (HFSC). As it turns out, the Federation is in a position to test his hypothesis against a control group and conclusively reject Wilson's hypothesis.
Having provided technical support to more than 100 credit unions during this process, including more than a dozen that were not approved for CDCI Investments, the Federation looked at the percentages of credit unions located in districts represented by members of the HFSC, and found the following:
- 7.1% of credit union that applied for CDCI investments were located in HFSC districts
- 6.9% of credit unions approved for CDCI investments were located in HFSC districts
- 7.7% of credit unions rejected for CDCI investments were located in HFSC districts
In other words, the location of a credit union in an HFSC member's district had absolutely no influence on the probability of being approved or rejected for a CDCI investment.
The Federation's critique of the CDCI program is not that it invested too much in low-income credit unions, or invested in the wrong ones. Rather, the onerous application process, the regulatory burden, the fear of political attacks, and other factors resulted in relatively little being invested in the only group of financial institutions that are specifically committed to serving low-income individuals and communities.
We estimate that more than 100 credit unions were well qualified to receive funding, and that an additional $100 million in capital could readily have been put to good use by credit unions serving low-income communities. But the CDCI program was, unfortunately, a one-time event, and the opportunity won't soon come again.
© 2010 National Federation of Community Development Credit Unions.