(November 19, 2008 – New York, NY) Community development credit unions (CDCUs) have long known that lending to borrowers with imperfect credit is not necessarily bad business. In fact, CDCUs have consistently shown that when “subprime” borrowers are given loans with reasonable and realistic terms, default rates tend to be lower than at mainstream banks. While a chorus of media voices have asserted that low-income people and the Community Reinvestment Act (CRA) are to blame for the mortgage meltdown and subsequent financial crisis, new coverage in major national print and online media is bursting the “blame bubble” and publicizing the sound financial record of CDCUs and other community development financial institutions (CDFIs).
A recent article by Newsweek Senior Editor Daniel Gross addresses this very issue. In “A Risk Worth Taking,” Gross highlights what he calls the “ethical subprime lending industry,” made up of CDCUs and other CDFIs including community development loan funds, community development banks, microenterprise lenders, and community development venture capital funds. He explains that CDFIs’ are unique in their “double bottom line,” which looks at social mission along with profits when they lend to their constituencies.
The article, which quotes National Federation of Community Development Credit Unions (Federation) President and CEO Cliff Rosenthal, began to take shape earlier this year during a series of interviews between Rosenthal and Gross after a press event at the Institute for American Values, which Gross moderated. Rosenthal explained that while the Federation’s member CDCUs lend almost exclusively to sub-prime borrowers, delinquent loans make up only 3.1% of their assets, and charge-offs are usually even lower, averaging only .87% -- far better than many other lenders.
The article also referenced the community development efforts of various CDCUs, including the more than $20 million-in-assets Lower East Side People’s Federal Credit Union (New York, NY), the $10 million-in-assets Faith Community United Credit Union in (Cleveland, OH) and the $8 million-in-assets North Side Community Federal Credit Union (Chicago, IL). All of these small institutions specialize in serving underserved low-income communities, and a majority of their members would be considered sub-prime by traditional lenders. However, despite their members’ lower credit scores, these institutions manage to lend profitably. They do this by developing a relationship with their borrowers, offering them affordable credit with realistic terms, and following-up with their members at the first sign of trouble meeting payments.
Gross’ article, A Risk Worth Taking is available online by clicking here.
Gross was also interviewed on National Public Radio’s (NPR’s) The Take Away, where he spoke about his article and this important issue. To listen to the NPR piece, please click here.
(If the NPR audio does not load automatically, click on the link below the player playlist.)
© 2008 National Federation of Community Development Credit Unions.